<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
Commission File Number 000-19480
---------------------
MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)
</TABLE>
(770) 444-5300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE OF CLASS AT NOVEMBER 6, 1998
- - -------------- -------------------
<S> <C>
Common Stock $0.01 Par Value................................ 78,731,387 Shares
Non-voting Common Stock $0.01 Par Value..................... 0 Shares
</TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements..............................
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997.................................
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997.........
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997..............
Notes to Consolidated Financial Statements.............
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Part II: OTHER INFORMATION
Item 1: Legal Proceedings.................................
Item 6: Exhibits and Reports on Form 8-K..................
Index to Exhibits.........................................
</TABLE>
---------------------
THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
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. FIFTEEN U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND MEMBERS OF ITS
MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON 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
THAT 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 IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 10,768 $ 15,341
Restricted cash........................................... 221 2,218
Accounts receivable, billed............................... 74,806 84,506
Accounts receivable, unbilled............................. 53,565 63,553
Other..................................................... 8,315 11,716
--------- --------
Total current assets.............................. 147,675 177,334
Property and equipment...................................... 58,360 59,694
Deferred income taxes....................................... -- 60,857
Intangible assets........................................... 49,851 462,510
Net assets of discontinued operation........................ 91,249 90,865
Other....................................................... 11,106 9,951
--------- --------
$ 358,241 $861,211
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 8,671 $ 9,941
Accrued compensation...................................... 29,075 31,869
Accrued expenses.......................................... 42,751 50,681
Accrued litigation settlement............................. 12,500 --
Current portion of long-term debt......................... 1,977 11,432
Deferred income taxes..................................... 2,392 2,392
--------- --------
Total current liabilities......................... 97,366 106,315
Long-term debt.............................................. 222,068 189,259
Accrued litigation settlements.............................. 28,875 52,500
Other obligations........................................... 3,983 11,356
--------- --------
Total liabilities................................. 352,292 359,430
--------- --------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1998
and 1997; none issued.................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized
in 1998 and 1997; issued and outstanding 78,679 in 1998
and 73,204 in 1997..................................... 787 732
Common stock, non voting, $0.01 par value, 600 authorized
in 1998 and 1997; none issued.......................... -- --
Paid-in capital........................................... 739,630 678,998
Accumulated deficit....................................... (734,468) (177,949)
--------- --------
Total stockholders' equity........................ 5,949 501,781
--------- --------
$ 358,241 $861,211
========= ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue............................................ $ 101,309 $111,209 $ 328,410 $ 368,401
--------- -------- --------- ---------
Salaries and wages................................. 77,294 80,369 222,365 237,799
Other operating expenses........................... 42,100 41,747 105,563 115,807
Depreciation....................................... 6,291 6,625 19,867 19,335
Amortization....................................... 5,245 5,297 16,471 16,493
Interest expense, net.............................. 6,196 7,241 18,410 19,411
Intangible asset impairment........................ 390,641 -- 390,641 --
Litigation settlements............................. 19,500 52,500 41,375 52,500
Restructuring and other charges.................... 3,784 13,837 5,780 16,661
--------- -------- --------- ---------
Total expenses........................... 551,051 207,616 820,472 478,006
--------- -------- --------- ---------
Loss before income taxes........................... (449,742) (96,407) (492,062) (109,605)
Income tax expense (benefit)....................... 67,619 (14,721) 62,595 (19,766)
--------- -------- --------- ---------
Loss from continuing operations.................... (517,361) (81,686) (554,657) (89,839)
Income from discontinued operation, net of tax..... 1,356 477 3,687 4,306
Extraordinary items, net of tax.................... -- -- (5,557) 76,391
--------- -------- --------- ---------
Net loss................................. $(516,005) $(81,209) $(556,527) $ (9,142)
========= ======== ========= =========
Basic and diluted net income (loss) per common
share:
Loss from continuing operations.................... $ (6.58) $ (1.12) $ (7.26) $ (1.24)
Income from discontinued operation, net of tax..... 0.02 0.01 0.05 0.06
Extraordinary items, net of tax.................... -- -- (0.07) 1.05
--------- -------- --------- ---------
Net loss........................................... $ (6.56) $ (1.11) $ (7.28) $ (0.13)
========= ======== ========= =========
Weighted average shares outstanding................ 78,655 72,942 76,442 72,542
========= ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(556,527) $ (9,142)
Less: income from discontinued operation.................... 3,687 4,306
--------- ---------
(560,214) (13,448)
Adjustments to reconcile net loss, excluding the
discontinued operation, to net cash used for operating
activities:
Depreciation and amortization............................. 36,338 35,828
Gain on sale of HRI, net of tax........................... -- (76,391)
Impairment losses on long-lived assets.................... 390,641 8,661
Early extinguishment of debt.............................. 9,231 --
Deferred income taxes..................................... 60,857 (15,905)
Changes in assets and liabilities, excluding effects of
acquisitions:
Restricted cash........................................... 2,500 799
Accounts receivable, billed............................... 9,700 (3,343)
Accounts receivable, unbilled............................. 9,988 8,704
Accounts payable.......................................... (1,270) 5,580
Accrued compensation...................................... (2,794) 8,612
Accrued expenses.......................................... (9,408) (15,414)
Accrued litigation settlements............................ 41,375 52,500
Other, net................................................ 6,647 (3,334)
--------- ---------
Net cash used for operating activities............. (6,409) (7,151)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (19,331) (9,700)
Software development costs.................................. (3,217) (4,121)
Proceeds from sale of HRI, net.............................. -- 126,375
Other....................................................... 2,164 (1,439)
--------- ---------
Net cash (used for) provided by investing
activities........................................ (20,384) 111,115
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan.................. 1,446 1,286
Proceeds from the exercise of employee stock options........ 5,683 5,522
Proceeds from borrowings.................................... 339,467 98,992
Principal payments of long-term debt........................ (315,248) (203,329)
Deferred financing costs.................................... (12,432) (3,008)
--------- ---------
Net cash provided by (used for) financing
activities........................................ 18,916 (100,537)
--------- ---------
CASH:
Net change.................................................. (7,877) 3,427
Net cash provided by (used for) discontinued operation...... 3,304 (4,783)
Balance at beginning of period.............................. 15,341 5,403
--------- ---------
Balance at end of period.................................... $ 10,768 $ 4,047
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 13,926 $ 12,503
Income taxes.............................................. 1,482 10,347
Non-cash investing and financing activities:
Additions to capital lease obligations.................... 42 --
Issuance of stock warrants................................ -- 4,969
Issuance of Common Stock upon funding of litigation
settlement.............................................. 52,500 --
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K filed
February 2, 1998 (as amended by Form 10-K/A filed June 22, 1998).
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
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, liabilities, revenues
and expenses. Actual results could differ from those estimates.
As discussed more thoroughly in Note 2, the Hospital Services segment has
been presented as a discontinued operation for all periods presented.
NOTE 2 -- DISCONTINUED OPERATION
On October 15, 1998, the Company entered into a definitive agreement to
sell its Hospital Services segment, which provides business management services
and bad debt collections to approximately 1,200 hospital clients, to NCO Group,
Inc. for up to $117.5 million. In accordance with the agreement, $107.5 million
is payable at closing and an additional purchase price adjustment of up to $10.0
million is payable subject to the achievement of various operational targets in
1999. The sale is subject to regulatory approval, but is expected to be
consummated by December 15, 1998.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
presented to reflect the Hospital Services segment as a discontinued operation.
The net operating results of the segment have been reported in the Consolidated
Statements of Operations as "Income from discontinued operation"; the net assets
have been reported in the Consolidated Balance Sheets as "Net assets of
discontinued operation"; and the net cash flows have been reported in the
Consolidated Statements of Cash Flows as "Net cash provided by (used for)
discontinued operation".
Summarized financial information for the discontinued operation is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue................................................... $29,124 $23,840 $81,081 $72,410
Income from discontinued operation, net of tax of $943,
$331, $2,562 and $2,993................................. 1,356 477 3,687 4,306
</TABLE>
4
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 36,982 $ 35,102
Total assets................................................ 105,573 103,681
Current liabilities......................................... 14,154 12,624
Total liabilities........................................... 14,324 12,816
Net assets of discontinued operation........................ 91,249 90,865
</TABLE>
NOTE 3 -- INTANGIBLE ASSET IMPAIRMENT
At September 30, 1998, the Company recorded an intangible asset impairment
charge of $390.6 million to adjust the intangible assets of the Physician
Services segment to their fair value. As previously disclosed, management
continually monitors its results of operations and other developments within the
industry to adjust its cash flow forecast, as necessary, to determine if an
adjustment is necessary to the carrying value of the Company's intangible
assets.
During the third quarter of 1998, management of the Company believed there
were events and changes in circumstances that warranted a re-assessment as to
whether the carrying amount of the intangible assets for the Physician Services
segment was still recoverable. These events included: (i) a continual increase
in the segment's operating losses due primarily to client losses; (ii)
significant litigation charges within the Physician Services segment; and (iii)
absence of revenue growth within the Physician Services segment. Therefore, in
accordance with applicable accounting rules, management prepared a 40 year
undiscounted cash flow analysis to determine if these intangible assets were
still recoverable. Management prepared the analysis with assumptions that
reflected its current outlook on the business. In all instances, management
believes the assumptions inherent in the analysis were reasonable and
supportable. The following key assumptions were used in management's
undiscounted cash flow analysis: (i) revenue was forecasted to decline over the
next five years and then remain flat; (ii) EBITDA margin was forecasted to
continue to decrease in 1999, increase slightly over the following four years
and then stabilize at a moderate margin over the remaining life of the asset;
and (iii) capital spending would be maintained in the range of 3% of revenue.
Since the undiscounted cash flow model showed an impairment of the Company's
long-lived assets, the Company used a discounted cash flow model to measure the
fair value of these long-lived assets which was consistent with the Company's
policy. The fair value calculation determined that the fair value of the
long-lived assets was approximately $63 million. The Company wrote-off the value
of its longest lived assets first, which resulted in the write-off of all of the
Physician Services segment's goodwill and a portion of the value of its client
lists. As a result of this impairment charge, the Company reduced the estimated
useful life of its remaining intangible assets for the Physician Services
segment to 10 years.
NOTE 4 -- 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
conducted 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,
5
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
1997, with which it complied. The subpoena required, among other things, records
of any audit or investigative reports relating to the billing of payors globally
for radiological services during the period January 1, 1991 to date and any
refunds owed to or issued to payors with respect to such global billing reports
in the Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the appropriate state or states may elect to intervene fully or partially in
qui tam litigation and proceed with the action.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx) (the
"Complaint"). On February 11, 1998, the United States provided Medaphis with a
copy of the Complaint, Substitution of Attorney, and Order which prohibited the
Company from making any use of the Complaint, including any public disclosure,
other than for the purposes of settlement negotiations, without further order of
the Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an order modifying its February 6, 1998 order to
allow Medaphis to make public disclosures concerning the Complaint and its
contents to the extent that Medaphis determined such disclosures were required
by applicable securities laws, provided that such disclosures did not reveal the
Relators' identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs.
The Complaint includes causes of action under the Federal False Claims Act, 31
U.S.C. sec 3729 et seq., and the California False Claims Act, Cal. Gov't Code
sec. 12650 et seq. The Complaint also includes causes of action relating to
Medaphis' termination of Relator II, including a count under the state and
federal whistleblower protection statutes.
The Company recorded charges of $12 million in the third quarter of 1995
solely for legal and administrative fees, costs and expenses it anticipates
incurring in connection with the California Investigation and the putative class
action lawsuits which were filed in 1995 following the Company's announcement of
the California Investigation. Since the third quarter of 1995, the Company has
periodically adjusted this reserve, as necessary, including a $0.3 million
increase in the second quarter of 1998. Such adjustments to the reserve have
aggregated to a net reduction of $0.5 million. The reserve currently covers only
the anticipated expenses of the California Investigation and the related
lawsuits and does not include any provision for fines, penalties, damages,
assessments, judgments or sanctions that may arise out of such matters.
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provide for the payment by the Company of $3.6
million in the aggregate, the dismissal of all pending proceedings against the
Company and the release of various other claims arising out of the California
Investigation. As a part of these settlements, CompMed, Inc., a company acquired
by the Company in 1992, pled guilty to a single criminal count.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error, which primarily impacts certain managed care
plans, 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
6
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
overpayments by carriers and beneficiaries, cannot be determined by the Company,
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. The Company is unable to estimate the possible range of
loss, if any.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan were
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services has requested information from GFS following an audit of a GFS client.
GFS has complied with those requests. 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 each of the years ended
December 31, 1996 and 1997, GFS represented approximately 7% of Medaphis'
revenue. During those years, GFS processed approximately 5.6 million and 6.25
million claims, respectively, approximately 2 million and 2.3 million of which,
respectively, were made to government programs. The government requested that
GFS voluntarily produce records, and GFS complied with that request. The Company
recorded charges of $2 million and $1 million in the second and third quarters
of 1997, respectively, and $0.7 million and $0.1 million in the second and third
quarters of 1998, 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 has determined it is in its best interest to settle such
claims. The Company has reached an agreement in principle with the United States
to settle the matters related to the GFS Investigation on an ability to pay
basis. The settlement, which is subject to definitive documentation, requires
the Company to pay to the United States and the various states a total of $15
million, of which $8 million will be paid within 10 days of the execution of a
definitive Settlement Agreement among the parties, with the balance of $7
million being paid in eight equal quarterly installments over 1999 and 2000. The
deferred portion of the settlement payment will bear interest at the one year
Treasury Bill rate. The Settlement Agreement will provide for the dismissal with
prejudice of claims against the Company and the release by the United States of
civil and administrative claims arising out of the emergency room billing of
government programs services provided by GFS from 1993 through the date of the
Settlement Agreement.
The Company recorded a litigation settlement charge of $19.5 million in the
quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement of the California and GFS Investigations,
the Company entered into a Corporate Integrity Agreement with the Office of the
Inspector General of the Department of Health and Human Services. This
Agreement, which has a term of sixty-five months, provides that the government
will not seek to exclude the Company from participation in governmental health
care programs based on the conduct alleged in the California and GFS
Investigations and requires the Company to continue its existing compliance
program, augmented by an annual third party review and additional reporting
requirements.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
7
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
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 "Derivative Suit"). The plaintiff sought
unspecified 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, which motion was denied without prejudice. The
parties entered into a Stipulation and Settlement Agreement dated June 26, 1998
(the "Derivative Stipulation") to settle the Derivative Suit. The Derivative
Stipulation provides for the enactment of procedures for governance of the Audit
Committee of the Board of Directors and for such attorney's fees and expenses as
may be awarded by the court in an amount not to exceed $250,000 (to be paid by
the Company's directors' and officers' liability insurance carrier). On
September 29, 1998, the court granted final approval to the settlement and
ordered all claims dismissed.
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 Health Data
Sciences ("HDS"). Plaintiff seeks rescissory, compensatory and punitive damages
in excess of $100 million, rescission, injunctive relief and costs. On January
10, 1997, the defendants filed a demurrer to the complaint. On February 5, 1997,
the Court overruled defendants' demurrer. On March 18, 1997, the court denied
the plaintiff's motion for a preliminary injunction. On July 16, 1997, plaintiff
filed an amended complaint adding several new parties, including current and
former directors and former and current officers of Medaphis. All of the newly
added defendants have responded to the amended complaint. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
Securities Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such Securities Act claims. The Company is unable to
estimate a possible range of loss.
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
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. On April 18, 1997, the Medaphis defendants and BSG defendants filed
motions to dismiss the complaint. On or about July 3, 1997, in lieu of
responding to these motions, the plaintiffs filed an amended complaint, adding
new claims under the Securities Act and common law and new parties, including
former officers of Medaphis, Medaphis' former independent accountants and BSG.
On or about October 29, 1997, all
8
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
defendants filed motions to dismiss the amended complaint. On May 12, 1998, the
court ruled in favor of defendants on the motions, dismissing all of plaintiffs'
claims with prejudice and without leave to amend. On May 15, 1998, the Judge
signed an order to that effect. The plaintiffs have appealed from this order,
and that appeal is pending. The Company is unable to estimate a possible range
of loss.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 March 31, 1999. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. In June 1998, the Company and
the BSG Principals reached an agreement in principle to settle the claims made
on behalf of the former BSG shareholders in exchange for approximately 3.2
million shares of Medaphis Common Stock, subject to negotiation and definitive
documentation of other terms and conditions of the settlement. The Company
recorded a litigation settlement charge of $21.3 million in the quarter ended
June 30, 1998 in connection with this agreement in principle. The charge
reflects 3.2 million shares of Medaphis Common Stock valued at the fair value
per share on the date on which the material terms of the agreement in principle
was reached. The Company classified the entire $21.3 million liability
associated with the proposed settlement as noncurrent since such obligation will
be settled with Common Stock rather than current assets and the exact timing of
the payments of claims pursuant to such settlement is not determinable.
On November 9, 1998, the parties entered into a letter of intent with
respect to the settlement of the BSG Principals' claims. The terms of the letter
of intent, which vary from the previously announced agreement in principle,
provide for the payment by the Company to the BSG Principals of 4.5 million
shares of the Company's Common Stock and $2.5 million in cash, to be funded by
the Company's officers and directors' and officers' liability insurance. The
settlement is subject to the consent and approval of the Company's insurer and
its funding of the cash portion of the settlement. Based on the price of the
Company's Common Stock on the date of the letter of intent, the settlement would
result in a charge of approximately $17.7 million, $2.5 million of which would
be funded by insurance. Since the Company had previously estimated this
liability at $21.3 million, the Company will reduce this liability in the fourth
quarter of 1998 by $3.6 million.
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 was 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 alleged
common law fraud and violations of the federal securities laws in connection
with the merger. In addition, the complaint alleged breaches of contract
relating to the merger agreement and a registration rights agreement, as well as
tortious interference with economic advantage and declaratory judgement.
Defendants filed a motion to dismiss the complaint. On September 29, 1998, the
Court granted Defendants' motion to dismiss with respect to all securities law,
fraud and tort claims. Plaintiffs' claims for breach of contract and declaratory
judgement remain outstanding. Plaintiffs have sought leave to file a
supplemental amended complaint asserting solely the contract and declaratory
judgment claims, and seeking rescission of the merger agreement and return of
all MMS shares, damages in excess of $100 million, and voiding of various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
The
9
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Company expects that discovery, which had been stayed pending resolution of the
motion to dismiss, will commence in the near term. The Company is unable to
estimate a possible range of loss.
On August 12, 1997, George D. Stickle 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 asserted claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserted claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint sought rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 61,553 shares of Medaphis Common Stock. The
Company recorded a litigation settlement charge of approximately $0.4 million in
the quarter ended June 30, 1998 in connection with this agreement. On June 26,
1998, the court entered an order substituting Peter Gladkin as lead plaintiff in
lieu of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. On September 29,
1998, the court granted final approval to the settlement and ordered all claims
dismissed.
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. A number of the former
stockholders of Rapid Systems Solutions, Inc. ("RSSI"), a company acquired by
the Company in 1996, opted out of the settlement of the 1996 Class Action
against the Company and made claims against the Company, alleging securities
fraud and other potential causes of action in connection with the acquisition.
The Company has settled with each of such former RSSI stockholders for a total
of $444,000 in cash, in the aggregate, to be funded by the Company's directors'
and officers' liability insurer and the forgiveness of certain indebtedness. The
Company recorded a litigation settlement charge of $1.2 million in the quarter
ended September 30, 1998 in connection with this settlement.
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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended 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 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company has cooperated with the Commission
in its investigation and will continue to do so.
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, including, without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to certain of the pending claims, the Company has not
accrued any amounts for any damages, settlements, penalties or awards with
respect to such unsettled claims, except as otherwise disclosed.
10
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 5 -- RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1998 1997 1998 1997
------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring costs................................. $ -- $ 5,465 $ 325 $ 5,465
Property and equipment impairment................... -- 6,959 -- 6,959
Legal costs......................................... 1,814 600 2,504 2,600
Pooling charges..................................... -- (46) -- (46)
Severance costs..................................... 511 859 1,436 1,683
Other............................................... 1,459 -- 1,515 --
------ ------- ------ -------
$3,784 $13,837 $5,780 $16,661
====== ======= ====== =======
</TABLE>
Restructuring Costs. In June 1998, the Company recorded approximately $0.3
million of restructuring costs for the consolidation of several corporate and
operating division departments to eliminate redundant activities. These costs
relate to severance costs for approximately 20 employees who had been notified
of their termination and related benefits.
In August 1997, the Company adopted a plan to combine the operations of its
technology companies 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 employees who had been notified of their
termination by September 30, 1997. In addition, the Company reevaluated the
adequacy of the reserves established for the MPSC office consolidations and
recorded a charge of $1.7 million.
The description of the type and amount of restructuring costs recorded and
applied against each reserve in the nine months ended September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE
DECEMBER 31, RESERVE AGAINST SEPTEMBER 30,
1997 ADJUSTMENT RESERVE 1998
------------ ---------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Lease termination costs................... $8,015 $ -- $(2,005) $6,010
Severance................................. 1,357 325 (1,437) 245
------ ---- ------- ------
$9,372 $325 $(3,442) $6,255
====== ==== ======= ======
</TABLE>
Property and Equipment Impairment. During the quarter ended September 30,
1997, the Company assessed the recoverability of certain of its property and
equipment and recorded a charge for impairment losses of $7.0 million.
Legal Costs. In the three and nine months ended September 30, 1998, the
Company recorded charges of $0.1 million and $0.8 million, respectively, for the
legal and administrative fees, costs and expenses associated with various legal
matters described in Note 4. In the three and nine months ended September 30,
1997, the Company recorded charges of $0.6 million and $2.6 million,
respectively, for the legal and administrative fees, costs and expenses
associated with the same legal matters.
In addition, the Company settled various legal matters for $1.7 million in
the third quarter of 1998.
Severance Costs. The Company recorded charges of $0.5 million and $1.4
million in the three and nine months ended September 30, 1998, respectively, for
severance costs associated with former executive
11
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
management. The Company had recorded $0.9 million and $1.7 million in the three
and nine months ended September 30, 1997, respectively, for severance costs
associated with former executive management.
NOTE 6 -- INCOME TAXES
INCOME TAXES. Based on recent events and the current operating forecast,
the Company reassessed the recoverability of its deferred tax asset at September
30, 1998. Based on its analysis, the Company determined a full valuation
allowance of $67.6 million against the deferred tax asset was required. If,
during the future periods, management believes the Company will generate
sufficient taxable income to realize the deferred tax asset, then the Company
will adjust this valuation reserve accordingly.
NOTE 7 -- LONG TERM DEBT
On February 20, 1998, the Company sold $175 million of senior notes (the
"Notes"). The Notes bear interest at the rate of 9 1/2% per annum, payable
semi-annually on February 15 and August 15 of each year, commencing on August
15, 1998. The Notes will mature on February 15, 2005. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest. In addition, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the original
principal amount of the Notes at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more equity offerings; provided that at least $100 million aggregate principal
amount of the Notes remain outstanding immediately following any such
redemption.
Payment of principal, of premium, if any, and interest on the Notes is
fully and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operations or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are
inconsequential individually and in the aggregate to the consolidated financial
statements.
The Company also entered into a new $100 million credit facility (the
"Credit Facility") on February 20, 1998. The Company has the option of making
"LIBOR" based loans or "base rate" loans under the Credit Facility. LIBOR based
loans bear interest at LIBOR plus 3.0%. Base rate loans bear interest at prime
plus 1.75%. In addition, the Company pays a quarterly commitment fee on the
unused portion of the Credit Facility ranging from 0.25% to 0.75% per annum
based on the Company's leverage ratio. The Credit Facility contains financial
and other restrictive covenants, including, without limitation, those
restricting the incurrence of additional indebtedness, the creation of liens,
the payment of dividends, sales of assets, capital expenditures, and prepayment
of the Notes and those requiring maintenance of minimum net worth, minimum
EBITDA (as defined), minimum interest coverage and maximum leverage.
Availability under the Credit Facility is determined by the Company's Borrowing
Base (as defined). Amounts outstanding under the Credit Facility will be due on
February 20, 2001. At September 30, 1998, the Company had $47 million in
borrowings outstanding under the Credit Facility at interest rates ranging from
8.0% to 8.2%.
The Company used the proceeds from the offering of the Notes, together with
the initial borrowing under the Credit Facility and available cash, to repay the
$210 million borrowings under the then-current loan facility plus accrued
interest. As a result of this early extinguishment of debt, the Company recorded
an extraordinary charge of $5.6 million, net of tax of $3.6 million, to
write-off the unamortized costs associated with the previous debt facility.
12
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On October 15, 1998, the Company entered into a definitive agreement with
NCO Group, Inc. for the sale of the Company's Hospital Services segment for up
to $117.5 million in cash. The Company expects the sale to be consummated prior
to December 15, 1998, but there can be no assurance that the sale will be
consummated. If consummated, a portion of the net proceeds of the sale will be
used to pay off the Credit Facility in full. Under the Indenture governing the
Notes, the balance of the net sale proceeds must be reinvested in the Company's
business within 360 days after the sale. To the extent that proceeds are not so
reinvested, the Company is required to offer to repurchase Notes at par with
such proceeds.
On October 16, 1998, the Company entered into a letter agreement with the
requisite lenders under the Credit Facility which, among other things,
contained: (i) a waiver concerning the GFS Investigation and the California
Investigation including the acknowledgment that neither investigation settlement
is expected to have a material adverse effect; (ii) a waiver concerning the
Company's compliance with the financial covenants for the fiscal quarter ended
September 30, 1998 provided that the Hospital Services segment is sold on or
before December 15, 1998; and (iii) a consent to the sale of the Hospital
Services segment provided that the net disposition proceeds are used immediately
upon closing of the sale to pay in full the obligations outstanding under the
Credit Facility. The letter agreement also contained the First Amendment to the
Credit Facility which, among other things, changed the margin on Base Rate and
LIBOR loans to 1.75% and 3.0% per annum, respectively. The letter agreement is
included as Exhibit 10.5 to this Quarterly Report on Form 10-Q.
NOTE 8 -- NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statements of Position ("SOP") 97-2, Software Revenue
Recognition ("SOP 97-2"). SOP 97-2 is effective for transactions entered into in
the first quarter of 1998. In March 1998, the AICPA issued SOP 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2, "Software Revenue Recognition,"
("SOP 98-4"). SOP 98-4 defers for one year the application of certain passages
in SOP 97-2. The Company had historically recorded the revenue associated with
software licenses upon shipment of the product and when no significant
contractual obligations remained outstanding. The adoption of SOP 97-2 changes
the way the Company records revenue for its ULTICARE(R) software license sales
only from upon delivery to a percentage-of-completion method over the life of
the installation period. As of September 30, 1998, the Company had not sold any
ULTICARE licenses that required installation; therefore, the adoption of SOP
97-2 has had no material impact on the Company's operating results for the nine
months ended September 30, 1998. SOP 97-2 will not materially impact the pattern
of revenue recognition for all of the Company's other software sales.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The Company's
net loss, as presented in the Consolidated Statements of Operations,
approximates the Company's other comprehensive income amount, as defined, for
all periods presented.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1,
provides guidance on the accounting for the costs of computer software developed
or obtained for internal use and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not believe SOP
98-1 will have a material impact on the Company's results of operations.
In June 1998, the AICPA issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes guidance on the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities and is effective for
financial statements for all fiscal quarters of fiscal years beginning after
June \15, 1999. The Company does not believe that SFAS 133 will have a material
impact on the Company's results of operations.
13
<PAGE> 16
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9 -- SEGMENT REPORTING
Medaphis provides its services and products through the Physician Services
segment, Per-Se Technologies ("Per-Se") and Impact Innovations ("Impact"). The
Physician Services segment provides business management services and claims
processing to physicians including the collection of clinical data, data input,
medical coding, billing, cash collections and accounts receivable management.
Per-Se provides application software and system integration services to
healthcare markets. Impact provides full-service systems integration,
information technology consulting and tailored software development to
service-oriented markets such as energy, communications and financial services.
Healthcare Recoveries, Inc. ("HRI") provided subrogation and related recovery
services primarily to healthcare payors. HRI was sold on May 28, 1997.
Medaphis evaluates each segment's performance based on its operating profit
or loss. The Company also accounts for inter-segment sales as if the sales were
to third parties.
14
<PAGE> 17
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company's reportable segments are strategic business units that offer
different products and services. The Per-Se segment includes the results of the
newly formed Electronic Commerce group, for all periods presented. Some parts of
this group had previously been included in the Physician and Hospital Services
segments. Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Physician Services....................... $ 62,534 $ 59,419 $ 202,235 $ 205,791
Per-Se................................... 19,447 24,479 64,454 69,002
Impact................................... 19,375 27,346 62,078 78,993
HRI...................................... -- -- -- 14,720
Eliminations............................. (47) (35) (357) (105)
--------- -------- --------- ---------
$ 101,309 $111,209 $ 328,410 $ 368,401
========= ======== ========= =========
Operating profit(1):
Physician Services....................... $ (9,856) $(11,920) $ (5,391) $ (5,578)
Per-Se................................... (9,152) 1,520 (6,217) 12,423
Impact................................... (2,174) (3,879) (404) (4,370)
HRI...................................... -- -- -- 3,685
Corporate................................ (8,439) (8,550) (23,844) (27,193)
--------- -------- --------- ---------
$ (29,621) $(22,829) $ (35,856) $ (21,033)
========= ======== ========= =========
Interest expense, net...................... $ 6,196 $ 7,241 $ 18,410 $ 19,411
========= ======== ========= =========
Restructuring and other charges (including
intangible asset impairment and
litigation settlements):
Physician Services....................... $ 410,458 $ 4,894 $ 410,458 $ 6,894
Per-Se................................... (50) 3,253 112 3,253
Impact................................... 2,014 2,430 2,403 2,430
HRI...................................... -- -- -- --
Corporate................................ 1,503 55,760 24,823 56,584
--------- -------- --------- ---------
$ 413,925 $ 66,337 $ 437,796 $ 69,161
========= ======== ========= =========
Loss before income taxes................... $(449,742) $(96,407) $(492,062) $(109,605)
========= ======== ========= =========
Depreciation and amortization:
Physician Services....................... $ 7,355 $ 8,546 $ 23,500 $ 25,851
Per-Se................................... 2,325 1,756 6,921 4,920
Impact................................... 888 1,118 3,175 3,292
HRI...................................... -- -- -- 401
Corporate................................ 968 502 2,742 1,364
--------- -------- --------- ---------
$ 11,536 $ 11,922 $ 36,338 $ 35,828
========= ======== ========= =========
Capital expenditures:
Physician Services....................... $ 763 $ 2,093 $ 12,822 $ 3,863
Per-Se................................... 593 720 3,382 2,129
Impact................................... 335 949 963 2,045
HRI...................................... -- -- -- 108
</TABLE>
15
<PAGE> 18
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Corporate................................ 422 1,011 2,164 1,555
--------- -------- --------- ---------
$ 2,113 $ 4,773 $ 19,331 $ 9,700
========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets:
Physician Services........................................ $142,863 $563,884
Per-Se.................................................... 64,343 75,964
Impact.................................................... 25,566 31,359
Corporate(2).............................................. 125,469 190,004
-------- --------
$358,241 $861,211
======== ========
</TABLE>
- - ---------------
(1) Excludes restructuring and other charges, litigation settlements, intangible
asset impairment and interest expense.
(2) Includes net assets of $91,249 and $90,865 related to the discontinued
operation.
16
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company"), is a leader in delivering
healthcare information and business management services, together with enabling
technologies in selected industries. Medaphis believes it is well-positioned to
capitalize on the healthcare industry trends toward consolidation, managed care
and cost containment through a broad range of services and products that enable
customers to provide quality patient care efficiently and cost effectively.
Servicing approximately 20,000 physicians and 1,500 hospitals, predominantly in
North America, the Company's large client base and national presence further
support the Company's competitive position. Medaphis provides its services and
products through its Physician Services segment, Per-Se Technologies ("Per-Se")
and Impact Innovations ("Impact").
The Physician Services segment provides a range of business management
services to physicians, including clinical data collection, data input, medical
coding, billing, cash collections and accounts receivable management. These
services are designed to assist customers with the business management functions
associated with the delivery of healthcare services, allowing physicians and
hospital staffs to focus on providing quality patient care. These services also
assist physicians in improving cash flows and reducing administrative costs and
burdens. Per-Se provides application software and a broad range of information
technology and consulting services to healthcare providers. Impact provides
system integration services to service-oriented markets such as energy,
communications and financial services.
Medaphis markets its services and products primarily to integrated
healthcare delivery networks, hospitals, physician practices, long-term care
facilities, home health providers and managed care providers.
RESULTS OF OPERATIONS
The following table presents certain items reflected in the Company's
consolidated statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenue........................................... 100.0% 100.0% 100.0% 100.0%
Salaries and wages................................ 76.3 72.3 67.7 64.5
Other operating expenses.......................... 41.6 37.5 32.1 31.4
Depreciation...................................... 6.2 6.0 6.0 5.2
Amortization...................................... 5.2 4.8 5.0 4.5
Interest expense, net............................. 6.1 6.5 5.6 5.3
Intangible asset impairment....................... 385.6 0.0 118.9 0.0
Litigation settlements............................ 19.2 47.2 12.6 14.3
Restructuring and other charges................... 3.7 12.4 1.8 4.5
------ ----- ------ -----
Loss before income taxes.......................... (443.9) (86.7) (149.7) (29.7)
Income tax expense (benefit)...................... 66.7 (13.2) 19.1 (5.4)
------ ----- ------ -----
Loss from continuing operations................... (510.6) (73.5) (168.8) (24.3)
Income from discontinued operation, net of tax.... 1.3 0.4 1.1 1.2
Extraordinary items, net of tax................... 0.0 0.0 (1.7) 20.7
------ ----- ------ -----
Net loss.......................................... (509.3)% (73.1)% (169.4)% (2.4)%
====== ===== ====== =====
</TABLE>
17
<PAGE> 20
Three months ended September 30, 1998 compared to three months ended September
30, 1997
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Physician Services....................................... $ 62,534 $ 59,419
Per-Se................................................... 19,447 24,479
Impact................................................... 19,375 27,346
Eliminations............................................. (47) (35)
-------- --------
$101,309 $111,209
======== ========
</TABLE>
Physician Services' revenue increased by 5.2% for the three month period
ended September 30, 1998 as compared with the three month period ended September
30, 1997. The Company performed a detailed review to update the assumptions and
methodology underlying the calculation of accounts receivable, unbilled in the
third quarter of 1997. Excluding the adjustment to revenue of $10.7 million in
the third quarter of 1997, as a result of the review, Physician Services'
revenue would have decreased by 10.8% for the three month period ended September
30, 1998 as compared with the three month period ended September 30, 1997. The
decrease is attributable to the operating problems at Gottlieb's Financial
Services, Inc. ("GFS") related to the change to a manual coding process and an
increase in client losses within the entire Physician Services segment which
exceeded management's expectations. In addition, the Physician Services segment
continues to be affected by the revenue pressures on the physician accounts
receivable operations resulting from an increase in managed care. As further
discussed below, management believes the client losses and revenue pressures
will continue in the near future.
Per-Se's revenue decreased by 20.6% during the three months ended September
30, 1998 as compared with the same period for the prior year. The decrease is
primarily a result of a slowdown in software license fees in the patient
scheduling product line. Management believes this decline is due to certain
technical problems with a release within the patient scheduling product line.
The Company believes these problems have been corrected and Per-Se is in the
process of rebuilding its relationship with its clients which will allow Per-Se
to expand its reference base for new sales. The decrease in revenue is also a
result of Per-Se not selling any Patient1 software licenses in this period as
compared to $4.2 million in the same period last year.
The 29.1% decrease in Impact's revenue for the quarter ended September 30,
1998 as compared to the same period in 1997 is primarily a result of the
Company's decision late in 1997 to downsize this segment which created less
billable hours in 1998. This segment was downsized in 1997 principally to obtain
efficiencies, but also to reduce unproductive billable staff since growth in the
business had not occurred as quickly as planned.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes
restructuring and other charges, litigation settlements, intangible asset
impairment and interest expense, classified by the Company's different operating
segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Physician Services....................................... $ (9,856) $(11,920)
Per-Se................................................... (9,152) 1,520
Impact................................................... (2,174) (3,879)
Corporate................................................ (8,439) (8,550)
-------- --------
$(29,621) $(22,829)
======== ========
</TABLE>
18
<PAGE> 21
The operating loss for Physician Services in the third quarter of 1998 was
$9.9 million as compared to only $1.2 million in the third quarter of 1997,
excluding the previously mentioned adjustment to accounts receivable, unbilled.
This increase in the operating loss for the Physician Services division is
directly attributable to the revenue declines resulting from various operational
issues at GFS and client losses throughout the segment. Additionally, the
operating loss for the three months ended September 30, 1998 was impacted by a
$4.0 million increase in the allowance for doubtful accounts receivable. On July
19, 1998, FPA Medical Management and certain affiliates ("FPA") filed for
protection under Chapter 11 of the United States Bankruptcy Code. GFS is a
principal vendor to FPA. On August 18, 1998, the Bankruptcy Court entered an
Order authorizing FPA to assume certain vendor contracts, including GFS's
contract. The Company has been paid all pre-petition receivables an is
continuing to provide services to FPA under the contract. There can be no
assurance that FPA will continue to perform its obligations or that FPA will not
seek to liquidate under Chapter 7 of the Bankruptcy Code. The failure of FPA to
perform its obligations could have material adverse effect on GFS.
The operations of Per-Se have been impacted by the previously mentioned
decline in software license sales, increased investments in new product
development and reserve adjustments. During the third quarter of 1998, Per-Se
increased its reserves for bad debts by $7.3 million related to various
receivables and for a significant client which sought bankruptcy protection
during the quarter. In the third quarter of 1997, Per-Se recorded charges of
$4.7 million to adjust accounts receivable, unbilled for unanticipated
collection issues on certain contracts. On Jule 21, 1998 Allegheny Health,
Education and Research Foundation and ceratin affiliate (the "Debtor") filed for
protection under Chapter 11 on the United States Bankruptcy Code. Two of the
Company's affiliates have contracts with the Debtor and are among the Debtor's
twenty largest unsecured creditors. To date, the Debtor has not rejected the
Company's contracts. However, the Company expects that the Debtor will reject
the contracts and that the Company will have to seek to recover pre-peition
amounts outstanding as a general unsecured creditor. There can be no assurance
that the Company will realize any of these outstanding amounts. The Company has
reserved all pre-petition accounts receivable amounts.
The decrease in Impact's operating loss for the quarter ended September 30,
1998 as compared to the same period in 1997 is primarily a result of the
Company's decision late in 1997 to downsize this segment which created
management efficiencies and reduced the number of unproductive billable staff.
The Company's corporate overhead costs have decreased slightly over the
prior year. Management is committed to continually monitor its overhead costs to
create efficient processes and reduce costs where possible. Currently,
management is in the process of reducing costs in the payroll processing area
where management has made the decision to outsource its payroll processing
function. Depreciation expense will increase approximately $1.5 million over the
next two quarters as the Company fully depreciates the remaining cost of the
current payroll processing system over its shortened remaining useful life.
However, after the new processing system is in place, the Company expects an
overall reduction in its payroll processing costs.
INTEREST. Net interest expense was $6.2 million in the third quarter of
1998 as compared with $7.2 million in the third quarter of 1997. The $7.2
million of interest expense in the third quarter of 1997 includes $2.3 million
of expense associated with warrants issued in connection with the Company's debt
facility during that period. The Company entered into a new debt facility on
December 23, 1997, therefore, these warrants never became exercisable. Excluding
these warrants, net interest expense would have increased by $1.3 million due to
higher debt outstanding.
INTANGIBLE ASSET IMPAIRMENT. At September 30, 1998, the Company recorded
an intangible asset impairment charge of $390.6 million to adjust the intangible
assets of the Physician Services segment to their fair value. As previously
disclosed, management continually monitors its results of operations and other
developments within the industry to adjust its cash flow forecast, as necessary,
to determine if an adjustment is necessary to the carrying value of the
Company's intangible assets.
During the third quarter of 1998, management of the Company believed there
were events and changes in circumstances that warranted a re-assessment as to
whether the carrying amount of the intangible assets for the Physician Services
segment was still recoverable. These events included: (i) a continual increase
in the segment's operating losses due primarily to client losses; (ii)
significant litigation charges within the Physician
19
<PAGE> 22
Services segment; and (iii) absence of revenue growth within the Physician
Services segment. Therefore, in accordance with applicable accounting rules,
management prepared a 40 year undiscounted cash flow analysis to determine if
these intangible assets were still recoverable. Management prepared the analysis
with assumptions that reflected its current outlook on the business. In all
instances, management believes the assumptions inherent in the analysis were
reasonable and supportable. The following key assumptions were used in
management's undiscounted cash flow analysis: (i) revenue was forecasted to
decline over the next five years and then remain flat; (ii) EBITDA margin was
forecasted to continue to decrease in 1999, increase slightly over the following
four years and then stabilize at a moderate margin over the remaining life of
the asset; and (iii) capital spending would be maintained in the range of 3% of
revenue. Since the undiscounted cash flow model showed an impairment of the
Company's long-lived assets, the Company used a discounted cash flow model to
measure the fair value of these long-lived assets which was consistent with the
Company's policy. The fair value calculation determined that the fair value of
the long-lived assets was approximately $63 million. The Company wrote-off the
value of its longest lived assets first, which resulted in the write-off of all
of the Physician Services segment's goodwill and a portion of the value of its
client lists. As a result of this impairment charge, the Company reduced the
estimated useful life of its remaining intangible assets for the Physician
Services segment to 10 years.
LITIGATION SETTLEMENTS. During the third quarter of 1998, the Company
successfully negotiated agreements to resolve the investigations of the
Company's billing and collection practices in California and a settlement in
principle of allegations involving billing and collection practices at GFS.
Medaphis will pay approximately $12.5 million before year end and an additional
$7.0 million in two equal payments of $3.5 million in 1999 and 2000. Settlement
has been reached with all parties in connection with the California
Investigation and is subject to final approval by the State of California and
court approval. An agreement in principle based on the Company's ability to pay,
subject to definitive documentation and final approval by the United States, has
been reached in connection with the GFS Investigation.
In the prior year's comparable quarter, the Company had recorded a
litigation settlement charge of $52.5 million for the settlement of a class
action legal matter brought against the Company in 1996.
RESTRUCTURING AND OTHER CHARGES. The Company did not record any
restructuring costs during the third quarter of 1998 as compared to $5.5 million
of restructuring costs recorded during the third quarter of 1997. These costs in
1997 were primarily for the Company's August 1997 plan to consolidate its
technology companies (the "Per-Se Restructuring"). As of September 30, 1998,
management has decided not to continue with the Per-Se Restructuring and
management is currently assessing the strategic alternatives for Impact.
The Company incurred other charges of approximately $3.8 million and $8.4
million in the three-month period ended September 30, 1998 and 1997,
respectively. The 1998 amounts included: (i) $1.8 million of legal costs
primarily associated with the settlement of certain legal matters; (ii) $0.5
million for severance costs associated with former executive management; and
(iii) $1.5 million for the loss recorded on the sale of the data warehousing
software group of Impact. The 1997 charges were comprised of the following
amounts: (i) $7.0 million in non-cash property and equipment impairment charges
associated with the Per-Se Restructuring and the Company's assessment of the
recoverability of certain of its long-lived assets; (ii) $0.6 million for legal
costs associated with various legal matters (see Note 4 of the Notes to
Consolidated Financial Statements); and (iii) $0.8 million associated with
severance costs associated with former executive management.
INCOME TAXES. Based on recent events and the current operating forecast,
the Company reassessed the recoverability of its deferred tax asset at September
30, 1998. Based on its analysis, the Company determined a full valuation
allowance of $67.6 million against the deferred tax asset was required. If,
during the future periods, management believes the Company will generate
sufficient taxable income to realize the deferred tax asset, then the Company
will adjust this valuation reserve accordingly.
Effective income tax rates for the prior period presented vary from
statutory rates primarily as a result of nondeductible goodwill associated with
merger transactions consummated by the Company in previous years.
20
<PAGE> 23
DISCONTINUED OPERATION. On October 15, 1998, the Company entered into a
definitive agreement to sell its Hospital Services segment, which provides
business management services and bad debt collections to approximately 1,200
hospital clients, to NCO Group, Inc. for up to $117.5 million. In accordance
with the agreement, $107.5 million is payable at closing and an additional
purchase price adjustment of up to $10.0 million is payable subject to the
achievement of various operational targets in 1999. The sale is subject to
regulatory approval, but is expected to be consummated by December 15, 1998.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
presented to reflect the Hospital Services segment as discontinued operations.
The net operating results of the segment have been reported in the Consolidated
Statements of Operations as "Income from discontinued operation"; the net assets
have been reported in the Consolidated Balance Sheets as "Net assets of
discontinued operation"; and the net cash flows have been reported in the
Consolidated Statements of Cash Flows as "Net cash provided by (used for)
discontinued operation".
Summarized financial information for the discontinued operation for the
three months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $29,124 $23,840
Income from discontinued operation, net of tax of $943 and
$331...................................................... 1,356 477
</TABLE>
Nine months ended September 30, 1998 compared to nine months ended September
30, 1997
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $202,235 $205,791
Per-Se...................................................... 64,454 69,002
Impact...................................................... 62,078 78,993
HRI......................................................... -- 14,720
Eliminations................................................ (357) (105)
-------- --------
$328,410 $368,401
======== ========
</TABLE>
Excluding the previously discussed revenue adjustment for accounts
receivable, unbilled, Physician Services' revenue decreased 6.6% for the
nine-month period ended September 30, 1998 as compared with the nine-month
period ended September 30, 1997. The previously discussed operating issues at
GFS and client losses contributed to the decline in revenue.
Per-Se's revenue decreased 6.6% during the nine months ended September 30,
1998 as compared with the same period for the prior year. The decrease is
primarily a result of the previously discussed issues with Per-Se's patient
scheduling product and a decrease in the sales of the Patient1 product in 1998.
Per-Se has grown its pipeline for Patient1 and currently is one of two finalists
on several proposals.
In addition to growing its customer base for its existing software
products, management of Per-Se is expecting to grow future revenue through its
newly formed Electronic Commerce group ("E-Commerce"). The Company is
transforming this business from internal cost centers within the Physician and
Hospital Services segments to a revenue producing operating unit within Per-Se.
Management anticipates this business will grow next year with positive operating
and cash flow margins.
21
<PAGE> 24
The 21.4% decrease in the Impact's revenue is primarily a result of the
Company's decision in late 1997 to downsize this segment which created less
billable hours in the nine months ended September 30, 1998 as compared to the
same period in 1997. This segment was downsized in 1997 principally to obtain
management efficiencies, but also to reduce unproductive billable staff since
growth in the business had not occurred as quickly as had been planned.
Medaphis divested Healthcare Recoveries, Inc. ("HRI") in May 1997 through
an initial public offering of 100% of its stock.
OPERATING PROFIT (LOSS). Operating profit (loss) classified by the
Company's different operating segments is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $ (5,391) $ (5,578)
Per-Se...................................................... (6,217) 12,423
Impact...................................................... (404) (4,370)
HRI......................................................... -- 3,685
Corporate................................................... (23,844) (27,193)
-------- --------
$(35,856) $(21,033)
======== ========
</TABLE>
The operating loss for Physician Services for the nine months ended
September 30, 1998 was $5.4 million compared to a $5.1 million operating profit
for the nine months ended September 30, 1997, excluding the previously mentioned
adjustment to the accounts receivable unbilled account. This increase in the
operating loss for the Physician Services division is directly attributable to
revenue declines resulting from various operational issues at GFS and client
losses throughout the segment as well as increases in the reserve for bad debts.
The operating profit for Per-Se for the nine months ended September 30,
1998 has been impacted negatively by the previously mentioned decline in
software license sales, increased investments in new product development,
increases in general and administrative costs and reserve adjustments.
The decrease in Impact's operating loss for the nine-month period ended
September 30, 1998 as compared to the same period in 1997 is primarily a result
of the Company's decision late in 1997 to downsize this segment which created
management efficiencies and reduced the number of unproductive billable staff.
The Company's corporate overhead costs have decreased by 12.3% for the nine
months ended September 30, 1998 as compared to the nine months ended September
30, 1997. This reduction is primarily the result of less professional services
fees and a reduction of headcount resulting from process improvement
initiatives. Management is committed to continually monitor its overhead costs
to create efficient processes and reduce costs where possible.
INTEREST. Net interest expense decreased by approximately $1 million for
the nine-month period ended September 30, 1998 as compared to the nine-month
period ended September 30, 1997. See management's discussion in "Three months
ended September 30, 1998 compared to three months ended September 30, 1997."
INTANGIBLE ASSET IMPAIRMENT. See management's discussion in "Three months
ended September 30, 1998 compared to three months ended September 30, 1997."
LITIGATION SETTLEMENTS. In addition to the previously mentioned $19.5
million settlements of the federal investigations during the third quarter of
1998, the Company has agreed, in principle, to the material terms to settle
three outstanding legal matters which aggregated $21.9 million in the second
quarter of 1998. The Company has agreed, in principle, to settle these matters
primarily with Common Stock. In the comparable prior year's period, the Company
recorded a litigation settlement charge of $52.5 million for the settlement of
22
<PAGE> 25
a class action legal matter brought against the Company in 1996. See Note 4 of
the Notes to Consolidated Financial Statements where the 1998 settlements in
principle are discussed in detail.
RESTRUCTURING AND OTHER CHARGES. The Company recorded restructuring costs
of $0.3 million in the nine months ended September 30, 1998 for the severance
costs associated with the downsizing of several corporate departments as
compared to $5.5 million of restructuring costs recorded in the nine-month
period ended September 30, 1997. These costs in 1997 were primarily for the
Per-Se Restructuring. As of September 30, 1998, management has decided not to
continue with the Per-Se Restructuring and management is currently assessing the
strategic alternatives for Impact.
As of September 30, 1998, the Company had accrued, but had not yet paid,
expenses of approximately $6.3 million, in connection with the various
restructurings undertaken over the past few years. Such amounts consist
primarily of estimated lease termination costs which will be paid in varying
amounts through 2005.
The Company incurred other charges of approximately $5.5 million and $11.2
million in the nine-month period ended September 30, 1998 and 1997,
respectively. The 1998 amounts included: (i) $2.5 million of legal costs
consisting of an increase to the Company's legal reserves for the legal and
administrative fees, costs and expenses associated with various legal matters
(see Note 4 of the Notes to Consolidated Financial Statements) as well as the
settlement of certain pending matters; (ii) $1.5 million for severance costs
associated with former executive management; and (iii) $1.5 million for the loss
recorded on the sale of the data warehousing software group of impact. The 1997
charges were comprised of the following amounts: (i) $7.0 million in non-cash
property and equipment impairment charges associated with the Per-Se
Restructuring and the Company's assessment of the recoverability of certain of
its long-lived assets; (ii) $2.6 million for legal costs associated with various
legal matters (see Note 4 of the Notes to Consolidated Financial Statements);
and (iii) $1.6 million associated with severance costs associated with former
executive management.
INCOME TAXES. See management's discussion in "Three months ended September
30, 1998 compared to three months ended September 30, 1997."
DISCONTINUED OPERATION. See management's discussion in "Three months ended
September 30, 1998 compared to three months ended September 30, 1997."
Summarized financial information for the discontinued operation for the
nine months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $81,081 $72,410
Income from discontinued operation, net of tax of $2,562 and
$2,993.................................................... 3,687 4,306
</TABLE>
EXTRAORDINARY ITEM. The Company used the proceeds from the February 1998
issuance of $175 million of senior notes and the Credit Facility, as defined
below, to redeem the notes evidencing the Company's previous debt facility. The
Company recorded a charge of $5.6 million, net of tax of $3.6 million, to
write-off the unamortized costs associated with the previous debt facility.
On May 28, 1997, Medaphis sold HRI through an initial public offering of
100% of its stock, which generated net proceeds to the Company of approximately
$117 million. The Company recorded an extraordinary gain on the sale of HRI of
$76.4 million, net of tax of $46.2 million, in the second quarter of 1997.
Medaphis had acquired HRI on August 28, 1995 through a business combination
accounted for as a pooling-of-interests.
23
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $50.3 million at September 30, 1998,
including $10.8 million of cash.
The Company's operating activities used $6.4 million of cash during the
nine months ended September 30, 1998 as compared with $7.2 a use of million
during the nine months ended September 30, 1997. The increase in the Company's
operating cash flows resulted primarily from aggressive collection of the
Company's accounts receivable.
Purchases of property and equipment were $19.3 million in the first nine
months of 1998 compared to $9.7 million in the prior year comparable period. The
increase reflects the purchase for approximately $9 million of certain real
property that the Company previously leased.
On February 20, 1998, the Company sold $175 million of 9 1/2% Senior Notes
due 2005 (the "Notes"). The Notes bear interest at the rate of 9 1/2% per annum,
payable semi-annually on February 15 and August 15 of each year, commencing on
August 15, 1998. The Notes will mature on February 15, 2005. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest. In addition, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the original
principal amount of the Notes at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds of one or more equity offerings; provided that
at least $100 million aggregate principal amount of the Notes remain outstanding
immediately following any such redemption.
Payment of principal, of premium, if any, and interest on the Notes is
fully and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operation or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are insignificant
individually and in the aggregate to the consolidated financial statements.
The Company also entered into a new $100 million credit facility (the
"Credit Facility") on February 20, 1998. The Company has the option of making
"LIBOR" based loans or "base rate" loans under the Credit Facility. LIBOR based
loans bear interest at LIBOR plus 3.0%. Base rate loans bear interest at prime
plus 1.75%. In addition the Company pays a quarterly commitment fee on the
unused portion on the Credit Facility ranging from 0.25% to 0.75% per annum
based on the Company's leverage ratio. The Credit Facility contains financial
and other restrictive covenants, including without limitation those restricting
the incurrence of additional indebtedness, the creation of liens, the payment of
dividends, sales of assets, capital expenditures, and prepayment of the Notes
and those requiring maintenance of minimum net worth, minimum EBITDA (as
defined) and minimum interest coverage and limiting leverage. Availability under
the Credit Facility is determined by the Company's Borrowing Base (as defined).
Amounts outstanding under the Credit Facility will be due on February 20, 2001.
At September 30, 1998, the Company had $47 million in borrowing outstanding
under the Credit Facility at interest ranging from 8.0% to 8.2%.
On October 16, 1998, the Company entered into a letter agreement with the
requisite lenders under the Credit Facility which, among other things,
contained: (i) a waiver concerning the GFS Investigation and the California
Investigation including the acknowledgment that neither investigation settlement
is expected to have a material adverse effect; (ii) a waiver concerning the
Company's compliance with the financial covenants for the fiscal quarter ended
September 30, 1998 provided that the Hospital Services segment is sold on or
before December 15, 1998; and (iii) a consent to the sale of the Hospital
Services segment provided that the net disposition proceeds are used immediately
upon closing of the sale to pay in full the obligations outstanding under the
Credit Facility. The letter agreement also contained the First Amendment to the
Credit Facility which, among other things changed the margin on Base Rate and
LIBOR loans to 1.75% and 3.0% per annum, respectively.
24
<PAGE> 27
The Company entered into a definitive agreement to sell its Hospital
Services segment to the NCO Group, Inc. on October 15, 1998. Under the terms of
the agreement, the Company will receive up to $117.5 million for the sale,
$107.5 million payable at Closing and an additional purchase price adjustment of
up to $10.0 million subject to the achievement of various operational targets in
1999. The transaction is subject to regulatory approval and is expected to be
consummated by December 15, 1998.
The Company will use the proceeds from the sale of its Hospital Services
segment to pay down its existing obligations under the Credit Facility. The
Company believes that the excess cash obtained from the sale of the Hospital
Services segment and anticipated cash flow from operations will be sufficient to
permit the Company to meet its operating expenses, make necessary capital
investments in operations and service its debt requirements for the foreseeable
future, however, there can be no assurance that such results will be achieved.
There can be no assurance that the sale of the Hospital Service segment
will be consummated. If such sale is not consummated prior to December 15, 1998,
the Company will not have sufficient liquidity without obtaining an additional
waiver from the requisite lenders under the Credit Facility or alternate sources
of liquidity. There can be no assurance that any required waiver or alternate
source of liquidity. There can be no assurance that any required waiver or
alternate source of liquidity will be available to the Company or can be
obtained on terms and conditions satisfactory to the Company.
The Company decided to transition from a computerized coding system used by
GFS for emergency room physician billing to manual coding. The Company does not
expect to incur any material extraordinary charges as a result of the transition
from the computerized coding system. There can be no assurance that any third
party claims or lost business relating to transition from, or modifications
previously made to, the GFS coding system will not have a material adverse
effect on the Company, including, without limitation, on the Company's revenue,
results of operations, financial condition or cash flow.
The Company is a party to legal actions as described in "Part II Item 1.
Legal Proceedings." There can be no assurance that these actions or
investigations will not have a disruptive effect upon the operations of the
business or that the resolution of these actions will not have a material
adverse effect on the Company's liquidity or financial position or that
appropriate amendments to the Credit Facility would not be required. If the
Company is unable to service its indebtedness, it will be required to adopt
alternative strategies, which may include actions such as reducing or delaying
capital expenditures, selling assets, restricting or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other general
corporate purpose may be impaired; and (ii) a substantial portion of the
Company's cash flow from operations may be dedicated to the payment of principal
and interest on its indebtedness thereby reducing the funds available to the
Company for its operations. In addition, the Credit Facility and the Indenture
for the Notes contains financial and other restrictive covenants, including
without limitation those restricting the incurrence of additional indebtedness,
the creation of liens, the payment of dividends, sales of assets, capital
expenditures, and prepayments of indebtedness.
YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible. GFS's computerized coding system is one of the legacy
systems from
25
<PAGE> 28
which the Company has transitioned. The Company believes that it is on target to
complete substantially all of these system migration efforts with respect to its
Physician Services business in the first half of 1999. The detail planning and
inventory for the majority of the Company's legacy systems that are being
modified for Year 2000 compatibility has been completed and such systems are in
remediation. In the third quarter of 1998, Per-Se Technologies released Year
2000 compatible versions for its scheduling products. Customers, vendors and
resellers have been identified and requests for information distributed
regarding the Year 2000 readiness of such parties. Responses are expected
through the first quarter of 1999. The Company will develop contingency plans
during the fourth quarter of 1998 through the second quarter of 1999 in response
to assessments of the Year 2000 readiness of customers, vendors and resellers.
The estimated cost of the Company's Year 2000 efforts is $10 million to $15
million over 1998 and 1999, the majority of which represents redirection of
internal resources. However, there can be no assurance that the Company will
identify all such Year 2000 problems in its computer systems or those of its
customers, vendors or resellers in advance of their occurrence or that the
Company will be able to successfully remedy any problems that are discovered.
The expenses of the Company's efforts to identify and address such problems, or
the expenses or liabilities to which the Company may become subject as a result
of such problems, could have a material adverse effect on the Company's
business, financial condition and results of operations. The revenue stream and
financial stability of existing customers may be adversely impacted by Year 2000
problems, which could cause fluctuations in the Company's revenue. In addition,
failure of the Company to identify and remedy Year 2000 problems could put the
Company at a competitive disadvantage relative to companies that have corrected
such problems.
26
<PAGE> 29
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
conducted 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 complied. The subpoena required, among other things,
records of any audit or investigative reports relating to the billing of payors
globally for radiological services during the period January 1, 1991 to date and
any refunds owed to or issued to payors with respect to such global billing
reports in the Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the appropriate state or states may elect to intervene fully or partially in
qui tam litigation and proceed with the action.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx) (the
"Complaint"). On February 11, 1998, the United States provided Medaphis with a
copy of the Complaint, Substitution of Attorney, and Order which prohibited the
Company from making any use of the Complaint, including any public disclosure,
other than for the purposes of settlement negotiations, without further order of
the Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an order modifying its February 6, 1998 order to
allow Medaphis to make public disclosures concerning the Complaint and its
contents to the extent that Medaphis determined such disclosures were required
by applicable securities laws, provided that such disclosures did not reveal the
Relators' identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs.
The Complaint includes causes of action under the Federal False Claims Act, 31
U.S.C. sec 3729 et seq., and the California False Claims Act, Cal. Gov't Code
sec. 12650 et seq. The Complaint also includes causes of action relating to
Medaphis' termination of Relator II, including a count under the state and
federal whistleblower protection statutes.
The Company recorded charges of $12 million in the third quarter of 1995
solely for legal and administrative fees, costs and expenses it anticipates
incurring in connection with the California Investigation and certain putative
class action lawsuits which were filed in 1995 following the Company's
announcement of the California Investigation. Since the third quarter of 1995,
the Company has periodically adjusted this reserve, as necessary, including a
$0.3 million increase in the second quarter of 1998. Such adjustments to the
reserve have aggregated to a net reduction of $0.5 million. The reserve
currently covers only the anticipated expenses of the California Investigation
and the related lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgments or sanctions that may arise out of
such matters.
27
<PAGE> 30
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provide for the payment by the Company of $3.6
million in the aggregate, the dismissal of all pending proceedings against the
Company and the release of various other claims arising out of the California
Investigation. As a part of these settlements, CompMed, Inc., a company acquired
by the Company in 1992, pled guilty to a single criminal count.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error which primarily impacts certain managed care
plans, 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, cannot be determined by the Company, 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.
The Company is unable to estimate the possible range of loss, if any.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan were
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services requested information from GFS following an audit of a GFS client. GFS
has complied with those requests. 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 each of the years ended December
31, 1996 and 1997, GFS represented approximately 7% of Medaphis' revenue. During
those years, GFS processed approximately 5.6 million and 6.25 million claims,
respectively, approximately 2 million and 2.3 million of which, respectively,
were made to government programs. The government requested that GFS voluntarily
produce records, and GFS complied with that request. The Company recorded
charges of $2 million and $1 million in the second and third quarters of 1997,
respectively, and $0.7 million in the second quarter of 1998 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 has determined it is in its best interest to settle such
claims. The Company has reached an agreement in principle with the United States
to settle the matters related to the GFS Investigation on an ability to pay
basis. The settlement, which is subject to definitive documentation, requires
the Company to pay to the United States and the various states a total of $15
million, of which $8 million will be paid within 10 days of the execution of a
definitive Settlement Agreement among the parties, with the balance of $7
million being paid in eight equal quarterly installments over 1999 and 2000. The
deferred portion of the settlement payment will bear interest at the one year
Treasury Bill rate. The Settlement Agreement will provide for the dismissal with
prejudice of claims against the Company and the release by the United States of
civil and administrative claims arising out of the emergency room billing of
government programs services provided by GFS from 1993 through the date of the
Settlement Agreement.
The Company recorded a litigation settlement charge of $19.5 million in the
quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement of the California and GFS Investigations,
the Company entered into a Corporate Integrity Agreement with the Office of the
Inspector General of the Department of Health and Human Services. This
Agreement, which has a term of sixty-five months, provides that the government
will not seek to exclude the Company from participation in governmental health
care programs based on the
28
<PAGE> 31
conduct alleged in the California and GFS Investigations and requires the
Company to continue its existing compliance program, augmented by an annual
third party review and additional reporting requirements.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
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.
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 "Derivative Suit"). The plaintiff sought
unspecified 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, which motion was denied without prejudice. The
parties entered into a Stipulation and Settlement Agreement dated June 26, 1998
(the "Derivative Stipulation") to settle the Derivative Suit. The Derivative
Stipulation provides for the enactment of procedures for governance of the Audit
Committee of the Board of Directors and for such attorney's fees and expenses as
may be awarded by the court in an amount not to exceed $250,000 (to be paid by
the Company's directors' and officers' liability insurance carrier). On
September 29, 1998, the court granted final approval to the settlement and
ordered all claims dismissed.
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 Health Data
Sciences Corporation ("HDS"). Plaintiff seeks rescissory, compensatory and
punitive damages in excess of $100 million, rescission, injunctive relief and
costs. On January 10, 1997, the defendants filed a demurrer to the complaint. On
February 5, 1997, the Court overruled defendants' demurrer. On March 18, 1997,
the court denied the plaintiff's motion for a preliminary injunction. On July
16, 1997, plaintiff filed an amended complaint adding several new parties,
including current and former directors and former and current officers of
Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the Securities Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such Securities Act
claims. The Company is unable to estimate a possible range of loss.
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
29
<PAGE> 32
Brown). Plaintiffs seek unspecified compensatory and punitive damages, as well
as fees, interest and other costs. On April 18, 1997, the Medaphis defendants
and BSG defendants filed motions to dismiss the complaint. On or about July 3,
1997, in lieu of responding to these motions, the plaintiffs filed an amended
complaint, adding new claims under the Securities Act and common law and new
parties, including former officers of Medaphis, Medaphis' former independent
accountants and BSG. On or about October 29, 1997, all defendants filed motions
to dismiss the amended complaint. On May 12, 1998, the court ruled in favor of
defendants on the motions, dismissing all of plaintiffs' claims with prejudice
and without leave to amend. On May 15, 1998, the Judge signed an order to that
effect. The plaintiffs have appealed from this order, and that appeal is
pending. The Company is unable to estimate a possible range of loss.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 March 31, 1999. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. In June 1998, the Company and
the BSG Principals reached an agreement in principle to settle the claims made
on behalf of the former BSG shareholders in exchange for approximately 3.2
million shares of Medaphis Common Stock, subject to negotiation and definitive
documentation of other terms and conditions of the settlement. The Company
recorded a litigation settlement charge of $21.3 million in the quarter ended
June 30, 1998 in connection with this agreement in principle. The charge
reflects 3.2 million shares of Medaphis Common Stock valued at the fair value
per share on the date on which the material terms of the agreement in principle
was reached. The Company classified the entire $21.3 million liability
associated with the proposed settlement as noncurrent since such obligation will
be settled with Common Stock rather than current assets and the exact timing of
the payments of claims pursuant to such settlement is not determinable.
On November 9, 1998, the parties entered into a letter of intent with
respect to the settlement of the BSG Principals' claims. The terms of the letter
of intent, which vary from the previously announced agreement in principle,
provide for the payment by the Company to the BSG Principals of 4.5 million
shares of the Company's voting common stock and $2.5 million in cash, to be
funded by the Company's officers and directors liability insurance. The
settlement is subject to the consent and approval of the Company's insurer and
its funding of the cash portion of the settlement. Based on the price of the
Company's common stock on the date of the letter of intent, the settlement would
result in a charge of approximately $17.7 million, $2.5 million of which would
be funded by insurance. Since the Company had previously estimated this
liability at $21.3 million, the Company will reduce this liability in the fourth
quarter of 1998 by $3.6 million.
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 was 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 alleged
common law fraud and violations of the federal securities laws in connection
with the merger. In addition, the complaint alleged breaches of contract
relating to the merger agreement and a registration rights agreement, as well as
tortious interference with economic advantage and declaratory judgement.
Defendants filed a motion to dismiss the complaint. On September 29, 1998, the
Court granted Defendants' motion to dismiss with respect to all securities law,
fraud and tort claims. Plaintiffs' claims for breach of contract and declaratory
judgement remain outstanding. Plaintiffs have sought leave to file a
supplemental amended complaint asserting solely the contract and declaratory
judgment claims, and seeking rescission of the merger agreement and return of
all MMS shares, damages in excess of $100 million, and
30
<PAGE> 33
voiding of various non-compete covenants and contract provisions between
Medaphis and plaintiffs. The Company expects that discovery, which had been
stayed pending resolution of the motion to dismiss, will commence in the near
term. The Company is unable to estimate a possible range of loss.
On August 12, 1997, George D. Stickle 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 asserted claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserted claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint sought rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 61,553 shares of Medaphis Common Stock. The
Company recorded a litigation settlement charge of approximately $0.4 million in
the quarter ended June 30, 1998 in connection with this agreement. On June 26,
1998, the court entered an order substituting Peter Gladkin as lead plaintiff in
lieu of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. On September 29,
1998, the court granted final approval to the settlement and ordered all claims
dismissed.
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. A number of the former
stockholders of Rapid Systems Solutions, Inc. ("RSSI"), a company acquired by
the Company in 1996, opted out of the settlement of the 1996 Class Action
against the Company and made claims against the Company, alleging securities
fraud and other potential causes of action in connection with the acquisition.
The Company has settled with each of such former RSSI stockholders for a total
of $444,000 in cash, in the aggregate, to be funded by the Company's directors'
and officers' liability insurer, and the forgiveness of certain indebtedness.
The Company recorded a litigation settlement charge of $1.2 million in the
quarter ended September 30, 1998 in connection with this settlement.
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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended 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 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company has cooperated with the Commission
in its investigation and will continue to do so.
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, including, without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to certain of the pending claims, the Company has not
accrued any amounts for any damages, settlements, penalties or awards with
respect to such unsettled claims, except as otherwise disclosed.
31
<PAGE> 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- - ------- -----------------------
<C> <C> <S>
2.1 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registrant's Registration Statement on Form S-1, File No.
33-42216)
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993)
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registrant's Registration Statement on Form 8-A/A, filed on
May 22, 1996)
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registrant's Registration Statement on Form
S-8, File No. 333-03213)
3.5 -- Amended and Restated By-Laws of Registrant, as amended
4.1 -- Credit Agreement dated February 13, 1998, among Registrant,
as Borrower, various financial institutions from time to
time parties thereto, as the Lenders, DLJ Capital as the
Syndication Agent for the Lenders, and Wachovia Bank, N.A.,
as the Administrative Agent for the Lenders (including form
of note) (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K filed on March 3,
1998)
4.2 -- Subsidiary Guaranty dated February 20, 1998, among the
domestic Subsidiaries of Registrant and Wachovia Bank, N.A.,
as Administrative Agent (incorporated by reference to
Exhibit 10.2 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.3 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.4 -- Registration Rights Agreement dated as of February 20, 1998,
among Registrant, the Subsidiary Guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation (incorporated by
reference to Exhibit 4.15 to Registrants' Registration
Statement on Form S-4, File No. 333-47409)
10.1 -- Employment Agreement dated July 27, 1998, between Registrant
and Wayne A. Tanner
10.2 -- Impact Innovations Key Employee Incentive Plan
10.3 -- Medaphis Corporation Long Term Incentive Plan
10.4 -- Corporate Integrity Agreement between the Office of the
Inspector General of the Department of Health and Human
Services and Registrant
10.5 -- Waiver and First Amendment to Credit Agreement, dated
October 16, 1998, among Registrant, as Borrower, DLJ Capital
Funding, Inc., as Syndication Agent, Wachovia Bank, N.A., as
Administrative Agent, and various financial institutions, as
Lenders.
11 -- Statement regarding Computation of Earnings Per Share
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
</TABLE>
32
<PAGE> 35
(B) Reports on Form 8-K
The Company has filed the following report on Form 8-K during the quarter
ended September 30, 1998:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- - ------------- ---------- -------------- --------------
<S> <C> <C> <C>
Announcement of certain executive officer
appointments and promotions................. No July 29, 1998 August 3, 1998
</TABLE>
33
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDAPHIS CORPORATION
(Registrant)
By: /s/ JAMES W. FITZGIBBONS
------------------------------------
James W. FitzGibbons
Vice President and Controller
(Principal Accounting Officer)
Date: November 16, 1998
34
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- - ------- -----------------------
<C> <C> <S>
2.1 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registrant's Registration Statement on Form S-1, File No.
33-42216)
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993)
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registrant's Registration Statement on Form 8-A/A, filed on
May 22, 1996)
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registrant's Registration Statement on Form
S-8, File No. 333-03213)
3.5 -- Amended and Restated By-Laws of Registrant, as amended
4.1 -- Credit Agreement dated February 13, 1998, among Registrant,
as Borrower, various financial institutions from time to
time parties thereto, as the Lenders, DLJ Capital Funding,
Inc., as the Syndication Agent for the Lenders, and Wachovia
Bank, N.A., as the Administrative Agent for the Lenders
(including form of note) (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.2 -- Subsidiary Guaranty dated February 20, 1998, among the
domestic Subsidiaries of Registrant and Wachovia Bank, N.A.,
as Administrative Agent (incorporated by reference to
Exhibit 10.2 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.3 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.4 -- Registration Rights Agreement dated as of February 20, 1998,
among Registrant, the Subsidiary Guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation (incorporated by
reference to Exhibit 4.15 to Registrants's Registration
Statement on Form S-4, File No. 333-47409)
10.1 -- Employment Agreement dated July 27, 1998, between Registrant
and Wayne A. Tanner
10.2 -- Impact Innovations Key Employee Incentive Plan
10.3 -- Medaphis Corporation Long Term Incentive Plan
10.4 -- Corporate Integrity Agreement between the Office of the
Inspector General of the Department of Health and Human
Services and Registrant
10.5 -- Waiver and First Amendment to Credit Agreement, dated
October 16, 1998, among Registrant,as Borrower, DLJ Capital
Funding, Inc., as Syndication Agent, Wachovia Bank, N.A., as
Administrative Agent, and various financial institutions, as
Lenders.
11 -- Statement regarding Computation of Earnings Per Share
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
</TABLE>
35
<PAGE> 1
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
by and between
MEDAPHIS CORPORATION
and
NCO GROUP, INC.
dated as of October 15, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I
PURCHASE AND SALE OF THE SHARES...................................................................................1
Section 1.1 Purchase and Sale......................................................................1
Section 1.2 Consideration..........................................................................1
Section 1.3 Closing................................................................................2
Section 1.4 Deliveries by Seller...................................................................2
Section 1.5 Deliveries by Buyer. ..................................................................2
Section 1.6 Closing Balance Sheet..................................................................3
Section 1.7 Post Closing Adjustment................................................................3
Section 1.8 Earn-Out Payment.......................................................................4
ARTICLE II
RELATED MATTERS...................................................................................................6
Section 2.1 Use of Seller's Name and Logo. ........................................................6
Section 2.2 Books and Records of the Company.......................................................7
Section 2.3 No Ongoing or Transition Services......................................................7
Section 2.4 Intercompany Accounts..................................................................7
Section 2.5 Distributions..........................................................................7
Section 2.6 Service Contracts......................................................................7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER..........................................................................8
Section 3.1 Organization...........................................................................8
Section 3.2 Authorization..........................................................................8
Section 3.3 Common Stock...........................................................................9
Section 3.4 Ownership of the Common Stock..........................................................9
Section 3.5 Consents and Approvals: No Violations..................................................9
Section 3.6 Financial Statements...................................................................9
Section 3.7 Absence of Undisclosed Liabilities....................................................10
Section 3.8 Absence of Material Adverse and Other Changes.........................................10
Section 3.9 Title, Ownership and Related Matters..................................................10
Section 3.10 Leases................................................................................11
Section 3.11 Intellectual Property.................................................................11
Section 3.12 Computer Software.....................................................................12
Section 3.13 Litigation............................................................................12
Section 3.14 Compliance with Applicable Law........................................................13
Section 3.15 Certain Contracts and Arrangements....................................................13
Section 3.16 Employee Benefit Plans: ERISA.........................................................13
Section 3.17 Taxes.................................................................................14
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 3.18 Certain Fees..........................................................................15
Section 3.19 Operations Prior to and Including the Closing.........................................15
Section 3.20 Debt Collection Licenses..............................................................17
Section 3.21 Employee Relations....................................................................17
Section 3.22 Accounts Receivable...................................................................17
Section 3.23 Suppliers and Customers...............................................................17
Section 3.24 Insurance.............................................................................18
Section 3.25 Questionable Payments.................................................................18
Section 3.26 Full Disclosure.......................................................................18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER..........................................................................18
Section 4.1 Organization and Authority of Buyer...................................................18
Section 4.2 Consents and Approvals; No Violations.................................................19
Section 4.3 Availability of Funds.................................................................19
Section 4.4 Litigation............................................................................19
Section 4.5 Certain Fees..........................................................................19
ARTICLE V
COVENANTS........................................................................................................20
Section 5.1 Conduct of the Company's Business....................................................20
Section 5.2 Access to Information.................................................................20
Section 5.3 Consents..............................................................................20
Section 5.4 Best Efforts..........................................................................21
Section 5.5 Public Announcements..................................................................21
Section 5.6 Covenant to Satisfy Conditions........................................................21
Section 5.7 Employees; Employee Benefits..........................................................22
Section 5.8 Certain Tax Matters...................................................................22
Section 5.9 Proceedings...........................................................................27
Section 5.10 Continued Effectiveness of Representations and Warranties of Corporation..............28
Section 5.11 No Shopping...........................................................................28
Section 5.12 Hart-Scott-Rodino Filings.............................................................28
Section 5.13 Releases..............................................................................28
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE PARTIES.........................................................................29
Section 6.1 Conditions to Each Party's Obligation.................................................29
Section 6.2 Conditions to Obligations of Seller...................................................29
Section 6.3 Conditions to Obligations of Buyer....................................................30
ARTICLE VII
TERMINATION, AMENDMENT; WAIVER...................................................................................31
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
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<S> <C>
Section 7.1 Termination...........................................................................31
Section 7.2 Procedure and Effect of Termination...................................................31
Section 7.3 Amendment, Modification and Waiver....................................................32
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS: INDEMNIFICATION.....................................................................32
Section 8.1 Survival of Representations and Warranties............................................32
Section 8.2 Seller's Agreement to Indemnify.......................................................33
Section 8.3 Buyer's Agreement to Indemnify........................................................33
Section 8.4 General Provisions....................................................................33
Section 8.5 Third Party Indemnification...........................................................34
ARTICLE IX
RESTRICTIVE COVENANTS OF THE SELLERS.............................................................................35
Section 9.1 Certain Acknowledgments...............................................................35
Section 9.2 Nondisclosure Covenants...............................................................36
Section 9.3 Noncompetition Covenants..............................................................36
Section 9.4 Nonsolicitation.......................................................................37
Section 9.5 Certain Exclusions....................................................................37
Section 9.6 Enforcement of Covenants..............................................................37
Section 9.7 Scope of Covenants....................................................................37
ARTICLE X
MISCELLANEOUS....................................................................................................38
Section 10.1 Fees and Expenses.....................................................................38
Section 10.2 Further Assurances....................................................................38
Section 10.3 Notices...............................................................................38
Section 10.4 Severability..........................................................................39
Section 10.5 Binding Effect; Assignment............................................................39
Section 10.6 No Third Party Beneficiaries..........................................................40
Section 10.7 Interpretation........................................................................40
Section 10.8 Jurisdiction and Consent to Service...................................................40
Section 10.9 Entire Agreement......................................................................41
Section 10.10 Governing Law.........................................................................41
Section 10.11 Specific Performance..................................................................41
Section 10.12 Counterparts..........................................................................41
</TABLE>
iii
<PAGE> 5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made and dated as of October 15, 1998
(the "Agreement"), by and between Medaphis Corporation, a Delaware corporation
("Seller"), and NCO Group, Inc., a Pennsylvania corporation ("Buyer").
WHEREAS, pursuant to the terms and conditions of this Agreement, Seller
desires to sell to Buyer, and Buyer desires to purchase from Seller, 100 shares
(the "Shares") of common stock, par value $1.00 per share (the "Common Stock"),
of Medaphis Services Corporation, a Georgia corporation and a wholly-owned
subsidiary of Seller (the "Company"), representing all of the issued and
outstanding capital stock of the Company.
WHEREAS, Seller and Buyer wish to make an election under Section
338(h)(10) of the Internal Revenue Code of 1986, as amended, (the "Code"), to
treat the transaction for federal income tax purposes (and for state and local
tax purposes, where a comparable election is allowable) as the deemed sale of
the Company's assets in connection with a complete liquidation of the Company
pursuant to Section 332 of the Code.
WHEREAS, immediately before the sale of the Shares to Buyer, the
Company will adopt a plan of complete liquidation within the meaning of Section
332 of the Code and, pursuant to such plan of complete liquidation, will
distribute to Seller (a) the stock of National Healthcare Technologies, Inc.
("NHTI") that is owned by the Company, which stock represents all of the issued
and outstanding stock of NHTI, and (b) all assets related solely to the
operation of the print and mail operation of the Company (the "Laser Center").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions set forth
below, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE OF THE SHARES
Section 1.1 Purchase and Sale. Subject to the terms and conditions of
this Agreement, at the Closing provided for in Section 1.3 hereof (the
"Closing"), Seller will sell, transfer and deliver to Buyer, and Buyer will
purchase, acquire and accept from Seller, the Shares.
Section 1.2 Consideration. Subject to the terms and conditions of this
Agreement, in consideration of the aforesaid sale, transfer and delivery of the
Shares, Buyer shall pay to Seller a total purchase price equal to (a) One
Hundred and Seven Million Five Hundred Thousand Dollars ($107,500,000) (the
"Base Purchase Price"), less (b) the amount of the Post-Closing Adjustment (as
defined in Section 1.7), if any, plus (c) the amount of the Earn-Out Payment (as
defined in Section 1.8), if any, (the Base Purchase Price, less any Post-Closing
Adjustment, plus any Earn-Out Payment is referred to as the "Purchase Price").
The Base Purchase Price shall be paid to Seller in cash by
<PAGE> 6
wire transfer of immediately available funds to such bank account as shall be
designated by Seller in writing not less than two business days prior to the
Closing.
Section 1.3 Closing. The Closing of the transactions contemplated by
this Agreement shall take place on November 30, 1998, provided that all of the
conditions to Closing set forth in Article VI hereof are satisfied or waived,
or, in the event that such conditions are not then satisfied or waived, the
third business day following the satisfaction or waiver of all of such
conditions, at 9:00 a.m., local time, at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, 919 Third Avenue, New York, New York, or on such other date
and at such other time or place as the parties may agree. The date of the
Closing is sometimes referred to herein as the "Closing Date". The transactions
contemplated by this Agreement shall be effective as of the close of business on
the Closing Date.
Section 1.4 Deliveries by Seller. At the Closing, Seller will deliver
or cause to be delivered to Buyer (unless delivered previously) the following:
(a) The stock certificate or certificates representing the Shares,
accompanied by stock powers duly executed in blank or duly executed stock
transfer forms or instruments of transfer which validly transfer title of the
Shares;
(b) The resignations of all members of the Board of Directors of
the Company;
(c) The stock books, ledger books and corporate seal of the
Company and each Subsidiary (as hereinafter defined);
(d) The books and records of the Company and each Subsidiary to
the extent provided in Section 2.2 hereof;
(e) An opinion of counsel, in form reasonably acceptable to Buyer,
from Skadden, Arps, Slate, Meagher & Flom LLP as to the matters reasonably
agreed to by the parties;
(f) All Releases (as defined in Section 5.13); and
(g) All other documents, certificates, instruments and writings
required or reasonably requested to be delivered by Seller at or prior to the
Closing pursuant to this Agreement or otherwise required in connection herewith.
Section 1.5 Deliveries by Buyer. At the Closing, Buyer will deliver or
cause to be delivered to Seller (unless previously delivered) the following:
(a) The Base Purchase Price referred to in Section 1.2 hereof,
and, if applicable, the Earn-Out Payment pursuant to Section 1.8(a);
2
<PAGE> 7
(b) An opinion of counsel, in form reasonably acceptable to
Seller, from Blank Rome Comisky & McCauley LLP as to the matters reasonably
agreed to by the parties; and
(c) All other documents, certificates, instruments or writings
required or reasonably requested to be delivered by the Buyer at or prior to the
Closing pursuant to this Agreement or otherwise required in connection herewith.
Section 1.6 Closing Balance Sheet. Buyer shall cause the Company to
close the books and accounts of the Company as of the Closing Date. Buyer will
deliver to Seller as soon as reasonably practicable, but in no event later than
forty-five (45) business days after Closing, a balance sheet of the Company and
Subsidiaries as of the Closing Date (the "Closing Balance Sheet"), which has
been audited by PricewaterhouseCoopers LLP (the "Accountants"). The Closing
Balance Sheet will be prepared in accordance with generally accepted accounting
principles consistently applied ("GAAP") and consistent with the presentation of
the balance sheet contained in the Unaudited Financial Statements (as
hereinafter defined) as of and for the period ended June 30, 1998. The Closing
Balance Sheet shall include accruals for all obligations of the Company and its
Subsidiaries including, but not limited to, for federal, state and local taxes
(including income taxes) as well as accruals including, but not limited to, for
payroll taxes, employee benefits, workers' compensation insurance premiums and
deposits, wages, bonuses, vacation pay, sick pay and "comp" time, in all cases
as if there had been a closing of the books on the Closing Date. Buyer shall
give the representatives of the Seller reasonable access to the Company's books
and records for the purpose of examining the Closing Balance Sheet.
Section 1.7 Post Closing Adjustment. If the Tangible Net Worth (as
hereinafter defined) of the Company and its Subsidiaries as reflected on the
Closing Balance Sheet is less than $32,426,000, the amount of such difference
shall be the Post Closing Adjustment which shall be payable by Seller to Buyer.
If any Post Closing Adjustment is required, the adjustment shall be paid on a
date (the "Payment Date") within three (3) business days after the Closing
Balance Sheet is finally determined pursuant to Section 1.6. The amount of any
Post Closing Adjustment payable by Seller shall be paid to Buyer by Seller by
wire transfer in immediately available funds to an account or accounts
designated by Buyer. "Tangible Net Worth" means the total shareholders equity of
the Company and its Subsidiaries on a consolidated basis as reflected on the
Closing Balance Sheet:
(i) less intangibles (including goodwill, deferred
financing acquisition costs, the book value of
internally developed software and deferred loan
costs) of the Company and its Subsidiaries reflected
on the Company's Closing Balance Sheet;
(ii) plus any amounts for deferred or current tax
liabilities reflected on the Company's Closing
Balance Sheet;
3
<PAGE> 8
(iii) less any balance due from Seller reflected on the
Company's Closing Balance Sheet;
(iv) less non-restricted/non-client cash and
non-restricted/non-client cash equivalents reflected
on the Company's Closing Balance Sheet;
(v) less an amount equal to the total accounts receivable
net of applicable bad debt reserve reflected on the
Company's Closing Balance Sheet in connection with
Allegheny Health, Education and Research Foundation;
(vi) plus any balance due to the Seller reflected on the
Company's Closing Balance Sheet; and
(vii) less amounts for deferred or current tax assets
reflected on the Company's Closing Balance Sheet.
Section 1.8 Earn-Out Payment. The "Earn-Out Payment" means that amount,
if any, payable by Buyer to Seller pursuant to Section 1.8(a) or Section 1.8(b)
below.
(a) In the event that prior to six months after the Closing Date,
the Company renews the Agreement for Collection Services between Galen Health
Care, Inc. and AssetCare, Inc. dated March 28, 1996 (the "Columbia Contract") on
substantially the same terms and conditions, including a guarantee period of not
less than two (2) years (the "Renewal") and provides written evidence of the
Renewal to Buyer reasonably satisfactory to Buyer, Buyer shall pay Seller an
Earn-Out Payment of Ten Million Dollars ($10,000,000) with Interest, as defined
below, if applicable, in cash by wire transfer of immediately available funds to
such bank account as shall be designated by Seller in writing. Such payment
shall occur upon the later of the Closing Date or three (3) business days after
the receipt of written evidence of the Renewal. In the event that Buyer pays the
Earn-Out Payment pursuant to Section 1.8(a), no Earn-Out Payment shall be
payable pursuant to Section 1.8(b).
(b) In the event that the Company does not obtain the Renewal of
the Columbia Contract on or before six months after the Closing Date (as
provided in Section 1.8(a)), Buyer shall pay Seller an Earn-Out Payment,
together with accrued interest thereon from the Closing Date at 5.5% per annum
("Interest"), equal to the sum of (i) the Retained Hospital Accounts Amount (as
hereinafter defined), if any, plus (ii) one-half of the Lost Hospital Accounts
Net Income (as hereinafter defined), if any. Any Earn-Out Payment payable
pursuant to this Section 1.8(b) shall not exceed Ten Million Dollars
($10,000,000) plus Interest (the "Maximum Earn-Out Payment"). The Earn-Out
Payment shall be paid by Buyer to Seller within three (3) business days after
the Earn-Out Statement is finalized pursuant to Section 1.8(e) in cash by wire
transfer of immediately available funds to such bank account as shall be
designated by Seller in writing.
4
<PAGE> 9
(c) The "Retained Hospital Account Amount" shall equal the result of
the following formula:
Test Period Net Revenues
[ ------------------------ X $15,000,000 ] - $5,000,000
Base Period Net Revenues
"Base Period Net Revenues" shall equal the net revenues received by the
Company during the twelve (12) calendar months ending on the Closing Date (the
"Base Period") from the Closing Date Columbia Hospital Accounts (as hereinafter
defined). "Closing Date Columbia Hospital Accounts" means those accounts from
all Columbia/HCA hospitals placing such accounts with the Company for collection
under the Columbia Contract prior to the expiration of the Columbia Contract.
For the purpose of the Base Period Net Revenues calculation, the net revenues
from any Closing Date Columbia Hospital Account from any Columbia/HCA hospital
which began placing accounts with the Company for collection after the beginning
of the Base Period shall be annualized by multiplying the net revenues for such
new Closing Date Columbia Hospital Account by a fraction equal to 365 divided by
the number of days from the starting date of such new Closing Date Columbia
Hospital Account to the Closing Date. "Test Period Net Revenues" shall equal the
net revenues received by the Company during the twelve (12) calendar months
ending on the first anniversary (the "Anniversary Date") of the Closing Date
(the "Test Period") from the Anniversary Date Columbia Hospital Accounts (as
hereinafter defined). "Anniversary Date Columbia Hospital Accounts" means those
accounts from all Columbia/HCA hospitals which have placed new accounts with the
Company for collection within the forty-five (45) day period prior to the first
Anniversary of the Closing Date and which have not notified the Company of their
intent to terminate their relationship with the Company. For the purpose of the
Test Period Net Revenues calculation, the net revenues from any Anniversary Date
Columbia Hospital Account from any Columbia/HCA hospital which began placing
accounts with the Company after the beginning of the Test Period shall be
annualized by multiplying the net revenues for such new Anniversary Date
Columbia Hospital Account by a fraction equal to 365 divided by the number of
days from the starting date of such new Closing Date Columbia Hospital Account
to the Anniversary Date.
(d) The "Lost Hospital Accounts Net Income" shall equal the
Company's net income arising from Lost Hospital Accounts (as hereinafter
defined) during the Test Period, calculated in accordance with GAAP. "Lost
Hospital Accounts" means those accounts from Columbia/HCA hospitals for which
the Company is performing accounts receivable services during the Test Period
but which are not placing or have not placed new accounts with the Company
within the period of
5
<PAGE> 10
45 days prior to the Anniversary Date or which have notified the Company of
their intent to terminate their relationship with the Company; provided,
however, that if the Company's recovery rate for such hospital's accounts during
the Test Period is lower by 10% than the Company's recovery rate for such
hospital during the Base Period and such hospital did not have a material change
in the composition of its placements, such accounts shall not be Lost Hospital
Accounts but shall be included in Anniversary Date Columbia Hospital Accounts.
(e) Within thirty (30) business days after the Anniversary Date,
Buyer shall prepare a statement (the "Earn-Out Statement") showing a clear and
detailed calculation of the Earn-Out Payment described in Section 1.8(b) and
deliver the Earn-Out Statement to Seller. Seller shall notify the Buyer, in
reasonable detail, of any objections to the Earn-Out Statement within thirty
(30) business days after Seller receives the Earn-Out Statement and shall be
provided reasonable access to the Company's books and records for the purpose of
examining the Earn-Out Statement. If Seller does not notify Buyer of any such
objections by the end of such thirty (30) business day period, then the Earn-Out
Statement, as prepared by Buyer, shall be considered final on the last day of
such thirty (30) business day period or on such earlier date as Seller notifies
Buyer that it has no objection. If Seller does notify Buyer of any such
objections by the end of such thirty (30) business day period, and Buyer and
Seller are unable to resolve their differences within thirty (30) business days
thereafter, then the dispute shall be submitted to the Accountant for
resolution, with the costs thereof being shared equally, and the Accountant
shall be instructed to deliver a final Earn-Out Statement to the Buyer and
Seller as soon as possible.
ARTICLE II
RELATED MATTERS
Section 2.1 Use of Seller's Name and Logo. It is expressly agreed that
Buyer is not purchasing, acquiring or otherwise obtaining any right, title or
interest in the names, "Medaphis", "Medaphis Corporation", or "Medaphis Services
Corporation", or any trade names, trademarks, identifying logos or service marks
related thereto or employing the words "Medaphis" or any part or variation of
any of the foregoing or any confusingly similar trade name, trademark or logo
(collectively, the "Seller's Trademarks and Logos"). Buyer agrees that within
thirty (30) days after the Closing Date, it will file an amendment to the
Company's Certificate of Incorporation amending the Company's name so as to
remove the name "Medaphis" therefrom and that none of Buyer, the Company nor any
of its affiliates shall make any use of the Seller's Trademarks and Logos from
and after the Closing Date and will remove and destroy as quickly as is
practicable all items, including, without limitation, all signage, stationery,
invoices or other letterhead, bearing Seller's Trademarks and Logos.
Notwithstanding the foregoing, Buyer, the Company and their affiliates shall
have the right to use Seller's Trademarks and Logos used in the business of the
Company prior to Closing for a period of six (6) months following the Closing
Date including, without limitation, the right to use signage, all pre-Closing
Date inventories of stationery, invoices, or other letterhead bearing Seller's
Trademarks and Logos and the right to use "Medaphis Services Corporation" on
Company's licenses and permits. For a period of twelve (12) months following the
Closing Date, Buyer, the Company and their affiliates shall have the right to
state orally that they were "formerly known as Medaphis
6
<PAGE> 11
Services Corporation" or substantially similar phrases and if required by law in
continued collection efforts, to use such phrases on stationery, invoices or
other letterhead.
Section 2.2 Books and Records of the Company. Seller agrees to deliver
to Buyer at or as soon as practicable after the Closing, as requested by Buyer,
all books and records of the Company and Subsidiaries (including, but not
limited to, correspondence, memoranda, books of account, personnel and payroll
records and the like), except for the Tax Returns (as defined in Section 3.17(c)
hereof) relating to the Company. Any information which would be required to
compute the Tax obligations ("Tax Information") of the Company and its
Subsidiaries which is not delivered to Buyer pursuant hereto will be preserved
by Seller for a period of at least seven (7) years following the Closing and
Seller will provide Buyer and its authorized representatives to have reasonable
access to, and examine and make copies of, in each case, during normal business
hours, all such Tax Information as reasonably requested by Buyer. All books and
records delivered by Seller to Buyer will be preserved by Buyer for a period of
at least seven (7) years following the Closing and Buyer will permit Seller and
its authorized representatives to have reasonable access to, and examine and
make copies of, all such books and records as reasonably requested by Seller.
Section 2.3 No Ongoing or Transition Services. For a period not to
exceed 120 days after Closing (60 days in the case of employee benefits), Seller
shall provide Company, its Subsidiaries and their respective clients such
transition services as reasonably requested by Buyer no later than three (3)
business days prior to the Closing Date, including without limitation,
accounting, general ledger, payroll and employee benefits, computer systems and
support, that was provided to the Company, the Subsidiaries and their respective
clients when the Company was owned by Seller prior to the Closing Date. The fees
and charges for the services provided by the Seller shall be based on Seller's
actual out-of-pocket costs to provide such services, without markup. Except as
provided in this Section 2.3, or as otherwise agreed to in writing by Seller and
Buyer, at the Closing, all data processing, accounting, insurance, banking,
personnel, legal, communications and other products or services provided to the
Company or any subsidiary of the Company by Seller or any affiliate of the
Seller, including any agreements or understandings (written or oral) with
respect thereto, will terminate.
Section 2.4 Intercompany Accounts. On or prior to the Closing Date, all
intercompany accounts between the Company, on the one hand, and Seller and its
affiliates, on the other hand, shall, at Seller's option, be cancelled or
settled. Except as provided in Section 1.7, no adjustment shall be made to the
Purchase Price as a result of any such cancellation or settlement.
Section 2.5 Distributions. The parties agree that Seller shall have the
right, at or prior to the Closing, to cause the Company to distribute cash to
the Seller or its affiliates, by one or more cash dividends, repurchase of
existing stock and/or other distributions provided, however, that Seller shall
not distribute any amounts which represent funds collected by the Company or any
Subsidiary on behalf of and belonging to customers. Except as provided in
Section 1.7, no adjustment shall be made to the Purchase Price as a result of
any such dividends, repurchases or other distributions paid by Seller.
7
<PAGE> 12
Section 2.6 Service Contracts. Prior to Closing, the Company shall
enter into Service Contracts with Seller or subsidiaries of Seller in form
reasonably satisfactory to Buyer providing for the provision of services and
other terms and conditions, all as summarized on Exhibit 2.6 attached hereto
(collectively, the "Service Contracts"). The Service Contracts shall contain,
among other things, a right of audit permitting Company or Buyer to audit the
costs charged by Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
Section 3.1 Organization. Each of the Company and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate and
other power and corporate authority to own, lease and operate its properties and
to carry on its operations as and where now being conducted. Each of the Company
and its Subsidiaries is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or operated by
the Company or such Subsidiary or the nature of the business conducted by the
Company or such Subsidiary makes such qualification necessary, which
jurisdictions are listed on Schedule 3.1, except in any such jurisdictions where
the failure to be so duly qualified or licensed and in good standing,
individually and in the aggregate, would not have a material adverse effect on
the business, results of operations or financial condition of the Company and
its Subsidiaries taken as a whole (a "Material Adverse Effect"). Seller has
previously made available to Buyer complete and correct copies of the Company's
and each of the Subsidiaries' Certificate of Incorporation and By-laws, as
currently in effect. Set forth on Section 3.1 of the Disclosure Schedule being
delivered to Buyer by Seller herewith (the "Disclosure Schedule") is a list of
the Company's subsidiaries (the "Subsidiaries"). The Company has no direct or
indirect equity interest in or control of any person other than the
Subsidiaries.
Section 3.2 Authorization. Seller has the corporate power and authority
to execute and deliver this Agreement and consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Seller and no other corporate
proceedings on the part of Seller are necessary to authorize the execution,
delivery and performance of this Agreement or the consummation of the
transactions so contemplated. This Agreement has been duly executed and
delivered by Seller and constitutes, and, when executed and delivered, each of
the other agreements, documents and instruments to be executed and delivered by
Seller pursuant hereto will constitute (assuming in each case the valid
authorization, execution and delivery of such agreement by Buyer), a valid and
binding agreement of Seller, enforceable against Seller in accordance with its
terms, except that (a) such enforcement may be subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other laws, now
or hereafter in effect, relating to or limiting creditors' rights generally, and
(b) the remedy of specific performance and injunctive and
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other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
Section 3.3 Common Stock. Set forth on Section 3.3 of the Disclosure
Schedule is the number of authorized shares of Common Stock of the Company, par
value $1.00 per share, and, of each of the Subsidiaries and the number of such
shares which are issued and outstanding. All of such shares are validly issued,
fully paid and non-assessable. No other class of capital stock of the Company or
of any Subsidiary is authorized, issued or outstanding. Except as set forth on
Schedule 3.3, the Company owns of record and beneficially all outstanding
capital stock of each of the Subsidiaries free and clear of all liens, claims,
charges, options, security interests or other encumbrances (collectively,
"Encumbrances"). There are no outstanding securities convertible into,
exchangeable for, or carrying the right to acquire, equity or other securities
of the Company or any Subsidiary, nor are there any subscriptions, warrants,
options, rights, contracts, or other arrangements or commitments (other than
this Agreement) which could obligate the Company or any Subsidiary to issue or
Seller to sell any shares of Common Stock or any equity or other securities of
the Company or any Subsidiary.
Section 3.4 Ownership of the Common Stock. Seller is the record and
beneficial owner of the Shares, which comprise all of the issued and outstanding
shares of all classes of capital Stock of the Company. Except as set forth on
Section 3.4 of the Disclosure Schedule, Seller has good title to the Shares,
free and clear of all Encumbrances.
Section 3.5 Consents and Approvals: No Violations. Except for
applicable requirements of the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended (the "H-S-R Act"), or as set forth in Section 3.5 of the
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation by Seller of the transactions contemplated hereby will (a)
conflict with or result in any breach of any provision of the Certificate of
Incorporation or By-Laws of the Company, Seller or any Subsidiary; (b) require
any filing with, or the obtaining of any permit, license, authorization, consent
or approval of, any governmental or regulatory authority whether within or
outside the United States (collectively, "Permits"); (c) violate, conflict with
or result in a default (or any event that, with notice or lapse of time or both,
would constitute a default) under, or give rise to any right of termination,
cancellation or acceleration under, any of the terms, conditions or provisions
of any note, mortgage, other evidence of indebtedness, guarantee, license,
agreement, lease, or other contract or instrument or obligation (collectively,
"Contract") to which the Company, Seller or any Subsidiary is a party or by
which the Company, Seller or any Subsidiary or any of their assets may be bound;
(d) result in the creation or imposition of any Encumbrance upon the assets of
the Company or any Subsidiary, or give to any person any interest or right in
any of the assets or business of the Company or any Subsidiary; or (e) violate
any law, order, injunction, decree, statute, rule or regulation of any
governmental or regulatory authority whether within or outside of the United
States (collectively, "Laws") or any Judgment (as defined in Section 3.13)
applicable to the Company, Seller or any Subsidiary; excluding from the
foregoing clause (c) such violations, conflicts, defaults or rights which would
not have a Material Adverse Effect and would not adversely affect the ability of
Seller to consummate the transactions contemplated by this Agreement.
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Section 3.6 Financial Statements. Attached as Schedule 3.6 of the
Disclosure Schedule are copies of the Company's (a) audited (i) balance sheets
as of December 31, 1996 and 1997; (ii) statements of operations for each of the
three years in the period ended December 31, 1997; (iii) statements of
stockholders' equity for each of the three years in the period ended December
31, 1997; and (iv) statements of cash flows for each of the three years in the
period ended December 31, 1997 (the financial statements referred to in clauses
(a)(i)-(iv) and the accompanying notes thereto are referred to herein
collectively as the "Audited Financial Statements"), and (b) unaudited balance
sheet as of June 30, 1998 and statements of operations, stockholders equity and
cash flows for the six months ended June 30, 1997 and 1998 (the financial
statements referred to in clause (b) and the accompanying notes thereto are
referred to herein collectively as the "Unaudited Financial Statements"). The
Audited Financial Statements and the Unaudited Financial Statements
(collectively, the "Financial Statements") present fairly, in all material
respects, the financial position of the Company and the Subsidiaries as of the
respective dates thereof, and the results of operations and cash flows of the
Company and the Subsidiaries for the respective periods indicated, all in
conformity with GAAP, subject, in the case of the Unaudited Financial
Statements, to normal recurring year-end adjustments, the absence of notes, the
exclusion of NHTI and the Laser Center, and exclusive of parent company
allocations as listed in Note 11 to the Company's Financial Statements required
pursuant to Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended. With respect to the Unaudited Financial Statements, in the
opinion of management of the Seller, all adjustments, consisting of normal
recurring adjustments considered necessary for a fair presentation of results
for the interim period, have been included.
Section 3.7 Absence of Undisclosed Liabilities. Except (a) for
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice, and (b) as otherwise disclosed herein or in
Section 3.7(b) of the Disclosure Schedule, since June 30, 1998 the Company and
its Subsidiaries have not incurred any liabilities or obligations (whether
direct, indirect, accrued or contingent) in excess of $500,000 individually or
in the aggregate.
Section 3.8 Absence of Material Adverse and Other Changes. Except as
set forth in Section 3.8 of the Disclosure Schedule or as otherwise contemplated
by this Agreement, since June 30, 1998 there has been no change in the business,
results of operations or financial condition of the Company or its Subsidiaries
that, individually or in the aggregate, would have a Material Adverse Effect.
Section 3.9 Title, Ownership and Related Matters.
(a) As of the date hereof, neither the Company nor any
Subsidiary owns or holds any option to acquire any real property.
(b) The Company and each Subsidiary has, or will as of
the Closing have, good title to, free and clear of any Encumbrance, or rights by
license, lease or other Contract to use, all properties and assets (or rights
thereto), other than cash, cash equivalents and securities (except for
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the Shares) and except as contemplated in Article II of this Agreement,
necessary to permit the Company and each Subsidiary to conduct its business as
substantially currently conducted, except as set forth in Section 3.9(b) of the
Disclosure Schedule. All such property and assets material to the conduct of the
business of the Company and each Subsidiary are in good operating condition and
repair, ordinary wear and tear excepted.
Section 3.10 Leases
(a) Section 3.10(a) of the Disclosure Schedule lists, as
of the date hereof, all real property leases and subleases for space occupied by
the Company or any Subsidiary (collectively, the "Leases"). The Company is the
lessee under all the Leases. True and complete copies of the Leases and all
written amendments and agreements relating thereto have been made available to
Buyer. All of the Leases are valid, binding and enforceable in accordance with
their terms, and neither the Company, nor any Subsidiary (including, without
limitation, with respect to their respective occupancy, maintenance and use of
the property) nor, to the best knowledge of Seller and Company, the other party
to any Lease is in default under such Lease or any applicable Law relating to
the occupancy, maintenance and use of the property, except for defaults, if any,
which would not, individually or in the aggregate, have a Material Adverse
Effect. No written notice from any lessor, governmental body or other person has
been received by the Seller, the Company or any Subsidiary of the Company
claiming any violation of, or breach or default under, any lease or Law, or
requiring or calling attention to the need for any work, repairs, construction,
alternation or installations. Except as disclosed in Section 3.10 of the
Disclosure Schedule, neither the Company nor any Subsidiary of the Company has
placed or caused to be placed, and to the best knowledge of the Seller and the
Company there were not and are not any Hazardous Substances (as hereinafter
defined) on or under any of such real property under lease except for Hazardous
Substances on or under any such real property in an amount that would create a
liability for clean-up of such Hazardous Substances of less than $5,000 per
property, but in the aggregate not more than $100,000 for all such real
property. "Hazardous Substance" means (a) all substances, wastes, contaminants,
pollutants and materials defined or designated as hazardous, dangerous or toxic
pursuant to any Law of any state in which any real property leased or occupied
by Company is located or any United States Law, and (b) asbestos,
polychlorinated biphenyls ("PCBs") and petroleum.
(b) Section 3.10(b) of the Disclosure Schedule lists, as
of the date hereof, all leases or other agreements or rights under which the
Company or any Subsidiary is the lessee of, or holds or operates, any machinery,
equipment, vehicles or other tangible personal property owned by a third party,
except those that are terminable by the Company without penalty on 60 or fewer
days notice or that provide for annual rental payments of less than $25,000.
Section 3.11 Intellectual Property.
(a) Except as set forth in Section 3.11(a) of the
Disclosure Schedule (i) the conduct of the business of the Company does not
infringe upon any Intellectual Property (as defined below) right of any third
party, and (ii) there are no pending or, to the best knowledge of Seller and
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Company, threatened proceedings or litigation or other adverse claims by any
person against the use by the Company of any name, corporate name, fictitious
name, software, trademarks, trade names, service marks, service names, logos,
assumed names, copyrights, trade secrets, patents and all registrations, and
applications therefor, which are owned by the Company or used in the operation
of the Company's business as currently conducted (collectively, the
"Intellectual Property"). "Asset Care" is a registered trademark of the Company.
All of the Intellectual Property owned or used by the Company or any Subsidiary
and material to the operation of the Company's business is listed on Section
3.11 of the Disclosure Schedule.
(b) Except as set forth in Section 3.11(b) of the
Disclosure Schedule, the Company owns free and clear of any Encumbrances or has
valid licenses or other rights to use the Intellectual Property necessary to
permit the Company and its Subsidiaries to conduct their operations as currently
conducted.
Section 3.12 Computer Software. Except as set forth in Section 3.12 of
the Disclosure Schedule, the Company owns free and clear of any Encumbrances or
has valid licenses or other rights to use all computer software programs
necessary to permit the Company and its Subsidiaries to conduct their operations
as currently conducted, all as indicated in Section 3.12 of the Disclosure
Schedule (provided, however, Seller shall not be required to list any
commercially available software under license). Without limiting the generality
of the foregoing, the Company owns, free and clear of any Encumbrances, the
software known as "N-Sure" and the related object code and source code. With
respect to the software developed by the Company or any Subsidiary, including
without limitation N-Sure, and without taking into effect the impact of data
supplied by third parties, and provided that the Company complies with its
internal Year 2000 Compliance Program, each component of such software that
creates, accepts, displays, stores, retrieves, accesses, recognizes,
distinguishes, compares, sorts, manipulates, processes, calculates or otherwise
uses dates or date-related data will not be materially adversely affected by the
impact on dating caused by advent of the year 2000, the advent of the 21st
century, or the transition from the 20th century through the year 2000 and into
the 21st century. Seller and the Company have no reason to believe that any
software owned or licensed by the Company which was developed by third parties
will be materially adversely affected by the impact on dating caused by the
advent of the year 2000, the advent of the 21st century, or the transition from
the 20th century through the year 2000 and into the 21st century.
Section 3.13 Litigation. Except as set forth in Section 3.13 of the
Disclosure Schedule, (a) there is no action, suit, litigation proceeding,
arbitration or governmental or regulatory investigation (collectively,
"Proceeding") pending or, to the best knowledge of Seller and Company,
threatened against Seller, the Company or any Subsidiary; (b) there is no
outstanding judgment, order, writ, injunction, fine, citation, award, decree or
other judgment (collectively, "Judgment") of any nature of any court, government
authority or regulatory authority or arbitration tribunal against the Company or
any Subsidiary, or their respective businesses or assets; and (c) no breach of
contract, tort or other claim (whether arising from the operations of the
business or otherwise) by any third party seeking damages in excess of $25,000
has been asserted and is outstanding against the Company or any Subsidiary.
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Section 3.14 Compliance with Applicable Law. The Company and each
Subsidiary is in compliance with all Laws applicable to the Company and each
Subsidiary and their operations, except for violations, if any, which would not
have a Material Adverse Effect.
Section 3.15 Certain Contracts and Arrangements. Except as set forth in
Section 3.15 of the Disclosure Schedule, as of the date hereof, neither the
Company nor any Subsidiary is a party to or bound by any written (a) indenture,
mortgage, note, installment obligation, agreement or other instrument or
Contract relating to the borrowing of money by the Company (other than
intercompany accounts which shall be governed by Section 2.4 hereof), or the
guaranty by the Company of any obligation for the borrowing of money; or (b)
other Contracts, including without limitation, purchase orders, or any
enforceable oral Contracts, excluding Contracts that are terminable by the
Company without penalty on 60 or fewer days notice or that provide for annual
receipts or payments of less than $500,000 (which Disclosure Schedule shall be
updated prior to Closing to include such Contracts with annual receipts or
payments of between $200,000 and $500,000). A description of each such oral
Contract is set forth in Section 3.15 of the Disclosure Schedule. Except as set
forth in Section 3.15 of the Disclosure Schedule, all such Contracts (including
any Contracts listed on Section 3.19 of the Disclosure Schedule) are valid,
binding and enforceable in accordance with their terms and, to the best
knowledge of Seller and Company, neither the Company nor any other party thereto
is in default under any of the aforesaid Contracts other than such defaults, if
any, which would not, individually or in the aggregate, have a Material Adverse
Effect.
Section 3.16 Employee Benefit Plans: ERISA.
(a) Section 3.16(a) of the Disclosure Schedule lists each
"employee benefit plan" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and all other material
employee benefit, bonus and fringe benefit plans maintained for the benefit of,
or to which there is an obligation to contribute to by the Company or any trade
or business, whether or not incorporated (an "ERISA Affiliate"), that, together
with the Company would be deemed a "single employer" within the meaning of
Section 4001 of ERISA or Section 414 of the Code, for the benefit of any
employee or former employee of the Company (a "Plan" and collectively, the
"Plans"). Seller has made available to Buyer copies of each of the Plans
including all amendments to date, and true and correct copies of the most
current IRS Form 5500s and any other form or filing required to be submitted to
any governmental agency with respect to such Plans.
(b) Except as set forth in Section 3.16(b) of the
Disclosure Schedule, (i) each of the Plans complies and has been operated in all
material respects with its terms and all applicable Laws including ERISA and the
Code as defined below (and the regulations and rulings thereunder), and (ii)
each of the Plans intended to be "qualified" within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), has been
determined by the Internal Revenue Service (the "IRS") to be so qualified and
Seller knows of no fact or set of circumstances that would adversely affect such
qualification prior to the Closing. Seller has made available to Buyer copies of
the most recent determination letter issued by the Internal Revenue Service with
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respect to each Plan. None of the Plans is subject to Title IV of ERISA. There
are no pending or, to the best knowledge of Seller or Company, threatened
material claims (other than routine claims for benefits) by, on behalf of or
against any of the Plans or any trusts related thereto. To the best knowledge of
Seller and Company, there are no audits or investigations by any governmental
agency which relate directly or indirectly to the Plans. The Company has made,
or will have made prior to Closing, any payments or contributions required with
respect to such Plans.
(c) Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated hereby will (i) result in
any payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due from Company under any
of Company's Plans, (ii) increase any benefits otherwise payable under any of
Company's Plans, or (iii) result in the acceleration of the time of payment or
vesting of any such benefits to any extent. No event has occurred which will
result in material liability to Company in connection with any employee benefit
plan established, maintained, contributed to or to which there has been an
obligation to contribute (currently or previously) by Company, or an ERISA
Affiliate.
Section 3.17 Taxes.
(a) Except as set forth in Section 3.17 of the Disclosure
Schedule, Seller has (i) timely filed or caused to be filed on a timely basis
with the appropriate taxing authorities all Tax Returns (as defined below)
required to be, filed by or with respect to the Company (including, without
limitation, any income Tax Return required to be filed by any Affiliated Group
(as defined in Section 5.8) with respect to which the Seller and the Company or
any of its Subsidiaries was a member), and (ii) paid or made adequate provision
for the payment of all Taxes (as defined below) owed by Company and/or any other
member of an Affiliated Group (whether or not shown on any Tax Return) for each
taxable period during which Company and its Subsidiaries were members of such
group. Such Tax Returns are true, correct and complete in all material respects.
(b) Except as set forth in Section 3.17 of the Disclosure
Schedule, (i) there are no liens for Taxes with respect to the assets of the
Company or its Subsidiaries except for statutory liens for current Taxes not yet
delinquent and no claims with respect to Taxes are being asserted by any taxing
authority in writing, which individually or in the aggregate would have a
Material Adverse Effect; (ii) all deficiencies asserted in writing as a result
of any examinations by the Internal Revenue Service or any other taxing
authority have been paid and fully settled; (iii) none of the Tax Returns
applicable to the Company or any of its Subsidiaries is currently being audited
or examined by any taxing authority; (iv) there is no unpaid tax deficiency,
determination or assessment currently outstanding against the Company or any
Subsidiary; (v) there are no outstanding agreements or waivers extending the
statute of limitations relating to the assessment of Taxes applicable to the
Company or any Subsidiary; (vi) neither the Company nor any Subsidiary, nor the
Seller on behalf of the Company or any Subsidiary has filed a consent pursuant
to Section 341(f) of the Code; (vii) each of the Company and its Subsidiaries
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has withheld and paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party; (viii) none of the Company and its
Subsidiaries has made any payments, is obligated to make any payments, or is a
party to any agreement that could obligate it to make any payments as a result
of the transactions contemplated by this Agreement that will not be deductible
under Section 280G of the Code; (ix) none of the Company and its Subsidiaries
has been a United States real property holding corporation within the meaning of
Code Section 897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii); (x) none of the Company and its Subsidiaries is a party to any
Tax allocation or sharing agreement; and (xi) neither Company nor any of its
Subsidiaries has (i) been a member of an Affiliated Group filing a consolidated
federal income Tax Returns other than the Seller Group (as defined in Section
5.8), or (ii) any liability for the Taxes of any person other than members of
the Seller Group (A) under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign law), (B) as a transferee or successor, (C)
by Contract, or (D) otherwise.
(c) As used in this Agreement:
(i) "Taxes" shall mean all taxes, levies,
charges or fees including income, corporation, advance corporation, gross
receipts, transfer, excise, property, sales, use, value-added, license, payroll,
pay-as-you-earn, withholding, social security and franchise or other
governmental taxes or charges, imposed by the United States or any state,
county, local or foreign government, and such term shall include any interest,
penalties or additions to tax attributable to such taxes.
(ii) "Tax Return" shall mean any report, return
or statement required to be supplied to a taxing authority in connection with
Taxes.
Section 3.18 Certain Fees. Except for the engagement of Donaldson,
Lufkin & Jenrette, the fees and expenses of which shall be the sole
responsibility of Seller, none of Seller, the Company or any Subsidiary has
employed any financial advisor or finder or incurred any liability for any
financial advisory or finders or brokers fees in connection with this Agreement
or the transactions contemplated hereby.
Section 3.19 Operations Prior to and Including the Closing. Except as
set forth in Schedule 3.19, and except in connection with the transactions
contemplated by this Agreement, since June 30, 1998, neither the Company nor any
Subsidiary has:
(1) amended its Certificate of Incorporation or By-laws or merged
with or into or consolidated with any other person, or changed or agreed to
change in any manner the rights of its outstanding capital stock or the
character of its Business;
(2) except as permitted by Section 2.5, declared, set aside or
paid any dividend or other distribution in respect of the capital stock of the
Company or any Subsidiary; redeemed or acquired any of such stock; issued or
sold, or issued options or rights to subscribe to, or entered into any Contracts
to issue or sell, any shares of its capital stock; or subdivided or in any way
reclassified any shares of its capital stock;
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(3) entered into or amended any employment agreements, entered
into any Contracts with any labor union or association representing any
employee, or entered into or amended any Employee Benefit Plans;
(4) settled any dispute (excluding disputes settled between
clients of the Company and account debtors in the ordinary course of the
Company's accounts receivable collection business) involving payment of any
amount in excess of $50,000 or waived any right of material value to its
business;
(5) made any change in its accounting methods, practices, policies
or principles;
(6) materially and adversely changed any of its business policies,
including, without limitation, pricing, purchasing, production, personnel,
sales, returns, budget or acquisition policies;
(7) made any wage or salary increase or bonus, or increase in any
other direct or indirect compensation, for or to any officer, director,
employee, consultant or agent of the Company or any Subsidiary, or any accrual
for or commitment or agreement to make or pay the same, except for such
increases or bonuses as are granted in the ordinary course of business in
accordance with its customary practices (which shall include normal periodic
performance reviews and related compensation and benefit increases), or loaned
or advanced any funds to any Person;
(8) except in the ordinary course of business, entered into any
lease or sublease (as lessor or lessee) or abandoned or made any other
disposition of any assets involving more than $200,000 in the aggregate, granted
or suffered any Encumbrances on any of its assets having a value in excess of
$200,000 in the aggregate;
(9) except in the ordinary course of business consistent with past
practices, incurred or assumed any liabilities or obligations;
(10) except for tangible property acquired in the ordinary course
of business, made any acquisition of all or substantially all of the Assets or
capital stock or business of any other person;
(11) made any capital expenditure or commitment for any property,
plant or equipment in excess of $100,000 individually or $250,000 in the
aggregate;
(12) disposed of, leased or encumbered, or pledged or granted a
security interest in any assets, or increased any of the indebtedness of the
Company or any Subsidiary of the Company, other than in the normal and ordinary
course of business consistent with past practices;
(13) paid, discharged or satisfied any liabilities other than by
payment, discharge or satisfaction in the ordinary course of business consistent
with past practices;
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(14) made any Contract to do any of the actions referred to in
paragraphs (1) through (13) above.
Section 3.20 Debt Collection Licenses. The Company and its Subsidiaries
hold all Permits which are necessary and material for the conduct of their
accounts receivable or debt collection business as currently conducted. A list
of the states in which the Company and Subsidiaries have debt collection
licenses is set forth on Schedule 3.2. All such Permits are in full force and
effect, no violations which have not been remedied have been recorded in respect
of any such Permit and neither the Company nor any Subsidiary is in default, nor
has received any notice of any claim of default, with respect to any such Permit
or of any notice of any other claim or Proceeding (or threatened Proceeding)
relating to any such Permit.
Section 3.21 Employee Relations. Neither the Company nor any Subsidiary
has been a party to or bound by any union or collective bargaining Contract, nor
is any such Contract currently in effect or being negotiated by or on behalf of
Company or any Subsidiary. Except as set forth in Section 3.15 of the Disclosure
Schedule and except for any limitations of general application under applicable
employment Laws, neither the Company nor any Subsidiary is a party to any
written or oral employment agreement with any of its officers, directors,
employees, consultants, agents, or other persons which is not terminable by the
Company or its Subsidiaries at will without penalty or cost to the Company or
its Subsidiaries. There are no pending, nor, to the Knowledge of the Seller,
threatened walkouts, strikes, union organizing efforts or labor disturbances or
any pending arbitration, unfair labor practice or grievance, with respect to the
Company's or any Subsidiary's employees. Upon termination of the employment of
any of its employees, neither the Company nor any Subsidiary of the Company will
by reason of any Contract or Plan entered into prior to the Closing Date be
liable to any of its employees for severance pay or any other payments, except
as and to the extent set forth in Section 3.21 of the Disclosure Schedule. Since
December 31, 1997, Company and Subsidiaries have not had an "employment loss"
within the meaning of the Workers' Adjustment and Retraining Notification Act
("WARN Act") and the regulations thereunder.
Section 3.22 Accounts Receivable. All accounts receivable of the
Company or any Subsidiary arose in the ordinary course of business and are
proper and valid accounts receivable. To the best of the knowledge of the Seller
and the Company, there are no refunds, discounts, rights of setoff (excluding
statutory or common law rights of setoff) or assignment affecting any such
accounts receivable.
Section 3.23 Suppliers and Customers. Set forth on Section 3.23 of the
Disclosure Schedule is a list of the ten largest customers (measured by volume
of revenues in 1998) of the Company and its Subsidiaries (the "Ten Largest
Customers"). Except as set forth on Section 3.23 of the Disclosure Schedule,
none of the Ten Largest Customers has given notice to the Company or any
Subsidiary that it will or intends to terminate its relationship with the
Company or any Subsidiary. Neither the Seller, the Company nor any Subsidiary
has any reason to believe that the relationship of the Company and the Company's
Subsidiaries with the Ten Largest Customers are not satisfactory. All funds
collected by the Company or the Subsidiaries on behalf of and belonging
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to customers have been properly remitted to customers or are properly reflected
on the financial statements of the Company and its Subsidiaries.
Section 3.24 Insurance. To the best knowledge of the Seller and the
Company, the Company and its Subsidiaries are insured against risks of the types
and amounts consistent with similarly situated businesses. None of Seller,
Company or any Subsidiary has received notice of cancellation with respect to
any such insurance. Except as described on Section 3.24 of the Disclosure
Schedule, there are no claims that are pending under any such insurance.
Section 3.25 Questionable Payments. Neither any Company or any
Subsidiary nor, to the best knowledge of the Seller and the Company, any
directors, officers, consultants, agents, employees or other persons associated
with or active on behalf of Company or any Subsidiary, has (1) made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment of any
nature, or (2) made any material favor or gift which is not deductible for
Federal income tax purposes.
Section 3.26 Full Disclosure. No representation or warranty made by the
Seller in this Agreement or pursuant hereto (a) contains any untrue statement of
any material fact; or (b) omits to state any fact that is necessary to make the
statements made, in the context in which made, not false or misleading in any
material respect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
Section 4.1 Organization and Authority of Buyer.
(a) Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania. Buyer has
previously delivered to Seller complete and correct copies of its Certificate of
Incorporation and By-laws, as currently in effect. Buyer has the corporate power
and authority to execute and deliver this Agreement and consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Buyer and no other corporate
proceedings on tile part of Buyer are necessary to authorize the execution,
delivery and performance of this Agreement or the consummation of the
transactions so contemplated.
(b) This Agreement has been duly executed and delivered by Buyer
and constitutes, and, when executed and delivered, each of the other agreements,
documents and instruments to be executed and delivered by Buyer, pursuant hereto
will constitute, a valid and binding agreement of Buyer (in each case, assuming
the valid authorization, execution and delivery of such agreement by Seller),
enforceable against Buyer in accordance with its terms, except that (i)
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such enforcement may be subject to any bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other laws, now or hereafter in effect,
relating to or limiting creditors' rights generally, and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
Section 4.2 Consents and Approvals; No Violations. Except for
applicable requirements of the H-S-R Act, neither the execution and delivery of
this Agreement nor the consummation by Buyer of the transactions contemplated
hereby will (a) conflict with or result in any breach of any provision of the
Certificate of Incorporation or By-Laws of Buyer; (b) require any filing with,
or the obtaining of any permit, authorization, consent or approval of, any
governmental or regulatory authority whether within or outside the United
States; (c) violate, conflict with or result in a default (or any event which,
with notice or lapse of time or both, would constitute a default) under, or give
rise to any right of termination, cancellation or acceleration under, any of the
terms, conditions or provisions of any note, mortgage, other evidence of
indebtedness, guarantee, license, agreement, lease or other instrument or
obligation to which Buyer is a party or by which Buyer or any of its assets may
be bound; or violate any order, injunction, decree, statute, rule or regulation
applicable to Buyer, excluding from the foregoing clauses (b), (c) and (d), (i)
such requirements, violations, conflicts, defaults, rights, security interests,
claims, liens, charges, other encumbrances or violations which would not
adversely affect the ability of Buyer to consummate the transactions
contemplated by this Agreement, or (ii) which become applicable as a result of
any acts or omissions by, or the status of or any facts pertaining to, the
Company or Seller.
Section 4.3 Availability of Funds. Buyer has, or will have at Closing,
sufficient immediately available funds, in cash, to pay the Purchase Price, to
provide the Company with sufficient working capital and to pay any other amounts
payable pursuant to this Agreement and to effect the transactions contemplated
hereby. Buyer has provided to Seller complete true and correct copies of Buyer's
audited financial statements for the year ended December 31, 1997 and Buyer's
unaudited financial statements for the six months ended June 30, 1998.
Section 4.4 Litigation. There is no claim, action, suit, proceeding or
governmental investigation pending or, to the best knowledge of Buyer,
threatened against the Buyer, by or before any court, governmental or regulatory
authority or by any third party which challenges the validity of this Agreement.
Section 4.5 Certain Fees. Except for the engagement of The Robinson
Humphrey Company, neither Buyer nor any of its affiliates has employed any
financial advisor or finder or incurred any liability for any financial advisory
or finders' fees in connection with this Agreement or the transactions
contemplated hereby.
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ARTICLE V
COVENANTS
Section 5.1 Conduct of the Company's Business. Seller agrees that,
during the period from the date of this Agreement to the Closing, except as
otherwise contemplated by this Agreement or consented to by Buyer:
(a) Seller shall cause the Company and each of the Subsidiaries to
use its best efforts to conduct its business operations in the ordinary course
consistent with past practice; and
(b) Seller shall not, and shall cause the Company and each of the
Subsidiaries not to, breach any of the representations or warranties in Section
3.19.
Section 5.2 Access to Information.
(a) Between the date of this Agreement and the Closing, Seller
shall (i) give Buyer and its authorized representatives reasonable access to all
books, records, offices and other facilities and properties of the Company and
its Subsidiaries; (ii) permit Buyer to make such inspections thereof as Buyer
may reasonably request; and (iii) cause the officers of Seller and the Company
to furnish Buyer with such financial and operating data and other information
with respect to the business and properties of the Company and its Subsidiaries
as Buyer may from time to time reasonably request; provided, however, that any
such investigation shall be conducted during normal business hours under the
supervision of Seller's or the Company's personnel and in such a manner as to
maintain the confidentiality of this Agreement and the transactions contemplated
hereby and not interfere unreasonably with the business operations of Seller or
the Company.
(b) All information concerning Seller furnished or provided by
Seller or its affiliates to Buyer or its representatives (whether furnished
before or after the date of this Agreement) shall be held subject to a
confidentiality agreement between Seller and Buyer, dated as of August 5, 1998
(the "Confidentiality Agreement"). The Confidentiality Agreement shall expire at
Closing. Notwithstanding anything to the contrary contained in this Agreement,
neither Seller nor any affiliate of Seller shall have any obligation to make
available or provide to Buyer or their representatives a copy of any
consolidated, combined or unitary Tax Return filed by Seller, or any of its
affiliates, or any related materials.
Section 5.3 Consents.
(a) Each of Seller and Buyer shall cooperate, and use its best
efforts, to make all filings and obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental authorities
and other third parties necessary to consummate the transactions contemplated by
this Agreement including, without limitation, obtaining the consents of the Ten
Largest Customers and the landlord of the Company's principal facility to the
consummation of the transactions contemplated hereby, if required under the
terms of the Contract with such Customer
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or the Lease for such facility, as the case may be (collectively, the "Material
Consents"). In addition to the foregoing, Buyer agrees to provide such
assurances as to financial capability, resources and credit worthiness as may be
reasonably requested by any third party whose consent or approval is sought
hereunder; provided, however, that Buyer shall not be required to provide any
guarantee or surety.
(b) With respect to any agreements for which any required consent
or approval is not obtained prior to the Closing, Seller and Buyer shall each
use its best efforts to obtain any such consent or approval after the Closing
Date until such consent or approval has been obtained and Seller shall provide
Buyer or the Company with the same benefits arising under such agreements,
including performance by Seller as agent, if legally and commercially feasible,
provided, that Buyer and the Company shall provide Seller with such access to
the premises, books and records and personnel as is necessary to enable Seller
to perform its obligations under such agreements and Buyer or the Company shall
pay or satisfy the corresponding liabilities for the enjoyment of such benefits
to the extent Buyer or the Company would have been responsible therefor if such
consent or approval had been obtained.
Section 5.4 Best Efforts. Each of Seller and Buyer shall cooperate, and
use its best efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations to consummate the transactions contemplated by this
Agreement.
Section 5.5 Public Announcements. Except as otherwise agreed to by the
parties, the parties shall not issue any report, statement or press release or
otherwise make any public statements with respect to this Agreement and the
transactions contemplated hereby, except as in the reasonable judgment of the
party may be required by law or in connection with the obligations of a
publicly-held, exchange-listed company, in which case the parties will exercise
their best efforts to reach mutual agreement as to the language of any such
report, statement or press release. Upon the execution of this Agreement and
upon the Closing, Seller and Buyer will consult with each other with respect to
the issuance of a joint or individual report, statement or press release with
respect to this Agreement and the transactions contemplated hereby.
Section 5.6 Covenant to Satisfy Conditions. Seller will use its best
efforts to ensure that the conditions set forth in Article VI hereof are
satisfied, insofar as such matters are within the control of Seller, and Buyer
will use its best efforts to ensure that the conditions set forth in Article VI
hereof are satisfied, insofar as such matters are within the control of Buyer.
Seller and Buyer further covenant and agree, with respect to a threatened or
pending preliminary or permanent injunction or other order, decree or ruling or
statute, rule, regulation or executive order that would adversely affect the
ability of the parties hereto to consummate the transactions contemplated
hereby, to use all reasonable efforts to prevent or lift the entry, enactment or
promulgation thereof, as the case may be.
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Section 5.7 Employees; Employee Benefits.
(a) Following Closing, Buyer shall give full credit for all
service with the Company or any affiliate thereof ("Affiliate"), and any
predecessor thereto to the extent that service with such predecessor entity was
recognized under the applicable Plan of the Company or any Affiliate, to each
employee of the Company ("Employee") for purposes of waiting periods relating to
preexisting conditions under medical plans, eligibility to participate in,
vesting under, and eligibility for early retirement or any subsidized benefit
provided for under, any employee benefit plan (including, but not limited to,
any "employee benefit plan" as defined in Section 3(3) of ERISA) maintained by
Buyer or its subsidiaries (including, without limitation, any vacation or
accrued sick pay plan or policy) on or after the Closing Date. Prior to the
Closing Date, Seller shall furnish Buyer with a list of the length of service
with the Company or its Affiliates for each of the Employees. For purposes of
computing deductible amounts (or like adjustments or limitations on coverage)
under any employee welfare benefit plan (including, without limitation, any
"employee welfare benefit plan" as defined in Section 3(l) of ERISA), expenses
and claims previously recognized for similar purposes under the applicable
welfare benefit plan of the Company or any affiliate shall be credited or
recognized under the comparable plan maintained after the Closing Date by Buyer
or its subsidiaries.
(b) Following the Closing Date, Company shall be responsible and
assume all liability for all notices or payments due to any Employee, and all
notices, payments, fines or assessments due to any government authority,
pursuant to any applicable Law, with respect to the employment, discharge or
layoff of employees by the Company after the Closing Date, including, but not
limited to, the WARN Act and any rules or regulations as have been issued, in
connection with the foregoing.
(c) After the Closing Date, Buyer shall be responsible for, and
shall indemnify and hold harmless Seller and its Affiliates and their officers,
directors, employees, affiliates and agents and the fiduciaries (including plan
administrators) of the Plans, from and against, any and all claims, losses,
damages, costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) and other liabilities and obligations relating to
or arising out of (i) all salaries, commissions, vacation entitlements and
bonuses due to any Employee accrued but unpaid as of the Closing Date which are
reflected on the Closing Balance Sheet, (ii) any failure by Buyer to comply with
the provisions of this Section 5.7 and (iii) any claims of, or damages or
penalties sought by, any Employee, or any governmental entity on behalf of or
concerning any Employee, with respect to any act or failure to act by Buyer to
the extent arising from the employment, discharge, layoff or termination of any
Employee after the Closing Date.
Section 5.8 Certain Tax Matters.
(a) Certain Definitions As used in this Agreement:
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(i) "Affiliated Group" means any affiliated
group within the meaning of Section 1504(a) of the Code or any similar group
defined under a similar provision of state, local or foreign law.
(ii) "Buyer Tax Group" means the affiliated
group, within the meaning of Section 1504(a) of the Code, of which Buyer is the
common parent or any of Buyer's foreign subsidiaries.
(iii) "Election" means the election to be made by
Buyer and Seller pursuant to Section 338(h)(10) of the Code, 'as described in
Section 5.8(b) hereof.
(iv) "Pre-Closing Period" means any taxable
period, including that portion of any Straddle Period, which ends on or before
the Closing Date.
(v) "Seller Group" means the affiliated group,
within the meaning of Section 1504(a) of the Code, of which Seller is the common
parent.
(vi) "Straddle Period" means any taxable period
that includes (but does not end on) the Closing Date.
(b) Section 338(h)(10) Election.
(i) With respect to the purchase by Buyer of the
Shares pursuant to this Agreement (A) Seller and Buyer shall jointly make the
Election on a timely basis (and any comparable election under state or local tax
law), (B) Seller and Buyer shall, as promptly as practicable following the
Closing Date, cooperate with each other to take all actions necessary and
appropriate (including filing such forms, returns, elections, schedules and
other documents as may be required) to effect and preserve a timely Election in
accordance with the provisions of Treasury Regulation Section 1.338(h)(10)-l (or
any comparable provisions of state or local tax law) or any successor provisions
and (C) Seller and Buyer shall report the purchase by Buyer of the Shares
pursuant to this Agreement consistent with the Election (and any comparable
elections under state or local tax laws) and shall take no position inconsistent
therewith in any Tax Return, any proceeding before any taxing authority or
otherwise.
(ii) In connection with the Election, Buyer and
Seller shall agree to the determination of the "Aggregate Deemed Sales Price"
(as defined under applicable Treasury Regulations) of the Shares and the
allocation of such "Aggregate Deemed Sales Price" among the assets of the
Company, which determination and allocation shall be made by Buyer in its sole
discretion and will be attached hereto as Schedule 5.8(b). The determination of
the amount of the "Aggregate Deemed Sales Price" and the allocation thereof
shall be made in accordance with Section 338(b) of the Code and applicable
Treasury Regulations. Unless (x) otherwise required by a court of competent
jurisdiction, (y) otherwise required by the Internal Revenue Service following
an audit, or (z) Seller receives a written opinion from a nationally recognized
law firm (which opinion and
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law firm shall be reasonably acceptable to Buyer) that there is no substantial
authority (within the meaning of Section 662(d)(2)(B)(i) of the Code) for such
position. Each of Seller and Buyer shall (A) be bound by such determination and
such allocation for purposes of determining any Taxes, (B) prepare and file, and
cause its affiliates to prepare and file, all Tax Returns on a basis consistent
with such determination of the "Aggregate Deemed Sales Price" and such
allocation and (C) take no position, and cause its affiliates to take no
position, inconsistent with such determination and such allocation on any
applicable Tax Return, in any proceeding before any taxing authority or
otherwise. In the event that any such determination or allocation is disputed by
any taxing authority, the party receiving notice of the dispute shall promptly
notify the other party hereto concerning resolution of the dispute.
(c) Return Filings, Refunds, Credits and Transfer Taxes
(i) Except with regard to Tax Returns for
Straddle Periods, Seller shall prepare, or cause to be prepared, and file, or
cause to be filed, on a timely basis all Tax Returns of or including the Company
and its Subsidiaries for all Pre-Closing Periods (the "Pre-Closing Period
Returns"). Seller shall pay, or cause to be paid, all Taxes with respect to the
Company and its Subsidiaries shown to be due on the Pre-Closing Period Returns.
(ii) Buyer shall prepare, or cause to be
prepared, and shall file, or cause to be filed, on a timely basis all Tax
Returns with respect to the Company and its Subsidiaries for all periods ending
after the Closing Date, including Tax Returns, if any, for any Straddle Period
(the "Straddle Period Returns"). Buyer shall pay, or cause to be paid, all Taxes
shown to be due on such Tax Returns.
(iii) Buyer shall provide Seller with copies of
any Straddle Period Returns at least thirty (30) business days prior to the due
date thereof (giving effect to any extensions thereto), accompanied by a
statement calculating in reasonable detail Seller's indemnification obligation
pursuant to Section 5.8(e) hereof (the "Indemnification Statement"). Seller
shall have the right to review such Straddle Period Returns and Indemnification
Statement prior to the filing of such Straddle Period Returns. If Seller
disputes any amounts shown due on such Tax Returns or the amount calculated in
the Indemnification Statement, Seller and Buyer shall consult and resolve in
good faith any issues arising as a result of the review of such Straddle Period
Return and Indemnification Statement. If Seller agrees to the Indemnification
Statement amount, Seller shall pay to Buyer an amount equal to the Taxes shown
on the Indemnification Statement less any amounts paid by Seller or the Company
on or before the Closing Date with respect to estimated taxes not-later than
three (3) business days before the due date (including any extensions thereof)
for payment of Taxes with respect to such Straddle Period Return. If t he
parties are unable to resolve any dispute within fifteen (15) business days
after Seller's receipt of such Straddle Period Return and Indemnification
Statement, such dispute shall be resolved by the [Independent Accountants],
which shall resolve any issue in dispute as promptly as practicable. If the
Independent Accountants are unable to make a determination with respect to any
disputed issue prior to the due date (including any extensions) for the filing
of the Straddle Period Return in, question, (A) Buyer shall file, or shall
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cause to be filed, such Straddle Period Return without such determination having
been made and (B) Seller shall pay to Buyer, not later than three days before
the due date (including any extensions thereof) for the payment of Taxes with
respect to such Straddle Period Return, an amount determined by Seller as the
proper amount chargeable to Seller pursuant to this Section 5.8(c). Upon
delivery to Seller and Buyer by the Independent Accountants of its
determination, appropriate adjustments shall be made to the amount paid by
Seller in accordance with the immediately preceding sentence in order to reflect
the decision of the Independent Accountants. The determination by the
Independent Accountants shall be final, conclusive and binding on the parties.
(iv) Seller and Buyer shall reasonably cooperate,
and shall cause their respective affiliates, officers, employees, agents,
auditors and representatives reasonably to cooperate, in preparing and filing
all Tax Returns (including amended returns and claims for refund), including
maintaining and making available to each other all records necessary in
connection with Taxes and in resolving all disputes and audits with respect to
all taxable periods relating to Taxes. Buyer and Seller recognize that Seller
will need access, from time to time, after the Closing Date, to certain
accounting and tax records and information held by the Company to the extent
such records and information pertain to events occurring prior to the Closing
Date; therefore, Buyer agrees that from and after the Closing Date Buyer shall,
and shall cause the Company to, (A) retain and maintain such records until such
time as Seller determines that such retention and maintenance is no longer
necessary and (B) allow Seller and its agents and representatives (and agents
and representatives of its affiliates), to inspect, review and make copies of
such records as Seller may deem necessary or appropriate from time to time.
(v) For a period of seven (7) years from the
Closing Date, Buyer shall not, and shall cause the Company not to, dispose of or
destroy any of the business records and files of the Company relating to Taxes
in existence on the Closing Date without first offering to turn over possession
thereof to Seller by written notice to Seller at least thirty (30) days prior to
the proposed date of such disposition or destruction.
(vi) Any refunds and credits of Taxes of the
Company and its Subsidiaries or similar benefit (including any interest or
similar benefit) received from or credited thereon by the applicable tax
authority with respect to (A) any taxable period ending on or before the Closing
Date or (B) Taxes for which the Seller has indemnified the Buyer under the
Agreement, shall be for the account of Seller, and if received or utilized by
Buyer or the Company, shall be paid to Seller within five (5) business days
after Buyer or the Company receives such refund or utilizes such credit. Except
as provided in the next sentence, any refunds or credits of the Company with
respect to any Straddle Period shall be apportioned between Seller and Buyer on
the basis of an interim closing of the books. In the case of a refund or credit
attributable to any Taxes that are imposed on a periodic basis and are
attributable to the Straddle Period, other at than Taxes based upon or related
to gross or net income or receipts, the refund or credit of such Taxes of the
Company for the Pre-Closing Period shall be deemed to be the amount of such
refund or credit for the Straddle Period multiplied by a fraction the numerator
of which is the number of days in the Straddle Period ending on the Closing Date
and the denominator of which is the number of days in the Straddle Period. Buyer
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shall not carry back any tax losses, credits or other tax benefits attributable
to the operations of the Company and its Subsidiaries after the Closing Date.
(vii) Notwithstanding any other provisions of this
Agreement to the contrary, all sales, use, transfer, stamp, duties, recording
and similar Taxes incurred in connection with the transactions contemplated by
this Agreement shall be shared equally by Seller and Buyer, and Seller shall, at
its own expense, accurately file or cause to be filed all necessary Tax Returns
and other documentation with respect to such Taxes and timely pay all, such
Taxes. If required by applicable law, Buyer will join in the execution of any
such Tax Returns or such other documentation.
(d) Elections. Buyer shall not, and shall cause the Company not
to, make, amend or revoke any Tax election if such action would adversely affect
Seller or any person (other than the Company and its Subsidiaries) as to whom or
with whom Seller has filed a consolidated return with respect to any, taxable
period ending on or before the Closing Date or for the Pre-Closing Period or any
Tax refund with respect thereto.
(e) Tax Indemnification.
(i) Buyer shall indemnify, defend and hold harmless
Seller and its affiliates; at any time after the Closing, from and against (A)
any liability for Taxes of the Company and its Subsidiaries for any taxable
period ending after the Closing Date except for Straddle Periods, in which case
Buyer's indemnity will cover only that portion of any such Taxes that is not
attributable to the Pre-Closing Period; (B) all costs and expenses (including
reasonable attorneys and accountants fees) attributable to any contest or
dispute involving the foregoing; and (C) Taxes arising out of any action taken
by the Company or any of its Subsidiaries on the Closing Date after the Closing,
other than actions contemplated by this Agreement or actions taken in the
ordinary course of business.
(ii) Seller shall indemnify, defend and hold harmless
Buyer and its affiliates, at any time after the Closing, from and against any
liability for Taxes, regardless of whether any such liability or potential
liability has been disclosed to Buyer, of the Company and its Subsidiaries
(including, without limitation, liability for Taxes of any person other than any
of the Company and its Subsidiaries: (i) under Reg. ss.1. 1502-6 (or any similar
provision of Law), (ii) as a transferee or successor, (iii) by Contract, or (iv)
otherwise) except as provided in Section 5.8(c)(vii) hereof, for the Pre-Closing
Period, including any Straddle Period.
(iii) In determining the responsibility of Seller and Buyer
for Taxes attributable to any Straddle Period, Taxes based upon or related to
gross or net income or receipts shall be apportioned on the basis of an interim
closing of the Company's books as of the Closing Date, and all other Taxes shall
be prorated on a daily basis.
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(iv) If a claim for Taxes shall be made by any taxing
authority in writing, which, if successful, might result in an indemnity payment
pursuant to this Section 5.8, the party seeking indemnification (the "Tax
Indemnified Party") shall promptly notify the other party (the "Tax Indemnifying
Party") in writing of such claim (a "Tax Claim") within a reasonably sufficient
period of time to allow the Tax Indemnifying Party effectively to contest such
Tax Claim, and. in reasonable detail to apprise the Tax Indemnifying Party of
the nature of the Tax Claim, and provide copies of all correspondence and
documents received by it from the relevant taxing authority. Failure to give
prompt notice of a Tax Claim hereunder shall affect the Tax Indemnifying Party's
obligation under this Section to the extent that the Tax Indemnifying Party is
prejudiced by such failure to give prompt notice.
(v) With respect to any Tax Claim which might result in
an indemnity payment to Buyer pursuant to this Section 5.8(e) (including,
without limitation, Taxes of the Company for a Straddle Period), Seller shall
control all proceedings taken in connection with such Tax Claim and, without
limiting the foregoing, may in its sole discretion and at its sole- expense
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with any taxing authority with respect thereto, and may, in its sole
discretion, either pay the Tax claimed and sue for a refund where applicable law
permits such refund suits or contest such Tax Claim. Buyer shall not under any
circumstances settle or otherwise compromise any Tax Claim referred to in the
preceding sentence without Seller's prior written consent. Notwithstanding
anything in the foregoing to the contrary, Seller shall not settle any Tax Claim
in a manner which would adversely affect the Company and its Subsidiaries after
the Closing Date without the prior written consent of the Buyer, which consent
shall not unreasonably be withheld. In connection with any proceeding taken in
connection with such Tax Claim, (A) Seller shall keep Buyer informed of all
material developments and events relating to such Tax Claim if involving a
material liability for Taxes and (B) Buyer shall have the right, at its sole
expense, to participate in any such proceedings. Buyer shall cooperate with
Seller in contesting such Tax Claim (without charge to Seller), which
cooperation shall include, without limitation, the retention and the provision
to Seller of records and information which are reasonably relevant to such Tax
Claim, and making employees available to Seller to provide additional
information or explanation of any material provided hereunder or to testify at
proceedings relating to such Tax Claim, provided that no charges shall be
incurred by Seller for the services of such employees.
(vi) With respect to any Tax Claim not described in
Section 5.8(e)(v) hereof which might result in an indemnity payment to Seller
pursuant hereto, Buyer shall control all proceedings in accordance with
provisions that are parallel to those in Section 5.8(e) hereof.
(f) Tax Sharing Agreements. Any tax sharing agreement between
Seller and any of the Company and its Subsidiaries is terminated as of the
Closing Date and will have no further effect for any taxable year (whether the
current year, a future year, or a past year).
Section 5.9 Proceedings. Seller shall promptly notify Buyer of any
Proceedings which, after the date hereof, are threatened or commenced against
the Seller, Company or any Subsidiary
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against any officer, director, employee, consultant or agent with respect to the
affairs of the Company or any Subsidiary, which if adversely determined could
reasonably be expected to have a Material Adverse Effect.
Section 5.10 Continued Effectiveness of Representations and Warranties
of Corporation. Seller will use its commercially reasonable efforts to cause the
Company and its Subsidiaries to conduct the business of the Company and the
Subsidiaries in such a manner so that the representations and warranties
contained in Article III herein shall continue to be true and correct on and as
of the Closing Date as if made on and as of the Closing Date, and Buyer shall
promptly be given notice of any event, condition or circumstance occurring from
the date hereof through the Closing Date which would cause any of such
representations and warranties to become untrue in any material respect.
Section 5.11 No Shopping. The Seller shall not, nor shall any Seller
allow the Company or any Subsidiary to, directly or indirectly, through any
director, officer, employee, agent or otherwise, solicit, initiate or encourage
submission of proposals or offers from any person relating, directly or
indirectly, to any acquisition of all or substantially all of the assets or
capital stock of the Company or any Subsidiary or participate in any negotiation
regarding, or furnish to any other person any information with respect to, or
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person to or seek, directly or
indirectly, to acquire all or substantially all of the assets or capital stock
of the Company or any Subsidiary of the Company. The Seller shall promptly
notify NCO if any such proposal or offer, or any inquiry or contact with any
Person with respect thereto, is made.
Section 5.12 Hart-Scott-Rodino Filings. As promptly as practicable
after the date of this Agreement, Buyer and Seller shall make all filings under
the H-S-R Act which are required in connection with the transactions
contemplated by this Agreement. Each party shall cooperate with the other party
in connection with the other party's filings under the H-S-R Act including,
without limitation, providing all information reasonably requested by each party
to the other and taking all reasonable actions to cause the early termination of
all applicable waiting periods.
Section 5.13 Releases. Seller shall, at its sole expense, use its
commercially reasonable efforts to obtain the release of the Company and each of
its Subsidiaries from all guarantees and sureties (other than those in the
ordinary course of the Company's business) listed on Section 3.15 of the
Disclosure Schedule, including without limitation, those arising under the
Credit Agreement dated February 13, 1998 among, inter alia, Seller, DLJ Capital
Funding and Wachovia Bank, N.A. ("Credit Agreement"), and the Indenture dated
February 20, 1998 by Seller and its subsidiaries ("Indenture"), and from all
Encumbrances including applicable UCC-3 Releases (collectively, the "Releases").
Seller shall take or cause to be taken such action, including without
limitation, providing such certificates, notices, agreements or instruments and
applying the proceeds of the sale of the Shares, as are required of the Seller
or the Company under the Credit Agreement and the Indenture to obtain the
applicable Releases thereunder. Buyer and Seller shall use their respective
commercially reasonable efforts to obtain the release of Seller from guarantees
under the Leases;
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provided, however, that Buyer shall not be required to provide any guaranty or
suretyship for any Leases.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE PARTIES
Section 6.1 Conditions to Each Party's Obligation. The respective
obligation of each party to consummate the transactions contemplated herein is
subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) No statute, rule or regulation shall have been enacted,
entered, promulgated or enforced by any court or governmental authority which
prohibits or restricts the consummation of the transactions contemplated hereby;
(b) There shall not be in effect any Judgment of any court of
competent jurisdiction enjoining the consummation of the transactions
contemplated hereby;
(c) There shall not be any Proceeding instituted, pending or
threatened by any governmental or other regulatory or administrative agency or
commission or any person which seeks to enjoin or otherwise prevent, or which
seeks material monetary penalties as a result of, consummation of the
transactions contemplated hereby; and
(d) Any waiting periods applicable to the transactions
contemplated by this Agreement under applicable U.S. antitrust or trade
regulation laws and regulations, including, without limitation, under the H-S-R
Act shall have expired or been terminated.
Section 6.2 Conditions to Obligations of Seller. The obligations of
Seller to consummate the transactions contemplated hereby are further subject to
the satisfaction (or waiver) at or prior to the Closing of the following
conditions:
(a) Each representation and warranty made by Buyer in Article IV
of this Agreement shall be true and correct (a) in all material respects with
respect to representations and warranties which are not modified by materiality
and (b) in all respects with respect to representations and warranties which are
modified by materiality, in either case, on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date except for
those representations and warranties made as of a specified date which shall
continue to be true and correct as of such date and except for changes permitted
or contemplated hereby.
(b) Buyer shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Closing pursuant to the terms hereof; and
(c) Buyer shall have delivered to Seller or its affiliates those
items set forth in Section 1.5 hereof.
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Notwithstanding the failure of any one or more of the foregoing
conditions, the Seller may proceed with the Closing without satisfaction, in
whole or in part, of any one or more of such conditions. To the extent that on
or before the third day prior to the Closing Buyer delivers to Seller a written
notice, prepared in good faith, specifying in reasonable detail the failure of
such condition or the breach by Buyer of any of the representations or
warranties of Buyer herein and Seller nevertheless proceeds with the Closing,
Seller shall be deemed to have waived for all purposes any rights or remedies it
may have against Buyer by reason of the failure of any such condition or the
breach of any such representation or warranty to the extent described in such
notice.
Section 6.3 Conditions to Obligations of Buyer. The obligations of
Buyer to consummate the transactions contemplated hereby are further subject to
the satisfaction (or waiver) at or prior to the Closing of the following
conditions:
(a) Each representation and warranty made by Seller in this
Agreement shall be true and correct (a) in all material respects with respect to
representations and warranties which are not modified by materiality and (b) in
all respects with respect to representations and warranties which are modified
by materiality, in either case, on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date except for those
representations and warranties made as of a specified date which shall continue
to be true and correct as of such date and except for changes permitted or
contemplated hereby.
(b) Seller shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Closing pursuant to the terms hereof;
(c) All Material Consents shall have been obtained and remain in
full force and effect;
(d) Since the date of the Agreement, there shall have been no
change in the business, results of operations or financial condition of the
Company that, individually or in the aggregate had or would have a Material
Adverse Effect;
(e) The Service Contracts shall have been entered into and remain
in full force and effect;
(f) The Shares and the capital stock of the Subsidiaries shall be
free and clear of any Encumbrance.
(g) Seller or its affiliates shall have delivered to Buyer those
items set forth in Section 1.4 hereof.
Notwithstanding the failure of any one or more of the foregoing
conditions, Buyer may proceed with the Closing without satisfaction, in whole or
in part, of any one or more of such conditions. To the extent that on or before
the third day prior to the Closing Seller delivers to Buyer
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a written notice, prepared in good faith, specifying in reasonable detail the
failure of such condition or the breach by Seller of any of the representations
or warranties of Seller herein and Buyer nevertheless proceeds with the Closing,
Buyer shall be deemed to have waived for all purposes any rights or remedies it
may have against Seller by reason of the failure of any such condition or the
breach of any such representation or warranty to the extent described in such
notice.
ARTICLE VII
TERMINATION, AMENDMENT; WAIVER
Section 7.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date:
(a) At any time, by, mutual written consent of Seller and Buyer;
(b) By Buyer or Seller if any court of competent jurisdiction in
the United States or any United States governmental body shall have issued a
final and non-appealable order, decree, or ruling permanently restraining,
enjoining or otherwise prohibiting the consummation of the transactions
contemplated hereby; provided that no party hereto affiliated with the person
who brought the action seeking the permanent enjoinment of the transactions
contemplated hereby may seek termination of this Agreement pursuant to this
Section 7.1(b);
(c) If the transactions contemplated hereby or any of the
conditions to Closing hereunder become impossible to perform or obtain, as
applicable, provided that no party hereto who caused such impossibility may seek
termination of this Agreement pursuant to this Section 7.1(c);
(d) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Agreement which (i) results in the failure of a condition set forth in Article
VI and (ii) cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained in this Agreement);
(e) At any time on or after December 31, 1998, by either Seller,
on the one hand, or Buyer, on the other hand, if the Closing shall not have
occurred on or prior to such date (or such later date as Seller and Buyer shall
have agreed in writing), provided that no party hereto may seek termination of
this Agreement pursuant to this Section 7.1(e) if such party is in material
breach of the Agreement.
Section 7.2 Procedure and Effect of Termination. In the event of the
termination of this Agreement and the abandonment of the transactions
contemplated hereby pursuant to Section 7.1 hereof, written notice thereof shall
forthwith be given by the parties so terminating to the other party and this
Agreement shall terminate and the transactions contemplated hereby shall be
abandoned,
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without further action by Seller, on the one hand, or Buyer, on the other hand.
If this Agreement is terminated pursuant to Section 7.1 hereof:
(a) Each party shall redeliver all documents, work papers and
other materials of the other parties relating to the transactions contemplated
hereby, whether obtained before or after the execution hereof, to the party
furnishing the same, and all confidential information received by any party
hereto with respect to the other party shall be treated in accordance with the
Confidentiality Agreement and Section 5.2(b) hereof;
(b) All filings, applications and other submissions made pursuant
hereto shall, at the option of Seller, and to the extent practicable, be
withdrawn from the agency or other person to which made; and
(c) There shall be no liability or obligation hereunder on the
part of Seller or Buyer or any of their respective directors, officers,
employees, affiliates, controlling persons, agents or representatives, except
that Seller or Buyer, as the case may be, may have liability to the other party
if the basis of termination is a willful, material breach by Seller or Buyer, as
the case may be, of one or more of the provisions of this Agreement, and except
that the obligations provided for in Sections 7.2(a), 7.2(b) and 10.1 hereof
shall survive any such termination.
Section 7.3 Amendment, Modification and Waiver. This Agreement may be
amended, modified or supplemented at any time by written agreement of Seller and
Buyer. Any failure of Seller or Buyer to comply with any term or provision of
this Agreement may be waived, with respect to Buyer, by Seller and, with respect
to Seller, by Buyer, by an instrument in writing signed by or on behalf of the
appropriate party, but such waiver or failure to insist upon strict compliance
with such term or provision shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure to comply.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS: INDEMNIFICATION
Section 8.1 Survival of Representations and Warranties. Unless
otherwise provided herein, the representations and warranties of Seller and
Buyer, made in Articles III and IV hereof, respectively, shall survive the
Closing: (a) with respect to claims for indemnification not based on the
assertion of liability by third parties, for a period of fifteen months after
the Closing Date, or (b) with respect to claims for indemnification based on the
assertion of liability by third parties, for a period of twenty-four months
after the Closing Date (as applicable, the "Indemnity Period"); but except as
provided in Section 7.2(c) hereof, shall not survive any termination of this
Agreement pursuant to Section 7.1. The parties intend to shorten the statute of
limitations and agree that no claims or causes of action may be brought against
Seller or Buyer based upon, directly or indirectly, any of the representations
or warranties contained in Articles III and IV hereof after the Indemnity Period
except as provided in Section 8.4(b). This Article VIII shall not limit any
covenant or
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agreement of the parties, which contemplates performance after the Closing,
including, without limitation, the covenants and agreements set forth in
Sections 5.7 and 5.8 hereof.
Section 8.2 Seller's Agreement to Indemnify. Subject to the terms and
conditions set forth herein, from and after the Closing, Seller shall indemnify
and hold harmless Buyer, Company and Subsidiaries and their respective
directors, officers, employees, affiliates, controlling persons, agents and
representatives and their successors and assigns (collectively, the "Buyer
Indemnitees") from and against all liability, demands, claims, actions or causes
of action, assessments, losses, damages, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) (collectively "Buyer
Damages") arising out of or caused by, directly or indirectly, any or all of the
following: (i) any misrepresentation, breach or failure of any warranty or
representation made by the Seller in or pursuant to this Agreement; (ii) any
failure or refusal by Seller to satisfy or perform in all material respects any
covenant, term or condition of this Agreement required to be satisfied or
performed by the Seller; (iii) any claim against Company under any guaranty or
surety by Company of the obligations or liabilities of Seller or its
subsidiaries; (iv) any claims asserted by Allegheny Health, Education and
Research Foundation, Allegheny University of the Health Sciences, Allegheny
University Medical Partners, Allegheny Hospitals, Centennial and Allegheny
University Hospital -- East, or its agents, trustees or assigns (collectively,
"Allegheny") against Buyer Indemnitees which arise from or relate to payments
received by the Company or Subsidiaries from Allegheny prior to the date when
Allegheny filed its petition for relief under Chapter 11 in the United States
Bankruptcy Court for the Western District of Pennsylvania, Case Nos. 98-25773
through 98-25777, inclusive; and (v) any Proceeding against any Buyer Indemnitee
by any person arising out of the foregoing.
Section 8.3 Buyer's Agreement to Indemnify. Subject to the terms and
conditions set forth herein, from and after the Closing, Buyer shall indemnify
and hold harmless Seller, Company and Subsidiaries and their respective
directors, officers, employees, affiliates, controlling persons, agents and
representatives and their successors and assigns (collectively, the "Seller
Indemnitees") from and against all liability, demands, claims, actions or causes
of action, assessments, losses, damages, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) (collectively "Seller
Damages") arising out of or caused by, directly or indirectly, any or all of the
following: (i) any misrepresentation, breach or failure of any warranty or
representation made by the Buyer in or pursuant to this Agreement; (ii) any
failure or refusal by Buyer to satisfy or perform in all material respects any
covenant, term or condition of this Agreement required to be satisfied or
performed by the Buyer; (iii) any claim against the Seller under any guaranty of
the Leases by Seller with respect to obligations or liabilities arising on or
after the Closing Date; (iv) any Proceeding against any Seller Indemnitee by any
person arising out of the foregoing.
Section 8.4 General Provisions.
(a) Seller's obligations to indemnify the Buyer Indemnitees
pursuant to Section 8.2, and Buyer's obligation to indemnify the Seller
Indemnitees pursuant to Section 8.3, are subject to the following limitations:
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(i) No indemnification shall be made by Seller or Buyer
(referred to as the "Indemnitor") unless the aggregate amount of all of Buyer
Damages or all of Seller Damages (Buyer Damages and Seller Damages are sometimes
referred to as "Damages"), as the case may be, exceeds $1,000,000 and, in such
event, indemnification shall be made by Indemnitor only to the extent Buyer
Damages or Seller Damages, as the case may be, exceed $1,000,000.
(ii) In no event shall an Indemnitor's aggregate
obligation to indemnify the Buyer Indemnitees or Seller Indemnitees, as the case
may be (Buyer Indemnitees and Seller Indemnitees are sometimes referred to as
"Indemnitees") exceed $15,000,000; provided, however, that any Damages arising
from any indemnification matter described in Section 8.4(b) shall not be taken
into account in calculating the amount of Damages for the purposes of the
limitation provided by this Section 8.4(a)(ii).
(iii) Indemnitor shall be obligated to indemnify the
Indemnitees only for those claims giving rise to Damages as to which the
Indemnitees have given Indemnitor written notice thereof prior to the end of the
Indemnity Period. Any written notice delivered by a Indemnitee to Indemnitor
with respect to Damages shall set forth with as much specificity as is
reasonably practicable the basis of the claim for Damages and, to the extent
reasonably practicable, a reasonable estimate of the amount thereof.
(iv) Except for willful, knowing or intentional fraud,
remedies that cannot be waived as a matter of law and injunctive or provisional
relief, if the Closing occurs, this Article VIII shall be the exclusive remedy
for breaches of this Agreement (including any covenant, obligation,
representation or warranty contained in this Agreement or in any certificate
delivered pursuant to this Agreement) or otherwise in respect of the sale of the
Shares contemplated hereby.
(b) None of the foregoing limitations in Section 8.1 or Section
8.4 shall apply in the case of any indemnification matter involving; (i) title
to the Shares; (ii) Taxes; or (iii) civil false claims act liabilities for
billing and coding under Medicare and Medicaid; or (iv) covenants, agreements or
obligations to be performed after Closing; (v) indemnification matters described
in Section 8.2(iii), Section 8.2(iv) or Section 8.3(iii) and any related
Proceeding; or (vi) Buyer's breach of the representations contained in Section
4.1.
(c) In determining the amount of Damages arising from breach of
representations or warranties qualified by materiality or Material Adverse
Effect, such qualification shall not be taken into account in determining the
amount of such damages.
(d) The right to indemnification, payment of damages or other
remedy based on representations, warranties, covenants and obligations of this
Agreement will not be affected by any investigation conducted with respect to,
or any knowledge acquired (or capable of being acquired) at any time, whether
before or after the execution and delivery of this Agreement or the Closing
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Date, with respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant, or obligation.
Section 8.5 Third Party Indemnification. The obligations of Indemnitor
to indemnify the Indemnitees under Section 8.2 or Section 8.3 hereof, as the
case may be, with respect to Damages resulting from the assertion of liability
by third parties (a "Claim"), will be subject to the following terms and
conditions:
(a) Any party against whom any Claim is asserted will give Seller
written notice of any such Claim promptly after learning of such Claim, and
Indemnitor may at its option undertake the defense thereof by representatives of
its own choosing. Failure to give prompt notice of a Claim hereunder shall not
affect Indemnitor's obligations under this Section 8.5, except to the extent
Indemnitor is materially prejudiced by such failure to give prompt notice. If
Indemnitor, within thirty (30) days after notice of any such Claim, or such
shorter period as is reasonably required, fails to assume the defense of such
Claim, or does not continue to defend the Claim in good faith, the Indemnitee
against whom such claim has been made will (upon further notice to Indemnitor)
have the right to undertake the defense, compromise or settlement of such claim
on behalf of and for the account and risk, and at the expense, of Indemnitor,
subject to the right of Indemnitor to assume the defense of such Claim at any
time prior to settlement, compromise or final determination thereof. If
Indemnitee reasonably believes that the handling of the Defense by Indemnitor
may have a material adverse affect on any Indemnitee, its business or financial
condition, or its relationship with any customer, prospect, supplier, employee,
salesman, consultant, agent or representative, then Indemnitee may, at its
option and expense and through counsel of its choice, assume control of the
defense of such Claim, provided that Indemnitor shall be entitled to participate
in the defense of such Claim at its expense and through counsel of its choice.
(b) Anything in this Section 8.5 to the contrary, notwithstanding,
Indemnitor shall not enter into any settlement or compromise of any action, suit
or proceeding or consent to the entry of any judgment (i) which does not include
as an unconditional term thereof the delivery by the claimant or plaintiff to
the Indemnitee of a written release from all liability in respect of such
action, suit or proceeding or (ii) for other than monetary damages to be borne
in full by Indemnitor, without the prior written consent of the Indemnitee,
which consent shall not be unreasonably withheld.
ARTICLE IX
RESTRICTIVE COVENANTS OF THE SELLERS
Section 9.1 Certain Acknowledgments. Seller expressly acknowledges
that:
(a) Business. The accounts receivable management business
(collectively, the "Business") as currently conducted by Company and
Subsidiaries involve the provision of accounts receivable collection and
management services using proprietary and confidential systems and information.
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(b) Competitive Nature of Business. The Business is highly
competitive, is marketed throughout the United States and Europe and requires
long sales "lead times" often exceeding one year. The Company and Subsidiaries
expend substantial time and money, on an ongoing basis, to train their
employees, maintain and expand their customer base, and improve and develop
their products and services.
(c) Access to Information. During the period that Seller owned the
Company and Subsidiaries, Seller had access to proprietary and confidential
property, knowledge and information of the Company and Subsidiaries, which,
after Closing, shall be proprietary and confidential property, knowledge and
information of the Buyer; such property, knowledge and information must be kept
in strict confidence to protect the Business and maintain the competitive
position of the Business in the marketplace; and such property, knowledge and
information would be useful to competitors of the Business for indefinite
periods of time.
(d) Basis for Covenants. The covenants of Sections 9.2, 9.3 and
9.4 (the "Covenants") are a material part of this Agreement and are an integral
part of the obligations of the Seller hereunder; the Covenants are supported by
good and adequate consideration; and the Covenants are reasonable and necessary
to protect the legitimate business interests of the Company and Buyer.
(e) Conduct of Business by Buyer. Buyer has informed Seller that
after Closing, the Business will be conducted by the Buyer through the Company
and the Subsidiaries and/or other subsidiaries of Buyer (collectively, the "NCO
Companies").
Section 9.2 Nondisclosure Covenants. Except with Buyer's prior written
consent, Seller shall not, directly or indirectly, in any capacity, communicate,
publish or otherwise disclose to any person, or use for the benefit of any
person, any confidential or proprietary property, knowledge or information of
the Business, no matter when or how such knowledge or information was obtained,
including without limitation (a) any information concerning the conduct and
details of the Company's or the Subsidiaries' businesses; (b) the identity of
customers and prospects, their specific requirements, and the names, addresses
and telephone numbers of individual contacts at customers and prospects; (c)
prices, renewal dates and other detailed terms of customer and supplier
Contracts and proposals; (d) pricing policies, marketing and sales strategies,
methods of delivering products and services, and products and service
development projects and strategies; (e) employment and payroll records; (f)
forecasts, budgets and other nonpublic financial information; and (g) expansion
plans, management policies, methods of operation, and other business strategies
and policies.
Section 9.3 Noncompetition Covenants. During the period beginning on
the Closing Date and ending on the fifth (5th) anniversary of the Closing Date,
except with the Buyer's prior written consent, Seller shall not, directly or
indirectly, in any capacity, at any location worldwide:
(a) Solicitation Restrictions. Communicate with or solicit any
person who is or during such period becomes a customer, prospect, supplier,
employee, salesman, agent or
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representative of, or a consultant to the Business, in any manner which
interferes with such person's relationship with the Business, or in an effort to
obtain any such person as a customer, employee, salesman, agent or
representative of, or a consultant to, any other person that conducts a business
competitive with or similar to all or any part of the Business.
(b) Competing Business Restrictions. Establish, own, manage,
operate, finance or control, or participate in the establishment, ownership,
management, operation, financing or control of, or be a director, officer,
employee, salesman, agent or representative of, or be a consultant to, any
person that conducts a business competitive with or similar to all or any part
of the Business. Nonsolicitation. During the period beginning on the Closing
Date and ending on the fifth (5th) anniversary of the Closing Date, Seller shall
not, directly or indirectly, solicit (other than a general public solicitation)
any of the employees of the Business who were employed by the Business prior to
the Closing Date to become employees or independent contractors of Seller or any
of its subsidiaries.
Section 9.4 Certain Exclusions. Confidential and proprietary property,
knowledge and information of the Business shall not include any information that
is now known by or readily available to the general public, nor shall it include
any information that in the future becomes known by or readily available to the
general public other than as a result of any breach of the Covenants of this
Agreement. If Seller is required to disclose proprietary information to any
court, administrative agency or governmental authority or else stand liable for
contempt or other penalty and Seller notifies Buyer as soon as possible so that
Buyer may seek a protective order or other relief, then, in the absence of such
protective order or other relief, Seller may disclose such proprietary
information without liability under this Agreement. Nothing in Article IX shall
prohibit Seller from conducting any business (other than the Business) being
conducted by Seller on the date hereof. The ownership by Seller of not more than
five percent (5%) of the outstanding securities of any public company shall not,
by itself, constitute a breach of the Covenants of Section 9.3, even if such
public company competes with the Business. The acquisition by Seller of the
stock or assets of any person or entity (an "Acquired Business") which conducts
a business competitive with the Business shall not, by itself, constitute a
breach of the Covenants of Section 9.3 (i) if less than 10% of the gross
revenues of such Acquired Business are derived from business competitive with
the Business, or (ii) if 10% or more of the gross revenues of such Acquired
Business are derived from business competitive with the Business and Seller
disposes of such competitive business as soon as practicable after the
acquisition of the Acquired Business by Seller. Seller hereby agrees to notify
Buyer in a timely fashion so as to permit Buyer, at its option, to bid on or
offer to purchase any competitive business to be disposed of by Seller pursuant
to the preceding sentence.
Section 9.6 Enforcement of Covenants. Seller expressly acknowledges
that it would be extremely difficult to measure the damages that might result
from any breach of the Covenants, and that any breach of the Covenants will
result in irreparable injury to the Business for which money damages could not
adequately compensate. If a breach of the Covenants occurs, then the NCO
Companies shall be entitled, in addition to all other rights and remedies that
they may have at law
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or in equity, to seek an injunction issued by any competent court enjoining and
restraining the Seller and all other persons involved therein from continuing
such breach.
Section 9.7 Scope of Covenants. If any Covenant, or any part thereof,
or the application thereof, is construed to be invalid, illegal or
unenforceable, then the other Covenants, or the other portions of such Covenant,
or the application thereof, shall not be affected thereby and shall be
enforceable without regard thereto. If any of the Covenants is determined to be
unenforceable because of its scope, duration, geographical area or other factor,
then the court making such determination shall have the power to reduce or limit
such scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.
ARTICLE X
MISCELLANEOUS
Section 10.1 Fees and Expenses. Whether or not the transactions
contemplated herein are consummated pursuant hereto, except as otherwise
provided herein, each of Seller and Buyer shall pay all fees and expenses
incurred by, or on behalf of, such party, and Seller shall pay all fees and
expenses incurred by or on behalf of Company and Subsidiary in connection with,
or in anticipation of, this Agreement and the consummation of the transactions
contemplated hereby. Each of Seller and Buyer shall indemnify and hold harmless
the other party from and against any and all claims or liabilities for financial
advisory and finders' fees incurred by reason of any action taken by such party
or otherwise arising out of the transactions contemplated by this Agreement by
any person claiming to have been engaged by such party.
Section 10.2 Further Assurances. From time to time after the Closing
Date, at the request of another party hereto and at the expense of the party so
requesting, each of the parties hereto shall execute and deliver to such
requesting party such documents and take such other action as such requesting
party may reasonably request in order to consummate more effectively the
transactions contemplated hereby.
Section 10.3 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and may be given by any of the following methods: (a) personal
delivery; (b) facsimile transmission; (c) registered or certified mail, postage
prepaid, return receipt requested; or (d) overnight delivery service. Notices
shall be sent to the appropriate party at its address or facsimile number given
below (or at such other address or facsimile number for such party as shall be
specified by notice given hereunder):
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If to Buyer, to:
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
Telephone No.: 215-793-9300
Fax No.: 215-793-2929
Attention: Joshua Gindin, Esquire
with a copy to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Telephone No.: 215-569-5500
Fax No.: 215-569-5555
Attention: Francis E. Dehel, Esquire
If to Seller, to:
Medaphis Corporation
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, GA 30339
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, IL 60606-1285
Fax No.: (312) 407-0411
Attention: Lynn Hiestand, Esquire
All such notices, requests, demands, waivers and, communications shall be deemed
received upon (i) actual receipt thereof by the addressee, (ii) actual delivery
thereof to the appropriate address or (iii) in the case of a facsimile
transmission, upon transmission thereof by the sender and issuance by the
transmitting machine of a confirmation slip that the number of pages
constituting the notice have been transmitted without error. In the case of
notices sent by facsimile transmission, the sender shall contemporaneously mail
a copy of the notice to the addressee at the address provided for above.
However, such mailing shall in no way alter the time at which the facsimile
notice is deemed received.
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Section 10.4 Severability. Should any provision of this Agreement for
any reason be declared invalid or unenforceable, such decision shall not affect
the validity or enforceability of any of the other provisions of this Agreement,
which remaining provisions shall remain in full force and effect and the
application of such invalid or unenforceable provision to persons or
circumstances other than those as to which it is held invalid or unenforceable
shall be valid and enforced to the fullest extent permitted by law.
Section 10.5 Binding Effect; Assignment. This Agreement and all of the
provisions hereof shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Neither
this Agreement nor any of the rights, interests or obligations hereunder shall
be assigned, directly or indirectly, including, without limitation, by operation
of law, by any party hereto without the prior written consent of the other
parties hereto provided, however, that Buyer shall have the right to assign its
rights (but not its obligations) under this Agreement to a wholly-owned
subsidiary of Buyer.
Section 10.6 No Third Party Beneficiaries. This Agreement is solely for
the benefit of Seller, and its successors and permitted assigns, with respect to
the obligations of Buyer under this Agreement, and for the benefit of Buyer, and
its respective successors and permitted assigns, with respect to the obligations
of Seller, under this Agreement, and this Agreement shall not be deemed to
confer upon or give to any other third party any remedy, claim liability,
reimbursement, cause of action or other right.
Section 10.7 Interpretation.
(a) The article and section headings contained in this Agreement
are solely for the purpose of reference, are not part of the agreement of the
parties and shall not in any way affect the meaning or interpretation of this
Agreement.
(b) As used in this Agreement, the term "person" shall mean and
include an individual, a partnership, a joint venture, a corporation, a trust,
an unincorporated organization and a government or any department or agency
thereof.
(c) As used in this Agreement, the term "affiliate" shall have the
meaning set forth in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended.
(d) In view of the fact that each of the parties hereto has been
represented by their own counsel and this Agreement has been fully negotiated by
all parties, the legal principle that ambiguities in a document are construed
against the draftsperson of that document shall not apply to this Agreement.
40
<PAGE> 45
Section 10.8 Jurisdiction and Consent to Service. Without limiting the
jurisdiction or venue of any other court, each of Seller and Buyer (a) agrees
that any suit, action or proceeding arising out of or relating to this Agreement
may be brought solely in the state or Federal courts of the District of
Delaware; (b) consents to the exclusive jurisdiction of each such court in any
suit, action or proceeding relating to or arising out of this Agreement; (c)
waives any objection which it may have to the laying of venue in -any such suit,
action or proceeding in any such court; and (d) agrees that service of any court
paper may be made in such manner as may be provided under applicable laws or
court rules governing service of process.
Section 10.9 Entire Agreement. Except for this Agreement, the
Confidentiality Agreement, the Disclosure Schedule, and the Exhibits and other
documents referred to herein or delivered pursuant hereto which form a part
hereof constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties or any of them with
respect to the subject matter hereof.
Section 10.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
Section 10.11 Specific Performance. The parties agree that any breach
of the terms of this Agreement would give rise to irreparable harm for which
money damages would not be an adequate remedy and accordingly the parties agree
that, in addition to any other remedies, each shall be entitled to enforce the
terms of this Agreement by a decree of specific performance without the
necessity of proving the inadequacy of money damages as a remedy.
Section 10.12 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
* * * * * * * * * *
(signatures appear on next page)
41
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MEDAPHIS CORPORATION
By: /s/ RANDOLPH L. M. HUTTO
--------------------------------
Name: Randolph L. M. Hutto
Title: EVP
NCO GROUP, INC.
By: /s/ JOSHUA GINDIN
--------------------------------
Name: Joshua Gindin
Title: EVP
42
<PAGE> 1
EXHIBIT 3.5
- - --------------------------------------------------------------------------------
AMENDED AND RESTATED BY-LAWS
OF
MEDAPHIS CORPORATION
----------------------------
Incorporated under the Laws of the
State of Delaware
----------------------------
Adopted as of June 30, 1991 and
Amended as of December 21, 1992
Amended and Restated as of March 24, 1997
Further Amended as of May 19, 1997
Further Amended as of July 29, 1998
Further Amended as of October 13, 1998
- - --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I OFFICES................................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS...............................................................1
Section 1. Place of Meetings......................................................................1
Section 2. Annual Meeting.........................................................................1
Section 3. Special Meetings.......................................................................1
Section 4. Notice of Meetings.....................................................................1
Section 5. Notice of Nomination of Directors......................................................2
Section 6. Notice of Other Business...............................................................3
Section 7. List of Stockholders...................................................................3
Section 8. Quorum.................................................................................4
Section 9. Voting.................................................................................4
Section 10. Proxies................................................................................4
Section 11. Inspectors of Elections................................................................4
Section 12. Action without a Meeting...............................................................5
ARTICLE III BOARD OF DIRECTORS.....................................................................5
Section 1. Powers.................................................................................5
Section 2. Election and Term......................................................................6
Section 3. Number.................................................................................6
Section 4. Quorum and Manner of Acting............................................................6
Section 5. Organization Meeting...................................................................6
Section 6. Regular Meetings.......................................................................6
Section 7. Special Meetings; Notice...............................................................6
Section 8. Removal of Directors...................................................................7
Section 9. Resignations...........................................................................7
Section 10. Vacancies..............................................................................7
Section 11. Compensation of Directors..............................................................7
Section 12. Action Without a Meeting...............................................................7
Section 13. Telephonic Participation in Meetings...................................................8
Section 14. Committees of the Board of Directors...................................................8
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE IV OFFICERS...............................................................................8
Section 1. Principal Officers.....................................................................8
Section 2. Election and Term of Office............................................................8
Section 3. Other Officers.........................................................................8
Section 4. Removal................................................................................8
Section 5. Resignations...........................................................................9
Section 6. Vacancies..............................................................................9
Section 7. Chairman of the Board..................................................................9
Section 8. Vice Chairmen..........................................................................9
Section 9. President..............................................................................9
Section 10. Vice Presidents........................................................................9
Section 11. Treasurer..............................................................................9
Section 12. Secretary.............................................................................10
Section 13. Salaries..............................................................................10
ARTICLE V SHARES AND THEIR TRANSFER.............................................................10
Section 1. Certificate for Stock.................................................................10
Section 2. Stock Certificate Signature...........................................................10
Section 3. Stock Ledger..........................................................................10
Section 4. Cancellation..........................................................................10
Section 5. Registrations of Transfers of Stock...................................................11
Section 6. Regulations...........................................................................11
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates.....................................11
Section 8. Record Dates..........................................................................11
ARTICLE VI MISCELLANEOUS PROVISIONS..............................................................11
Section 1. Corporate Seal........................................................................11
Section 2. Voting of Stocks Owned by the Corporation.............................................11
Section 3. Dividends.............................................................................12
Section 4. Indemnification and Insurance.........................................................12
ARTICLE VII AMENDMENTS............................................................................13
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED BY-LAWS
OF
MEDAPHIS CORPORATION
(a Delaware corporation)
----------------------------
ARTICLE I
OFFICES
The registered office of the Corporation in the State of Delaware shall
be located in the City of Wilmington, County of New Castle. The Corporation may
establish or discontinue, from time to time, such other offices within or
without the State of Delaware as may be deemed proper for the conduct of the
Corporation's business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of stockholders shall be
held at such place or places, within or without the State of Delaware, as may
from time to time be fixed by the Board of Directors, or as shall be specified
in the respective notices, or waivers of notice, thereof.
Section 2. Annual Meeting. The annual meeting of stockholders for the
election of Directors and the transaction of other business shall be held on
such date and at such time and place as may be designated by the Board of
Directors. At each annual meeting, the stockholders entitled to vote shall elect
a Board of Directors and may transact such other proper business as may come
before the meeting.
Section 3. Special Meetings. A special meeting of the stockholders, or
of any class thereof entitled to vote, for any purpose or purposes, may be
called at any time by the Chairman of the Board, if any, or the President or by
order of the Board of Directors and shall be called by the President or the
Secretary upon the written request of stockholders holding of record at least
50% of the outstanding shares of stock of the Corporation entitled to vote at
such meeting. Such written request shall state the purpose or purposes for which
such meeting is to be called.
Section 4. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of stockholders, whether annual or special,
stating the place, date and hour of the meeting shall be given not less than ten
days nor more than sixty days before the date on which the meeting
<PAGE> 5
is to be held to each stockholder of record entitled to vote thereat by
delivering a notice thereof to him personally or by mailing such notice in a
postage prepaid envelope directed to him at his address as it appears on the
records of the Corporation, unless he shall have filed with the Secretary of the
Corporation a written request that notices intended for him be directed to
another address, in which case such notice shall be directed to him at the
address designated in such request. Notice shall not be required to be given to
any stockholder who shall waive such notice in writing, whether prior to or
after such meeting, or who shall attend such meeting in person or by proxy
unless such attendance is for the express purpose of objecting, at the beginning
of such meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Every notice of a special meeting of the
stockholders shall also state the purpose or purposes for which it is called.
Section 5. Notice of Nomination of Directors. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as Directors of the Corporation. Nominations of persons for election as
Directors of the Corporation may be made at a meeting of stockholders only (i)
by or at the direction of the Board of Directors, (ii) by any nominating
committee or person appointed by the Board or (iii) by any stockholder of the
Corporation entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this Section 5. Such
nominations, other than those made by or at the direction of the Board or by any
nominating committee or person appointed by the Board, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation, in the case of an annual meeting
of stockholders, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided, however, that in
the event that the annual meeting is called for a date that is not within 30
days before or after such anniversary date, notice by the stockholder in order
to be timely must be so received not later than the close of business on the
15th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs; and in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the 15th day following the day on which notice of the date
of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs. Such stockholder's notice to
the Secretary shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a Director, (i) the name,
age, business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the person and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as now or hereafter
amended; and (b) as to the stockholder giving the notice (i) the name and record
address of such stockholder and (ii) the class and number of shares of capital
stock of the Corporation which are beneficially owned by such stockholder. The
Corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine the eligibility of
such proposed nominee to serve as a Director of the Corporation.
-2-
<PAGE> 6
No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The Chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedures, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
Section 6. Notice of Other Business. To be properly brought before the
meeting, business must be either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board, (b) otherwise
properly brought before the meeting by or at the direction of the Board, or (c)
otherwise properly brought before the meeting by a stockholder. In addition to
any other applicable requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 90 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder in order to be timely must be so received not
later than the close of business on the 15th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure of
the date of the annual meeting was made, whichever first occurs. A stockholder's
notice to the Secretary shall set forth with respect to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class and number
of shares of the Corporation which are beneficially owned by the stockholder,
and (iv) any material interest of the stockholder in such business.
Notwithstanding anything in the By-laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 6, provided, however, that nothing in this
Section 6 shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting.
The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 6, and if
he should so determine, he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
Section 7. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of the stock ledger to
prepare and make, at least ten days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in his name. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days
-3-
<PAGE> 7
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall be
kept and produced at the time and place of the meeting during the whole time
thereof and subject to the inspection of any stockholder who may be present. The
original or duplicate ledger shall be the only evidence as to who are the
stockholders entitled to examine such list or the books of the Corporation or to
vote in person or by proxy at such meeting.
Section 8. Quorum. At each meeting of the stockholders, the holders of
record of a majority of the issued and outstanding stock of the Corporation
entitled to vote at such meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business, except as otherwise
provided by law, the Certificate of Incorporation or these By-laws. In the
absence of a quorum, any officer entitled to preside at, or act as Secretary of,
such meeting shall have the power to adjourn the meeting from time to time until
a quorum shall be constituted.
Section 9. Voting. Every stockholder of record who is entitled to vote
shall, at every meeting of the stockholders, be entitled to one vote for each
share of stock held by him on the record date; except, however, that shares of
its own stock belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held by the Corporation, shall neither be entitled to vote
nor counted for quorum purposes. Nothing in this Section shall be construed as
limiting the right of the Corporation to vote its own stock held by it in a
fiduciary capacity. At all meetings of the stockholders, a quorum being present,
all matters shall be decided by majority vote of the shares of stock entitled to
vote held by stockholders present in person or by proxy, except as otherwise
required by law or the Certificate of Incorporation. Unless demanded by a
stockholder of the Corporation present in person or by proxy at any meeting of
the stockholders and entitled to vote thereat or so directed by the chairman of
the meeting or required by law, the vote thereat on any question need not be by
written ballot. On a vote by written ballot, each ballot shall be signed by the
stockholder voting, or in his name by his proxy, if there be such proxy, and
shall state the number of shares voted by him and the number of votes to which
each share is entitled.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. A proxy
acting for any stockholder shall be duly appointed by an instrument in writing
subscribed by such stockholder. No proxy shall be valid after the expiration of
three years from the date thereof unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation.
Section 11. Inspectors of Elections. The Board of Directors, in advance
of any stockholder meeting, shall appoint an inspector of elections to act at
such meeting, and any adjournment thereof,
-4-
<PAGE> 8
and make a written report thereof. In case any person appointed fails to appear
or act, the vacancy may be filled by an alternate appointed by the Board in
advance of the meeting or at the meeting by the person presiding thereat. The
inspector, before entering upon discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability.
Section 12. Action without a Meeting. Any action required to be taken
at any annual or special meeting of stockholders or any action which may be
taken at any annual or special meeting of stockholders may be taken without a
meeting, without a vote, if a consent in writing setting forth the action so
taken shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. Any stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date. If no record date has been fixed by the Board of
Directors within ten (10) days of the date on which such a request is received,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of stockholders
meetings are recorded, to the attention of the Secretary of the Corporation.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors and prior
action by the Board of Directors is required by applicable law, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by law or in the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed under the direction of the Board of Directors.
-5-
<PAGE> 9
Section 2. Election and Term. Except as otherwise provided by law,
Directors shall be elected at the annual meeting of stockholders and shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified, or until they sooner die, resign or are removed. At
each annual meeting of stockholders, at which a quorum is present, the persons
receiving a plurality of the votes cast shall be the Directors. Acceptance of
the office of Director may be expressed orally or in writing, and attendance at
the organization meeting shall constitute such acceptance.
Section 3. Number. The number of Directors shall be such number as
shall be determined from time to time by the Board of Directors, but shall not
be less than three nor more than ten.
Section 4. Quorum and Manner of Acting. Unless otherwise provided by
law, the presence of 50% of the whole Board of Directors shall be necessary to
constitute a quorum for the transaction of business. In the absence of a quorum,
a majority of the Directors present may adjourn the meeting from time to time
until a quorum shall be present. Notice of any adjourned meeting need not be
given. At all meetings of Directors, a quorum being present, all matters shall
be decided by the affirmative vote of a majority of the Directors present,
except as otherwise required by law, the Certificate of Incorporation or these
By-laws. The Board of Directors may hold its meetings at such place or places
within or without the State of Delaware as the Board of Directors may from time
to time determine or as shall be specified in the respective notices, or waivers
of notice, thereof.
Section 5. Organization Meeting. Immediately after each annual meeting
of stockholders for the election of Directors, the Board of Directors shall meet
at the place of the annual meeting of stockholders for the purpose of
organization, the election of officers and the transaction of other business.
Notice of such meeting need not be given. If such meeting is held at any other
time or place, notice thereof must be given as hereinafter provided for special
meetings of the Board of Directors, subject to the execution of a waiver of the
notice thereof signed by, or the attendance at such meeting of, all Directors
who may not have received such notice.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
may be held at such time and place, within or without the State of Delaware, as
shall from time to time be determined by the Board of Directors. After there has
been such determination, and notice thereof has been once given to each member
of the Board of Directors as hereinafter provided for special meetings, regular
meetings may be held without further notice being given.
Section 7. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any,
the President or by a majority of the Directors. Notice of each such meeting
shall be mailed to each Director, addressed to him at his residence or usual
place of business, at least five days before the date on which the meeting is to
be held, or shall be sent to him at such place by facsimile, telegraph or cable,
or be delivered personally or by telephone, not later than the day before the
day on which such meeting is to be held. Each such notice shall state the time
and place of the meeting and, as may be required, the purposes thereof.
-6-
<PAGE> 10
Notice of any meeting of the Board of Directors need not be given to any
Director if he shall sign a written waiver thereof either before or after the
time stated therein for such meeting, or if he shall be present at the meeting.
Unless limited by law, the Certificate of Incorporation, these By-laws or the
terms of the notice thereof, any and all business may be transacted at any
meeting without the notice thereof having specifically identified the matters to
be acted upon.
Section 8. Removal of Directors. Any Director or the entire Board of
Directors may be removed, with or without cause, at any time, by action of the
holders of record of a majority of the issued and outstanding stock of the
Corporation entitled to vote thereon (i) present in person or by proxy at a
meeting of such stockholders or (ii) by a consent in writing in the manner
contemplated in Section 12 of Article II, and the vacancy or vacancies in the
Board of Directors caused by any such removal may be filled by action of such a
majority at such meeting or at any subsequent meeting or by consent.
Section 9. Resignations. Any Director of the Corporation may resign at
any time by giving written notice to the Chairman of the Board, if any, the
President or the Secretary of the Corporation. The resignation of any Director
shall take effect upon receipt of notice thereof or at such later time as shall
be specified in such notice; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 10. Vacancies. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining Directors
though less than a quorum of the Board of Directors, or by the sole remaining
Director, as the case may be, or if the vacancy is not so filled, or if no
Director remains, by the affirmative vote of a majority of the stockholders
entitled to vote thereon. A Director elected to fill a vacancy shall serve the
unexpired term of his predecessor in office, or, if such vacancy occurs by
reason of an amendment to these By-laws increasing the number of Directors,
until the next election of Directors by the stockholders, and until his
successor has been elected and qualified, or until he sooner dies, resigns or is
removed.
Section 11. Compensation of Directors. Directors, as such, shall not
receive any stated salary for their services, but, by resolution of the Board, a
specific sum fixed by the Board plus expenses may be allowed for attendance at
each regular or special meeting of the Board; provided, however, that nothing
herein contained shall be construed to preclude any Director from serving the
Corporation or any parent or subsidiary corporation thereof in any other
capacity and receiving compensation therefore.
Section 12. Action Without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting if a written consent thereto is signed by all members of the Board, and
such written consent is filed with the minutes or proceedings of the Board.
-7-
<PAGE> 11
Section 13. Telephonic Participation in Meetings. Members of the Board
of Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
Section 14. Committees of the Board of Directors. The Board of
Directors, by resolution adopted by a majority of the full Board of Directors,
may designate from among its members an executive committee and one or more
other committees, each consisting of one or more directors. Except as prohibited
by law, each committee shall have the authority set forth in the resolution of
the Board of Directors establishing such committee. Unless the Board of
Directors otherwise provides, each committee designated by the Board of
Directors may make, alter and repeal rules for the conduct of its business. In
the absence of such rules each committee shall conduct its business in the same
manner as the Board of Directors conducts its business pursuant to Article III
of these By-laws.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The Board of Directors shall elect a
President, a Secretary and a Treasurer, and may in addition elect a Chairman of
the Board, one or more Vice Chairmen of the Board, one or more Vice-Presidents
and such other officers as it deems fit; the President, the Secretary, the
Treasurer, the Chairman of the Board, if any, the Vice Chairmen of the Board, if
any, and the Vice Presidents, if any, being the principal officers of the
Corporation. One person may hold, and perform the duties of, any two or more of
said offices; provided, however, that the offices of President and Secretary
shall not be held by one person coincidentally.
Section 2. Election and Term of Office. The principal officers of the
Corporation shall be elected annually by the Board of Directors at the
organization meeting thereof. Each such officer shall hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal.
Section 3. Other Officers. In addition, the Board may elect, or the
Chairman of the Board, if any, or the President may appoint, such other officers
as they deem fit. Any such other officers chosen by the Board of Directors shall
be subordinate officers and shall hold office for such period, have such
authority and perform such duties as the Board of Directors, the Chairman of the
Board, if any, or the President may from time to time determine.
Section 4. Removal. Any officer may be removed, either with or without
cause, at any time, by resolution adopted by the Board of Directors at any
regular meeting of the Board, or at any special meeting of the Board called for
that purpose, at which a quorum is present.
-8-
<PAGE> 12
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Chairman of the Board, if any, the President, the
Secretary or the Board of Directors. Any such resignation shall take effect upon
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 6. Vacancies. A vacancy in any office may be filled for the
unexpired portion of the term in the manner prescribed in these By-laws for
election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board of
Directors, if elected, shall preside, if present, at all meetings of the Board
of Directors and meetings of the stockholders, if present thereat, and shall
have and perform such other duties as from time to time may be assigned by the
Board of Directors.
Section 8. Vice Chairmen. Each Vice Chairman shall have the general
powers and duties as shall be delegated to him by the Chairman of the Board of
Directors or as shall be established by resolution of the Board of Directors.
Section 9. President. The President shall be the chief executive
officer of the Corporation, and shall have the general powers and duties of
supervision and management usually vested in the office of the President and
Chief Executive Officer of a corporation. He shall preside, in the absence or
non-election of the Chairman of the Board of Directors, at all meetings of the
stockholders and the Board of Directors, and shall have general supervision,
direction and control of the business of the Corporation. Except as the Board of
Directors shall authorize the execution thereof in some other manner, he shall
execute bonds, mortgages, and other contracts on behalf of the Corporation, and
shall cause the seal to be affixed to any instrument requiring it and when so
affixed the seal shall be attested by the signature of the Secretary or the
Treasurer.
Section 10. Vice Presidents. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the Board of
Directors or the President.
Section 11. Treasurer. The Treasurer shall have charge and custody of,
and be responsible for, all funds and securities of the Corporation. He shall
exhibit at all reasonable times his books of account and records to any of the
Directors of the Corporation upon application during business hours at the
office of the Corporation where such books and records shall be kept; when
requested by the Board of Directors, he shall render a statement of the
condition of the finances of the Corporation at any meeting of the Board or at
the annual meeting of stockholders; he shall receive, and give receipt for,
moneys due and payable to the Corporation from any source whatsoever; in
general, he shall perform all the duties incident to the office of Treasurer and
such other duties as from time to time may be assigned to him by the Board of
Directors or the President. The Treasurer shall give such bond, if any, for the
faithful discharge of his duties as the Board may require.
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Section 12. Secretary. The Secretary, if present, shall act as
secretary at all meetings of the Board of Directors and of the stockholders and
keep the minutes thereof in a book or books to be provided for that purpose; he
shall see that all notices required to be given by the Corporation are duly
given and served; he shall have charge of the stock records of the Corporation;
he shall see that all reports, statements and other documents required by law
are properly kept and filed; and in general he shall perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him by the Board of Directors or the President.
Section 13. Salaries. The salaries of the principal officers shall be
fixed from time to time by the Board of Directors or an authorized committee
thereof, and the salaries of any other officers may be fixed by the President.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 1. Certificate for Stock. Every stockholder of the Corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors shall prescribe, certifying the number of shares of the
capital stock of the Corporation owned by him. No certificate shall be issued
for partly paid shares.
Section 2. Stock Certificate Signature. The certificates for such stock
shall be numbered in the order in which they shall be issued and shall be signed
by the Chairman of the Board, if any, or the President and the Secretary or
Treasurer of the Corporation and its seal shall be affixed thereto. If such
certificate is countersigned (i) by a transfer agent other than the Corporation
or its employee, or (ii) by a registrar other than the Corporation or its
employee, the signatures of such officers of the Corporation may be facsimiles.
In case any officer of the Corporation who has signed, or whose facsimile
signature has been placed upon, any such certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
Section 3. Stock Ledger. A record shall be kept by the Secretary or by
any other officer, employee or agent designated by the Board of Directors, of
the name of each person, firm or corporation holding capital stock of the
Corporation, the number of shares represented by, and the respective dates of,
each certificate for such capital stock, and in case of cancellation of any such
certificate, the respective dates of cancellation.
Section 4. Cancellation. Every certificate surrendered to the
Corporation for exchange or registration of transfer shall be cancelled, and no
new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so cancelled,
except, subject to Section 7 of this Article V, in cases provided for by
applicable law.
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Section 5. Registrations of Transfers of Stock. Registrations of
transfers of shares of the capital stock of the Corporation shall be made on the
books of the Corporation on surrender of the certificate or certificates for
such shares properly endorsed and the payment of all taxes thereon. The person
in whose name shares of stock stand on the books of the Corporation shall be
deemed the owner thereof for all purposes as regards the Corporation; provided,
however, that whenever any transfer of shares shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to do
so.
Section 6. Regulations. The Board of Directors may make such rules and
regulations as it may deem expedient, not inconsistent with the Certificate of
Incorporation or these By-laws, concerning the issue, transfer and registration
of certificates for shares of the stock of the Corporation. It may appoint, or
authorize any principal officer or officers to appoint, one or more transfer
clerks or one or more transfer agents and one or more registrars, and may
require all certificates of stock to bear the signature or signatures of any of
them.
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates. Before
any certificates for stock of the Corporation shall be issued in exchange for
certificates which shall become mutilated or shall be lost, stolen or destroyed,
proper evidence of such loss, theft, mutilation or destruction shall be procured
for the Board of Directors, if it so requires.
Section 8. Record Dates. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a date as a
record date for any such determination of stockholders. Such record date shall
not more than sixty (60) days and, in the case of a meeting of stockholders, not
less than ten (10) days prior to the date on which the particular action,
requiring such determination of stockholders, is to be taken.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. Corporate Seal. The Board of Directors shall provide a
corporate seal, which shall be in the form of a circle and shall bear the name
of the Corporation and words and figures showing that it was incorporated in the
State of Delaware in the year 1985. The Secretary shall be the custodian of the
seal. The Board of Directors may authorize a duplicate seal to be kept and used
by any other officer.
Section 2. Voting of Stocks Owned by the Corporation. The Board of
Directors may authorize any person on behalf of the Corporation to attend, vote
and grant proxies to be used at any meeting of stockholders of any corporation
(except the Corporation) in which the Corporation may
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hold stock. Nothing in this Section shall be construed as limiting the right of
the Corporation to vote its own stock held by it in a fiduciary capacity.
Section 3. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor, at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the Corporation available
for dividends such sum or sums as the Directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
Board of Directors shall deem conducive to the interests of the Corporation.
Section 4. Indemnification and Insurance.
(a) Right to Indemnification. The Corporation shall indemnify and
hold harmless, to the fullest extent permitted by the Delaware General
Corporation Law as it presently exists or may hereafter be amended, any person
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses reasonably incurred by such person. The Corporation shall
be required to indemnify a person in connection with a proceeding initiated by
such person only if the proceeding was authorized by the Board of Directors of
the Corporation. The right provided in this Section 4(a) is a contract right.
(b) Prepayment of Expenses. The Corporation shall pay the expenses
incurred by an officer or director in defending or investigating any proceeding
in advance of its final disposition; provided, however, that, if required by the
Delaware General Corporation Law, the payment of expenses incurred by a director
or officer in advance of the final disposition of the proceeding shall be made
only upon receipt of an undertaking by the director or officer to repay all
amounts advanced if it should ultimately be determined that the director or
officer is not entitled to be indemnified under this Section or otherwise. The
right provided in this Section 4(b) is a contract right.
(c) Claims. If a claim for indemnification or payment of expenses
under this Section is not paid in full within sixty days after a written claim
therefor has been received by the Corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action, the Corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
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(d) Non-Exclusivity of Rights. The rights conferred on any person
by this Section shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, these Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
(e) Other Indemnification. The Corporation's obligation, if any,
to indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or non-profit entity shall be reduced by any amount such
person may collect as indemnification from such other corporation, partnership,
joint venture, trust, enterprise or non-profit enterprise.
(f) Insurance. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the Delaware General Corporation Law.
(g) Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Section shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
ARTICLE VII
AMENDMENTS
These By-laws of the Corporation may be altered, amended or repealed by
the Board of Directors at any regular or special meeting of the Board of
Directors or by the affirmative vote of the holders of record of a majority of
the issued and outstanding stock of the Corporation entitled to vote thereon (i)
present in person or by proxy at a meeting of holders of such stock or (ii) by a
consent in writing in the manner contemplated in Section 12 of Article II,
provided, however, that notice of the proposed alteration, amendment or repeal
is contained in the notice of such meeting. By-laws, whether made or altered by
the stockholders or by the Board of Directors, shall be subject to alteration or
repeal by the stockholders as in this Article VII above provided.
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 27th day of July, 1998, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and WAYNE A. TANNER a resident of the State of
Georgia (the "Executive").
Statement of Background Information
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services; (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services; (d) medical coverage information services; and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and other
end users (collectively "Providers"), (i) strategic, operational and financial
information systems and services and decision support tools for healthcare
providers, (ii) software systems which provide claims and reimbursement services
and electronic claims processing, and (iii) software applications which assist
Providers with automated scheduling and resource management (the items discussed
in Sections (a)(i), (a)(ii) and (a)(iii) of this paragraph are referred to as
"Systems"), which Systems include, but are not limited to, nurse scheduling and
management information systems, operating room patient scheduling and surgery
information systems, enterprise wide patient scheduling and resource management
systems, enterprise-wide employee scheduling and management information systems
and related software interfaces to other information systems; and (b) provides
to Providers installation and support services related to the Company's Systems
(the "Systems Business").
The Company also renders professional services with respect to the
development of computer software, algorithms, design, documentation, and related
materials, and the development, design, deployment, and operation of local and
wide area computer networks, all in conjunction with the sale, design,
deployment, operation and maintenance of custom computer processing systems for
improvement of operational efficiency or functionality through the use of image
storage and processing, work flow technology, optical character recognition or
other related technologies (the "System Integration Business") (the Processing
Business, the Systems Business, the Systems Integration
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Business and any other distinct business segment in which the Company engages
during Executive's employment are collectively referred to herein as the
"Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Executive and Executive hereby
accepts such employment upon the terms and conditions set forth in this
Agreement.
2. Duties of Executive. Executive's title will be Executive Vice President
and Chief Financial Officer of Medaphis Corporation and Executive will
report directly to the Chief Operating Officer of the Company.
Executive agrees to perform and discharge such other duties as may be
assigned to Executive from time to time by the Company to the
reasonable satisfaction of the Company, and such duties will be
consistent with those duties regularly and customarily assigned by the
Company to the position of Executive Vice President and Chief Financial
Officer of Medaphis Corporation. Executive also agrees to comply with
all of the Company's policies, standards and regulations as promulgated
by the officers of the Company, and to follow the instructions and
directives of the Board of Directors, the Chairman and the Chief
Executive Officer of the Company. Executive will devote Executive's
full professional and business-related time, skills and best efforts to
such duties and will not, during the term of this Agreement, be engaged
(whether or not during normal business hours) in any other business or
professional activity, whether or not such activity is pursued for
gain, profit or other pecuniary advantage, without the prior written
consent of the Chairman of the Company, which consent will not be
unreasonably withheld. This Section will not be construed to prevent
Executive from (a) investing personal assets in businesses which do not
compete with the Company in such form or manner that will not require
any services on the part of Executive in the operation or the affairs
of the companies in which such investments are made and in which
Executive's participation is solely that of an investor; (b) purchasing
securities in any corporation whose securities are listed on a national
securities exchange or regularly traded in the over-the-counter market,
provided that Executive at no time owns, directly or indirectly, in
excess of one percent (1%) of the outstanding stock of any class of any
such corporation engaged in a business competitive with that of the
Company; or (c) participating in conferences, preparing and publishing
papers or books or teaching, so long as the Chief Executive Officer of
the Company approves such participation, preparation and publication or
teaching prior to Executive's engaging therein.
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3. Term. The term of this Agreement will be for a three (3) year period of
time, commencing as of September 1, 1998 and expiring on August 31,
2001, subject to earlier termination as provided for in Section 4 of
this Agreement. This Agreement shall be automatically renewed for
successive one (1) year periods at the end of the initial three-year
term, unless either party gives notice to the other of its intent to
terminate this Agreement not less than ninety (90) days prior to
commencement of any such one-year renewal period. In the event such
notice to terminate is properly and timely given, this Agreement shall
terminate at the end of the initial term or the one-year renewal period
in which such notice is given.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate this
Agreement and all of its obligations hereunder immediately if any of
the following events occur:
(i) Executive materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten (10) days after Executive's receipt from the
Company of written notice of such breach (notwithstanding the
foregoing, no cure period shall be applicable to breaches by
Executive of Sections 6, 7 or 8 of this Agreement);
(ii) Executive commits any other act materially detrimental to
the business or reputation of the Company;
(iii) Executive commits or is convicted of any crime involving
fraud, deceit or moral turpitude; or
(iv) Executive dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Executive's duties under this Agreement. Without limiting the
generality of the foregoing, Executive's inability adequately
to perform services under this Agreement for a period of sixty
(60) consecutive days will be conclusive evidence of such
mental or physical incapacity or disability, unless such
inability adequately to perform services under this Agreement
is pursuant to a mental or physical incapacity or disability
covered by the Family Medical Leave Act, in which case such
sixty (60)-day period shall be extended to a one hundred and
twenty (120)-day period.
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(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate
Executive's employment pursuant to this Agreement without cause upon at
least thirty (30) days' prior written notice to Executive. In the event
Executive's employment with the Company is terminated by the Company
without cause, Executive shall be entitled to elect a severance
consideration equal to (i) two (2) years of salary continuation (this
severance consideration does not include the right to receive any
incentive bonus payments) at Executive's then current salary level, or
(ii) Executive's then-current monthly salary (this severance
consideration does not include the right to receive any incentive bonus
payments) multiplied by the number of months remaining in the initial
term hereof, as specified in Section 3, above. In addition, the Company
shall provide benefit continuation to the extent that Executive remains
eligible to participate in the applicable benefit pursuant to the terms
of the respective benefit plan after termination and shall pay to
Executive monthly an amount equal to the difference between the cost to
Executive of medical, dental and vision coverage at the levels at which
Executive is participating on the date of termination and the cost to
Executive of COBRA coverage for the lesser of (x) eighteen (18) months
and (y) the number of months remaining in the initial term hereof as
specified in Section 3, above.
(c) Termination by Executive With Good Reason. Except as set forth in
Paragraph (d) below, in the event Executive elects to voluntarily
terminate his employment following the occurrence of events
constituting "Good Reason" for his voluntary termination of employment,
Executive shall be entitled to elect a severance consideration equal to
(i) two (2) years of salary continuation (this severance consideration
does not include the right to receive any incentive bonus payments) at
Executive's then current salary level, or (ii) Executive's then-current
monthly salary (this severance consideration does not include the right
to receive any incentive bonus payments) multiplied by the number of
months remaining in the initial term hereof, as specified in Section 3,
above. In addition, the Company shall provide benefit continuation to
the extent that Executive remains eligible to participate in the
applicable benefit pursuant to the terms of the respective benefit plan
after termination and shall pay to Executive monthly an amount equal to
the difference between the cost to Executive of medical, dental and
vision coverage at the levels at which Executive is participating on
the date of termination and the cost to Executive of COBRA coverage for
the lesser of (x) eighteen (18) months and (y) the number of months
remaining in the initial term hereof as specified in Section 3, above.
For purposes of this Agreement, "Good Reason" is defined as (w) a
reduction of greater than 10% in Executive's annual base salary; (x) a
change in Executive's work location to a work location more than 50
miles from Executive's existing work location, except for required
travel on the Company's
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business to an extent consistent with Executive's then present business
travel obligations; (y) an assignment to any duties inconsistent in any
material adverse respect with Executive's current position, duties or
responsibilities, other than an insubstantial and inadvertent act that
is remedied by the Company promptly after receipt of notice thereof
given by Executive; or (z) the failure by the Company to continue any
material benefit or compensation plan in which Executive is
participating unless Executive is provided with comparable benefits.
(d) Change in Control. In the event there is a Change in Control (as
defined herein) of Medaphis Corporation, Executive will be entitled to
receive a severance payment equal to two (2) years of "Cash
Compensation" (defined as the sum of Executive's then current base
salary and the incentive bonus payment received by Executive during the
year immediately prior to the Change in Control), if (A) Executive's
employment is terminated by the Company without cause within one (1)
year following any such Change in Control; (B) if Executive's
employment is terminated by the Company at the request of or pursuant
to an agreement with a third party who has taken steps reasonably
calculated to effect a Change in Control; (C) if Executive's employment
is terminated by the Company in connection with or in anticipation of a
Change in Control; (D) if Executive voluntarily terminates his
employment for Good Reason (as defined above in Paragraph (c)) within
one (1) year following any such Change in Control; or (E) if Executive
voluntarily terminates his employment for Good Reason within one (1)
year following any action taken by the Company at the request of or
pursuant to an agreement with a third party who has taken steps
reasonably calculated to effect a Change in Control or any action taken
by the Company in connection with or in anticipation of a Change in
Control, in each case which action constitutes Good Reason. For
purposes of this Agreement, a "Change in Control" of Medaphis
Corporation shall be deemed to occur upon any of the following:
(i) a consolidation or merger of Medaphis Corporation with or
into any other corporation, or any other entity or person,
other than a wholly-owned subsidiary of Medaphis Corporation,
excluding any transaction in which the shares of the Company's
common stock outstanding immediately prior to any such
consolidation or merger represents immediately thereafter more
than 50% of the combined voting power of the resulting entity
after the transaction;
(ii) any corporate reorganization, including an exchange
offer, in which Medaphis Corporation shall not be the
continuing or surviving entity resulting from such
reorganization, excluding any transaction in which the shares
of the Company's common stock outstanding immediately prior to
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any such reorganization represents immediately thereafter more
than 50% of the combined voting power of the resulting entity
after the transaction; or
(iii) the failure for any reason of individuals who constitute
the Incumbent Board to continue to constitute at least a
majority of the Board. For purposes of this Section 4 (d), the
term "Board" shall mean the Board of Directors of the Company
and the term "Incumbent Board" shall mean the members of the
Board as of the date hereof and any person becoming a member
of the Board hereafter whose election or nomination is by a
vote of at least a majority of the directors then comprising
the Incumbent Board (other than an election or nomination of
an individual whose initial assumption of office is in
connection with an actual or threatened election contest
relating to the election of the directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as
amended).
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all
services rendered by Executive under this Agreement, the Company will
pay Executive a base salary of Two Hundred Fifty Thousand Dollars
($250,000.00) per annum to be paid in accordance with the Company's
regular payroll practices, provided, however, that such payments shall
be made no less frequently than in equal monthly installments. Such
base salary will be subject to adjustments in the normal course of
business.
b) Incentive Compensation. Executive shall be eligible to participate
in the 1998 Medaphis Corporation and its Subsidiary Corporations
Incentive Compensation Plan (and any comparable future incentive
compensation plans during the term of this Agreement) at a
participation category of up to 80% of Executive's then current annual
base salary, payable at the discretion of the Board of Directors of the
Company. Executive's incentive compensation shall be guaranteed at the
eighty percent (80%) level for the first twelve (12) months of
employment, pro-rated between 1998 and 1999 based on the number of
months Executive is employed by the Company during each respective
fiscal year.
c) Stock Options. Effective as of September 1, 1998, or as soon as
reasonably practicable thereafter and subject to the approval of the
Compensation Committee of the Board of Directors of Medaphis
Corporation, the Company will cause Medaphis to issue to Executive,
effective as of the date approved by the Compensation Committee of the
Board of Directors of Medaphis Corporation,
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options to purchase Two Hundred Thousand (200,000) shares of Medaphis
Common Stock pursuant to the terms and conditions of the Amended and
Restated Medaphis Corporation Non-Qualified Stock Option Plan ("Stock
Option Plan"), as amended. Such options will vest at the rate of
thirty-three and one-third percent (33.33%) per year for a three-year
period beginning on the starting date of this Agreement, subject to the
terms and conditions of the Stock Option Plan. Such options shall vest
in full immediately upon the occurrence of certain change in control
events outlined in the Stock Option Plan. Executive shall be considered
for additional grants of options to purchase shares of Medaphis common
stock in a manner that is consistent with other senior officers of the
Company. Except as expressly set forth herein, nothing in this
Agreement shall give rise to a contractual right to Executive to
receive grants of additional stock options of Medaphis. Further,
Medaphis has no obligation to Executive to create parity with any other
Medaphis executives with respect to any options granted to such other
executives.
d) Other Benefits. Executive will be entitled to such fringe benefits
as may be provided from time-to-time by the Company to its Executives,
including, but not limited to, loan arrangements to facilitate the
purchase of common stock of the Company, financial counseling services,
group health insurance, life and disability insurance, vacations and
any other fringe benefits, in each case as now or hereafter provided by
the Company to its Executives, if and when Executive meets the
eligibility requirements for any such benefit. The Company reserves the
right to change or discontinue any employee benefit plans or programs
now being offered to its employees; provided, however, that all
benefits provided for Executives of the same position and status as
Executive will be provided to Executive on an equal basis.
e) Business Expenses. Executive will be reimbursed for all reasonable
expenses incurred in the discharge of Executive's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Executive under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due
employees.
g) Golf Club Membership. The Company will pay for Executive's
membership initiation fee to join a golf club of Employee's choice,
such choice subject to the approval of the Company, which fee shall not
exceed $35,000, or, at the Company's option, the Company will name
Executive as a designated representative under a Company-held corporate
membership.
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6. Non-Disclosure of Proprietary Information. Executive recognizes and
acknowledges that the Trade Secrets (as defined below) and Confidential
Information (as defined below) of the Company and its affiliates and
all physical embodiments thereof (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' businesses.
Executive further acknowledges that access to such Proprietary
Information is essential to the performance of Executive's duties under
this Agreement. Therefore, in order to obtain access to such
Proprietary Information, Executive agrees that, except in connection
with performing duties assigned to him by the Company, Executive shall
hold in confidence all Proprietary Information and will not reproduce,
use, distribute, disclose, publish or otherwise disseminate any
Proprietary Information, in whole or in part, and will take no action
causing, or fail to take any action necessary to prevent causing, any
Proprietary Information to lose its character as Proprietary
Information, nor will Executive make use of any such information for
Executive's own purposes or for the benefit of any person, firm,
corporation, association or other entity (except the Company) under any
circumstances.
For purposes of this Agreement, the term "Trade Secrets" means
information, without regard to form, including, but not limited to, any
technical or non-technical data, formula, pattern, compilation,
program, device, method, technique, drawing, process, financial data,
financial plan, product plan, list of actual or potential customers or
suppliers, or other information similar to any of the foregoing, which
is not commonly known by or available to the public and (i) derives
economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons
who can derive economic value from its disclosure or use, and (ii) is
the subject of efforts that are reasonable under the circumstances to
maintain its secrecy. For purposes of this Agreement, the term "Trade
Secrets" does not include information that Executive can show by
competent proof (i) was known to Executive and reduced to writing prior
to disclosure by the Company (but only if Executive promptly notifies
the Company of Executive's prior knowledge); (ii) was generally known
to the public at the time the Company disclosed the information to
Executive; (iii) became generally known to the public after disclosure
by the Company through no act or omission of Executive; or (iv) was
disclosed to Executive by a third party having a bona fide right both
to possess the information and to disclose the information to
Executive.
The term "Confidential Information" means any data or information of
the Company, other than trade secrets, which is valuable to the Company
and not generally known to competitors of the Company. The provisions
of this Section 6
8
<PAGE> 9
will apply to Trade Secrets for so long as such information remains a
trade secret and to Confidential Information during Executive's
employment with the Company and for a period of two (2) years following
any termination of Executive's employment with the Company for whatever
reason.
7.A. Non-Competition Covenant. During Executive's employment by the
Company Executive will be a member of the Company's executive
management team. Executive agrees that during his employment and for a
period of two (2) years following any termination of Executive's
employment for whatever reason, Executive will not, directly or
indirectly, on Executive's own behalf or in the service of or on behalf
of any other individual or entity, compete with the Company within the
Geographical Area (as hereinafter defined). The term "compete" means to
engage in, have any equity or profit interest in, make any loan to or
for the benefit of, or render services of any marketing, management,
sales, administrative, supervisory or consulting nature, directly or
indirectly, on Executive's own behalf or in the service of or on behalf
of any other individual or entity, either as a proprietor, employee,
agent, independent contractor, consultant, director, officer, partner
or stockholder (other than a stockholder of a corporation listed on a
national securities exchange or whose stock is regularly traded in the
over-the-counter market, provided that Executive at no time owns,
directly or indirectly, in excess of one percent (1%) of the
outstanding stock of any class of any such corporation) any business
which provides Business products or services, provided that nothing in
this Agreement will preclude Executive from rendering legal services in
the role of outside counsel on behalf of any entity, including those
entities that compete with the Company, following the termination of
his employment with the Company. For purposes of this Agreement, the
term "Geographical Area" means the territory located within a
seventy-five (75) mile radius of any Company facility for which
Executive exercised managerial control or provided legal services on
behalf of the Company.
B. Non-Solicitation of Clients Covenant. Executive agrees that during
Executive's employment by the Company and for a period of two (2) years
following the termination of Executive's employment for whatever
reason, Executive will not, directly or indirectly, on Executive's own
behalf or in the service of or on behalf of any other individual or
entity, divert, solicit or attempt to divert or solicit any individual
or entity (i) who is a client of the Company at any time during the six
(6)-month period prior to Executive's termination of employment with
the Company ("Client"), or was actively sought by the Company as a
prospective client, and (ii) with whom Executive had material contact
while employed by the Company, to provide Business services or products
to such Clients or prospects.
9
<PAGE> 10
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below may,
if it chooses, sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions
of such Section to the remaining portion of the Geographical Area, the
client base or the prospective relationship or prospect list, or the
remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the
judicial authority may, if it chooses, replace each such severed
provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It is
the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the event that any provision of
either such Section is determined not to be specifically enforceable,
the Company shall nevertheless be entitled to bring an action to seek
to recover monetary damages as a result of the breach of such provision
by Executive.
8. Non-Solicitation of Employees Covenant. Executive further agrees and
represents that during Executive's employment by the Company and for a
period of two (2) years following any termination of Executive's
employment for whatever reason, Executive will not, directly or
indirectly, on Executive's own behalf or in the service of, or on
behalf of any other individual or entity, divert or solicit, or attempt
to divert or solicit, to or for any individual or entity which is
engaged in providing Business services or products, any person employed
by the Company, whether or not such employee is a full-time employee or
temporary employee of the Company, whether or not such employee is
employed pursuant to written agreement and whether or not such employee
is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Executive represents and warrants that
Executive's employment with the Company does not and will not breach
any agreement which Executive has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Executive will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Executive.
10. Return of Proprietary Information. Executive acknowledges that as a
result of Executive's employment with the Company, Executive may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Executive
acknowledges, warrants and agrees that Executive will return to the
Company all such items and any copies or excerpts thereof, in any form
or
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<PAGE> 11
medium, and any other properties, files or documents obtained as a
result of Executive's employment with the Company, immediately upon the
termination of Executive's employment with the Company.
11. Proprietary Rights. During the course of Executive's employment with
the Company, Executive may make, develop or conceive of useful
processes, machines, compositions of matter, computer software,
algorithms, works of authorship expressing such algorithm, or any other
discovery, idea, concept, document or improvement which relates to or
is useful to the Company's Business (the "Inventions"), whether or not
subject to copyright or patent protection, and which may or may not be
considered Proprietary Information. Executive acknowledges that all
such Inventions will be "works made for hire" under United States
copyright law and will remain the sole and exclusive property of the
Company. Executive also hereby assigns and agrees to assign to the
Company, in perpetuity, all right, title and interest Executive may
have in and to such Inventions, including without limitation, all
copyrights, and the right to apply for any form of patent, utility
model, industrial design or similar proprietary right recognized by any
state, country or jurisdiction. Executive further agrees, at the
Company's request and expense, to do all things and sign all documents
or instruments necessary, in the opinion of the Company, to eliminate
any ambiguity as to the ownership of, and rights of the Company to,
such Inventions, including filing copyright and patent registrations
and defending and enforcing in litigation or otherwise all such rights.
Executive will not be obligated to assign to the Company any Invention
made by Executive while in the Company's employ which does not relate
to any business or activity in which the Company is or may reasonably
be expected to become engaged, except that Executive is so obligated if
the same relates to or is based on Proprietary Information to which
Executive will have had access during and by virtue of Executive's
employment or which arises out of work assigned to Executive by the
Company. Executive will not be obligated to assign any Invention which
may be wholly conceived by Executive after Executive leaves the employ
of the Company, except that Executive is so obligated if such Invention
involves the utilization of Proprietary Information obtained while in
the employ of the Company. Executive is not obligated to assign any
Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was
conceived and reduced to practice by Executive prior to Executive's
employment with the Company.
12. Remedies. Executive agrees and acknowledges that the violation of any
of the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and
11 of this
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<PAGE> 12
Agreement would cause irreparable injury to the Company, that the
remedy at law for any such violation or threatened violation thereof
would be inadequate, and that the Company will be entitled, in addition
to any other remedy, to temporary and permanent injunctive or other
equitable relief without the necessity of proving actual damages or
posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Executive:
2840 Mt. Wilkinson Parkway Wayne A. Tanner
Suite 300 P.O. Box 1411
Atlanta, GA 30339 Monroe, GA 30655
Attn: Chief Executive Officer
or such other address or agent as may be hereafter designated in
writing by either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
14. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement will be construed as if
such invalid or illegal or unenforceable provision had never been
contained herein. It is the intent of the parties that this Agreement
be enforced to the maximum extent permitted by law.
15. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter
hereof. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the
parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
17. Assignment. This Agreement is one for personal services and will not be
assigned by Executive. The Company may assign this Agreement to its
parent company or
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<PAGE> 13
to any of its subsidiaries or affiliated companies; provided that the
parent or any subsidiary or affiliate fulfills the obligations of the
Company under this Agreement.
18. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any federal court in the state where the Company has
its principal place of business and each of the parties hereto hereby
submits to the personal jurisdiction of any such court. The foregoing
shall not limit the rights of any party to obtain execution of judgment
in any other jurisdiction. The parties further agree, to the extent
permitted by law, that a final and unappealable judgment against either
of them in any action or proceeding contemplated above shall be
conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified
exemplified copy of which shall be conclusive evidence of the fact and
amount of such judgment.
19. Indemnification. Executive shall be entitled to the indemnification and
exculpation offered through and set forth in the Company's Charter and
By-laws.
20. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EXECUTIVE:
By: /s/ David E. McDowell /s/ Wayne A. Tanner
------------------------------------ ------------------------------
David E. McDowell, Chairman and Wayne A. Tanner
Chief Executive Officer
/s/ Allen W. Ritchie
------------------------------------
Allen W. Ritchie, President and
Chief Operating Officer
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<PAGE> 14
EXHIBIT A
INVENTIONS
Executive represents that there are no Inventions.
WT
----------------------------
Executive's Initials
14
<PAGE> 1
EXHIBIT 10.2
IMPACT INNOVATIONS
KEY EMPLOYEE INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SS.1. PURPOSE.........................................................................................1
SS.2. DEFINITIONS.....................................................................................1
2.1 Board..................................................................................1
2.2 Code...................................................................................1
2.3 Company................................................................................1
2.4 Eligible Employee......................................................................2
2.5 Exchange Act...........................................................................2
2.6 Fair Market Value......................................................................2
2.7 Initial Public Offering................................................................3
2.8 1933 Act...............................................................................3
2.9 Option.................................................................................3
2.10 Option Agreement.......................................................................3
2.11 Option Price...........................................................................3
2.12 Plan...................................................................................3
2.13 Stock..................................................................................3
SS.3. SHARES RESERVED UNDER THE PLAN..................................................................4
SS.4. EFFECTIVE DATE..................................................................................5
SS.5. ADMINISTRATION..................................................................................5
SS.6. ELIGIBILITY.....................................................................................5
SS.7. GRANT OF OPTIONS................................................................................5
SS.8. OPTION PRICE....................................................................................7
SS.9. EXERCISE PERIOD.................................................................................7
SS.10. NONTRANSFERABILITY..............................................................................7
SS.11. SECURITIES REGISTRATION.........................................................................8
SS.12. LIFE OF PLAN....................................................................................9
SS.13. ADJUSTMENT......................................................................................9
SS.14. CHANGE OF CONTROL AND CERTAIN OTHER EVENTS.....................................................10
14.1 Change of Control Events..............................................................10
14.2 Accelerated Vesting...................................................................10
14.3 Conversion of Options.................................................................10
14.4 Notice................................................................................11
14.5 Disposition of Stock Following Change of Control of Company...........................11
14.6 Fractional Shares.....................................................................12
SS.15 AMENDMENT OR TERMINATION.......................................................................12
SS.16. MISCELLANEOUS..................................................................................12
16.1 No Stockholder Rights.................................................................12
16.2 No Contract of Employment.............................................................13
16.3 Other Conditions......................................................................13
16.4 Withholding...........................................................................14
16.5 Construction..........................................................................14
16.6 No "Incentive Stock Option" Treatment.................................................14
16.7 Not Rule 16b-3 Plan...................................................................14
16.8 References............................................................................14
</TABLE>
i
<PAGE> 3
IMPACT INNOVATIONS
KEY EMPLOYEE INCENTIVE PLAN
SS.1.
PURPOSE
The purpose of this Plan is to provide Eligible Employees with an
opportunity to share in the value created in the Company and its subsidiaries,
to assist the Company and its subsidiaries in attracting and retaining
outstanding personnel, to align the interests of Eligible Employees with the
interests of Medaphis Corporation and its stockholders, and to provide incentive
to Eligible Employees and to reward Eligible Employees for the performance
required to complete a successful Initial Public Offering or other Change of
Control of the Company.
SS.2.
DEFINITIONS
Each capitalized term set forth in this ss.2 shall have the meaning set
forth opposite such capitalized term for purposes of this Plan and, for purposes
of definitions, the singular shall include the plural and the plural shall
include the singular.
2.1 Board - means the Board of Directors of the Company.
2.2 Code - means the Internal Revenue Code of 1986, as amended.
2.3 Company - means Impact Innovations Holdings, Inc., a Delaware
corporation, and any successor to such corporation.
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<PAGE> 4
2.4 Eligible Employee - means any person who is an employee of the
Company, or of any direct and indirect subsidiary of the Company, including
without limitation any employee of Impact Innovations Group, Inc., a Delaware
corporation, or Impact Innovations Government Solutions, Inc., a Maryland
corporation. Eligible Employees shall not include (i) any officer or director of
Medaphis Corporation, (ii) any beneficial owner, directly or indirectly, of more
than 10% of the outstanding stock of Medaphis Corporation or (iii) any officer
or director or 10% beneficial owner of stock of Medaphis Corporation who is
subject to the provisions of Section 16 of the Exchange Act with respect to
Medaphis Corporation.
2.5 Exchange Act -means the Securities Exchange Act of 1934, as
amended.
2.6 Fair Market Value - means, for any date prior to an Initial
Public Offering or other Change of Control, the current valuation of a share of
Stock as provided by an independent investment banking firm selected by the
Board and updated no less often than quarterly. For any date following an
Initial Public Offering, Fair Market Value means (i) the closing price for such
date for a share of Stock as reported by The Wall Street Journal under the New
York Stock Exchange Composite Transactions quotation system (or under any
successor quotation system) or, (ii) if the Stock is not traded on the New York
Stock Exchange, as reported for such date by The Wall Street Journal under the
Nasdaq National Market System quotation system or under the quotation system
under which such closing price is reported or, (iii) if The Wall Street Journal
does not report such closing price, such closing price as reported for such date
by a newspaper or trade journal selected by the Board or, (iv) if no such
closing price is available for such date, such closing price as so reported or
quoted in accordance with ss.2.6(i), (ii) or (iii) for the immediately preceding
business day,
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<PAGE> 5
or, (v) if no newspaper or trade journal reports such closing price or if no
such price quotation is available, the price that the Board acting in good faith
determines through any reasonable valuation method that a share of Stock might
change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having reasonable knowledge of the
relevant facts.
2.7 Initial Public Offering - means the first offering for sale by the
Company to the public of securities of the same class as any shares subject to
an Option granted hereunder pursuant to a registration statement filed in
accordance with the 1933 Act or any comparable law then in effect (other than on
Forms S-4, S-8 or any other form which does not permit registration of
securities by selling stockholders for sale to the public for cash), and the
effective date of any such Initial Public Offering shall be the first day on
which the securities covered thereby may lawfully be offered and sold pursuant
to such registration statement.
2.8 1933 Act - means the Securities Act of 1933, as amended.
2.9 Option - means an option granted under this Plan to purchase
Stock.
2.10 Option Agreement - means the written agreement that sets forth
the terms of an Option granted to an Eligible Employee under this Plan.
2.11 Option Price - means the price that shall be paid to purchase
one share of Stock upon the exercise of the Option granted under this Plan.
2.12 Plan - means this Impact Innovations Key Employee Incentive
Plan.
2.13 Stock - means the common stock of the Company, par value $.01
per share.
3
<PAGE> 6
SS.3.
SHARES RESERVED UNDER THE PLAN
There shall be 1,500,000 shares of Stock reserved for issuance under
this Plan, and such shares of Stock shall be reserved to the extent that the
Company deems appropriate from authorized but unissued shares of Stock and from
shares of Stock that have been repurchased by the Company. Furthermore, any
shares of Stock subject to an Option that remain unissued after the cancellation
or expiration of such Option thereafter shall again become available for use
under this Plan. The total number of shares of Stock reserved for issuance under
this Plan (the "Reserved Stock") is intended to represent Fifteen Percent (15%)
of the Company's issued and outstanding Stock, on a fully-diluted basis (i.e.,
treating all of the shares of Reserved Stock as issued and outstanding) (the
"Outstanding Shares"). If, immediately prior to the occurrence of a Change of
Control event described in ss.14.1, the total number of shares of Reserved Stock
exceeds Fifteen Percent (15%) of the number of Outstanding Shares, then,
effective no later than the last business day before the closing date of such
Change of Control, the Board shall adjust the capital structure of the Company
by causing the Company's Restated Certificate of Incorporation to be duly
amended to increase the aggregate number of shares of Stock that the Company is
authorized to issue, and by declaring a stock split to be effected in the form
of a stock dividend on the outstanding shares of Stock held by the Company's
sole stockholder, appropriate so that the number of shares of Reserved Stock
shall, as a result, be equal to, and shall not exceed, Fifteen Percent (15%) of
the number of Outstanding Shares. An adjustment to the capital structure of the
Company made pursuant to this ss.3 shall not constitute grounds under ss.13 for
adjustment of the number of shares of Stock reserved under this ss.3, the number
of shares of Stock subject to Options
4
<PAGE> 7
granted under this Plan or the Option Price of such Options.
SS.4.
EFFECTIVE DATE
The effective date of this Plan shall be July 28, 1998.
SS.5.
ADMINISTRATION
The Plan shall be administered by the Board. The Board acting in its
absolute discretion shall exercise such power and take such action as expressly
called for under this Plan and, further, the Board shall have the power to
interpret this Plan and to take such other action in the administration and
operation of this Plan as the Board deems equitable under the circumstances,
which action shall be binding on the Company, on each affected Eligible Employee
and on each other person directly or indirectly affected by such action. No
member of the Board shall be liable for any action or determination made in good
faith with respect to this Plan or any Option granted under this Plan.
SS.6.
ELIGIBILITY
Only Eligible Employees shall be eligible for the grant of Options
under this Plan.
SS.7.
GRANT OF OPTIONS
The Board, acting in its absolute discretion, shall have the right to
grant Options to Eligible Employees under this Plan. Each grant of an Option
shall be evidenced by an Option Agreement, and each Option Agreement shall
incorporate such terms and conditions as the Board, acting in its absolute
discretion, deems consistent with the terms of this Plan,
5
<PAGE> 8
provided that (unless the Board decides otherwise with respect to any Option
grant) each Option Agreement shall provide that if the Eligible Employee ceases
to be an employee of the Company or of any parent or subsidiary of the Company
(other than as a result of transaction contemplated by ss.14 or for reasons
other than death or disability (within the meaning of Code Section 22(e)(3))
before the Option is fully vested, any portion of the Option which is not fully
vested on the date of the such termination of employment shall be automatically
forfeited as of such employment termination date, and the vested portion of the
Option which is unexercised shall expire, terminate and become unexercisable no
later than the earlier to occur of: (i) the expiration of three (3) months from
the date on which the Eligible Employee ceases to be an employee of the Company
or any parent or subsidiary of the Company, or (ii) the stated term of such
Option.
If an Eligible Employee ceases to be an employee of the Company or of
any parent or subsidiary of the Company as a result of death or disability
(within the meaning of Code Section 22(e)(3)) before an Option issued hereunder
is fully vested, any portion of the Option which is not fully vested on the date
of such termination of employment shall become fully vested and immediately
exercisable as of such employment termination date, and any such Options which
are unexercised shall expire no later than the earlier to occur of: (i) six (6)
months from the date the Eligible Employee ceases to be employed by the Company
or any parent or subsidiary of the Company for reasons of death or disability
(within the meaning of Code Section 22(e)(3)) or (ii) the stated term of such
Option. Notwithstanding any provision hereof or of any Option Agreement to the
contrary, any Option that becomes exercisable hereunder as a result of the death
or disability of an Eligible Employee (within the meaning of Code Section
22(e)(3)) prior to either (i) a Change of Control event described
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<PAGE> 9
in ss.14.1 or (ii) the conversion of Options described in ss.14.3, and which is
exercised prior to such Change of Control event or conversion of Options, shall,
at the Company's sole discretion, entitle the holder to receive in lieu of Stock
a cash payment in an amount equal to the "in the money" value of such Option
upon exercise (i.e., the difference between the Fair Market Value on the date of
exercise and the Fair Market Value on the date of grant, multiplied by the
number of shares of Stock otherwise purchaseable upon exercise of the Option).
SS.8.
OPTION PRICE
The Option Price for each share of Stock subject to an Option will
equal the Fair Market Value of a share of Stock on the date such Option is
granted.
SS.9.
EXERCISE PERIOD
Each Option granted under this Plan shall be exercisable in whole or in
part at such time as set forth in the related Option Agreement, but no Option
Agreement shall make an Option exercisable after the earlier of:
(a) the date such Option is exercised in full or forfeited, or
(b) the date which is the tenth (10th) anniversary of the date
such Option is granted.
SS.10.
NONTRANSFERABILITY
No Option granted under this Plan shall be transferable by an Eligible
Employee other than by will or by the laws of descent and distribution at his or
her death, and an Option
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<PAGE> 10
shall be exercisable during the Eligible Employee's lifetime only by the
Eligible Employee or, if the Eligible Employee is determined under applicable
law to be incompetent to act on his or her own behalf, by the person authorized
under such applicable law to act on the Eligible Employee's behalf. The Company
shall treat any person to whom an Option is transferred by will or by the laws
of descent and distribution the same as an Eligible Employee for the purposes of
exercising such Option.
SS.11.
SECURITIES REGISTRATION
Each Option Agreement shall provide that, upon the receipt of shares of
Stock as a result of the exercise of an Option, the Eligible Employee shall, if
so requested by the Company, hold such shares of Stock for investment and not
with a view to resale or distribution to the public and, if so requested by the
Company, shall deliver to the Company a written statement satisfactory to the
Company to that effect. Each Option Agreement also shall provide that, if so
requested by the Company, the Eligible Employee shall make a written
representation to the Company that he or she will not sell or offer to sell any
of such Stock unless a registration statement shall be in effect with respect to
such stock under the 1933 Act and any applicable state securities law or unless
he or she shall have furnished to the Company an opinion, in form and substance
satisfactory to the Company, of legal counsel acceptable to the Company, that
such registration is not required. Certificates representing the Stock
transferred upon the exercise of an Option granted under this Plan may at the
discretion of the Company bear a legend to the effect that such Stock has not
been registered under the 1933 Act or any applicable state securities law and
that such stock may not be sold or offered for sale in the absence of an
effective registration statement as to such
8
<PAGE> 11
Stock under the 1933 Act and any applicable state securities law or an opinion,
in form and substance satisfactory to the Company, of legal counsel acceptable
to the Company, that such registration is not required.
SS.12.
LIFE OF PLAN
No Option shall be granted under this Plan on or after the earlier of
(a) the tenth (10th) anniversary of the effective date of this
Plan (as determined under ss.4) in which event this Plan
thereafter shall continue in effect until all outstanding
Options have been exercised in full or no longer are
exercisable, or
(b) the date on which all of the Stock reserved under ss.3 has (as
a result of the exercise of Options granted under this Plan)
been issued or no longer is available for use under this Plan,
in which event this Plan also shall terminate on such date.
SS.13.
ADJUSTMENT
The number of shares of Stock reserved under ss.3, the number of shares
of Stock subject to Options granted under this Plan and the Option Price of such
Options may be adjusted by the Board in an equitable manner to reflect any
change in the capitalization of the Company, except for any adjustment to the
capital structure of the Company made pursuant to ss.3, including, but not
limited to, such changes as stock dividends or stock splits, a subdivision or
combination of the stock, a reclassification of the Stock, a merger or
consolidation of the Company or any like changes in the Stock or in the value of
a share of
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<PAGE> 12
Stock. If any adjustment under this ss.13 would create a fractional share of
Stock or a right to acquire a fractional share of Stock such fractional shares
shall be disregarded and the number of shares of Stock reserved under this Plan
and the number subject to any Options granted under this Plan shall be the next
lower number of shares of Stock, rounding all fractions downward. Any adjustment
made under this ss.13 by the Board shall be conclusive and binding on affected
persons.
SS.14.
CHANGE OF CONTROL AND CERTAIN OTHER EVENTS
14.1 Change of Control Events. The following events shall constitute
"Change of Control" events for purposes of this Plan: (1) the acquisition of the
Stock such that Medaphis Corporation or an entity controlled by or under common
control with Medaphis Corporation does not own, directly or indirectly, more
than fifty percent (50%) of the voting stock of the Company; (2) the sale of
substantially all of the assets of the Company and its subsidiaries to an entity
other than an entity controlled by or under common control with Medaphis
Corporation; (3) the merger, reorganization, or consolidation of the Company
other than in a transaction in which Medaphis Corporation or an entity
controlled by or under common control with Medaphis Corporation retains,
directly or indirectly, more than a fifty percent (50%) interest in the
surviving corporation; or (4) an Initial Public Offering.
14.2 Accelerated Vesting. Upon the consummation of a Change of Control
event described in ss.14.1, all outstanding Options under this Plan will become
fully vested and immediately exercisable.
14.3 Conversion of Options. If a Change of Control event does not occur
prior to the third (3rd) anniversary of the effective date of the Plan, any
Options outstanding as of
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<PAGE> 13
the third (3rd) anniversary of the effective date of the Plan will be converted
into options under the Medaphis Corporation Non-Qualified Stock Option Plan for
Non-Executive Employees, as amended, or any successor plan, to purchase a number
of shares of Medaphis Corporation common stock determined by the Board. Any
Option converted into an option to purchase Medaphis Corporation stock pursuant
to this ss.14.3 shall have an exercise price equal to the fair market value of
Medaphis Corporation common stock as of the original date of grant of the
converted Option, as determined by the Board. If a Change of Control event
occurs prior to the third (3rd) anniversary of the effective date of the Plan,
then upon such occurrence this ss.14.3 will immediately terminate and will be of
no further force or effect.
14.4 Notice. Subject to compliance with applicable federal and state
securities laws, the Board will undertake to provide applicable Eligible
Employees with reasonable notice of any Change of Control event described in
ss.14.1 prior to the occurrence of such Change of Control event.
14.5 Disposition of Stock Following Change of Control of Company. In
the event of a Change of Control event described in ss.14.1(1), (2), or (3),
each Eligible Employee electing to exercise any outstanding Option will have the
right in connection with the closing of such Change of Control event either to
(1) sell to the Company or the surviving or resulting corporation, the shares of
Stock which the Eligible Employee received upon exercise of such Option at a
cash price per share equivalent to the Fair Market Value of the Stock as of the
date of such Change of Control event, or (2) receive the number and class of
shares of stock or other securities or any other property to which the terms of
the agreement of merger, consolidation, or other reorganization would entitle
the Eligible Employee to receive as the holder of record of the number of shares
of Stock which the Eligible Employee
11
<PAGE> 14
received upon exercise of such Option; provided, however, that in the event a
Change of Control event contemplated by this ss.14.5 involves a merger to be
accounted for under the "pooling of interests" accounting method, then the Board
shall have the authority hereunder to modify the rights of an Eligible Employee
under this ss.14.5 to the extent necessary in order to preserve the "pooling of
interests" accounting treatment for such merger.
14.6 Fractional Shares. No Change of Control event or conversion of
options contemplated by this ss.14 shall create a right to acquire a fractional
share of Stock or a fractional share of Medaphis Corporation common stock, and
any such fractional share shall be forfeited by the Eligible Employee.
SS.15.
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent
that the Board deems necessary or appropriate. The Board also may suspend the
granting of Options under this Plan at any time and may terminate this Plan at
any time; provided, however, the Board shall not have the right unilaterally to
modify, amend or cancel any Option granted before such modification, amendment
or cancellation unless the Eligible Employee consents in writing to such
modification, amendment or cancellation.
SS.16.
MISCELLANEOUS
16.1 No Stockholder Rights. No Eligible Employee shall have any rights
as a stockholder of the Company as a result of the grant of an Option to him or
to her under the Plan or his or her exercise of such Option pending the actual
delivery of Stock subject to such Option to such Eligible Employee.
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<PAGE> 15
16.2 No Contract of Employment. The grant of an Option to an Eligible
Employee under this Plan shall not constitute a contract of employment and shall
not confer on an Eligible Employee any rights upon his or her termination of
employment in addition to those rights, if any, expressly set forth in the
Option Agreement which evidences his or her Option.
16.3 Other Conditions. Notwithstanding anything contained herein or in
any Option Agreement to the contrary, no purported exercise of any Option shall
be effective without the written approval of the Company, which may be withheld
to the extent that the exercise, either individually or in the aggregate with
the exercise of other previously exercised Options and/or offers and sales
pursuant to any prior or contemplated offering of securities, would, in the
opinion of the Company's counsel, result in (i) the violation of any statute,
law, regulation or rule applicable to the Company, its parent or any of its
subsidiaries, including without limitation, any federal or state securities law;
(ii) a default under the Credit Agreement dated as of February 13, 1998 among
Medaphis Corporation, various financial institutions from time to time parties
thereto, DLJ Capital Funding, Inc., as Syndication Agent, and Wachovia Bank,
N.A., as Administrative Agent (as it may be amended from time to time, the
"Credit Agreement"), under any agreement entered into pursuant to the Credit
Agreement, or under any similar agreement entered into in substitution for or
replacement of the Credit Agreement; or (iii) a default under the Indenture with
respect to Medaphis Corporation's $175,000,000 of 9 1/2% Senior Notes due
February 15, 2005, dated as of February 20, 1998 among Medaphis Corporation, the
Subsidiary Guarantors named therein and State Street Bank and Trust Company, as
Trustee (as it may be amended from time to time, the "Indenture"), under any
agreement entered into pursuant to the Indenture, or under any similar agreement
entered into in substitution for or replacement of the
13
<PAGE> 16
Indenture. Each Option Agreement may require that an Eligible Employee (as a
condition to the exercise of an Option) enter into any agreement or make such
representations requested by the Company, including any agreement which
restricts the transfer of Stock acquired pursuant to the exercise of such Option
and provides for the repurchase of such Stock by the Company under certain
circumstances.
16.4 Withholding. The exercise of any Option granted under this Plan
shall constitute an Eligible Employee's full and complete consent to whatever
action the Board deems necessary to satisfy the federal and state tax
withholding requirements, if any, which the Board acting in its discretion deems
applicable to such exercise.
16.5 Construction. This Plan shall be construed under Delaware law.
16.6 No "Incentive Stock Option" Treatment. No Option granted under
this Plan shall be treated as an "incentive stock option" within the meaning of
ss.422 of the Code.
16.7 Not Rule 16b-3 Plan. This Plan is not intended to satisfy and
will not satisfy the conditions set forth in Rule 16b-3 under ss.16 of the
Exchange Act.
16.8 References. Any references in this Plan to a section (ss.) shall
be a section (ss.) of this Plan unless otherwise specified in such reference.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Plan as of the 28th day of July, 1998 to evidence adoption of
this Plan.
IMPACT INNOVATIONS HOLDINGS, INC.
By: /s/ RANDOLPH L. M. HUTTO
-------------------------------------
Randolph L. M. Hutto
Executive Vice President,
General Counsel and Secretary
14
<PAGE> 1
EXHIBIT 10.3
MEDAPHIS CORPORATION
LONG TERM INCENTIVE PLAN
1. PURPOSE
The Medaphis Corporation Long Term Incentive Plan (the "Plan") is intended
to promote the long-term growth and financial success of Medaphis Corporation
(the "Company") in the interests of the Company and its stockholders and to
strengthen the link between management and stockholders by providing senior
executives of the Company and its Subsidiaries (as hereinafter defined) with
incentive awards earned based upon the performance of the Common Stock (as
hereinafter defined).
2. DEFINITIONS
Except where the content otherwise indicates, the following definitions
apply:
"Actual Award" means the opportunity to receive cash incentive payments
pursuant to this Plan.
"Average Market Price" of a Security means, for a given period, the sum
of the Market Prices of such Security for each Trading Day in the relevant
period divided by the number of Trading Days in such period.
"Board" means the Board of Directors of the Company.
"Base Award" means the base award level for each Participant as
determined by the Committee in its sole discretion.
"Cause" means (i) the willful and continued failure of the Participant
to perform substantially the Participant's duties with the Company or one of its
Subsidiaries (other than any such failure resulting from Disability), after a
written demand for substantial performance is delivered to the Participant by
the Board which specifically identifies the manner in which the Board believes
that the Participant has not substantially performed the Participant's duties,
(ii) the willful engaging by the Participant in illegal conduct or dishonesty
which is materially and demonstrably injurious to the Company, or (iii) the
conviction of the Participant of a felony involving moral turpitude. For
purposes of this definition, no act or failure to act, on the part of the
Participant, shall be considered "willful" unless it is done, or omitted to be
done, by the Participant in bad faith or without reasonable belief that the
Participant's action or omission was not inconsistent with the best interests of
the Company. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board or upon the instructions of a senior
officer of the Company or based upon the advice of counsel for the Company shall
be conclusively presumed to be done, or omitted to be done, by the Participant
in good faith and not inconsistent with the best interests of the Company.
"Change of Control" shall be deemed to have occurred if and when (i)
any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934
Act) becomes a beneficial owner, directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the Company's
then outstanding securities, or (ii) individuals who were members of the Board
as of the Effective Date (the "Incumbent Board") shall cease to constitute at
least a majority of the Board (provided that any individuals whose nomination
was approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual was a member
of the Incumbent Board, but excluding for this purpose any individual whose
initial assumption of office occurs as a result of an actual or threatened
solicitation of proxies or consents by or on behalf of a person other than the
Board), or (iii) the consummation of a reorganization, merger, consolidation or
sale of all or substantially all the assets of the Company or complete
liquidation ("Corporate Transaction"), excluding any such Corporate Transaction
pursuant to which (1) substantially all of the stockholders of the Company prior
to the Corporate Transaction will own more than 60% of the voting securities of
the corporation resulting from such Corporate Transaction in substantially the
same proportions as their ownership of Common Stock immediately prior to such
Corporate Transaction and (2) individuals who were members of the Incumbent
Board immediately prior to the approval of the agreement providing for the
Corporate Transaction will constitute at least a majority of the members of the
board of directors of the corporation resulting from such Corporate Transaction.
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<PAGE> 2
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board or such other
committee of the Board as the Board may designate to administer the Plan;
provided, that the Committee shall at all times be composed of not less than two
persons who qualify as "outside directors" within the meaning of Section 162(m)
of the Code.
"Committee Certification" means the certification of the Committee that
the Total Shareholder Return Goal has been met.
"Common Stock" means the voting Common Stock, $0.01 par value per
share, of the Company.
"Comparative Performance Percentile" shall be calculated by (i)
calculating the Total Shareholder Return of each Index Stock; (ii) ranking the
Index Stocks according to Total Shareholder Return, (iii) ranking the Company
amongst such Index Stocks according to the Total Shareholder Return of the
Company, (iv) dividing (x) that number of Index Stocks with lower Total
Shareholder Returns than the Total Shareholder Return of the Company by (y) the
number of Index Stocks plus 1, and (v) multiplying such quotient by 100.
"Constructive Termination" has the meaning ascribed to it in the
employment agreement between the Participant and the Company or any of its
Subsidiaries; provided, that if no such employment agreement is in effect at the
time of the Participant's Termination of Service, or if such employment
agreement does not contain a definition of "Constructive Termination," then
"Constructive Termination" means a Participant's voluntary Termination of
Service within a period of ninety (90) days following either (i) the 30th day
after the Company has received a written notice from the Participant describing
in reasonable detail a material reduction or material adverse change in the
Participant's job responsibilities or title which has not been remedied by the
Company during such 30-day period, or (ii) a reduction of more than 20% in the
then current sum of the Participant's base salary and target annual incentive
opportunities, other than a reduction which is part of a general cost reduction
affecting at least 80% of the officers of the Company, or in the case of a
Participant employed by a Subsidiary of the Company, 80% of the officers of such
Subsidiary. A transfer by the Company of a Participant from one Subsidiary to
another, or between the Company and any Subsidiary, shall not by itself
constitute a Constructive Termination unless it is accompanied by an event in
clause (i) or (ii) of the prior sentence.
"Designated Payment Date" means the date designated by the Company for
payment of an Actual Award, which date shall be not more than thirty (30) days
following the Committee Certification with respect to such Actual Award and in
any event no later than sixty (60) days following the end of the relevant
Measurement Period.
"Disability" means the inability of the Participant to perform his or
her normal duties of employment as a result of incapacity as determined by the
Committee.
"Effective Date" means April 15, 1998, the date the Plan was approved
by the Board of the Company.
"Index Stock" means the common stock of any corporation (other than the
Company) included in the Market Index on each Trading Day during a Measurement
Period.
"Market Index" shall mean the Standard & Poor's 400 Mid-Cap, or in the
event such index is no longer available, such comparable stock market index as
may be selected by the Committee.
"Market Price" with respect to a given Security shall mean, for any
given date (or in the event such date is not a Trading Day with respect to such
Security, the last Trading Day prior to such date), the closing sale price of
such Security on such date, as reported as the New York Stock Exchange Composite
Transactions for such day in The Wall Street Journal, or, if such Security is
not listed on such exchange, as reported on the principal national securities
exchange or national automated stock quotation system on which such Security is
traded or quoted.
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<PAGE> 3
"Measurement Period" means the 24 month period beginning April 16, 1998
through April 15, 2000; the 24 month period beginning April 16, 1999 through
April 15, 2001; the 24 month period beginning April 16, 2000 through April 15,
2002; the 24 month period beginning April 16, 2001 through April 15, 2003; and
the 24 month period beginning April 16, 2002 through April 15, 2004.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Participant" means each eligible employee of the Company or any of its
Subsidiaries who is designated by the Committee to receive an Actual Award.
"Retirement" shall be as defined by the Committee.
"Security" means the Common Stock or an Index Stock.
"Service" means employment with the Company or its Subsidiaries.
"Subsidiary" means a corporation (or partnership, joint venture, or
other enterprise) of which the Company owns or controls, directly or indirectly,
50% or more of the outstanding shares of stock normally entitled to vote for the
election of directors (or comparable equity participation and voting power).
"Termination of Service" means a Participant's termination of Service
such that he or she is no longer an employee of either the Company or any of its
Subsidiaries for any reason whatsoever.
"Total Shareholder Return" of a Security shall be calculated by (i)
assuming that one share of such Security is purchased on the first day of the
relevant Measurement Period at the Average Market Price of such Security during
the Measurement Period, (ii) assuming that additional shares (or fractions of
shares) of such Security are purchased upon the payment of dividends or other
distributions to holders of such Security on the initial share of such Security
and on shares accumulated through the assumed reinvestment of dividends and
other distributions at a price equal to the Market Price of such Security on the
date such dividends or distributions are paid, (iii) calculating the number of
shares (including fractions of shares) of such Security that would be
accumulated over the Measurement Period (or such shorter period as provided in
the Plan), adjusting, as necessary, for any stock split or similar events, (iv)
multiplying the number of shares of such Security (including fractions of
shares) determined in clause (iii) by the Average Market Price during the
Measurement Period, and (v) determining the annual compound rate of growth
during the Measurement Period (or such shorter period) based upon the value
determined in clause (i) and the value determined in clause (iv) for such
Security.
"Total Shareholder Return Goal" means the goal set forth in Section
6(b).
"Trading Day" means, with respect to a Security, a day on which such
Security is publicly traded.
3. MAXIMUM AWARD
The maximum amount that may be awarded to any Participant under the
Plan shall be $2,500,000.
4. TERM OF THE PLAN
The Effective Date of the Plan is April 15, 1998. The Plan shall be
terminated on December 31, 2005; provided, that Actual Awards outstanding as of
such date shall not be affected or impaired by the termination of the Plan; and
provided further, that the Committee may elect to renew the Plan for such
additional periods of time as the Committee deems appropriate.
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<PAGE> 4
5. ELIGIBLE EMPLOYEES
All officers of the Company and other key employees of the Company and its
Subsidiaries who, in the opinion of the Committee, can materially influence the
long-term performance of the Company and/or its Subsidiaries are eligible to
receive an Actual Award. The Committee shall have the power and complete
discretion to select those eligible employees who are to receive Actual Awards.
6. COMMITTEE CERTIFICATION AND PAYMENT OF ACTUAL AWARDS
(a) Actual Awards shall be paid in cash on the appropriate Designated
Payment Date as and when they are earned, as set forth below in this Section 6;
provided, that no such payment shall be made unless and until the relevant
Committee Certification has been made. The Committee shall meet to consider
whether to make a Committee Certification not later than the 60th day following
the end of the relevant Measurement Period. In no event shall more than 100% of
an Actual Award be considered earned or be paid.
(b) An Actual Award may be earned as of the end of each Measurement Period
based upon the Total Shareholder Return Goal, as follows:
<TABLE>
<CAPTION>
Aggregate
Award
Earned
------------------
Comparative Performance Percentile
- - ----------------------------------
<S> <C>
Below 60th.................................................. 0
60 - 69th................................................... Base Award
70 - 79th................................................... 2 Times Base Award
80 - 89th 3 Times Base Award
90 and Above................................................ 4 Times Base Award
</TABLE>
(c) Treatment of a Termination of Service. (i) Upon a Termination of Service
of a Participant prior to the end of a Measurement Period for any reason except
death, Disability, Retirement, Constructive Termination or an involuntary
Termination of Service without Cause, the Participant shall not be entitled to
any payment with respect to his or her Actual Award.
(ii) Upon a Termination of Service of a Participant prior to the end of the
Measurement Period due to Retirement, death, Disability, Constructive
Termination or an involuntary Termination of Service without Cause, the
Participant (or the Participant's estate) will continue to be entitled to a
potential payment under the Participant's Actual Award based on the achievement
of the Total Shareholder Return Goal during the remainder of the Measurement
Period, as if the Participant had not experienced a Termination of Service.
(d) Change of Control. Upon a Change of Control of the Company, all
Participants who have not experienced a Termination of Service described in
Section 6(c)(i) before the Change of Control shall be entitled to receive, not
later than the 30th day after the Change of Control, payment of the full amount
of their Actual Awards to the extent not previously paid pursuant to Section
6(b) above, regardless of whether the Total Shareholder Return Goal has been
achieved, and the Participants shall have no further rights with respect to the
Actual Awards.
7. PLAN ADMINISTRATION
The Plan shall be administered by the Committee. If at any time no Committee
shall be in office, the functions of the Committee specified in the Plan shall
be exercised by the members of the Board who are "outside directors" within the
meaning of Section 162(m) of the Code. Subject to the provisions of the Plan,
the Committee shall interpret the Plan and make such rules as it deems necessary
for the proper administration of the Plan, shall make all other determinations
necessary or advisable for the administration of the Plan and shall correct any
defect or supply any omission or reconcile any inconsistency in the Plan in the
manner and to the extent that the Committee deems desirable to carry the Plan
into effect. Among other things, the Committee shall have the authority, subject
to the terms of the Plan, to determine (i) the individuals to whom the Actual
Awards are granted, (ii) the time or times the Actual Awards are granted, (iii)
the basis for any Termination of Service, including whether or not it was for
Cause, Disability, Retirement or otherwise (which determination shall be
reasonable), (iv) the calculation of Total Shareholder Return and the
Comparative Performance Percentile, (v) the Committee Certification, and (vi)
the forms, terms and provisions of any documents under the Plan. Any action
taken or determination made by the Committee pursuant to this paragraph and the
other paragraphs of the Plan in which the Committee is given discretion shall be
final and conclusive on all parties. The act or determination of a majority of
the Committee shall be deemed to be the act or determination of the entire
Committee. The Committee may consult with counsel,
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<PAGE> 5
who may be counsel to the Company, and such other advisors as the Committee may
deem necessary and/or desirable, and the members of the Committee shall not
incur any liability for any action taken in good faith in reliance upon the
advice of counsel or any other advisor.
8. AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Board, upon the recommendation of the Committee, may amend, suspend or
terminate the Plan at any time, subject to the provisions of this Section 8. No
amendment, suspension or termination of the Plan may, without the consent of the
Participant, adversely affect such Participant's rights under the Plan in any
material respect.
9. MISCELLANEOUS PROVISIONS
(a) Unsecured Status of Claim. Participants and their beneficiaries, heirs,
successors and assigns shall have no legal or equitable rights, interests or
claims in any specific property or assets of the Company. No assets of the
Company shall be held under any trust for the benefit of Participants, their
beneficiaries, heirs, successors or assigns, or held in any way as collateral
security for the fulfillment of the Company's obligations under the Plan.
Any and all of the Company's assets shall be, and shall remain, the general
unpledged and unrestricted assets of the Company. The Company's obligations
under the Plan shall be merely that of an unfunded and unsecured promise of the
Company to pay employee compensation benefits in the future.
(b) Employment Not Guaranteed. Nothing contained in the Plan nor any related
Agreement nor any action taken in the administration of the Plan shall be
construed as a contract of employment or as giving a Participant any right to be
retained in the Service of the Company.
(c) Nonassignability. No person shall have any right to commute, sell,
assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
hypothecate or convey in advance of actual receipt the deferred cash incentive,
if any, payable under the Plan, or any part thereof, or any interest therein,
which are, and all rights to which are, expressly declared to be unassignable
and nontransferable. No portion of the amounts payable shall, prior to actual
payment, be subject to seizure, attachment, lien or sequestration for the
payment of any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation of law in the
event of the Participant's or any other person's bankruptcy or insolvency. Any
such transfer or attempted transfer in violation of the preceding provisions
shall be considered null and void.
(d) Withholding Tax. The Company shall withhold from all benefits due under
the Plan an amount sufficient to satisfy any federal, state and local tax
withholding requirements.
(e) Applicable Law. The Plan and any related Agreements shall be governed in
accordance with the laws of the State of Delaware without regard to the
application of the conflicts of law provisions thereof.
(f) Inurement of Rights and Obligations. The rights and obligations under
the Plan and any related Agreements shall inure to the benefit of, and shall be
binding upon, the Company, its successors and assigns, and the Participants and
their beneficiaries.
(g) Notice. All notices and other communications required or permitted to be
given under this Plan shall be in writing and shall be deemed to have been duly
given if delivered personally or mailed first class, postage prepaid, as
follows: (A) if to the Company -- at its principal business address to the
attention of the Secretary; (B) if to any Participant -- at the last address of
the Participant known to the sender at the time the notice or other
communication is sent.
(h) Exclusion from Pension and Other Benefit Plan Computation. All Actual
Awards are special incentive compensation that will not be taken into account,
in any manner, as salary, compensation or bonus in determining the amount of any
payment under any pension, retirement or other employee benefit plan of the
Company or any of its Subsidiaries, nor the amount of any life insurance
coverage, if any, provided by the Company or any of its Subsidiaries on the life
of the Participant which is payable to such beneficiary under any life insurance
plan covering employees of the Company or any of its Subsidiaries.
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<PAGE> 6
MEDAPHIS CORPORATION
By:
------------------------------------
Title:
---------------------------------
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<PAGE> 1
EXHIBIT 10.4
CORPORATE INTEGRITY AGREEMENT
BETWEEN THE
OFFICE OF INSPECTOR GENERAL
OF THE
DEPARTMENT OF HEALTH AND HUMAN SERVICES
AND
MEDAPHIS CORPORATION
I. PREAMBLE
Medaphis Corporation ("Medaphis") hereby agrees to enter into this
Corporate Integrity Agreement ("CIA") with the Office of Inspector General
("OIG") of the United States Department of Health and Human Services ("HHS") and
implement any reasonable and necessary policies, procedures, and practices to
ensure compliance with the terms of this agreement and the requirements of
Medicare, Medicaid, and all other Federal health care programs (as defined in 42
U.S.C. ss. 1320a-7b(f)). On or about this date, Medaphis is entering into a
settlement agreement with the United States and this CIA is incorporated into
that Settlement Agreement by reference.
Prior to the execution of this CIA, Medaphis commenced its own
compliance program which provides for a chief compliance officer, a compliance
committee, a training and education program, an internal monitoring and auditing
program, a confidential hotline, a screening methodology for prospective
employees, and for policies and procedures which, as represented by Medaphis,
are aimed at ensuring that its role in
1
<PAGE> 2
submitting claims is conducted in conformity with the statutes, regulations and
other directives applicable to the Federal and state health care programs.
Medaphis owns several subsidiaries, including Medaphis Physician
Services Corporation ("MPSC") and Gottlieb's Financial Services, Inc. As used
herein, any specific reference to MPSC includes Gottlieb's Financial Services,
Inc.
II. TERM OF THE AGREEMENT
Medaphis agrees to undertake the compliance and corporate integrity
obligations set forth below for a period of five (5) years and one hundred and
fifty (150) days from the date of execution of this CIA. At the end of four (4)
years and one hundred and fifty (150) days from the date of the execution of
this CIA, however, Medaphis shall have the right to petition the HHS-OIG for
early termination of this CIA. The date of execution will be the date of the
final signature on the Settlement Agreement with the United States Attorney's
Office in the Central District of California. The petition for early termination
(the "Petition") shall be submitted in writing to the address designated in
section VII of this CIA and shall state the reasons why early termination should
be granted. HHS-OIG shall review the Petition and shall transmit in writing its
decision concerning early termination to Medaphis. In determining whether the
Petition should be granted, HHS-OIG may consider: (1) Medaphis' compliance with
the provisions of this CIA; (2) the state of Medaphis' compliance programs and
its effectiveness; and (3) the opinions of any fiscal intermediaries, carriers,
or officers thereof or other fiscal agents of Federal health
2
<PAGE> 3
care programs regarding Medaphis' compliance with statutes, regulations, and
other directives applicable to the Federal and state health care programs.
III. CORPORATE INTEGRITY OBLIGATIONS
A. Compliance Officer. Medaphis shall continue, for at least
the term of this CIA, to have in place a Compliance Officer who shall be
responsible for developing and implementing policies, procedures, and practices
designed to ensure compliance with the requirements set forth in this CIA, and
with the requirements of Medicare, Medicaid, and all other Federal health care
programs. The Compliance Officer shall be a member of senior management of
Medaphis (i.e., not subordinate to the general counsel, Chief Financial Officer
("CFO"), or similar officer of Medaphis) and shall make regular (at least
quarterly) reports regarding compliance matters directly to the Medaphis Chief
Executive Officer ("CEO") and to the Board of Directors of Medaphis. If the
identity of the Compliance Officer changes, Medaphis shall notify the OIG, in
writing, within fifteen (15) days of such change.
In addition, for at least the term of this CIA, MPSC shall continue to
have in place a Compliance Committee. The Compliance Committee shall, at a
minimum, include the Compliance Officer, a senior executive from MPSC, and any
other appropriate senior officers as would be required to fulfill the duties and
responsibilities as set forth in this CIA. The Compliance Committee will support
the Compliance Officer in fulfilling his/her responsibilities. The names and
positions of the Compliance Committee members
3
<PAGE> 4
will be included in the Implementation and First Annual Reports. Any changes to
the membership of the Compliance Committee shall be noted in subsequent Annual
Reports.
B. Policies and Procedures. Within one hundred and twenty
(120) days after the date of execution of this CIA, to the extent not already
accomplished, Medaphis shall develop and initiate implementation of written
Standards of Conduct, Policies and Procedures regarding the operation of
Medaphis' corporate integrity program, and compliance with all applicable
Federal and state health care statutes, regulations, and guidelines, including
the requirements of Medicare, Medicaid, and other Federal health care programs.
The Board of Directors shall annually review the Standards of Conduct. In
addition to other requirements as determined by Medaphis, the Policies and
Procedures shall specifically require, with respect to claims submitted to
Medicare, Medicaid, and all other Federal health care programs, that: (1) for
those claims where coding or diagnosis decisions are made by employees or
contractors of Medaphis and/or MPSC, the claims are properly supported by
required documentation and shall be properly coded and not subject to improper
unbundling(1), upcoding(2), assumption coding(3), or other inappropriate
- - ------------------
(1) The term "unbundling" refers to the inappropriate coding of a single
procedure, such as a laboratory profile or single operative session, as
a number of separate procedures.
(2) The term "upcoding" refers to the coding of a service at a higher level
of complexity than was actually performed or documented to obtain a
higher level of reimbursement.
(3) The term "assumption coding" refers to the coding of a diagnosis or
procedure without supporting clinical documentation.
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coding; (2) for claims that are submitted based upon coding by the provider(4),
that such providers have been informed that claims shall be properly supported
by required documentation, properly coded, and not subject to improper
unbundling, upcoding, assumption coding, or other inappropriate coding; (3)
quality control systems be implemented to prevent the submission of duplicate
bills, and that resubmissions are done in accordance with the instructions by
the appropriate payor; (4) the computer systems employ technically feasible
techniques reasonably designed to detect false or fraudulent claims activity in
claims submitted by MPSC or Medaphis; (5) credit balances are regularly and
properly monitored to ensure that Medaphis timely notifies providers that
appropriate and timely refunds are due payors and patients; (6) modifiers are
appropriately used by Medaphis and MPSC coders, if such coding is performed by
Medaphis or MPSC, and that providers are advised to use appropriate modifiers
when Medaphis' or MPSC's billing is based upon modifiers supplied by the
provider; and (7) the necessary procedure and diagnosis reference tools are
regularly updated, made available, and used by the appropriate personnel. In
addition, the Policies and Procedures shall include disciplinary guidelines and
methods for employees to make complaints and notifications about compliance
issues to Medaphis' management through the Confidential Disclosure Program
required by section III(E). Medaphis shall review and, when
- - ----------------
(4) For purposes of this CIA, the term "provider" is used to designate
those individuals and entities for whom Medaphis or any of its
subsidiaries, including MPSC, submit claims.
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applicable, update the Policies and Procedures at least annually, and more
frequently as appropriate. The Policies and Procedures shall be available to the
OIG upon request.
To the extent not already accomplished, within one hundred and twenty
(120) days of the execution date of the CIA, Medaphis shall ensure that
employees have been provided the Standards of Conduct and all appropriate
policies and procedures which are relevant to that particular employee's
functions and responsibilities. Each employee shall certify, in writing, that he
or she has read, understands, and will abide by Medaphis' Standards of Conduct
and the applicable policies and procedures. Compliance staff or supervisors
should be available to explain any and all policies and procedures. New
employees shall receive the Standards of Conduct and the applicable policies and
procedures within one (1) week after the commencement of their employment or
contract. These individuals shall also certify, in writing, that they have read,
understand and will abide by Medaphis' Standards of Conduct and the applicable
policies and procedures. Medaphis shall distribute any changes as necessary to
the appropriate individuals. Employees must certify on an annual basis that they
have read, understand, and will abide by the Standards of Conduct and the
applicable policies and procedures.
C. Training and Education. Medaphis shall continue to maintain
a training and educational program. Such program shall: (1) ensure that by
December 31, 1998, all employees who supervise any function affecting coding
decisions will have the designation of either Certified Professional Coder
("CPC") (or an independent certified
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coder designation similar to a CPC) or a Medaphis Certified Coder ("MCC")(5);
and (2) ensure that within one hundred and eighty (180) days, employees who
perform any function affecting coding decisions will have the designation of
either CPC (or similar designation) or MCC.
Medaphis shall also provide at least two (2) hours of training annually
to each employee of Medaphis and its subsidiaries. This general training shall:
(1) cover Medaphis' Corporate Integrity Agreement; (2) cover Medaphis' Policies
and Procedures as appropriate for the type of employee; (3) reinforce the need
for strict compliance with the applicable statutes, regulations, program
guidelines, and Medaphis' Policies and Procedures; and (4) advise employees how
potential violations of these regulations or of the provider's policies and
procedures should be handled and that any failure to comply may result in
disciplinary action, up to termination of employment. New employees shall
receive the general training described above within thirty (30) days of the
beginning of their employment. Any employee who has received training on these
issues within one hundred and twenty days (120) days prior to the effective date
of this CIA, need only be advised of the terms and conditions of this CIA as it
applies to their responsibilities, to comply with the training requirements of
this paragraph for the current year.
- - -----------------
(5) MCC is a certification received after a minimum of eighty (80) hours of
training and five examinations relating to the CPT and ICD codes, human
anatomy, medical terminology, and billing compliance.
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In addition to the general training described above, each MPSC employee
and any other employee who is involved in the preparation or submission of
claims for reimbursement for such care for Medicare, Medicaid, or any other
Federal health care programs, shall receive at least four (4) hours of training,
annually, in: (1) the submission of accurate bills to Medicare, Medicaid, or
other Federal health care programs; (2) the personal obligation of each
individual involved in the billing process to ensure that such billings, and the
information contained therein, are accurate; (3) applicable reimbursement rules
and statutes; (4) the legal sanctions for improper billings; and (5) examples of
proper and improper billing practices. At least seventy-five percent (75%) of
all employees covered under this paragraph shall receive the specified training
as set forth in this paragraph within one hundred and twenty (120) days of the
execution date of this CIA. The remaining twenty-five percent (25%) of the
employees shall receive the specified training within one hundred and eighty
(180) days of the execution date of this CIA. Any employee having received such
training within the previous one hundred and twenty (120) days of the effective
date of this CIA need not undergo additional training until next year.
Individuals specifically responsible for coding or supervising such
function shall also engage in an additional four (4) hours annual training
designed to update their MCC or CPC status and provide information on any coding
changes relating to that individual's particular specialty (e.g., Radiology,
Pathology, Emergency Services, or Anesthesiology).
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Any employee having received such training within the previous one hundred and
twenty (120) days of the effective date of this CIA need not undergo additional
training until next year.
New employees who have any responsibility for billing or the assignment
of procedure or diagnosis codes shall have their work reviewed and supervised by
a Medaphis employee who has completed the training as specified in this section
until all appropriate training has been completed.
Medaphis will maintain a record of the date of training of each
employee.
D. Audits and Disclosures. Medaphis shall continue, for the
duration of this CIA, to do annual internal audits and reviews of each of its
thirty (30) largest billing offices of MPSC and internal audits and reviews
of the remaining billing offices of MPSC once every three (3) years. These
internal audits and reviews shall be conducted in accordance with the current
scope and methodology adopted by Medaphis, except to the extent that additional
procedures are required herein.
Medaphis also agrees that with respect to each office reviewed or
audited, it shall provide an analysis of that office's billing and coding
operation (including how the billing system operates, strengths and weaknesses
of the system, and whether the findings apply to other offices). In addition,
Medaphis agrees to do an audit, based upon a statistically valid random sample
of claims, to determine if the claims for services billed to Medicare, Medicaid,
and other Federal health care programs are accurate. Such audit shall also
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indicate the dollar variation at each of the offices and in auditing the Halley
claims (the net effect may also be reported). Such audit shall be performed at
the following offices, according to the following schedule:
Year 1:
- The MPSC billing offices located in Calabasas, California,
Grand Rapids, Michigan, and Jacksonville, Florida (or if they
have moved, the offices at the new location).
- Three (3) MPSC offices, not included in the previous sentence,
picked at random from a list of billing offices whose primary
clients require billing for Emergency Services (such review of
these three (3) offices will relate to the billing of
Emergency Room Services).
- A randomly chosen sample of one hundred (100) claims relating
to Emergency Room Services from the Halley claims clearing
house. Should such sample reveal a claim(s) that would result
in an overpayment, the audit will then include appropriate
follow-up to determine the nature and scope of the problem.
YEAR 2:
- The MPSC billing offices that represent the three (3) largest
billing offices (as determined by amount of gross revenue),
excluding from the list of offices that are chosen from any
office audited in Year 1.
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- Three (3) MPSC offices, not included in the audits of Year 1
or in the previous sentence, picked at random from a list of
billing offices whose primary clients require billing for
Radiology (such review of these three (3) offices will relate
to the billing of Radiology).
- A randomly chosen sample of one hundred (100) claims relating
to Radiology Services from the Halley claims clearing house.
Should such sample reveal a claim(s) that would result in an
overpayment, the audit will then include appropriate follow-up
to determine the nature and scope of the problem.
Year 3:
- The MPSC billing offices that represent the next three (3)
largest billing offices (as determined by amount of gross
revenue), excluding from the list that offices are chosen from
any office audited in Year 1 or Year 2.
- In addition, three (3) MPSC offices, not included in the
audits of Year 1 or Year 2 or in the previous sentence, picked
at random from a list of billing offices whose primary clients
require billing for Pathology (such review of these three (3)
offices will relate to the billing of Pathology).
- Also, there will be a randomly chosen sample of one hundred
(100) claims relating to Pathology from the Halley claims
clearing house. Should such sample reveal a claim(s) that
would result in an overpayment, the audit will
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then include appropriate follow-up to determine the nature and
scope of the problem.
YEAR 4:
- The MPSC billing offices that represent the next three (3)
largest billing offices (as determined by amount of gross
revenue) within MPSC, excluding from the list that offices are
chosen from any office audited in Year 1, Year 2, or Year 3.
- Three (3) offices, not included in the audits of Year 1, Year
2, or Year 3 or in the previous sentence, picked at random
from a list of billing offices whose primary clients require
billing for Anesthesiology (such review of these three (3)
offices will relate to the billing of Anesthesiology
Services).
- A randomly chosen sample of one hundred (100) claims relating
to Anesthesiology Services from the Halley claims clearing
house. Should such sample reveal a claim(s) that would result
in an overpayment, the audit will then include appropriate
follow-up to determine the nature and scope of the problem.
YEAR 5:
- The MPSC billing offices that were (or are still) located in
Calabasas, California, Grand Rapids, Michigan, and
Jacksonville, Florida. If such offices have moved, the audit
will occur at the new location(s).
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- Three (3) MPSC offices, picked at random from a list of
billing offices that were not included in any of the lists
required in Year 1 - Year 4.
- A randomly chosen sample of one hundred (100) claims relating
to any codes, not included in the subspecialties chosen in the
previous four (4) years, from the Halley claims clearing
house. Should such sample reveal a claim(s) that would result
in an overpayment, the audit will then include appropriate
follow-up to determine the nature and scope of the problem.
In addition, within one hundred and twenty (120) days of the date of
execution of this CIA, Medaphis shall retain an independent review organization,
such as an accounting firm or consulting firm, to perform agreed upon procedures
to assist the parties in assessing the adequacy of Medaphis' billing and
compliance practices. This will be an annual requirement and will cover a twelve
(12) month period. The independent review organization must have expertise in
the billing, coding, reporting and other requirements of Medicare, Medicaid, and
other Federal health care programs to which Medaphis submits claims.
The independent review organization will conduct two separate
engagements. One will be an analysis, based upon agreed upon procedures, of
MPSC's billing to the Medicare, Medicaid and all other Federal health care
programs to assist the parties in determining compliance with all applicable
statutes, regulations, and policies ("billing engagement"). The second
engagement will determine whether Medaphis is in compliance with this CIA
("compliance engagement"), based upon agreed upon
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procedures. The agreed upon procedures are attached hereto as "Appendix A" and
are incorporated into this CIA by reference.
The billing engagement shall provide:
1. an analysis of the sufficiency of MPSC's internal review of its
billing and coding operation (including how the billing system operates
and the strengths and weaknesses of the system);
2. an analysis of whether the internal audits were performed as
described above, an analysis of the sufficiency of the methodology
utilized, and a test of fifteen percent (15%) of those claims audited,
randomly selected, to independently determine whether those claims are
in accordance with the requirements of the Medicare, Medicaid, and
other Federal health care programs.
3. an analysis as to whether MPSC's and/or Medaphis' procedures are
effective to correct inaccurate billings or codings to Medicare,
Medicaid, and other Federal health care programs;
4. an analysis of whether programs, policies, operations, and
procedures comply with the statutes, regulations and other requirements
of Medicare, Medicaid and other Federal health care programs to which
Medaphis submits claims;
5. an analysis of whether Medaphis has instituted adequate quality
controls to prevent upcoding, duplicate billing, or assumption coding;
and
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6. an analysis of the steps Medaphis is taking to bring its operation
into compliance or to correct problems identified by the internal
audit(s) or reviews or by the independent review organization, as
appropriate;
The second engagement conducted by the Independent Review Organization
will be an analysis, based upon agreed upon procedures, of whether Medaphis'
program, policies, procedures, and operations comply with the terms of this
Agreement. In addition, Medaphis will ensure that a due diligence process will
be performed by the compliance office or independent due diligence firm on any
new acquisitions during the year. The due diligence process will include, but
not be limited to, a review of the policies and procedures, an analysis of a
random sample of claims to ensure they are being submitted with the proper codes
and diagnosis, interviews of current employees, and the use of a fraud and abuse
management tool to assess any aberrant billing patterns. In addition, the
computer systems of the new acquisition shall be reviewed to ensure there are no
systemic biases that would result in duplicate billing or overbilling to the
Medicare, Medicaid, or other Federal health care programs and Medaphis will
ensure that the personnel are qualified and properly trained in coding policies
and procedures.
A complete copy of the internal reviews and audits and the Independent
Review Organization's billing and compliance engagements shall be included in
Medaphis' Annual Report to the OIG.(6) The billing audit and engagement section
shall include the
(6) Medaphis however, is not required to include records from a due
diligence process for a potential acquisition which was not
consummated.
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methodology used to make each determination, the audit and engagement results,
and the identification of overpayments. The listing of overpayments should
include the amount of the overpayment and name of the contractor who should
receive the refund.
If, as a result of these audits or through any other means, there are
any billing, coding, or other policies, procedures and/or practices that result
in an overpayment and/or material deficiency, and Medaphis or MPSC had
responsibility in whole or in part for making the decision of how an item or
service should be billed, which decision resulted in an overpayment, then
Medaphis shall notify the payor (e.g., Medicare fiscal intermediary or carrier)
and the provider within thirty (30) days of discovering the deficiency or
overpayment and take remedial steps within sixty (60) days of discovering the
deficiency or overpayment (or such additional time as may be agreed to by the
payor) to correct the problem, including preventing the deficiency from
recurring. The notice to the payor should include: (1) a statement that the
notification is being made pursuant to a Corporate Integrity Agreement; (2) a
description of the complete circumstances surrounding the overpayment; (3) the
methodology by which the overpayment was determined; (4) the amount of the
overpayment; (5) any claim-specific information used to determine the
overpayment (e.g., beneficiary health insurance number, claim number, service
date, and payment date); and (6) the provider's name and identification number.
If the payor is not able to collect or recoup such an overpayment from the
provider in accordance with the payor's procedures, then Medaphis agrees to
refund the overpayment
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to the appropriate payor. Nothing in this paragraph affects Medaphis' rights to
collect such refund amounts from the appropriate provider.
If Medaphis has identified such a material deficiency, contemporaneous with
Medaphis' notification to the payor as provided above, Medaphis shall notify
OIG of: (1) the material deficiency (including Medaphis' findings and any
overpayment amounts); (2) Medaphis' findings concerning the material
deficiency; (3) Medaphis' action(s) to correct and prevent such material
deficiency from recurring; (4) the payor's name, address, and contact person
where the overpayment was sent; and (5) a copy of the letter to the provider
providing notification of the overpayment.
For purposes of this CIA, a "material deficiency" shall mean anything that
has a significant, adverse financial impact upon the Medicare and/or Medicaid
programs, which may be the result of an isolated event or a series of
occurrences, and which lacks conformity with Medicare and/or Medicaid billing
and/or reimbursement principles or other applicable statutes, and the
regulations and written directives issued by the Health Care Financing
Administration ("HCFA") and/or its agents, or any other agency charged with
administering the Federal health care program implicated and/or its agents.
While this reporting requirement focuses on occurrences having a "significant,
adverse financial impact," this provision does not excuse the Medaphis'
obligation under any applicable statutory or regulatory requirements to bring
to a payor's attention any other billing deficiencies, regardless of amount,
and to make appropriate refunds and take any steps necessary to prevent the
occurrence in the future.
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For purposes of this CIA, an "overpayment" shall mean the amount of
money received in excess of the amount due and payable under the Medicare,
Medicaid, or other Federal health care program statutes and regulations.
E. Confidential Disclosure Program. Medaphis will continue its
Confidential Disclosure Program, which consists of a toll-free compliance
"hotline" (1-888-COMPLYH), enabling employees, agents and contractors, if
applicable, to disclose, to the Compliance Officer or another appropriate
person who is not in the reporting individual's chain of command, any
identified issues or questions associated with the policies, practices, or
procedures with respect to Medicare, Medicaid, or any other Federal health care
program, alleged by the individual to be inappropriate.
The Confidential Disclosure Program shall emphasize a non-retribution,
non-retaliation policy, and shall include a reporting mechanism for anonymous,
confidential communication. Upon receipt of a complaint, the compliance officer
or other responsible person shall gather the information in such a way as to
elicit all relevant information from individuals reporting alleged misconduct.
The Compliance Officer or designee shall make a preliminary good faith inquiry
into the allegations set forth in every disclosure to ensure that he or she has
obtained all of the information necessary to determine whether a further review
should be conducted. For any disclosure that is sufficiently specific that it
reasonably permits a determination of the appropriateness of the alleged
improper practice, and provides opportunity for the taking of corrective
action, the Compliance
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Officer shall require the internal review of the allegations set forth in such
disclosure and ensure that proper follow-up is conducted.
The Compliance Officer shall maintain a confidential disclosure log,
which shall include a record of each allegation received, status of the
investigation of the allegation, and any corrective action taken in response to
the investigation.
F. Excluded Individuals. Medaphis shall not employ, contract with,
or otherwise use the services of any individual whom Medaphis knows or should
have known, after reasonable inquiry, (1) has been convicted of a criminal
offense related to health care (unless the individual has been reinstated to
participation in Medicare and all other Federal health care programs after
being excluded because of the conviction), or (2) is currently listed by a
Federal agency as excluded, debarred, or otherwise ineligible for participation
in any Federal health care program. In furtherance of this requirement,
Medaphis agrees to make reasonable inquiry as to any prospective employee,
agent, or individual considered for engagement by Medaphis as an independent
contractor by reviewing the General Services Administration's List of Parties
Excluded from Federal Programs (available over the Internet at
http://www.arnet.gov/epls) and the HHS/OIG Cumulative Sanction Report
(available over the Internet at http://www.dhhs.gov/progorg/oig). Within one
hundred and twenty (120) days of the date of execution of this CIA, if it has
not already been accomplished, Medaphis will have made reasonable inquiry
whether any current employee is excluded, debarred or
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otherwise ineligible for participation in any Federal health care program and
taken appropriate action.
G. Notification of Proceedings. Within thirty (30) days of
discovery, Medaphis shall notify OIG, in writing, of any ongoing investigation
or legal proceeding conducted or brought by a governmental entity or its agents
involving an allegation that Medaphis has committed a crime or has engaged in
fraudulent activities or any other knowing misconduct. The notification shall
include a description of the allegation, the identity of the investigating or
prosecuting agency, and the status of such investigation or legal proceeding.
Medaphis shall also provide written notice to OIG within thirty (30) days of
the resolution of the matter, and shall provide OIG with a description of the
findings and/or results of the proceedings.
IV. NEW ACQUISITIONS
Within thirty (30) days of acquiring a new company (by Medaphis or any
of its subsidiaries) or establishing a new billing office of MPSC, Medaphis
will notify the OIG, in writing, of the addition of any new operations, its
address, and functions. All requirements with respect to new employees (e.g.,
completing certifications and undergoing training) must be met as set forth in
this CIA.
V. OIG INSPECTION, AUDIT AND REVIEW RIGHTS
In addition to any other rights OIG may have by statute, regulation,
contract or pursuant to this CIA, OIG or its duly authorized representative(s)
or agents may examine
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Medaphis' books, records, and other documents and supporting materials for the
purpose of verifying and evaluating: (i) Medaphis' compliance with the terms of
this CIA; and (ii) Medaphis' compliance with the requirements of the Medicare,
Medicaid, and other Federal health care programs. As part of these records, the
OIG requires that Medaphis maintain and make available upon request a listing
for each Medaphis location of all billing numbers (e.g. PIN, IPIN) for which
that particular Medaphis location has billed the Medicare, Medicaid, or other
Federal health care programs. The documentation described above shall be made
available by Medaphis at all reasonable times for inspection, audit, or
reproductions. (7) Furthermore, for purposes of this provision, OIG or its duly
authorized representative(s) may interview any of Medaphis' employees who
consent to be interviewed at the employee's place of business during normal
business hours or at such other place and time as may be mutually agreed upon
between the employee and OIG. Medaphis agrees to assist OIG in contacting and
arranging interviews with such employees upon OIG's request. Medaphis employees
may elect to be interviewed with or without a representative of Medaphis or
counsel present.
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(7) By so agreeing to this section, Medaphis does not waive any
applicable attorney-client or work product privileges, however, any such claim
of privilege may not be used to avoid compliance with this CIA.
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VI. IMPLEMENTATION AND ANNUAL REPORTS
A. IMPLEMENTATION REPORT
Within one hundred and fifty (150) days after the date of execution of
this CIA, Medaphis shall submit a written report to the OIG summarizing the
status of implementation of the requirements of this CIA. This implementation
report shall include:
(1) the name, address, phone number and position description of the
Compliance Officer and compliance committee required in III(A);
(2) a certification by the Compliance Officer that the written
Policies and Procedures required by III(B) have been developed, are
being implemented, and that each affected employee, as specified in
this agreement, has signed the certification attesting he or she has
received, read, understood and will abide by the applicable policies
and procedures;
(3) a description of the training programs implemented pursuant to
III(C), a summary of the activities undertaken in furtherance of the
training programs, including schedules and format of the training
sessions, and a certification by the Compliance Officer that the
training required within the first one hundred and twenty (120) days
has been completed;
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(4) a description of the confidential disclosure program pursuant to
III(E) and a description of the other lines of communication between
the compliance officer and employees;
(5) the identity of the independent review organization and the
proposed start and completion date of the first engagements; and
(6) a summary of personnel actions taken pursuant to section III(F).
B. ANNUAL REPORT
Thereafter, Medaphis shall submit to the OIG an Annual Report, with
respect to the status and findings of Medaphis compliance activities. The Annual
Reports shall include:
(1) any change in the identity or position description of the
Compliance Officer described in III(A);
(2) notification of any changes or amendments to the Policies and
Procedures required by III(B) and the reasons for the changes (e.g.,
change in contractor policy). The Compliance Officer shall certify in
the annual report to the OIG that copies of the certifications required
by III(B) are on file and will be maintained for OIG inspection;
(3) compliance officer certification that all affected employees
have attended and completed training sessions as well as a summary of
when the training was performed and the proposed schedule for the next
year pursuant to III(C). The training materials will be available to
the OIG upon request;
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(4) a complete copy of the Independent Review Organization's billing
and compliance engagements and any corrective action Medaphis plans to
initiate in response; a complete copy of all internal reviews and
audits covered by this CIA and done for the previous year; and a copy
of the due diligence process performed for new acquisitions;
(5) a summary of problems identified in either a) the internal
audits or reviews; or b) the independent review organization billing,
compliance engagements or due diligence reviews; status of corrective
actions taken to address those problems; and, for each identified
overpayment, the following information: amount of individual
overpayments identified, the provider identification, the
corresponding payor's name to which the notification, and if required,
any payment was sent;
(6) a report of the aggregate overpayments that have been returned
to the Medicare, Medicaid, and other Federal health care programs that
were discovered as a direct or indirect result of the corporate
integrity provisions in this CIA; Overpayment amounts should be broken
down into the following categories: Medicare, Medicaid (report each
applicable state separately) and other Federal health care programs.
For any overpayments not identified through the audits, reviews, or
engagements pursuant to III(D), include a description of how each
overpayment was calculated and the reason for the overpayment;
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(7) a description of the disclosures received, status of actions
taken and the results pursuant to III(E) and a copy of the
confidential disclosure log required by that section;
(8) a description of any personnel action (other than hiring) taken
by Medaphis as a result of the obligations in section III(F);
(9) a description of any ongoing investigation or legal proceeding
conducted or brought by a governmental entity involving an allegation
that Medaphis has committed a crime or has engaged in fraudulent
activities as required by III(G). The statement shall include a
description of the allegation, the identity of the investigating or
prosecuting agency, and the status of such investigation, legal
proceeding or requests;
(10) a listing of all Medaphis locations (street, city, state, zip,
phone, and fax), and the corresponding name each location is doing
business as;
(11) a list of all providers who have ceased using the services of
Medaphis or MPSC during the previous year and provide the average
number of claims submitted per month on behalf of that provider; and
(12) a certification by the Compliance Officer verifying that: a)
Medaphis is in compliance with all of the requirements of this CIA, to
the best of his or her knowledge; and b) the Compliance Officer has
reviewed the Annual Report and has made reasonable inquiry regarding
its content and believes that, upon such inquiry the information is
accurate and truthful.
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The first Annual Report shall be received by the OIG no later than one
year and one hundred and fifty (150) days after the execution of the CIA.
Subsequent Annual Reports shall be submitted no later than one year after the
first report is due.
VII. NOTIFICATIONS AND SUBMISSION OF REPORTS
Unless otherwise stated subsequent to the execution of this CIA, all
notifications and reports required under the terms of this CIA shall be
submitted to the entities listed below:
OIG:
Civil Recoveries Branch - Compliance Unit
Office of Counsel to the Inspector General
Office of Inspector General
U.S. Department of Health and Human Services
330 Independence Avenue, SW
Cohen Building, Room 5527
Washington, D.C. 20201
Phone 202.619.2078
Fax 202.205.0604
Medaphis:
Christopher L. Ideker
Chief Compliance Officer
Medaphis Physician Services Corporation
Billing Compliance Department
2700 Cumberland Parkway - Suite 300
Atlanta, GA 30339
Phone 770.444.5504
Fax 770.444.7504
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VIII. DOCUMENT AND RECORD RETENTION
Medaphis shall maintain for inspection documents and records belonging
to Medaphis and relating to reimbursement from the Federal health care programs
or with compliance with this CIA one year longer than the duration of this CIA
or until otherwise required to retain such records, whichever is later.
Medaphis shall also maintain records of its current clients for the same
duration as stated in the previous sentence, to the extent allowed by law.
Medaphis shall not return records to discontinued clients unless such request
is initiated by the client and is in writing.
IX. CONFIDENTIALITY
The confidentiality of all documents and other information provided by
MPSC or Medaphis in connection with its obligations under this CIA shall be
maintained by the OIG except to the extent disclosure is required by law.
Nothing in this CIA shall be construed to prohibit the OIG from providing
information to any other department or agency of the United States Government,
or its representatives or agents or to any State, provided that any such entity
receiving such information shall be advised by the OIG of the confidentiality
provisions of this CIA. The OIG recognizes that certain information submitted
to it under this CIA may constitute trade secrets or confidential commercial or
financial information within the meaning of section 552(b) of the Freedom of
Information Act ("FOIA"), 5 U.S.C. ss. 552(b)(4). Medaphis shall identify all
records that it contends fall with this section. To the extent the OIG
determines that records submitted fall within
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the ambit of this exemption, OIG agrees to follow its pre-disclosure
notification procedures set out in 45 C.F.R. ss. 5.65 with respect to such
records. These procedures include prior notice to the designated person within
Medaphis (as provided in section VII) of any potential release of records under
the FOIA and an opportunity to provide information as to why the information is
exempt under 5 U.S.C. ss. 552(b)(4). Medaphis will also be given advance notice
to the address set forth herein, if OIG decides that any such information is
not exempt under section 552(b)(4). Medaphis shall designate documents as
subject to such an exemption only if such is the case.
X. BREACH AND DEFAULT PROVISIONS
Medaphis' compliance with the terms and conditions in this CIA shall
constitute an element of Medaphis' present responsibility with regard to
participation in Federal health care programs. Full and timely compliance by
Medaphis shall be expected throughout the duration of the compliance period
required by this CIA with respect to all of the obligations herein agreed to by
Medaphis. All modifications to this CIA (including changes to dates on which an
obligation is due to be met) shall be requested in writing and agreed to by the
OIG in writing prior to the date on which the modification is expected to take
effect.
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<PAGE> 29
A. STIPULATED PENALTIES FOR FAILURE TO COMPLY WITH CERTAIN
OBLIGATIONS
As a contractual remedy, Medaphis and OIG hereby agree that failure to
comply with certain obligations set forth in this CIA may lead to the
imposition of the following monetary penalties (hereinafter referred to as
"Stipulated Penalties") in accordance with the following provisions.
(1) A Stipulated Penalty of $2,500 (which shall begin to accrue
on the day after the date the obligation became due) for each day Medaphis
fails to have in place any of the following during the entire period beginning
one hundred and twenty (120) days after the execution of this CIA and
concluding at the end of the corporate integrity period required by this CIA:
a. a Compliance Officer;
b. a Compliance Committee;
c. written Policies and Procedures;
d. an education and training program;
e. a Confidential Disclosure Program;
(2) A Stipulated Penalty of $2,500 (which shall begin to accrue on
the day after the date the obligation became due) for each day Medaphis fails
meet any of the deadlines to provide the Implementation Report or the Annual
Reports.
(3) A Stipulated Penalty of $1,500 (which shall begin to accrue on
the date the failure to comply began) for each day Medaphis employs or
contracts with an individual
29
<PAGE> 30
after that individual has been listed by a federal agency as excluded, debarred,
suspended or otherwise ineligible for participation in the Medicare, Medicaid
or any other Federal health care program. This stipulated penalty shall not be
demanded if Medaphis can demonstrate that it did not discover the individual's
exclusion or other ineligibility after making a reasonable inquiry (as described
in section III(F)) as to the current or potential status of the employee or
consultant engaged, and Medaphis terminated the employment of such individual
immediately upon notice of ineligibility.
(4) A stipulated penalty of $1,500 (which shall begin to accrue on
the date the Medaphis fails to grant reasonable access) for each day Medaphis
fails to grant reasonable access to the information or documentation necessary
to exercise OIG's inspection, audit and review rights set forth in section V of
this CIA.
(5) A Stipulated Penalty of $1,000 (which shall begin to accrue
ten (10) days after the date of an OIG notice to Medaphis of a failure to
comply) for each day Medaphis fails to comply with any obligation of this CIA
other than those specifically mentioned in paragraphs (1) through (4) of this
section X(A).
B. PAYMENT OF STIPULATED PENALTIES
(1) Demand Letter. Upon finding that Medaphis has failed to comply
with any of the obligations described in section X(A) and determining that
Stipulated Penalties are appropriate, the OIG shall notify Medaphis by
certified mail of: (a) its failure to comply; and (b) the OIG's exercise of its
contractual right to demand payment of the Stipulated Penalties (this
notification is hereinafter referred to as the "Demand Letter"). Within
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<PAGE> 31
fifteen (15) days of the date of the Demand Letter, Medaphis shall either: (a)
cure the breach to the OIG's satisfaction and pay the applicable stipulated
penalties; or (b) request a hearing before an HHS administrative law judge
("ALJ") to dispute the OIG's determination of noncompliance, pursuant to the
agreed upon provisions set forth below in section X(D). Failure to respond to
the Demand Letter shall be considered a material breach of this Agreement and
shall be grounds for exclusion under section X(C).
(2) Timely Written Requests for Extensions. Medaphis may submit a
timely written request for an extension of time to perform any act or file any
notification or report required by this CIA. Notwithstanding any other
provision in this section, if the OIG grants the timely written request with
respect to an act, notification, or report, then Stipulated Penalties shall not
begin to accrue for the activity subject to the request, unless and until
Medaphis fails to meet the deadline granted by the extension. Notwithstanding
any other provision in this section, if OIG denies such a timely written
request, Stipulated Penalties for failure to perform the act or file the
notification or report shall not begin to accrue until two (2) business days
after Medaphis receives OIG's written denial of such a request. A "timely
written request" is defined as a request in writing received by OIG at least
five (5) business days prior to the date by which any act is due to be
performed or notification or report is due to be filed.
(3) Form of Payment. Payment of the stipulated penalties shall be
made by certified or cashier's check, payable to "Secretary of the Department
of Health and Human Services," and submitted to the OIG at the address set
forth in section VII.
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<PAGE> 32
(4) Independence from Material Breach Determination. Except as
otherwise noted, these provisions for payment of Stipulated Penalties shall not
affect or otherwise set a standard for the OIG's determination that Medaphis has
materially breached this CIA, which decision shall be made at the OIG's
discretion and governed by the provisions in section X(C), below.
C. EXCLUSION FOR MATERIAL BREACH OF THIS CIA
(1) Notice of Material Breach and Intent to Exclude. The parties
agree that a material breach of this CIA by Medaphis constitutes an independent
basis for Medaphis' exclusion from participation in Medicare, Medicaid, and all
other Federal health care programs. Upon a determination by the OIG that
Medaphis has materially breached this CIA and that exclusion should be imposed,
the OIG shall notify Medaphis by certified mail of (a) its material breach; and
(b) the OIG's intent to exercise its contractual right to impose exclusion
(this notification is hereinafter referred to as the "Notice of Material
Breach and Intent to Exclude Letter").
(2) Opportunity to Cure. Medaphis shall have thirty-five (35)
days from the date of the letter to demonstrate to the OIG's satisfaction that:
a. Medaphis is in full compliance with this CIA;
b. the alleged material breach has been cured; or
c. the alleged material breach cannot be cured within
the thirty-five (35) day period, but that (i) Medaphis
has begun to take action to cure the material breach,
(ii) Medaphis is pursuing such action with
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<PAGE> 33
due diligence, and (iii) Medaphis has provided to the
OIG a reasonable timetable for curing the material
breach.
(3) Exclusion Letter. If at the conclusion of the thirty-five (35)
day period, Medaphis fails to satisfy the requirements of section X(C)(2), OIG
may exclude Medaphis from participation in the Medicare, Medicaid, and all
other Federal health care programs. OIG will notify Medaphis in writing of its
determination to exclude Medaphis (this letter shall be referred to hereinafter
as the "Exclusion Letter"). Subject to the Dispute Resolution provisions in
section X(D), below, the exclusion shall go into effect thirty (30) days after
the date of the Exclusion Letter. The exclusion shall have national effect and
will also apply to all other federal procurement and non-procurement programs.
If Medaphis is excluded under the provisions of this CIA, Medaphis may seek
reinstatement pursuant to the provisions at 42 C.F.R. ss. 1001.3001-3004.
(4) Material Breach. A material breach of this CIA means: (a) a
failure by Medaphis to meet an obligation under this CIA where the failure has
a significant financial impact on the integrity of Medicare, Medicaid, or any
over Federal health care program (for example, a failure to report a material
deficiency, take corrective action and pay the appropriate refunds, as provided
in section III(D)); (b) repeated or flagrant violations of the obligations
under this CIA, including, but not limited to, the obligations addressed in
section X(A); or (c) a failure to respond to a Demand letter concerning the
payment of Stipulated Penalties in accordance with section X(B) above.
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<PAGE> 34
D. DISPUTE RESOLUTION
(1) Review Rights. Upon the OIG's delivery to Medaphis of its
Demand Letter or of its Exclusion Letter, and as an agreed-upon contractual
remedy for the resolution of disputes arising under the obligation of this CIA,
Medaphis shall be afforded some review rights comparable to the ones that are
provided in 42 U.S.C. ss. 1320a-7(f) and 42 C.F.R. ss. 1005 as if they applied
to the stipulated penalties or exclusion sought pursuant to this CIA.
Specifically, the OIG's determination to demand payment of stipulated penalties
or to seek exclusion shall be subject to review by an ALJ and the Departmental
Appeals Board ("DAB") in a manner consistent with the provisions in 42 C.F.R.
ss. 1005.2-1005.21. Notwithstanding the language in 42 C.F.R. ss. 1005.2(c), the
request for a hearing involving stipulated penalties shall be made within ten
(10) days of the date of the Demand Letter and the request for a hearing
involving exclusion shall be made within thirty (30) days of the date of the
Exclusion Letter.
(2) Stipulated Penalties Review. Notwithstanding any provision of
Title 42 of the United States Code or Chapter 42 of the Code of Federal
Regulations, the only issues in a proceeding for stipulated penalties under
this CIA shall be: (a) whether Medaphis was in full and timely compliance with
the obligations of this CIA for which the OIG demands payment; and (b) the
period of noncompliance. Medaphis shall have the burden of proving its full and
timely compliance and the steps taken to cure the noncompliance, if any. If the
ALJ sustains the OIG and orders Medaphis to pay Stipulated Penalties, such
Stipulated Penalties shall become due and payable 20 days after the ALJ issues
such a
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<PAGE> 35
decision, notwithstanding that Medaphis may request review of the ALJ decision
by the DAB.
(3) Exclusion Review. Notwithstanding any provision of Title 42 of
the United States Code or Chapter 42 of the Code of Federal Regulations, the
only issues in a proceeding for exclusion based on a breach of this CIA shall
be: (a) whether Medaphis was in material breach of this CIA; and (b) whether
such breach was continuing on the date of the Exclusion Letter. For purposes of
the exclusion herein agreed to in the event of material breach of this CIA, the
ALJ's decision shall trigger the exclusion. Thus, the OIG may proceed with its
exclusion of Medaphis if and when the ALJ issues a decision in favor of the
OIG. Medaphis' election of its contractual right to appeal to the DAB shall not
abrogate the OIG's authority to exclude Medaphis upon the issuance of the ALJ's
decision. If the ALJ sustains the OIG and determines that exclusion is
authorized, such exclusion shall take effect twenty (20) days after the ALJ
issues such a decision notwithstanding that Medaphis may request review of the
ALJ decision by the DAB.
(4) Finality of Decision The review by an ALJ or DAB provided for
above shall not be considered to be an appeal right arising under any statutes
or regulations. Consequently, the parties to this CIA agree that the DAB's
decision (or the ALJ's decision if not appealed) shall be considered final for
all purposes under this CIA and agree to waive any right they may have to
appeal the decision administratively, judicially, or otherwise seek its review
by any court or other adjudicative forum.
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<PAGE> 36
XI. EFFECTIVE AND BINDING AGREEMENT
Consistent with the provisions in the settlement pursuant to which
this CIA is entered, and into which this CIA is incorporated, Medaphis and the
OIG agree as follows:
1. This CIA shall be binding on the successors, assigns and
transferees of Medaphis Corporation and/or MPSC;
2. This CIA shall become final and binding on the date the final
signature is obtained on the Settlement Agreement;
3. Any modifications to this CIA shall be made with the prior
written consent of the parties to this CIA; and
4. The undersigned Medaphis signatories represent and warrant
that they are authorized to execute this CIA. The undersigned
United States signatory represents that he is signing this
CIA in his official capacity and that he is authorized to
execute this CIA.
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<PAGE> 37
ON BEHALF MEDAPHIS CORPORATION
/s/ Randolph L.M. Hutto 9/2/98
- - ----------------------------------------------------------- ------------
Randolph L.M. Hutto DATE
Executive Vice-President and General Counsel
of Medaphis Corporation
Executive Vice-President of Medaphis Physician Services
Corporation
/s/ Christopher L. Ideker 9/2/98
- - ----------------------------------------------------------- ------------
Christopher L. Ideker DATE
Chief Compliance Officer
Medaphis Corporation
/s/ Stephen S. Cowen 9/2/98
- - ----------------------------------------------------------- -----------
Stephen S. Cowen DATE
Attorney for Medaphis Corporation
King & Spalding
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<PAGE> 38
ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL
OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES
/s/ Lewis Morris 9/2/98
- - ----------------------------------------------- ------------
LEWIS MORRIS DATE
Assistant Inspector General for Legal Affairs
Office of Inspector General
U. S. Department of Health and Human Services
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APPENDIX A
AGREED UPON PROCEDURES
A. OBJECTIVE - to define procedures that will be followed by an
Independent Review Organization (IRO) that contracts with Medaphis to
conduct the agreed upon compliance and billing engagements, as set
forth in the CIA at paragraph II(D). The function of these agreed upon
procedures is to provide an analysis that will enable the OIG to
determine whether Medaphis: 1) is in compliance with the terms of the
CIA; and 2) has taken appropriate steps to comply with the applicable
requirements of Medicare, Medicaid, and other Federal health care
programs.
B. AGREED UPON PROCEDURES. In order to gather evidence to establish
whether Medaphis is in compliance with the terms of the CIA, the IRO
shall perform the following procedures and provide a report, as
required by the CIA, which shall note any deficiencies or variances:
1. Compliance Officer Responsibilities Review -- To assure that
the Medaphis Compliance Officer (CO) is functioning in a manner
consistent with the terms of the CIA, the IRO shall:
a. Review a Medaphis and MPSC corporate organization chart;
b. Review the CO job description;
c. Review the reporting obligations of the CO; and
d. Obtain and review the Board of Directors meeting minutes.
2. Review of Compliance Committee Function -- To assure that the
Medaphis Compliance Committee is functioning in a manner
consistent with the terms of the CIA, the IRO shall:
a. Review a current Compliance Committee membership list;
b. Review Compliance Committee minutes (redacted for
attorney-client privileged communications, if any); and
c. Review any reports, findings, or recommendations issued
by the Compliance Committee.
3. Review of Medaphis Written Policies and Procedures -- To assure
that the Medaphis Written Policies and Procedures function in a
manner consistent with the terms of the CIA and the Medicare,
Medicaid, and other Federal health care programs, the IRO
shall:
a. Review the current Standards of Conduct and any revisions
made thereto;
b. Review current billing compliance policies and
procedures, noting any policies that are at variance with
applicable laws, regulations, and program
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guidance. Additionally, the IRO shall note any laws,
regulations, or program guidance of which it is aware that the
Medaphis billing compliance policies appear to fail to cover or
consider;
c. Note specifically the existence and comment on the relevance
and accuracy of policies involving:
(i) Diagnosis coding;
(i) Procedure coding (including modifiers);
(iii) Duplicate billing;
(iv) Carrier or payor instructions for resubmission of claims;
and
(v) Adequate medical and billing documentation to support
proper payment of claims.
d. Review procedures relating to data processing controls for
detection of false or incorrect claims;
e. Review policies and procedures designed to instruct providers
concerning proper coding and use of modifiers and analyze the
effectiveness and accuracy of such instructions and note any
deficiencies;
f. Review credit balance monitoring mechanisms and evaluate
effectiveness for monitoring compliance with the credit balance
policy. Such review shall include, at a minimum:
(i) Review of Medaphis' credit balance reports;
(ii) Review repayment procedures and timeliness issues; and
(iii) Review communication procedures with Medaphis clients
regarding appropriate repayment of credit balances.
g. Review retention of records policy to ensure compliance with
the CIA; and
h. Review overpayment verification procedures for material
deficiencies and to ensure submission of accurate information
to payors and OIG. Also review attendant remedial steps and
provide an analysis of whether they are effective.
4. Review of Medaphis Training Program -- To assure that the Medaphis
Training Program functions in a manner consistent with the terms of
the CIA, the IRO shall:
a. Obtain and review relevant training database(s), materials,
policies, and other compilations regarding Standards of Conduct
and CIA training, training for individuals responsible for
procedure and diagnosis coding, and individuals responsible for
billing;
b. Review training materials and analyze whether they address the
issues as identified in the CIA and the appropriate policies
and procedures;
c. Review mechanism for timely distribution of Standards of
Conduct to all employees and note variance in implementation;
d. Compare training database with employee database regarding
Standards of Conduct and CIA training and note and report on
variances;
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<PAGE> 41
e. Compare training database with appropriate employee database
regarding training for individuals responsible for procedure
and diagnosis codes and note and report on variances,
including, but not limited to, an analysis of whether employees
responsible for making coding decisions have the required
certification as specified in the CIA;
f. Compare training database with appropriate employee database
regarding training for individuals responsible for billing and
note and report on variances;
g. Randomly select twenty-five (25) employees from the Standards
of Conduct ("SOC") database and confirm each employee's
receipt and understanding (ECRU) form, and note variances;
h. Randomly select twenty-five (25) employees who would be
required to attend billing or coding training to confirm
attendance at and completion of all applicable training;
i. Randomly select twenty-five (25) coders from Medaphis'
Certified Coder database to interview in person or by
telephone, as appropriate, and inquire as to:
(i) Job responsibilities and adequate job training;
(ii) Fulfillment of compliance training requirements;
(iii) Supervisor identity and views on his/her commitment to
correct coding procedures;
(iv) Use of coding aides and materials, their adequacy,
clarity, and accuracy; and
(v) Knowledge and comfort level in use of Medaphis
confidential disclosure program.
j. Randomly select twenty-five (25) of the MPSC new hires within
the preceding one year period from the appropriate employee
database and compare with training database. Report on
compliance with timeliness of SOC and CIA training. Determine,
through interviews, whether such new hires have received the
appropriate supervision, as required in the CIA.
5. Review of Compliance Audit Procedures -- To assure that the Medaphis
Compliance Audit mechanism functions in a manner consistent with the
terms of the CIA, the IRO shall:
a. Select the six office audits (as required by the CIA)
conducted in the last year for review of:
(i) Audit plan (including procedure used for of the
selection of claims, noting any potential for sample
selection bias);
(ii) Completeness and accuracy of workpapers;
(iii) Agreement with findings and accuracy of findings as
related in OIG report(s); and
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<PAGE> 42
(iv) Progress on remedial action plan and review of accuracy
of attendant language in OIG report(s) concerning such
remedial action plans.
b. Randomly select and review fifteen percent (15%) of the claims
at each of the specified offices and fifteen percent (15%) of
the claims from the Halley claims processing center that were
audited by Medaphis' compliance department to assure that
audit protocols are in compliance with the requirements of
the CIA. Such review shall include:
(i) An independent review of the claims to determine if they
are being billed in compliance with the requirements of
the Medicare, Medicaid, and Federal health care
programs, including, but not limited to, examination of
the support documentation and coding conclusions, noting
variances, if any;
(ii) Review of workpapers; and
(iii) Review of refund activity (if any) arising from findings
of Medaphis' compliance audit.
c. Provide an analysis of the internal audits with respect to
those items required by the CIA;
d. Provide an analysis of the sufficiency, including any
recommendations for improvement, of any due diligence reviews
conducted during the year which resulted in an acquisition;
and
e. Review the outcomes of the Fraud and Abuse Management System
("FAMS") Tool by randomly choosing twenty-five (25) FAMS
outliers and providing an analysis of the completeness of the
investigation with respect to those particular outliers,
including, but not limited to, any corrective action or
resolution of the possible aberrant billing behavior.
6. Review of OIG Reporting Obligations -- To assure that the Medaphis
reporting obligations are met in a manner consistent with the terms of
the CIA, the IRO shall:
a. Review Medaphis' reports submitted to OIG and any overpayment
reports submitted to government payors and note variances from
requirements of CIA; and
b. Review the calculations of all overpayments and provide an
analysis of the accuracy of the calculations.
7. Review of Confidential Disclosure Program -- To assure that the
Medaphis Confidential Disclosure Program functions in a manner
consistent with the terms of the CIA, the IRO shall:
a. Confirm that the hotline number works;
b. Review Medaphis' steps to make existence of hotline known to
all employees and note any deficiencies;
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c. Review the completeness of the log of disclosures;
d. Review the policies and procedures implemented to address
hotline or other confidential disclosures of potential
improper conduct; and
e. Review the remedial steps taken to address identified improper
conduct relating to billing and note any deficiencies in such
remedial procedures.
8. Review of Disciplinary Policy and Procedures -- To assure that the
Medaphis Disciplinary Policy and Procedures function in a manner
consistent with the terms of the CIA, the IRO shall:
a. Review Disciplinary Policies to ensure there is a
well-defined, written policy that sets forth the degree of
disciplinary action for failure to comply with the Company's
standards, policies and applicable statutes and regulations;
and
b. Review written Standards of Conduct to ensure that the
policies elaborate on procedures for addressing disciplinary
problems and the individuals responsible for taking such
disciplinary action.
9. Review of New Employee Policy -- To assure that the Medaphis New
Employee Policy functions in a manner consistent with the terms of
the CIA, the IRO shall:
a. Interview the Human Resources ("HR") manager and other
supervisory employees as necessary to confirm that all new
employees have been screened to ensure that they are not
debarred, excluded, or otherwise ineligible for participation
in federal health care programs;
b. Review HR documents and forms for new employees maintained to
document that new employees have been properly screened and
note any deficiencies in the forms or their retention; and
c. Review HR screening procedures to ensure that new employees
are not debarred, excluded, or otherwise ineligible for
participation in federal health care programs and note any
deficiencies with such screening procedures.
10. Other Recommendations -- To assure compliance with the CIA and
applicable Medicare, Medicaid, and other Federal health care program
statutes, regulations and policies, the IRO shall make any other
suggestions it deems necessary.
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<PAGE> 1
EXHIBIT 10.5
WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT (this "Waiver and
First Amendment") is dated as of the 16th day of October, 1998 among MEDAPHIS
CORPORATION (the "Borrower"), DLJ CAPITAL FUNDING, INC., as the Syndication
Agent (the "Syndication Agent"), WACHOVIA BANK, N.A., as Administrative Agent
(the "Administrative Agent"; the Syndication Agent and the Administrative Agent
are, collectively, the "Agents") and DLJ CAPITAL FUNDING, INC., WACHOVIA BANK,
N.A., CREDITANSTALT and TRANSAMERICA BUSINESS CREDIT CORPORATION, as the Lenders
(collectively, the "Lenders");
W I T N E S S E T H:
WHEREAS, the Borrower, the Syndication Agent, the Administrative Agent
and the Lenders executed and delivered that certain Credit Agreement, dated as
of February 13, 1998 the "Credit Agreement");
WHEREAS, the Borrower has requested that the Agents and the Lenders
grant certain waivers under the Credit Agreement, and the Agents and the Lenders
have agreed to grant such waivers, subject to the terms and conditions hereof,
including the agreement of the Borrower as to the amendments to the Credit
Agreement contained herein;
NOW, THEREFORE, for and in consideration of the above premises and
other good and valuable consideration, the receipt and sufficiency of which
hereby is acknowledged by the parties hereto, the Borrower, the Agents and the
Lenders hereby covenant and agree as follows:
1. Definitions. Unless otherwise specifically defined herein, each term
used herein which is defined in the Credit Agreement shall have the meaning
assigned to such term in the Credit Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference contained in the
Credit Agreement shall from and after the date hereof refer to the Credit
Agreement as amended hereby. The term "Effective Date" means the date set forth
above, but only upon satisfaction of the conditions set forth in Section 15.
<PAGE> 2
2. Waivers Concerning Settlement of Government Investigations.
(a) Description of the GFS Investigation. The Borrower has
indicated to the Agents and the Lenders that, as disclosed in the Borrower's
filings with the Securities and Exchange Commission provided to the Agents and
the Lenders pursuant to the Credit Agreement, the Borrower has been the subject
of an investigation by the United States Department of Justice and the United
States Attorney's office in Grand Rapids, Michigan with respect to Gottlieb's
Financial Services, Inc. (the "GFS Investigation"). Gottlieb's Financial
Services, Inc.* ("GFS") is a wholly-owned subsidiary of the Borrower and a
Subsidiary Guarantor under the Credit Agreement. The Borrower advises the Agents
and the Lenders that it has reached preliminary agreement with the United States
Department of Justice and the United States Attorney's office in Grand Rapids,
Michigan to settle the GFS investigation, which settlement covers all federal
and state claims and will involve the payment by the Borrower of from $15 to $17
million, of which $8 to $10 million will be payable in 1998, with the balance
payable at $3.5 million in each of 1999 and 2000. The Borrower further advises
that an additional payment, anticipated by the Borrower to be less than $50,000,
will be required to pay statutory legal fees in the qui tam litigation
underlying the GFS Investigation.
(b) Description of California Investigation. The Borrower advises the
Agents and the Lenders that it is in active negotiations, and believes that it
is close to reaching agreement, in connection with the investigation conducted
by the United States Attorney's office in Los Angeles, California (the
"California Investigation"), and that the basic terms of the proposed settlement
are:
Payment of $1.5 million to the United States in settlement of
various civil False Claims Act claims;
Payment of $60,000 to the State of California in
settlement of various civil False Claims Act claims;
Payment of $800,000 to one of the qui tam Relators and her
attorneys in settlement of all civil False Claims Act claims,
all employment related claims and all statutory attorneys'
fees and in return for a general release of all claims, known
and unknown, of the Relator against the Borrower or its
subsidiaries; and
A plea by CompMed (a company acquired by the Borrower and
later merged into Medaphis Physician Services Corporation) to
one felony count, payment of a fine of
- - -----------------
*As the Borrower has notified the Agents and the Lenders
previously, GFS's name was changed to Medaphis ER Physicians
Services, Inc. on September 29, 1998
2
<PAGE> 3
approximately $380,000, establishment of a restitution fund in
the amount of $650,000 to provide refunds to private carriers,
with any balance after 6 months going to the United States and
the State of California.
Payment of $187,500, plus legal fees estimated at $200,000, to
the second qui tam Relator and its attorneys in settlement of
all civil False Claims Act claims and all California insurance
claims and in return for a general release of all claims.
The Borrower advises that in connection with the proposed settlements
of the GFS and California Investigations, the Office of the Inspector
General of Health and Human Services has agreed with the Borrower that
the Borrower and its subsidiaries will not be excluded from
participation in the Medicare/Medicaid system.
(c) Waivers Concerning the GFS Investigation and the California
Investigation.
(i) Section 7.2.2 of the Credit Agreement prohibits
the Borrower from creating or incurring any indebtedness,
subject to certain exceptions. Section 7.2.2(1) excepts
Indebtedness "the terms and conditions of which shall have
been approved by the Required Lenders and, unless otherwise
approved by the Required Lenders, the Net Debt Proceeds
resulting therefrom are applied in accordance with clause (c)
of Section 3.1.1." As of the Effective Date, the Agents and
the Lenders hereby (x) approve the deferral under the
settlement proposals and (y) acknowledge that they believe
that the proposed settlement will constitute Permitted
Indebtedness within the meaning of the Credit Agreement, for
purposes of Section 7.2.2 of the Credit Agreement.
(ii) Section 7.1.1(e) of the Credit Agreement
requires that the Borrower give the Administrative Agent
notice of "the occurrence of any adverse development which
could reasonably be expected to have a Material Adverse Effect
with respect to any litigation, action or proceeding described
in any filing of the Borrower...filed with the SEC prior to
February 13, 1998... .". As of the Effective Date, the Agents
and the Lenders hereby acknowledge that neither the settlement
of the GFS Investigation nor the settlement of the California
Investigation is an adverse development within the meaning of
Section 7.1.1(e) of the Credit Agreement.
(iii) Section 6.5(c) of the Credit Agreement contains
a representation and warranty by the Borrower that "no
Development has occurred since December 31, 1997 that has
resulted, or could reasonably be expected
3
<PAGE> 4
to result in, a Material Adverse Effect". As a condition
precedent to any Credit Extension, Section 5.2.1(a) of the
Credit Agreement requires, among other things, that such
representation and warranty be true and correct in all
material respects as if made both immediately before and after
giving effect to such Credit Extension; and Section 5.2.2 of
the Credit Agreement indicates that the delivery of a request
for a Credit Extension and the acceptance of the benefits
constitutes a representation and warranty that such condition
is satisfied in all material respects. As of the Effective
Date, the Agents and the Lenders hereby acknowledge that (x)
neither of such settlements would be considered a development
that could reasonably be expected to have a Material Adverse
Effect within the meaning of Section 6.5(c) and (y) the
settlement of either of such investigations would not result
in (1) the failure of the condition precedent to Credit
Extensions set forth in Section 5.2(a) to be satisfied in
connection with any Credit Extension or (2) the making by the
Borrower in connection with a Credit Extension of a materially
inaccurate representation and warranty that constitutes an
Event of Default under Section 8.1.2 of the Credit Agreement.
3. Waiver Concerning Financial Covenants.
(a) Description of Anticipated Breach of Financial Covenants. The
Borrower advises the Agents and the Lenders that, based upon current forecasts,
it is possible that the Borrower will not meet the financial covenants set forth
in Section 7.2.4 of the Credit Agreement. The financial covenants include a
maximum Leverage Ratio, minimum Interest Coverage Ratio, minimum EBITDA and
minimum Net Worth. The Borrower advises that if the proposed settlements of the
GFS Investigation and the California Investigation were to be accrued in the
third quarter, it is possible that the Borrower would not meet the financial
covenants regardless of third quarter performance.
(b) Waiver of Anticipated Breach of Financial Covenants. As of the
Effective Date, the Agents and the Lenders hereby (i) waive compliance with the
financial covenants of Section 7.2.4 for the Fiscal Quarter ended September 30,
1998 and (ii) agree that, as a result of such waiver, such non-compliance will
not constitute a Default or an Event of Default under Section 8.1.3 of the
Credit Agreement for such Fiscal Quarter.
4. Sale of MSC.
(a) Description of Proposed Sale of MSC. The Borrower advises the
Agents and the Lenders that it is considering the sale of its Medaphis Services
Corporation ("MSC") subsidiary for cash. If a decision is made to proceed with
such sale, the Borrower would anticipate closing the sale during the fourth
quarter of 1998. Section 7.2.12 of the Credit Agreement
4
<PAGE> 5
prohibits the sale of assets in excess of $5 million, subject to certain
exceptions, none of which is applicable to the sale of MSC. The Borrower
anticipates a sales price for MSC exceeding $100 million.
(b) Consent to Sale of MSC. As of the Effective Date, the Agent and the
Lenders (i) consent to the proposed sale of MSC and (ii) waive compliance with
Section 7.2.12 so as to allow the sale, for cash, of MSC and subsequent
application of proceeds to pay down the Credit Facility, and (iii) agree that in
connection with such sale, the Administrative Agent shall release MSC from the
Subsidiary Guaranty and release MSC's assets and the capital stock in MSC from
the Collateral; provided that (x) the Net Disposition Proceeds be used
immediately upon closing of the sale to pay in full all Obligations under the
Credit Facility, (y) on the date of such payment, the Commitments of all Lenders
other than Wachovia Bank, N.A. be terminated, and that the Commitment of
Wachovia Bank, N.A. be reduced to an amount acceptable to Wachovia Bank, N.A.,
in its sole and absolute discretion, and (z) from and after the date of such
sale, until all Letters of Credit are surrendered for cancellation or expire,
the Borrower shall maintain with the Administrative Agent at all times cash
collateral in an amount not less than the undrawn amount of all Letter of Credit
Outstandings (and to the extent of any drawings under the Letters of Credit, the
Administrative Agent is expressly authorized, without notice to the Borrower, to
apply such cash collateral in payment of the related reimbursement obligation).
5. Amendment to Section 1.1. As of the Effective Date, Section 1.1 of
the Credit Agreement hereby is amended by deleting the definition of "Applicable
Margin" and substituting the following therefor:
"Applicable Margin" means at all times during the applicable
periods set forth below:
(a) with respect to the unpaid principal amount of each Loan
maintained as a Base Rate Loan, 1.75% per annum; and
(b) with respect to the unpaid principal amount of each Loan
maintained as a LIBO Rate Loan, 3.0% per annum.
6. New Section 8.1.11. As of the Effective Date, a new Section 8.1.11
hereby is added to the Credit Agreement, as follows:
SECTION 8.1.11. Failure to Sell MSC. Either (i) the Borrower fails to
close a sale of Medaphis Services Corporation for cash, as contemplated
in Section 4(a) of the Waiver and First Amendment by and among the
Borrower, the Agents and the Lenders dated as of October 16, 1998, or
(ii) any of the conditions set forth in the proviso contained in
Section 4(b) of such Waiver and First Amendment shall not be
5
<PAGE> 6
satisfied in connection with such sale, in each case on or before
December 15, 1998.
7. Restatement of Representations and Warranties. As of the Effective
Date, and after giving effect to the terms hereof, the Borrower hereby restates
and renews each and every representation and warranty heretofore made by it in
the Credit Agreement and the other Loan Documents as fully as if made on the
date hereof and with specific reference to this Waiver and First Amendment and
all other loan documents executed and/or delivered in connection herewith.
8. Effect of Amendment. Except as set forth expressly hereinabove, all
terms of the Credit Agreement and the other Loan Documents shall be and remain
in full force and effect, and shall constitute the legal, valid, binding and
enforceable obligations of the Borrower. The amendments contained herein shall
be deemed to have prospective application only, unless otherwise specifically
stated herein.
9. Ratification. The Borrower hereby restates, ratifies and reaffirms
each and every term, covenant and condition set forth in the Credit Agreement
and the other Loan Documents effective as of the date hereof.
10. Counterparts. This Waiver and First Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument.
11. Section References. Section titles and references used in this
Waiver and First Amendment shall be without substantive meaning or content of
any kind whatsoever and are not a part of the agreements among the parties
hereto evidenced hereby.
12. No Default. To induce the Agents and the Lenders to enter into this
Waiver and First Amendment and to continue to make credit accommodations
available to the Borrower pursuant to the Credit Agreement, the Borrower hereby
acknowledges and agrees that, as of the Effective Date hereof, and after giving
effect to the terms hereof, there exists (i) no Default or Event of Default and
(ii) no right of offset, defense, counterclaim, claim or objection in favor of
the Borrower arising out of or with respect to any of the Loans or other
Obligations of the Borrower owed to the Lenders under the Credit Agreement.
13. Further Assurances. The Borrower agrees to take such further
actions as the Agents shall reasonably request in connection herewith to
evidence the amendments herein contained to the Borrower.
6
<PAGE> 7
14. Governing Law. This Waiver and First Amendment shall be governed by
and construed and interpreted in accordance with, the laws of the State of New
York.
15. Conditions Precedent. This Waiver and First Amendment shall become
effective only upon (i) execution and delivery of this Waiver and First
Amendment by the Borrower, the Agents and the Required Lenders, (ii) execution
and delivery of the Consent and Reaffirmation of Guarantors at the end hereof by
each of the Guarantors, (iii) the payment to the Administrative Agent, for its
own account, of a waiver and amendment structuring and processing fee, and
reimbursement to the Administrative Agent for reasonable attorney's fees and
expenses incurred by it in connection with this Waiver and First Amendment,
pursuant to the letter agreement between the Borrower and the Administrative
Agent dated as of October 16, 1998, and (iv) the payment to the Administrative
Agent, for the ratable account of the Lenders, of a waiver and amendment fee of
$250,000.
[SIGNATURES CONTAINED ON NEXT PAGE]
7
<PAGE> 8
IN WITNESS WHEREOF, the Borrower, the Agents and each of the Lenders
has caused this Waiver and First Amendment to be duly executed, under seal, by
its duly authorized officer as of the day and year first above written.
MEDAPHIS CORPORATION,
as Borrower (SEAL)
By: /s/ WAYNE A. TANNER
-----------------------------
Title: EVP and CFO
DLJ CAPITAL FUNDING, INC.,
as Syndication Agent and
as a Lender (SEAL)
By: /s/ DANA F. KLEIN
-----------------------------
Title: Vice President
WACHOVIA BANK, N.A.,
as Administrative Agent and
as a Lender (SEAL)
By: /s/ ANN B. EDWARDS
-----------------------------
Title: Assistant Vice President
CREDITANSTALT,
as a Lender (SEAL)
By: /s/
-----------------------------
Title:
TRANSAMERICA BUSINESS CREDIT
CORPORATION,
as a Lender (SEAL)
By: /s/ PERRY VAVOULES
-----------------------------
Title: Senior Vice President
8
<PAGE> 9
CONSENT AND REAFFIRMATION OF GUARANTORS
Each of the undersigned (i) acknowledges receipt of the foregoing Waiver
and First Amendment to Credit Agreement (the "Waiver and First Amendment"), (ii)
consents to the execution and delivery of the Waiver and First Amendment by the
parties thereto and (iii) reaffirms all of its obligations and covenants under
the Subsidiary Guaranty dated as of February 13, 1998 executed by it, and agrees
that none of such obligations and covenants shall be affected by the execution
and delivery of the Waiver and First Amendment. This Consent and Reaffirmation
may be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same instrument.
IMPACT INNOVATIONS GROUP, INC.
(formerly known as BSG Government
Solutions, Inc.) (SEAL)
By: /s/ WAYNE A. TANNER
---------------------------------
Title: EVP and CFO
CONSORT TECHNOLOGIES, INC. (SEAL)
By: /s/ WAYNE A. TANNER
---------------------------------
Title: EVP and CFO
MEDAPHIS ER PHYSICIANS SERVICES, INC.
(formerly known as Gottleib's
Financial Services Inc.) (SEAL)
By: /s/ WAYNE A. TANNER
---------------------------------
Title: EVP and CFO
HEALTH DATA SCIENCES CORPORATION (SEAL)
By: /s/ WAYNE A. TANNER
---------------------------------
Title: EVP and CFO
MEDAPHIS HEALTHCARE INFORMATION
TECHNOLOGY COMPANY (SEAL)
By: /s/ WAYNE A. TANNER
---------------------------------
Title: EVP and CFO
MEDAPHIS SERVICES CORPORATION (SEAL)
By: /s/ WAYNE A. TANNER
---------------------------------
Title: EVP and CFO
9
<PAGE> 10
MEDAPHIS PHYSICIAN SERVICES CORPORATION (SEAL)
By: /s/ WAYNE A. TANNER
-------------------------------------
Title: EVP and CFO
NATIONAL HEALTHCARE TECHNOLOGIES, INC. (SEAL)
By: /s/ WAYNE A. TANNER
-------------------------------------
Title: EVP and CFO
ASSETCARE, INC. (SEAL)
By: /s/ WAYNE A. TANNER
-------------------------------------
Title: EVP and CFO
AUTOMATION ATWORK (SEAL)
By: /s/ WAYNE A. TANNER
-------------------------------------
Title: EVP and CFO
IMPACT INNOVATIONS GROUP, INC.
(formerly known as BSG Alliance/IT, Inc.) (SEAL)
By: /s/ WAYNE A. TANNER
-------------------------------------
Title: EVP and CFO
IMPACT INNOVATION HOLDINGS, INC.
(formerly known as BSG Corporation) (SEAL)
By: /s/ WAYNE A. TANNER
-------------------------------------
Title: EVP and CFO
10
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
Three and Nine Months Ended September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Description 1998 1997 1998 1997
- - ------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
during the period 78,655 72,942 76,442 72,542
Shares issuable upon assumed exercise
of stock options, less amounts assumed
repurchased under the treasury stock method -- -- -- --
--------- -------- --------- --------
Total weighted average common stock and common stock
equivalents outstanding during the period 78,655 72,942 76,442 72,542
========= ======== ========= ========
Net loss from continuing operations (517,361) $(81,686) $(554,657) $(89,839)
Discontinued operation, net of tax 1,356 477 3,687 4,306
Extraordinary items, net of tax -- -- (5,557) 76,391
--------- -------- --------- --------
Net loss $(516,005) $(81,209) $(556,527) $ (9,142)
========= ======== ========= ========
Net loss per common share:
Net loss from continuing operations $ (6.58) $ (1.12) $ (7.26) $ (1.24)
Discontinued operation, net of tax 0.02 0.01 0.05 0.06
Extraordinary items, net of tax -- -- (0.07) 1.05
--------- -------- --------- --------
Net loss $ (6.56) $ (1.11) $ (7.28) $ (0.13)
========= ======== ========= ========
</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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 10,768
<SECURITIES> 0
<RECEIVABLES> 128,371
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 147,675
<PP&E> 58,360
<DEPRECIATION> 0
<TOTAL-ASSETS> 358,241
<CURRENT-LIABILITIES> 97,366
<BONDS> 0
0
0
<COMMON> 787
<OTHER-SE> 5,162
<TOTAL-LIABILITY-AND-EQUITY> 358,241
<SALES> 0
<TOTAL-REVENUES> 328,410
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 802,062
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,410
<INCOME-PRETAX> (492,062)
<INCOME-TAX> 62,595
<INCOME-CONTINUING> (554,657)
<DISCONTINUED> 3,687
<EXTRAORDINARY> (5,557)
<CHANGES> 0
<NET-INCOME> (556,527)
<EPS-PRIMARY> (7.28)
<EPS-DILUTED> (7.28)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Medaphis Corporation ("Medaphis" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Medaphis. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Medaphis undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Medaphis provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Quarterly Report on Form
10-Q to which this statement is appended as an exhibit and also include the
following:
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness and, as a result, significant debt
service obligations. The Company's ability to make payments on its debt
obligations will depend on its future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. If the Company is
unable to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have important
consequences, including: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or other general corporate purposes may be impaired; (ii) a substantial portion
of the Company's cash flow from operations may be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to the Company for its operations; (iii) the Company's existing indebtedness
contains, and future financings are expected to contain, financial and other
restrictive covenants, including without limitation those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends, sales of assets, capital expenditures, and prepayment of indebtedness
and those requiring maintenance of minimum net worth, minimum EBITDA and minimum
interest coverage and limiting leverage; (iv) certain of the Company's
borrowings are and will continue to be at variable rates of interest which
expose the Company to the risk of increases in interest rates; and (v) the
Company may be more leveraged than certain of its competitors, which may place
the Company at a relative competitive disadvantage and make the Company more
vulnerable to changes in its industry and changing economic
<PAGE> 2
conditions. As a result of the Company's level of indebtedness, its financial
capacity to respond to market conditions, extraordinary capital needs and other
factors may be limited.
LIQUIDITY
The Company expects to consummate the sale of its Hospital Services segment
prior to December 15, 1998 and to use a portion of the net proceeds from the
sale to pay off the Credit Facility. There can be no assurance that the sale
will close by such date or at all. If the sale is not consummated prior to
December 15, 1998, the Company will not have sufficient liquidity without
obtaining an additional waiver from the requisite lenders under the Credit
Facility or alternate sources of liquidity. There can be no assurance that any
required waiver or alternate source of liquidity will be available to the
Company or can be obtained on terms and conditions satisfactory to the Company.
LITIGATION AND GOVERNMENT INVESTIGATIONS
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
conducted 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 complied. The subpoena required,
among other things, records of any audit or investigative reports relating to
the billing of payors globally for radiological services during the period
January 1, 1991 to date and any refunds owed to or issued to payors with
respect to such global billing reports in the Company's various offices,
including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the appropriate state or states may elect to intervene fully or partially in
qui tam litigation and proceed with the action.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx)(the
"Complaint"). On February 11, 1998, the United States provided Medaphis with a
copy of the Complaint, Substitution of Attorney, and Order which prohibited the
Company from making any use of the Complaint, including any public disclosure,
other than for the purposes of settlement negotiations, without further order of
the Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an order modifying its February 6, 1998 order to
allow Medaphis to make public disclosures concerning the Complaint and its
contents to the extent that Medaphis determined such disclosures were required
by applicable securities laws, provided that such disclosures did not reveal the
Relators' identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs.
The Complaint includes causes of action under the Federal False Claims Act, 31
U.S.C. sec 3729 et seq., and the California False Claims Act, Cal. Gov't Code
sec. 12650 et seq. The Complaint also includes causes of action relating to
Medaphis' termination of Relator II, including a count under the state and
federal whistleblower protection statutes.
The Company recorded charges of $12 million in the third quarter of 1995
solely for legal and administrative fees, costs and expenses it anticipates
incurring in connection with the California Investigation and certain putative
class action lawsuits which were filed in 1995 following the Company's
announcement of the California Investigation. Since the third quarter of 1995,
the Company has periodically adjusted this reserve, as necessary, including a
$0.3 million increase in the second quarter of 1998. Such adjustments to the
reserve have aggregated to a net reduction of $0.5 million. The reserve
currently covers only the anticipated expenses of the California Investigation
and the related lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgments or sanctions that may arise out of
such matters, as such amounts are not currently estimable.
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provide for the payment by the Company of $3.6
million in the aggregate, the dismissal of all pending proceedings against the
Company and the release of various other claims arising out of the California
Investigation. As a part of these settlements, CompMed, Inc., a company acquired
by the Company in 1992, pled guilty to a single criminal count.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error, which primarily impacts certain managed care
plans, 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 cannot be determined by the Company, 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.
The Company is unable to estimate the possible range of loss, if any.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan were
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS")(the "GFS Investigation"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services requested information from GFS following an audit of a GFS client. GFS
has complied with those requests. 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 each of the years ended December
31, 1996 and 1997, GFS represented approximately 7% of Medaphis' revenue. During
those years, GFS processed approximately 5.6 million and 6.25 million claims,
respectively, approximately 2 million and 2.3 million of which, respectively,
were made to government programs. The government requested that GFS voluntarily
produce records, and GFS complied with that request. The Company recorded
charges of $2 million and $1 million in the second and third quarters of 1997,
respectively, and $0.7 million and $0.1 million in the second and third quarters
of 1998, respectively, solely for legal and administrative fees, costs and
expenses in connection with the GFS
2
<PAGE> 3
Investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
While the Company denies the contentions of the government, the Company has
determined it is in its best interest to settle such claims. Accordingly, the
Company has reached an agreement in principle with the United States to settle
the matters related to the GFS Investigation on an ability to pay basis. The
settlement, which is subject to definitive documentation, requires the Company
to pay to the United States and the various states a total of $15 million, of
which $8 million will be paid within 10 days of the execution of a definitive
Settlement Agreement among the parties, with the balance of $7 million being
paid in eight equal quarterly installments over 1999 and 2000. The deferred
portion of the settlement payment will bear interest at the one year Treasury
Bill rate. The Settlement Agreement will provide for the dismissal with
prejudice of claims against the Company and the release by the United States of
civil and administrative claims arising out of the emergency room billing of
government programs services provided by GFS from 1993 through the date of the
Settlement Agreement.
The Company recorded a litigation settlement charge of $19.5 million in
the quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement of the California and GFS
Investigations, the Company entered into a Corporate Integrity Agreement with
the Office of the Inspector General of the Department of Health and Human
Services. This Agreement, which has a term of sixty-five months, provides that
the government will not seek to exclude the Company from participation in
governmental health care programs based on the conduct alleged in the
California and GFS Investigations and requires the Company to continue its
existing compliance program, augmented by an annual third party review and
additional reporting requirements.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that
the Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
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.
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 "Derivative Suit"). The plaintiff seeks
unspecified 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, which motion was denied without prejudice. The
parties entered into a Stipulation and Settlement Agreement dated June 26, 1998
(the "Derivative Stipulation") to settle the Derivative Suit. The Derivative
Stipulation provides for the enactment of procedures for governance of the Audit
Committee of the Board of Directors and for such attorney's fees and expenses as
may be awarded by the court in an amount not to exceed $250,000 (to be paid by
the Company's directors' and officers' liability insurance carrier). The court
granted final approval to the settlement on September 29, 1998, and ordered all
claims dismissed.
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 Health Data
Sciences Corporation ("HDS"). Plaintiff seeks rescissory, compensatory and
punitive damages in excess of $100 million, rescission, injunctive relief and
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cost. On January 10, 1997, the defendants filed a demurrer to the complaint. On
February 5, 1997, the Court overruled defendants' demurrer. On March 18, 1997,
the court denied the plaintiff's motion for a preliminary injunction. On July
16, 1997, plaintiff filed an amended complaint adding several new parties,
including current and former directors and former and current officers of
Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the Securities Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such Securities Act
claims. The Company is unable to estimate a possible range of loss.
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
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. On April 18, 1997, the Medaphis defendants and BSG defendants filed
motions to dismiss the complaint. On or about July 3, 1997, in lieu of
responding to these motions, the plaintiffs filed an amended complaint, adding
new claims under the Securities Act and common law and new parties, including
former officers of Medaphis, Medaphis' former independent accountants and BSG.
On or about October 29, 1997, all defendants filed motions to dismiss the
amended complaint. On May 12, 1998, the court ruled in favor of defendants on
the motions, dismissing all of plaintiffs' claims with prejudice and without
leave to amend. On May 15, 1998, the Judge signed an order to that effect. The
plaintiffs have appealed from this order, and that appeal is pending. The
Company is unable to estimate a possible range of loss.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 March 31, 1999. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. In June 1998, the Company and
the BSG Principals reached an agreement in principle to settle the claims made
on behalf of the former BSG shareholders in exchange for approximately 3.2
million shares of Medaphis Common Stock, subject to negotiation and definitive
documentation of other terms and conditions of the settlement. The Company
recorded a litigation settlement charge of $21.3 million in the quarter ended
June 30, 1998 in connection with this agreement in principle. The charge
reflects 3.2 million shares of Medaphis Common Stock valued at the fair value
per share on the date on which the material terms of the agreement in principle
was reached. The Company classified the entire $21.3 million liability
associated with the proposed settlement as noncurrent since such obligation will
be settled with Common Stock rather than current assets and the exact timing of
the payments of claims pursuant to such settlement is not determinable.
On November 9, 1998, the parties entered into a letter of intent with
respect to the settlement of the BSG Principals' claims. The terms of the letter
of intent, which vary from the previously announced agreement in principle,
provide for the payment by the Company to the BSG Principals of 4.5 million
shares of the Company's Common Stock and $2.5 million in cash, to be funded by
the Company's directors' and officers' liability insurance. The settlement is
subject to the consent and approval of the Company's insurer and its funding of
the cash portion of the settlement. Based on the price of the Company's Common
Stock on the date of the letter of intent, the settlement would result in a
charge of approximately $17.7 million, $2.5 million of which would be funded by
insurance. Since the Company had previously estimated this liability at $21.3
million, the Company will reduce this liability in the fourth quarter of 1998
by $3.6 million.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shaumaker,
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 was 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 alleged
common law fraud and violations of the federal securities laws in connection
with the merger. In addition, the complaint alleged
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breaches of contract relating to the merger agreement and a registration rights
agreement, as well as tortious interference with economic advantage and
declartory judgment. Defendants filed a motion to dismiss the complaint. On
September 29, 1998, the Court granted Defendants' motion to dismiss with respect
to all securities law, fraud and tort claims. Plaintiffs' claims for breach of
contract and declaratory judgement remain outstanding. Plaintiffs have sought
leave to file a supplemental amended complaint asserting solely the contract and
declaratory judgment claims, and seeking rescission of the merger agreement and
return of all MMS shares, damages in excess of $100 million, and voiding of
various non-compete covenants and contract provisions between Medaphis and
plaintiffs. The Company expects that discovery, which had been stayed pending
resolution of the motion to dismiss, will commence in the near term. The Company
is unable to estimate a possible range of loss.
On August 12, 1997, George D. Stickle filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglas in the United States District Court for the Northern District of
Georgia. The complaint asserted claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserted claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks recission, unspecified recissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 61,553, shares of Medaphis Common Stock (based
on a price per share of Medaphis Common Stock of approximately $7). The Company
recorded a litigation settlement charge of approximately $0.4 million in the
quarter ended June 30, 1998 in connection with this agreement. On June 26, 1998,
the court entered an order substituting Peter Gladkin as lead plaintiff in lieu
of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. On September 29,
1998, the court granted final approval to the settlement and ordered all claims
dismissed.
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. A number of the former
stockholders of Rapid Systems Solutions, Inc. ("RSSI"), a company acquired by
the Company in 1996, opted out of the settlement of the 1996 Class Action
against the Company and made claims against the Company, alleging securities
fraud and other potential causes of action in connection with the acquisition.
The Company has settled with each of such former RSSI stockholders for a total
of $444,000 in cash, in the aggregate, to be funded by the Company's directors'
and officers' liability insurer, and the forgiveness of certain indebtedness.
The Company recorded a litigation settlement charge of $1.2 million in the
quarter ended September 30, 1998 in connection with this settlement.
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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended 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 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company has cooperated with the Commission
in its investigation and will continue to do so.
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 investigation 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, including, without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to certain of the pending claims, the Company has not
accrued any amounts for any damages, settlements, penalties or awards with
respect to such unsettled claims, except as otherwise disclosed.
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PRIOR PERIOD LOSSES
The Company has had net losses in each of 1995, 1996, 1997 and the first
nine months of 1998. Such losses have resulted in substantial part from
restructuring and other charges, litigation settlements and intangible asset
impairment and to a lesser extent from amortization relating to acquisitions.
There can be no assurance when or if the Company will generate net income in the
future.
INTANGIBLE ASSETS
At September 30, 1998, the Company recorded an intangible asset
impairment charge of $390.6 million to adjust the intangible assets of the
Physician Services segment to their fair value. As previously disclosed,
management continually monitors its results of operations and other developments
within the industry to adjust its cash flow forecast, as necessary, to determine
if an adjustment is necessary to the carrying value of the Company's intangible
assets.
During the third quarter of 1998, management of the Company believed there
were events and changes in circumstances that warranted a re-assessment as to
whether the carrying amount of the intangible assets for the Physician Services
segment was still recoverable. These events included: (i) a continual increase
in the segment's operating losses due primarily to client losses; (ii)
significant litigation charges within the Physician Services segment; and (iii)
absence of revenue growth within the Physician Services segment. Therefore, in
accordance with applicable accounting rules, management prepared a 40 year
undiscounted cash flow analysis to determine if these intangible assets were
still recoverable. Management prepared the analysis with assumptions that
reflected its current outlook on the business. In all instances, management
believes the assumptions inherent in the analysis were reasonable and
supportable. The following key assumptions were used in management's
undiscounted cash flow analysis: (i) revenue was forecasted to decline over the
next five years and then remain flat; (ii) EBITDA margin was forecasted to
continue to decrease in 1999, increase slightly over the following four years
and then stabilize at a moderate margin over the remaining life of the asset;
and (iii) capital spending would be maintained in the range of 3% of revenue.
Since the undiscounted cash flow model showed an impairment of the Company's
long-lived assets, the Company used a discounted cash flow model to measure the
fair value of these long-lived assets which was consistent with the Company's
policy. The fair value calculation determined that the fair value of the
long-lived assets was approximately $63 million. The Company wrote-off the value
of its longest lived assets first, which resulted in the write-off of all of the
Physician Services segment's goodwill and a portion of the value of its client
lists. As a result of this impairment charge, the Company reduced the estimated
useful life of its remaining intangible assets for the Physician Services
segment to 10 years.
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DEPENDENCE ON TURNAROUND; FUTURE OPERATING RESULTS; MANAGEMENT
The Company suffered several setbacks in recent years, including (i)
government investigations into: (a) the California Investigation, and (b) the
GFS Investigation; (ii) the failure of prior managements' acquisition strategy
to integrate companies acquired; (iii) several restatements of various financial
statements of the Company, including restatements of the Company's fiscal 1994,
1995, 1996 and interim 1997 financial statements; (iv) the discontinuance of the
operations of one of the businesses acquired; (v) the abandonment of an
extensive reengineering program that failed to realize the improvement in
customer service and reduction of costs that were expected; (vi) a steep drop in
the price of its Common Stock; and (vii) the filing of various lawsuits and
claims made against the Company, including multiple putative shareholder class
action lawsuits alleging violations of the federal securities laws.
Consequently, the company has been operating in what is commonly described as a
"turnaround" situation. In addition to the risks generally associated with any
entity in a turnaround situation, the Company faces certain challenges more
specific to its operations, including:(i) integrating several recent
acquisitions into its ongoing operations; (ii) shifting its strategic focus from
acquiring compatible businesses to running its existing businesses efficiently
and profitably; (iii) managing existing customers' perceptions of the Company's
continued viability and refocusing on the high levels of customer service
required to develop new customers and retain existing customers; (iv) combating
employee turnover, particularly in light of declines in the market value of the
Company's Common Stock (the value of which often plays a role in compensation of
employees); (v) reducing costs and increasing efficiencies; and (vi)
reevaluating the efficiency of its operations following the Company's 1996
abandonment of its reengineering initiative to develop a unified billing and
information hardware and software system across all of its operating platforms,
the costs of which were subsequently determined to outweigh the benefits.
There can be no assurance that the Company will successfully meet these or
other operating challenges or that the Company's operating plans ultimately will
be successful. Any failure with respect to the foregoing
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could have a material adverse effect on the Company which could require the
Company to seek appropriate amendments to its existing credit facility.
The Company's success in general, and the successful implementation of its
operating plans in particular, is dependent upon, among other things, the
continued contributions of the Company's senior management. There can be no
assurance that the Company's management will be successful and the loss of
services of those members could have a material adverse effect on the Company's
businesses.
ACCOUNTING ISSUES
The Company received a subpoena from the Securities and Exchange
Commission (the "Commission") in connection with an on-going Commission
investigation on January 2, 1998. The subpoena seeks information in connection
with the November 19 and December 23, 1997 restatements and certain charges
taken by the Company in the third quarter of 1997. There can be no assurances
that the results of such inquiry will not have a material adverse effect on the
Company or that further restatements of the Company's financial statements will
not be required.
There can be no assurance that there will not be additional adjustments to
or reserves taken in the Company's financial statements in respect of the
pending or future lawsuits and government investigations.
EVOLVING INDUSTRY STANDARDS; RAPID TECHNOLOGICAL CHANGES
The markets for Medaphis' software products and services are characterized
by rapidly changing technology, evolving industry standards and frequent new
product introductions. Medaphis' success in its business will depend in part
upon its continued ability to enhance its existing products and services, to
introduce new products and services quickly and cost-effectively to meet
evolving customer needs, to achieve market acceptance for new product and
service offerings and to respond to emerging industry standards and other
technological changes. There can be no assurance that Medaphis will be able to
respond effectively to technological changes or new industry standards.
Moreover, there can be no assurance that competitors of Medaphis will not
develop competitive products, or that any such competitive products will not
have an adverse effect upon Medaphis' operating results.
The Company intends further to refine, enhance and develop certain of the
Company's existing software and billing systems and to change all of the
Company's billing and accounts receivable management services operations over
to the Company's most proven software systems and technology to reduce the
number of systems and technologies that must be maintained and supported.
Moreover, management intends to continue to implement "best practices" and
other established process improvements in its operations going forward. There
can be no assurance that the Company will be successful in refining, enhancing
and developing its software and billing systems going forward, that the costs
associated with refining, enhancing and developing such software and systems
will not increase significantly in future periods, that the Company will be
able successfully to migrate the Company's billing and accounts receivable
management services operations to the Company's most proven software systems
and technology or that the Company's existing software and technology will not
become obsolete as a result of ongoing technological developments in the
marketplace.
CLIENT/SERVER INFORMATION TECHNOLOGY PRODUCTS
Medaphis' client/server information technology business involves, among
other things, projects designed to reengineer significant customer operations
through the strategic use of imaging, client/server and other advanced
technologies. Failure to meet expectations with respect to a major project
could damage the Company's reputation and standing in the client/server
information technology marketplace, affect its ability to attract new
client/server information technology business, result in the payment of damages
to the customer, jeopardize the Company's ability to collect for services
already performed on the project and otherwise adversely affect its results of
operations.
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YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible. GFS's computerized coding system is one of the legacy
systems from which the Company has transitioned. The Company believes that it
is on target to complete substantially all of these system migration efforts
with respect to its Physician Services business in the first half of 1999. The
detail planning and inventory for the majority of the Company's legacy systems
that are being modified for Year 2000 compatibility has been completed and such
systems are in remediation. In the third quarter of 1998, Per-Se Technologies
released Year 2000 compatible versions for its scheduling products. Customers,
vendors and resellers have been identified and requests for information
distributed regarding the Year 2000 readiness of such parties. Responses are
expected through the first quarter of 1999. The Company will develop
contingency plans during the fourth quarter of 1998 through the second quarter
of 1999 in response to assessments of the Year 2000 readiness of customers,
vendors and resellers. The estimated cost of the Company's Year 2000 efforts is
$10 million to $15 million over 1998 and 1999, the majority of which represents
redirection of internal resources. However, there can be no assurance that the
Company will identify all such Year 2000 problems in its computer systems or
those of its customers, vendors or resellers in advance of their occurrence or
that the Company will be able to successfully remedy any problems that are
discovered. The expenses of the Company's efforts to identify and address such
problems, or the expenses or liabilities to which the Company may become
subject as a result of such problems, could have a material adverse effect on
the Company's business, financial condition and results of operations. The
revenue stream and financial stability of existing customers may be adversely
impacted by Year 2000 problems, which could cause fluctuations in the Company's
revenue. In addition, failure of the Company to identify and remedy Year 2000
problems could put the Company at a competitive disadvantage relative to
companies that have corrected such problems.
COMPETITION; INDUSTRY AND MARKET CHANGES
The business of providing management services and information technology
to physicians and hospitals is highly competitive. Medaphis competes with
certain national and regional physician and hospital reimbursement
organizations and collection businesses (including local independent operating
companies), certain national information and data processing organizations and
certain physician groups and hospitals that provide their own business
management services. Potential industry and market changes that could adversely
affect the billing and collection aspects of Medaphis' business include (i) a
significant increase in managed care providers relative to conventional
fee-for-service providers, potentially resulting in substantial changes in the
medical reimbursement process, or the Company's failure to respond to such
changes and (ii) new alliances between healthcare providers and third-party
payors in which healthcare providers are employed by such third-party payors.
The business of providing application software, information technology and
consulting services is also highly competitive and Medaphis faces competition
from certain national and regional companies in connection with its technology
operations. Certain of Medaphis' competitors have longer operating histories
and greater financial, technical and marketing resources than Medaphis. There
can be no assurance that competition from current or future competitors will
not have a material adverse effect upon Medaphis.
The Company's business is affected by, among other things, trends in the
U.S. healthcare industry. As healthcare expenditures have grown as a percentage
of the U.S. Gross National Product, public and private healthcare cost
containment measures have applied pressure to the margins of healthcare
providers.
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Historically, some healthcare payors have paid the prices established by
providers while other healthcare payors, notably government agencies and
managed care companies, have paid less than established prices (in many cases
less than the average cost of providing the services). As a consequence, prices
charged to healthcare payors willing to pay established prices have increased
in order to recover the cost of services purchased by government agencies and
others but not paid for by them (i.e., "cost shifting"). The increasing
complexity in the reimbursement system and assumption of greater payment
responsibility by individuals have caused healthcare providers to experience
increase accounts receivable and bad debt levels and higher business office
costs. Healthcare providers historically have addressed these pressures on
profitability by increasing their prices, by relying on demographic changes to
support increases in the volume and intensity of medical procedures and by cost
shifting. Notwithstanding the providers' responses to these pressures,
management believes that the revenue growth rate experienced by the Company's
clients continues to be adversely affected by increased managed care and other
industry factors affecting healthcare providers in the United States. At the
same time, the process of submitting healthcare claims for reimbursement to
third party payors in accordance with applicable industry and regulatory
standards continues to grow in complexity and to become more costly. Management
believes that these trends have adversely affected and could continue to
adversely affect the revenues and profit margins of the Company's operations.
Governmental Investigatory Resources and Healthcare Reform
The federal government in recent years has placed increased scruting on the
billing and collection practices of healthcare providers and related entities,
and particularly on possibly fraudulent billing practices. This heightened
scrutiny has resulted in a number of high profile civil and criminal
investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Sat. 1936) (codified in
scattered sections of the United States Code, including 18, 26, 29 and 42
U.S.C.), which includes an expansion of provisions relating to fraud and abuse,
creates additional criminal offenses relating to healthcare benefit programs,
provides for forfeitures and asset-freezing orders in connection with such
healthcare offenses and contains provisions for instituting greater coordination
of federal, state and local enforcement agency resources and actions.
In recent years, the focus of healthcare legislation has been on budgetary
and related funding mechanism issues. Both the Congress and the Clinton
Administration have made proposals to reduce the rate of increase in projected
Medicare and Medicaid expenditures and to change funding mechanisms and other
aspects of both programs. In late 1995, Congress passed legislation that would
substantially reduce projected expenditure increases and would make significant
changes in the Medicare and Medicaid programs. The Clinton Administration has
proposed alternate measures to reduce, to a lesser extent, projected increases
in Medicare and Medicaid expenditures. Neither proposal has become law and
Medaphis anticipates that both the Clinton Administration and the Republican
majorities in Congress will introduce legislation in 1998 designed to reduce
projected increases in Medicare and Medicaid expenditures and to make other
changes in the Medicare and Medicaid programs. Medaphis anticipates that such
proposed legislation would, if adopted, change aspects of the present methods of
paying physicians under such programs and provide incentives for Medicare and
Medicaid beneficiaries to enroll in health maintenance organizations and other
managed care plans. Medaphis cannot predict the effect of any such legislation,
if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market, including certain employer initiatives such as creating purchasing
cooperatives and contracting for healthcare services for employees through
managed care companies (including health maintenance organizations), and certain
provider initiatives such as risk-sharing among healthcare providers and managed
care companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services through integrated delivery systems may result in a decrease in
demand for Medaphis billing and collection services for particular physician
practices.
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EXISTING GOVERNMENT REGULATION
Existing government regulation can adversely affect Medaphis' business
through, among other things, its potential to reduce the amount of reimbursement
received by Medaphis' clients for healthcare services. Medaphis' medical billing
and collection activities are also governed by numerous federal and state civil
and criminal laws. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs.
Submission of claims for services or procedures that are not provided as
claimed, or which otherwise violate the regulations, may lead to civil monetary
penalties, criminal fines, imprisonment and/or exclusion from participation in
Medicare, Medicaid and other federally funded healthcare programs. Specifically,
the Federal False Claims Act allows a private person to bring suit alleging
false or fraudulent Medicare or Medicaid claims or other violations of the
statute and for such person to share in any amounts paid to the government in
damages and civil penalties. Successful plaintiffs can receive up to 25-30% of
the total recovery from the defendant. Such qui tam actions or "whistle-blower"
lawsuits have increased significantly in recent years and have increased the
risk that a company engaged in the healthcare industry, such as Medaphis and
many of its customers, may become the subject of a federal or state
investigation, may ultimately be required to defend a false claims action, may
be subjected to government investigation and possible criminal fines, may be
sued by private payors and may be excluded from Medicare, Medicaid and/or other
federally funded healthcare programs as a result of such an action. Some state
laws also provide for false claims actions, including actions initiated by a qui
tam plaintiff. Medaphis is currently the subject of several federal
investigations, and there can be no assurance that Medaphis will not be the
subject of false claims or qui tam proceedings relating to its billing and
collection activities or that Medaphis will not be the subject of further
government scrutiny or investigations relating to its billing and accounts
receivable management services operations. Any such proceeding or investigation
could have a material adverse effect upon the Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. Various
states have also promulgated laws and regulations that govern credit collection
practices. AssetCare, inc. a subsidiary of the Company, is registered as a debt
collector in 26 states; however, there can be no assurance that the Company and
its subsidiaries (other than AssetCare), will not be subjected to regulation as
a "debt collector" under the Federal Fair Debt Act or as a "collection agency"
under certain state collection agency laws and regulations. In the event that
the Company or a subsidiary of the Company other than AssetCare is subject to
such regulation, its impact on the Company cannot be predicted.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Such regulation could have an adverse effect on the operations of
hospitals in general, and consequently reduce the amount of the Company's
revenue related to its hospital clients.
There can be no assurance that current or future government regulations or
healthcare reform measures will not have a material adverse effect upon
Medaphis' business.
VOLATILITY OF STOCK PRICE. Medaphis believes factors such as announcements
with respect to the investigation of the billing practices of certain offices of
MPSC by the United States Attorney's Office for the Central District of
California, the Company's liquidity and financial resources, divestiture of
businesses, the ongoing governmental investigations, putative class action
lawsuits, other lawsuits or demands, healthcare reform measures and
quarter-to-quarter and year-to-year variations in financial results could cause
the market price of Medaphis Common Stock to fluctuate substantially. Any
adverse announcement with respect to such matters or any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate and
material adverse effect on the trading price of Medaphis Common Stock in any
given period. As a result, the market for Medaphis Common Stock may experience
material adverse price and volume fluctuations and an investment in the
Company's Common Stock is not suitable for any investor who is unwilling to
assume the risk associated with any such price and volume fluctuations.
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This Safe Harbor Statement supersedes the Safe Harbor Statements filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 and as Exhibit 99.13 to the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1997.
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