<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
MEDAPHIS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(MEDAPHIS LOGO)
MEDAPHIS CORPORATION
2840 MT. WILKINSON PARKWAY
SUITE 300
ATLANTA, GEORGIA 30339
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 6, 1999
---------------------
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Medaphis
Corporation (the "Company") will be held at the Renaissance Waverly Hotel, 2450
Galleria Parkway, Atlanta, Georgia 30339, on Thursday, May 6, 1999, at 10:00
a.m. for the following purposes:
(1) To elect seven (7) directors, and
(2) To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors of the Company has fixed the close of business on
March 22, 1999, as the record date for the determination of stockholders
entitled to receive notice of, and to vote at, the meeting and any adjournment
thereof.
Your attention is directed to the Proxy Statement submitted with this
Notice.
By Order of the Board of Directors,
/s/ RANDOLPH L. M. HUTTO
Randolph L. M. Hutto
Executive Vice President,
General Counsel and
Secretary
Atlanta, Georgia
April 6, 1999
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
<PAGE> 3
MEDAPHIS CORPORATION
2840 MT. WILKINSON PARKWAY
SUITE 300
ATLANTA, GEORGIA 30339
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 6, 1999
April 6, 1999
The enclosed form of proxy is solicited by the Board of Directors (the
"Board") of Medaphis Corporation ("Medaphis" or the "Company"), which has its
principal executive offices at 2840 Mt. Wilkinson Parkway, Suite 300, Atlanta,
Georgia 30339, for use at the annual meeting of stockholders to be held on May
6, 1999, at 10:00 a.m. at the Renaissance Waverly Hotel, 2450 Galleria Parkway,
Atlanta, Georgia 30339, and any adjournment thereof. When a proxy is properly
executed and returned, the shares it represents will be voted as directed at the
meeting and any adjournment thereof or, if no direction is indicated, such
shares will be voted in favor of the proposal set forth in the notice of the
annual meeting of stockholders attached hereto. Any stockholder giving a proxy
has the power to revoke it at any time before it is voted. Revocation of a proxy
is effective upon receipt by the Secretary of the Company of either (i) an
instrument revoking such proxy or (ii) a duly executed proxy bearing a later
date. Furthermore, if a stockholder attends the meeting and elects to vote in
person, any previously executed proxy is thereby revoked.
Only stockholders of record as of the close of business on March 22, 1999
will be entitled to vote at the annual meeting. As of that date, the Company had
outstanding 78,945,608 shares of common stock, $.01 par value ("Common Stock").
Each share of Common Stock is entitled to one vote. No cumulative voting rights
are authorized and appraisal rights for dissenting stockholders are not
applicable to the matter being proposed. It is anticipated that this proxy
statement ("Proxy Statement") and the accompanying proxy will first be mailed to
stockholders on or about April 6, 1999.
Votes cast by proxy or in person at the annual meeting will be tabulated by
the inspector of elections appointed for the meeting who will also determine
whether a quorum is present for the transaction of business. The Company's
Amended and Restated By-laws, as amended (the "By-laws"), provide that a quorum
is present if the holders of a majority of the issued and outstanding stock of
the Company entitled to vote at the meeting are present in person or represented
by proxy. Abstentions will be counted as shares that are present and entitled to
vote for purposes of determining whether a quorum is present, and thus will have
the effect of a vote against a proposal that requires the affirmative vote of a
majority of the votes cast by the stockholders of Common Stock present in person
or by proxy and entitled to vote thereon. Shares held by nominees for beneficial
owners will also be counted for purposes of determining whether a quorum is
present if the nominee has the discretion to vote on at least one of the matters
presented and even though the nominee may not exercise discretionary voting
power with respect to other matters and voting instructions have not been
received from the beneficial owner (a "broker non-vote"). Abstentions may be
specified on all proposals other than the election of directors, and will have
no effect on the vote for election of directors. Broker non-votes will not be
counted as votes for or against matters presented for stockholder consideration.
<PAGE> 4
ELECTION OF DIRECTORS
Management of the Company and the Board recommend the election of the
nominees listed below for the office of director to hold office until the next
annual meeting and until their successors are elected and qualified. All of such
nominees are members of the present Board. With the exception of Mr. Allen W.
Ritchie, who was appointed to the Board on July 28, 1998, Mr. Roderick M. Hills,
who was appointed to the Board on December 10, 1998, and Mr. Kevin E. Moley, who
was appointed to the Board on April 1, 1999, each of such nominees was elected
by the stockholders at the last annual meeting.
The Board has no reason to believe that any of the nominees for the office
of director will be unavailable for election as a director. However, if at the
time of the annual meeting any of the nominees should be unable or decline to
serve, the persons named in the proxy will vote for such substitute nominees,
vote to allow the vacancy created thereby to remain open until filled by the
Board, or vote to reduce the number of directors for the ensuing year, as the
Board recommends. In no event, however, can the proxy be voted to elect more
than seven directors. The election of the nominees to the Board requires the
affirmative vote of a plurality of the votes cast by stockholders present at the
annual meeting in person or by proxy. With respect to the election of directors,
votes may be cast or withheld for each nominee. Votes that are withheld will
have no effect on the election of directors. Stockholders eligible to vote at
the annual meeting do not have cumulative voting rights with respect to the
election of directors.
MANAGEMENT OF THE COMPANY
DIRECTOR NOMINEES
The Company currently has eight directors, all of whom hold office until
the annual meeting of stockholders and until their successors are elected and
qualified. Seven of the Company's directors are standing for reelection at the
annual meeting. Dennis A. Pryor, a director of the Company since 1993, is
retiring from the Board before the annual meeting and, therefore, is not
standing for reelection. The Board has voted to decrease the size of the Board
to seven directors effective upon the expiration of Mr. Pryor's term as a
director.
Set forth below is the name of each nominee for election to the Board. Also
set forth below as to each nominee is his age, the year in which he first became
a director, a brief description of his principal occupation and business
experience during the past five years, directorships of certain companies
presently held by him, and certain other information, which information has been
furnished by the respective nominees.
RODERICK M. HILLS
Age 68
Director since 1998
Mr. Hills is Chairman and was formerly President of Hills Enterprises, Ltd.
(formerly The Manchester Group Ltd.), a consulting firm, since 1987. He also has
been a Partner in Hills & Stern, a law firm, since 1999. Mr. Hills has also
served as Vice Chairman of the Board of Directors of Oak Industries, Inc., a
manufacturing firm, since 1989. Mr. Hills served from September to November 1996
as Chairman of Federal-Mogul Corporation, an automotive parts manufacturing
firm. Mr. Hills served as a Partner and/or Consultant to the law firms of
Donovan, Leisure, Rogovin, Huge & Schiller; Shea & Gould; and Mudge, Rose,
Guthrie, Alexander & Ferndon from 1989 until 1995. Mr. Hills served as Chairman
of the Securities and Exchange Commission from 1975 to 1977 and as counsel to
the President of the United States in 1975. Mr. Hills is also a Board member of
Federal-Mogul Corporation, Oak Industries, Inc., and Waste Management, Inc.
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<PAGE> 5
DAVID R. HOLBROOKE, M.D.
Age 58
Director since 1994
Dr. Holbrooke has been the President and Chief Executive Officer of
Advocates Rx, Inc., a medical management and healthcare venture development
company, since 1995. From 1983 to 1995, Dr. Holbrooke served as President and
Chief Executive Officer of Holbrooke & Associates. Dr. Holbrooke has a 25 year
history of entrepreneurship, management, medical practice, and new business
development experience in the healthcare services industry. He currently is
active as a board member and investor in several privately held healthcare
companies.
DAVID E. MCDOWELL
Age 56
Director since 1996
Mr. McDowell was appointed to the Board in May 1996 and has served as
Chairman of the Board from October 1996 to the present. From October 1996 to
July 1998, Mr. McDowell also served as Chief Executive Officer of the Company,
and resigned from such position on July 28, 1998. From 1992 to 1996, he was
President, Chief Operating Officer and a director of McKesson Corporation.
McKesson is the world's largest distributor of pharmaceutical and healthcare
products through McKesson Drug Company in the United States and Medis Health and
Pharmaceutical Services, Inc. in Canada. Prior to 1992, Mr. McDowell served for
over 25 years as a senior executive at IBM, including as a Vice President and
President of the National Services Division.
KEVIN E. MOLEY
Age 52
Director since 1999
Mr. Moley has been the Chairman of the Board of Patient Care Dynamics LLC,
a lessor of computer hardware and software to physicians' offices, since
November 1998. From January 1996 to March 1998, Mr. Moley was the President and
CEO of Integrated Medical Systems, Inc., a leading provider of electronic
connectivity among healthcare providers. From February 1993 to January 1996, Mr.
Moley was Senior Vice President of PCS Health Systems, Inc., the largest
pharmacy benefit management company in the healthcare industry. Mr. Moley served
as Deputy Secretary, U.S. Department of Health and Human Services ("HHS") from
November 1991 to January 1993, and as Assistant Secretary for Management and
Budget of HHS from May 1989 to November 1991. Mr. Moley served from 1984 to 1988
in various senior management positions with the U.S. Health Care Financing
Administration. Mr. Moley is also a member of the Board of Directors of
Cephalon, Inc., Merge Technologies, Inc., and PhyMatrix Corp.
JOHN C. POPE
Age 50
Director since 1997
Mr. Pope has been Chairman of the Board of MotivePower Industries, Inc., a
manufacturer of locomotives and locomotive components, since December 1995. From
January 1988 to July 1994, Mr. Pope held various positions with UAL Corporation
and its subsidiary, United Airlines, Inc., most recently as President, Chief
Operating Officer and Director. Mr. Pope is also a member of the Board of
Directors of Federal-Mogul Corporation, Wallace Computer Services, Inc., LAI
Ward Howell, Incorporated, Waste Management, Inc., and Dollar Thrifty Automotive
Group, Inc.
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<PAGE> 6
ALLEN W. RITCHIE
Age 41
Director since 1998
Mr. Ritchie was appointed to the Board in July 1998. Also, in July 1998
Mr. Ritchie became the Chief Executive Officer and President of the Company. In
April 1998 he was appointed President and Chief Operating Officer of the
Company. From January to April, 1998 he was Executive Vice President and Chief
Financial Officer of the Company. From 1991 to 1997, Mr. Ritchie served as a
senior executive of AGCO corporation, including as President and a member of the
Board of Directors. From 1979 to 1991, he was employed with Arthur Andersen &
Co., where he was a partner in the Atlanta office.
C. CHRISTOPHER TROWER
Age 50
Director since 1997
Mr. Trower, a member of the Georgia and Kentucky bars, is engaged in the
private practice of law. Since June, 1997, he has been the owner of the Atlanta
law firm of electriclaw.com. From 1988 to June, 1997, Mr. Trower was a partner
in the Atlanta law firm of Sutherland, Asbill & Brennan.
BOARD REPRESENTATION
Effective May 6, 1996, the Company acquired all of the outstanding stock of
BSG Corporation, a Delaware corporation ("BSG") in a merger transaction (the
"BSG Merger"). Pursuant to the terms of a merger agreement dated as of March 15,
1996, among the Company, BSG and BSGSub, Inc., a Delaware corporation and a
wholly owned subsidiary of the Company, for a period of five years following the
closing of the BSG Merger, the Company will nominate a designee of Raymond J.
Noorda and Steven G. Papermaster for election as a member of the Board. Steven
G. Papermaster was initially so designated and was elected a member of the Board
on May 15, 1996. Also in May 1996, Mr. Papermaster was elected an Executive Vice
President of Medaphis. On March 21, 1997, Mr. Papermaster resigned as a director
and Executive Vice President of Medaphis. Mr. Papermaster resigned from all
offices with subsidiaries of the Company on October 14, 1997. As of the date
hereof, Messrs. Noorda and Papermaster have not designated a replacement
nominee.
OPERATION OF THE BOARD OF DIRECTORS
The Company has an Audit Committee of the Board (the "Audit Committee")
which, during 1998, was composed of David R. Holbrooke, M.D., Chairman, Robert
C. Bellas, Jr., and C. Christopher Trower. Mr. Bellas resigned from the Board of
Directors and the Audit Committee on August 10, 1998. Mr. Roderick M. Hills was
appointed to the Committee on January 20, 1999. The Audit Committee is
responsible for meeting with the Company's auditors at least annually to review
the Company's financial statements and internal accounting controls. The Audit
Committee is also responsible for submitting recommendations to the Board
regarding the Company's internal accounting controls. The Audit Committee may
exercise such additional authority as may be prescribed from time to time by
resolution of the Board.
The Company has a Compensation Committee of the Board (the "Compensation
Committee") which, during 1998, was composed of Robert C. Bellas, Jr., Chairman,
David R. Holbrooke, M.D., and John C. Pope. Mr. Bellas resigned from the Board
of Directors and the Compensation Committee on August 10, 1998. Mr. Pope was
appointed Chairman of the Committee on October 29, 1998. The Compensation
Committee makes recommendations at least annually to the Board regarding the
compensation of the officers of the Company. The Compensation Committee may
exercise such additional authority as may be prescribed from time to time by
resolution of the Board.
The Company does not have a nominating committee.
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<PAGE> 7
During 1998, the Board met nine (9) times, the Audit Committee met six (6)
times and the Compensation Committee met four (4) times. All of the directors
attended 75% or more of the aggregate number of meetings of the Board and all
committees on which they served during 1998.
DIRECTORS' COMPENSATION
In July 1997, the Company adopted a non-employee director compensation
plan. The intent of this plan is to compensate non-employee members of the Board
fairly for their talents and time spent on behalf of the Company. The plan
provides both cash and equity compensation. The cash compensation consists of an
annual retainer in the amount of $16,000, and a fee in the amount of $1,000 for
each Board meeting attended. Each Board committee chairman also receives an
annual retainer in the amount of $2,000, and a fee in the amount of $750 for
each committee meeting attended, and each Board committee member other than a
committee chairman receives a fee in the amount of $650 for each committee
meeting attended. Equity compensation under the plan consists of an initial
grant of 10,000 stock options (upon first election or appointment to the Board)
and an annual grant of 2,000 stock options for each year of service thereafter.
The stock option plan under which these options are granted is the Company's
Non-Employee Director Stock Option Plan, as amended (the "Director Plan").
Non-employee directors may elect to defer receipt and taxation of the cash
compensation under this plan by participating in the Company's Non-Employee
Director Deferred Stock Credit Plan (the "Deferred Stock Credit Plan"). Deferral
of taxation is accomplished under the Deferred Stock Credit Plan using a
cash-based feature similar in substance to a restricted stock program (i.e., the
prospective economic benefit to each participant reflects the full market price
per share of the Company's Common Stock, and varies with fluctuations in that
price). The pay element is paid to the participant upon retirement from the
Board.
In addition, the Company reimburses each director for out-of-pocket
expenses associated with each Board or committee meeting attended and for each
other business meeting at which the Company has requested the director's
presence.
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<PAGE> 8
MANAGEMENT COMMON STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of December 31, 1998, by (i) each of the Company's
directors, (ii) the Company's "named executive officers" (as hereinafter
defined) and (iii) such directors and all executive officers as a group. Under
Item 402(a)(3) of Regulation S-K under the Securities Act of 1933, as amended,
the term "named executive officers" means (i) all individuals serving as the
Company's Chief Executive Officer or acting in a similar capacity during the
last completed fiscal year, regardless of compensation level; (ii) the Company's
four (4) most highly compensated executive officers other than the Chief
Executive Officer who were serving as executive officers at the end of the last
completed fiscal year; and (iii) up to two (2) additional individuals for whom
disclosure would have been provided pursuant to clause (ii) but for the fact
that such individuals were not serving as executive officers of the Company at
the end of the last completed fiscal year. Disclosure with respect to C. James
Schaper, the former Executive Vice President and Chief Operating Officer of the
Company, and Harvey Herscovitch, the former Senior Vice President, Strategy and
Organization of the Company, is provided herein pursuant to the requirements of
clause (iii) of Item 402(a) (3).
<TABLE>
<CAPTION>
BENEFICIAL PERCENT OF
NAME OWNERSHIP(1) CLASS
- ---- ------------- ----------
<S> <C> <C>
Roderick M. Hills........................................... 3,000(2) *
David R. Holbrooke.......................................... 72,900(3) *
David E. McDowell........................................... 498,750(4) *
Kevin E. Moley.............................................. -- --
John C. Pope................................................ 39,400(5) *
Dennis A. Pryor............................................. -- --
Allen W. Ritchie............................................ 200,000(6) *
C. Christopher Trower....................................... 7,700(7) *
Randolph L.M. Hutto......................................... 94,334(8) *
Wayne A. Tanner............................................. 34,000 *
C. James Schaper............................................ -- --
Harvey Herscovitch.......................................... 50,334(9) *
All executive officers and directors as a group (10
persons).................................................. 950,084 1.2%
</TABLE>
- ---------------
* Beneficial ownership represents less than 1% of the outstanding Common
Stock.
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the voting of
such security, or "investment power," which includes the power to dispose of
or to direct the disposition of such security. A person is also deemed to be
a beneficial owner of any securities which that person has the right to
acquire within sixty (60) days. Under these rules, more than one person may
be deemed to be a beneficial owner of the same securities and a person may
be deemed to be a beneficial owner of securities as to which he has no
economic or pecuniary interest. Except as set forth in the footnotes below,
the persons named above have sole voting and investment power with respect
to all shares of Common Stock shown as being beneficially owned by them.
(2) All shares are owned through a limited partnership, the Hills Family Trust.
(3) Includes 1,500 shares held in a bank account for the benefit of Dr.
Holbrooke's son, a minor. Also includes 10,400 shares that are not currently
outstanding, but which may be acquired under the Director Plan.
(4) Includes 298,750 shares that are not currently outstanding, but which may be
acquired upon the exercise of stock options granted under the Company's
stock option plans; does not include 210,000 shares that may be acquired
upon the exercise of stock options granted under the Company's stock option
plans which are subject to an accelerated vesting schedule based on
appreciation in the market value of the Common Stock, as described elsewhere
in this Proxy Statement.
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(5) Includes 4,400 shares that are not currently outstanding, but which may be
acquired under the Director Plan.
(6) Includes 100,000 shares that are not currently outstanding, but which may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
(7) Includes 5,000 shares held by a family member, for which Mr. Trower
disclaims beneficial ownership. Also includes 2,000 shares that are not
currently outstanding, but which may be acquired under the Director Plan.
(8) Includes 10,000 shares held by Mr. Hutto in a 401(k) plan. Also includes
83,334 shares that are not currently outstanding, but which may be acquired
upon the exercise of stock options granted under the Company's stock option
plans.
(9) Includes 43,334 shares that are not currently outstanding, but which may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
EMPLOYMENT AGREEMENTS
In November 1996, the Company and David E. McDowell, then the Company's
Chairman and Chief Executive Officer, entered into a five-year employment
agreement which contains certain non-competition, non-solicitation and change in
control provisions. Pursuant to that agreement, Mr. McDowell received a signing
incentive of $500,000 and is to receive a base salary of at least $300,000 per
year. Mr. McDowell is entitled to reimbursement of certain expenses, including
housing and travel expenses, and is also entitled to receive an amount equal to
any federal and state income taxes payable by him as a result of such expense
reimbursement. Upon early termination of the agreement by the Company other than
for cause or by Mr. McDowell for "good reason" or by either party for any reason
following certain change in control events, the Company is obligated to pay Mr.
McDowell his annual salary, to provide for the continued vesting of stock option
awards described in the agreement and to provide for certain health insurance
benefits to Mr. McDowell through November 19, 2001. Upon certain change in
control events and a termination of the agreement by Mr. McDowell, the Company
will pay to Mr. McDowell (in lieu of its obligation to make the foregoing
payments of salary and to provide the foregoing benefits), a termination payment
in periodic installments or a lump sum (at Mr. McDowell's option) equal to the
salary that would have been payable to Mr. McDowell pursuant to the agreement
from the date of termination until November 18, 2001, and an additional amount
sufficient to make Mr. McDowell whole with respect to any tax which may be
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"). A "change in control event" is generally defined in the agreement as
the adoption of a plan of liquidation or approval of the dissolution of the
Company, certain mergers and consolidations of the Company, the sale or transfer
of substantially all of the Company's assets, certain changes in the composition
of the Company's Board of Directors, or the acquisition of more than 30% of the
Common Stock by any individual, entity, group or other person. Mr. McDowell also
received options to purchase up to 810,000 shares of Common Stock. Mr. McDowell
resigned as Chief Executive Officer of the Company on July 28, 1998, but still
serves as Chairman of the Board.
In July 1997, the Company and Randolph L. M. Hutto, the Executive Vice
President, General Counsel and Secretary of the Company, entered into a
three-year employment agreement which contains certain non-competition,
non-solicitation and change in control provisions. Pursuant to that agreement,
Mr. Hutto received a signing bonus of $100,000 (structured as a loan forgiven
ratably over the initial 12 months of the agreement), and is to receive a base
salary of $250,000 per year (subject to adjustments by any increases given in
the normal course of business). Mr. Hutto also is entitled to an incentive
compensation payment equal to 80% of his base salary, payable at the discretion
of the Board; provided, however, that the payment of such incentive compensation
for 1997 was guaranteed, and pro-rated based upon the number of months that Mr.
Hutto was employed by the Company during 1997. Upon early termination of Mr.
Hutto's employment by the Company other than for cause or by Mr. Hutto for "good
reason," Mr. Hutto is entitled to elect a severance payment equal to the greater
of two years of salary and benefit continuation, or his then current
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<PAGE> 10
monthly salary multiplied by the number of months remaining in the initial term
of the agreement, in each case excluding any incentive bonus payments. In the
event Mr. Hutto's employment by the Company is terminated in connection with a
change in control of the Company, he is entitled to receive a severance payment
equal to two years of salary and benefits, including incentive bonus payments. A
"change in control" is generally defined in the agreement as any consolidation,
merger, reorganization or other transaction in which the Company is not the
surviving entity or certain changes in the composition of the Company's Board of
Directors. Mr. Hutto also received options to purchase up to 250,000 shares of
Common Stock.
In January 1998, the Company and Allen W. Ritchie, then the Executive Vice
President and Chief Financial Officer of the Company, entered into a three-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Ritchie is to
receive a base salary of $300,000 per year, subject to adjustments in the normal
course of business, and he is entitled to an incentive compensation payment of
up to 80% of his base salary, payable at the discretion of the Board. Upon early
termination of Mr. Ritchie's employment by the Company other than for cause or
by Mr. Ritchie for "good reason," Mr. Ritchie is entitled to elect a severance
payment equal to two years of salary and benefit continuation, or his then
current monthly salary multiplied by the number of months remaining in the
initial term of the agreement, in each case excluding any incentive bonus
payments. In the event Mr. Ritchie's employment by the Company is terminated in
connection with a change in control of the Company, he is entitled to receive a
severance payment equal to two years of salary and benefits, including incentive
bonus payments. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or certain changes in the composition of the
Company's Board of Directors. Mr. Ritchie also received options to purchase up
to 300,000 shares of Common Stock. In April 1998, Mr. Ritchie was appointed
President and Chief Operating Officer of the Company. In July 1998, Mr. Ritchie
was promoted to Chief Executive Officer and President of the Company, and became
a member of the Board.
Effective September, 1998, the Company and Wayne A. Tanner, the Executive
Vice President and Chief Financial Officer of the Company, entered into a
three-year employment agreement which contains certain non-competition,
non-solicitation and change in control provisions. Pursuant to that agreement,
Mr. Tanner is to receive a base salary of $250,000 per year, subject to
adjustments in the normal course of business, and he is entitled to an incentive
compensation payment of up to 80% of his base salary, payable at the discretion
of the Board. Mr. Tanner's incentive compensation is guaranteed for the first
twelve (12) months of his employment, pro-rated between 1998 and 1999 based on
the number of months he is employed by the Company during each such year. Upon
early termination of Mr. Tanner's employment by the Company other than for cause
or by Mr. Tanner for "good reason," Mr. Tanner is entitled to elect a severance
payment equal to two years of salary and benefit continuation, or his then
current monthly salary multiplied by the number of months remaining in the
initial term of the agreement, in each case excluding any incentive bonus
payments. In the event Mr. Tanner's employment by the Company is terminated in
connection with a change in control of the Company, he is entitled to receive a
severance payment equal to two years of salary, including incentive bonus
payments. A "change in control" is generally defined in the agreement as any
consolidation, merger, reorganization or other transaction in which the Company
is not the surviving entity or certain changes in the composition of the
Company's Board of Directors. Mr. Tanner also received options to purchase up to
200,000 shares of Common Stock, and is entitled to reimbursement of the
initiation fee for a golf club membership, up to $35,000.
In February 1997, the Company and C. James Schaper, then an Executive Vice
President of the Company, entered into a three-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Schaper received a signing bonus of
$100,000 and a base salary of $250,000 per year (subject to adjustments by any
increases given in the normal course of business), and was entitled to an
incentive compensation payment equal to 80% of his base salary, payable at the
discretion of the Board. At the end of the first year of the agreement, Mr.
Schaper was eligible to receive an additional payment of $100,000. In the event
Mr. Schaper's employment was terminated by the Company without cause, the
Company remained subject to its obligations under the agreement as if Mr.
Schaper remained employed for the balance of the agreement's three-year term. In
the event that
8
<PAGE> 11
Mr. Schaper elected to resign from the Company following a change in control of
the Company, he was entitled to receive a severance payment equal to the greater
of one year of salary continuation at his then current base salary or the amount
of the payments due and owing to him through the remaining term of the
agreement. A "change in control" is generally defined in the agreement as any
consolidation, merger, reorganization or other transaction in which the Company
is not the surviving entity or the sale of a substantial portion of the
Company's assets. Mr. Schaper also received options to purchase up to 250,000
shares of Common Stock. In June 1997, the Company and Mr. Schaper entered into a
letter agreement in which the Company agreed that if Mr. Schaper remained
employed by the Company on December 31, 1997, then the Company would pay him a
special one time bonus for 1997 in the amount of $187,500. On January 27, 1998,
Mr. Schaper was promoted to Chief Operating Officer of the Company. Mr. Schaper
resigned from the Company on April 15, 1998.
In April 1997, the Company and Harvey Herscovitch, then the Senior Vice
President, Strategy and Organization of the Company, entered into a two-year
agreement which contains certain non-competition, non-solicitation and change in
control provisions. Pursuant to that agreement, Mr. Herscovitch is to receive a
base salary of $140,000 per year (subject to adjustments by any increases given
in the normal course of business), and is entitled to an incentive compensation
payment equal to 40% of his base salary, payable at the discretion of the Board.
Mr. Herscovitch is also entitled to a housing allowance and to reimbursement of
certain commuting expenses. In the event Mr. Herscovitch's employment is
terminated by the Company without cause, the Company will remain subject to its
obligations under the agreement as if Mr. Herscovitch remained employed for the
balance of the agreement's two-year term. In the event that Mr. Herscovitch
elects to resign from the Company following a change in control of the Company,
he is entitled to receive a severance payment equal to the greater of one year
of salary continuation at his then current base salary or the amount of the
payments due and owing to him through the remaining term of the agreement. A
"change in control" is generally defined in the agreement as any consolidation,
merger, reorganization or other transaction in which the Company is not the
surviving entity or the sale of a substantial portion of the Company's assets.
Mr. Herscovitch also received options to purchase up to 40,000 shares of Common
Stock. In June 1997, the Company and Mr. Herscovitch entered into a letter
agreement in which the Company agreed that if Mr. Herscovitch remained employed
by the Company on December 31, 1997, then the Company would pay him a special
one time bonus for 1997 in the amount of $105,000. In December 1998, in
connection with an action by the Board to realign various Company officer
positions, Mr. Herscovitch's status as an executive officer of the Company
ceased.
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of February 28, 1999
concerning each person known to the Board to be a "beneficial owner," as such
term is defined by the rules of the Securities and Exchange Commission, of more
than 5% of the outstanding shares of the Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED(1) OF CLASS
- ---------------- ------------------ --------
<S> <C> <C>
Ardsley Advisory Partners and Philip J. Hempleman(2)........ 5,898,000 7.49%
646 Steamboat Road, Greenwich, Connecticut 06836
NFT Ventures, Inc.(3)....................................... 4,436,205 5.63%
899 W. Center Street, Orem, Utah 84057
Basil P. Regan(4)........................................... 4,019,700 5.10%
6 East 43rd St., New York, New York 10017
</TABLE>
- ---------------
(1) See Note (1) under "Management Common Stock Ownership."
(2) The information regarding Ardsley Advisory Partners and Phillip J. Hempleman
is given in reliance upon a Schedule 13G filed by such stockholders on
February 16, 1999 with the Securities and Exchange Commission.
9
<PAGE> 12
(3) Includes 4,436,205 shares as to which NFT Ventures, Inc. ("NFT") has shared
voting and shared investment power. The information regarding NFT is given
in reliance upon a Schedule 13D filed by such stockholder on May 17, 1996
with the Securities and Exchange Commission. Does not include 3,650,000
shares to be issued to such stockholder pursuant to the terms of a
settlement agreement among the Company, such stockholder and certain other
parties. See "Certain Transactions."
(4) The information regarding Basil P. Regan is given in reliance upon a
Schedule 13G filed by such stockholder on February 23, 1999.
CERTAIN INFORMATION REGARDING EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of (i) the Company's
Chief Executive Officer, (ii) the three other most highly compensated executive
officers of the Company (determined as of December 31, 1998) and (iii) two
additional individuals who would have been among the Company's four highly
compensated executive officers, but for the fact that they were not serving as
executive officers of the Company at December 31, 1998 (collectively, the "named
executive officers") for 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
- --------------------------- ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David E. McDowell...................... 1998 $300,000 $ 75,000 -- 58,750 $ 3,050
Chairman of the Board 1997 300,000 150,000 $119,812 810,000* 4,661
(11/96 - Present) 1996 42,692 -- -- 810,000 519,770(3)
and Chief Executive Officer
(11/96 - 7/98)
Allen W. Ritchie....................... 1998 271,154 150,000 -- 950,000 425
President and Chief Executive Officer
(7/98 - Present);
President and Chief Operating Officer
(4/98 - 7/98); 1997 -- -- -- -- --
Executive Vice President 1996 -- -- -- -- --
and Chief Financial Officer
(1/98 - 4/98)
Randolph L. M. Hutto................... 1998 250,000 63,000 -- 75,000 76,296(5)
Executive Vice President 1997 102,612 100,000(4) -- 250,000 28,560(5)
and General Counsel 1996 -- -- -- -- --
(7/97 - Present)
Wayne A. Tanner........................ 1998 75,962 60,770(6) -- 350,000 68
Executive Vice President and 1997 -- -- -- -- --
Chief Financial Officer
(9/98 - Present) 1996 -- -- -- -- --
C. James Schaper....................... 1998 87,500 100,000(7) -- 58,750 2,779
Executive Vice President 1997 182,692 187,500(8) -- 500,000* 104,071(9)
(2/97 - 4/98) 1996 -- -- -- -- --
and Chief Operating Officer
(1/98 - 4/98)
Harvey Herscovitch..................... 1998 140,000 -- 18,970 -- 14,187
Senior Vice President, 1997 120,616 155,000(8) 36,147 130,000* 340
Strategy and Organization 1996 -- -- -- -- --
(4/97 - 12/98)
</TABLE>
- ---------------
* Reflects the repricing, exchange and reissuance of certain stock options
outstanding as of April 25, 1997 and having an exercise price of $5.50 and
above, including certain options outstanding under the Company's Amended and
Restated Non-Qualified Stock Option Plan, as amended.
(1) Includes amounts reimbursed for certain personal expenses, including housing
and travel expenses.
10
<PAGE> 13
(2) Includes amounts paid by the Company on behalf of each named executive
officer for matching 401(k) plan contributions, matching non-qualified
deferred compensation plan contributions, and life, medical and dental
insurance premiums.
(3) Includes $500,000 signing incentive received by Mr. McDowell in connection
with his entering into a five-year employment agreement with the Company on
November 19, 1996, and a $19,000 prepaid rent and security deposit paid by
the Company on behalf of Mr. McDowell for housing in Atlanta, Georgia.
(4) Reflects incentive compensation for 1997 guaranteed under Mr. Hutto's
employment agreement.
(5) Includes pro rata forgiveness of debt pursuant to a loan from the Company to
Mr. Hutto. In connection with his entering into a three-year employment
agreement with the Company on July 28, 1997, the Company made a loan to Mr.
Hutto in the amount of $100,000. This loan was forgiven on a pro-rata basis
during the initial twelve months of the agreement.
(6) Reflects incentive compensation for 1998 guaranteed under Mr. Tanner's
employment agreement.
(7) Reflects the amount earned by Mr. Schaper in 1998 pursuant to a provision of
his employment agreement in which the Company agreed to pay him this amount
at the end of the initial year of his employment.
(8) Reflects the amount earned by this executive in 1997 pursuant to a letter
agreement in which the Company agreed that if this executive remained
employed by the Company on December 31, 1997, then the Company would pay
this amount to him as a special one time bonus.
(9) Includes $100,000 signing incentive received by Mr. Schaper in connection
with his entering into a three-year employment agreement with the Company on
February 25, 1997.
STOCK OPTION GRANTS
The following table sets forth information with respect to options granted
under the Company's Amended and Restated Non-Qualified Stock Option Plan, as
amended (the "Stock Option Plan"), to each of the named executive officers
during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE (PER EXPIRATION -----------------------------
NAME GRANTED 1998 SHARE)(1) DATE 5% 10%
- ---- ---------- ------------ -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David E. McDowell.................... 58,750 0.9803% $7.0625 1/26/09 $ 294,735.34 $ 768,898.66
Allen W. Ritchie..................... 300,000 5.0059% 7.0625 1/26/09 1,505,031.52 3,926,291.02
100,000 1.6686% 9.7810 4/15/09 694,782.93 1,812,533.45
150,000 2.5030% 5.5300 7/28/09 589,226.50 1,537,160.31
400,000 6.6746% 3.0625 10/29/09 870,165.71 2,270,067.96
Randolph L. M. Hutto................. 75,000 1.2515% 3.0625 10/29/09 163,156.07 425,637.74
Wayne A. Tanner...................... 200,000 3.3373% 4.5900 9/1/09 652,091.53 1,701,161.14
150,000 2.5030% 3.0625 10/29/09 326,312.14 851,275.49
C. James Schaper..................... 58,750 0.9803% 7.0625 1/26/09 294,735.34 768,898.66
Harvey Herscovitch................... -- -- -- -- -- --
</TABLE>
- ---------------
(1) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. Such options may not be exercised
later than 11 years, or earlier than six months, after the original date of
grant.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions. The amounts
reflected in this table may not necessarily be achieved.
11
<PAGE> 14
STOCK OPTION EXERCISES
None of the named executive officers other than C. James Schaper exercised
any stock options during 1998. The table below shows the number of shares of
Common Stock covered by both exercisable and unexercisable stock options held by
the named executive officers as of December 31, 1998. The table also reflects
the values for in-the-money options based on the positive spread between the
exercise price of such options and the last reported sale price of the Common
Stock on December 31, 1998, which was the last trading date in 1998 for the
Common Stock.
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
OPTIONS VALUE --------------------------- ---------------------------
NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David E. McDowell.............. -- -- 240,000 628,750 -- --
Allen W. Ritchie............... -- -- -- 950,000 -- $87,000
Randolph L. M. Hutto........... -- -- 83,334 241,666 -- 16,312
Wayne A. Tanner................ -- -- -- 350,000 -- 32,625
C. James Schaper............... 83,334 $227,798 -- -- -- --
Harvey Herscovitch............. -- -- 30,001 59,999 -- --
</TABLE>
LONG-TERM INCENTIVE PLAN
The table below shows the number of units awarded under the Company's Long
Term Incentive Plan ("LTIP") to the named executive officers in 1998, the
performance period until payout, and the dollar value of estimated payouts. LTIP
awards may not be sold, assigned, transferred or otherwise conveyed, and are
forfeited in the event of termination of employment for any reason except death,
disability, retirement, constructive termination or involuntary termination
without cause.
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER
SHARES, PERIOD UNTIL NON-STOCK PRICE-BASED PLANS(3)
UNITS OR OTHER MATURATION -------------------------------
NAME RIGHTS(1) OR PAYOUT(2) THRESHOLD TARGET MAXIMUM
- ---- -------------- ------------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
David E. McDowell....................... -- -- -- -- --
Allen W. Ritchie........................ $125,000 4/98 - 4/04 $625,000 -- $2,500,000
Randolph L. M. Hutto.................... 85,000 4/98 - 4/04 425,000 1,700,000
Wayne A. Tanner......................... -- -- -- -- --
C. James Schaper........................ -- -- -- -- --
Harvey Herscovitch...................... 50,000 4/98 - 4/04 250,000 1,000,000
</TABLE>
- ---------------
(1) LTIP base awards are cash amounts, or multiples thereof, which are earned if
the total stockholder return on the Common Stock (the "Company's TSR") meets
certain performance targets compared to the total stockholder return on the
S&P Mid-Cap 400 Index (the "Index TSR"). LTIP base awards are earned if the
Company's TSR is from 60% to 69% of the Index TSR. Multiples of the base
awards are earned as follows: if the Company's TSR is from 70% to 79%, 80%
to 89%, or 90% to a higher percentage of the Index TSR, then the base awards
are multiplied by two, three, and four times, respectively. No LTIP awards
are earned if the Company's TSR is lower than 60% of the Index TSR.
12
<PAGE> 15
(2) For each LTIP award there are five consecutive 24-month measurement periods,
as follows: 4/16/98-4/15/00, 4/16/99-4/15/01, 4/16/00-4/15/02,
4/16/01-4/15/03, and 4/16/02-4/15/04. The first payout would be made based
on the performance of the Common Stock for the 24-month period starting on
April 16, 1998. The second payout would be made based on the performance of
the Common Stock for the 24-month period starting on the first anniversary
of that date, and so on during the life of the plan.
(3) "Threshold" amounts are the aggregate amounts payable in the event that the
base awards are earned in each of the five measurement periods. "Maximum"
amounts are the aggregate amounts payable in the event that four times the
base awards are earned in each of the five measurement periods. "Target"
amounts indicate that no LTIP awards would have been earned based on the
performance of the Common Stock during the Company's last fiscal year.
13
<PAGE> 16
STOCK PRICE PERFORMANCE GRAPH
The graph below reflects the cumulative stockholder return (assuming the
reinvestment of dividends) on the Common Stock compared to the return of the
Center for Research in Security Prices Total Return Index for the Nasdaq Stock
Market (U.S. Companies) (the "Nasdaq Composite") and the Company's peer group
indices for the periods indicated. The graph reflects the investment of $100 on
December 31, 1993 in the Common Stock, the Nasdaq Composite and the Company's
peer group indices. The Company's former peer group consisted of the following
companies: Cambridge Technology Partners, Cerner Corporation, HBO & Company,
National Data Corporation, Pacific Physician Services, Inc., QuadraMed
Corporation, Sapient Corporation and Shared Medical Systems Corporation (the
"1998 Peer Group"). The Company's current peer group index consists of the
following companies: ADAC Laboratories, Cerner Corporation, IDX Systems
Corporation, McKesson HBOC, Inc., National Data Corporation, and Shared Medical
Systems Corporation (the "1999 Peer Group"). In revising the Company's former
peer group index, management of the Company took into consideration a number of
factors, including a reevaluation of the business activities of companies in the
former peer group, the acquisition of Pacific Physician Services, Inc. by Med
Partners/Mullikin, Inc., the sale of the Company's hospital services business,
and the intended sale of the Company's information technology consulting
business.
<TABLE>
<CAPTION>
Measurement Period Nasdaq 1998 Peer 1999 Peer
(Fiscal Year Covered) Medaphis Composite Group Group
<S> <C> <C> <C> <C>
12/93 100.00 100.00 100.00 100.00
12/94 140.91 97.75 133.30 167.49
12/95 224.24 138.26 238.56 243.32
12/96 67.80 170.02 334.14 266.42
12/97 39.39 208.30 479.87 386.91
12/98 19.88 293.52 527.31 491.85
</TABLE>
Source: Hewitt Associates L.L.C.
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended (together, the "Acts"), except
to the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
14
<PAGE> 17
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Each executive officer's compensation is determined annually by the
disinterested members of the Board based upon the recommendations of the
Compensation Committee of the Board (the "Compensation Committee"). As of the
date hereof, the Compensation Committee consists of the two Board members whose
names appear below. None of the disinterested members of the Board had, during
1998, any interlocking or other relationships with the Company that would call
into question their independence with respect to executive compensation matters
involving the Company. The Compensation Committee also receives input from the
Chief Executive Officer regarding compensation of all executive officers other
than the Chief Executive Officer, who considers the same criteria as those
considered by the Compensation Committee, as described below.
Compensation Components and Philosophy. The components of the Company's
executive compensation program consist of base salaries, cash bonuses and
long-term incentives, including stock options. The Company's compensation
program is structured and administered to support the Company's business
mission, which is to develop an organization that efficiently and effectively
delivers a wide range of business management services, enterprise-wide software
and electronic commerce solutions to healthcare providers, and generates
favorable returns for its stockholders in the process. The program is designed
to provide base salaries that represent competitive compensation for the
Company's executive officers, and incentive compensation and long-term
incentives that motivate the Company's executive officers to achieve strategic
business objectives over the long-term.
Base Salary. Each executive officer's base salary, including the base
salary of the Chief Executive Officer, is based primarily upon the competitive
market for the executive officer's services. It is the Compensation Committee's
goal that the Company pay market level compensation for market level
performance.
In addition to competitive compensation information, the Compensation
Committee evaluates certain qualitative factors, such as the Chief Executive
Officer's and the Compensation Committee's perceptions of each executive
officer's performance (i.e., experience, responsibilities assumed, demonstrated
leadership ability and overall effectiveness) during the preceding year. Other
factors considered by the Compensation Committee in formulating base salary
recommendations include the level of an executive's compensation in relation to
other executives in the Company with the same, more and less responsibilities
than the particular executive, inflation, the performance of the executive's
division or group in relation to established operating budgets, and the
Company's guidelines for salary increases to non-executive employees which are
determined as a part of the Company's annual budgeting and planning process.
Additionally, for executive officers, compensation arrangements are often set
forth in employment contracts with specified terms.
Cash Bonus Awards. Except for the Chairman of the Board, each executive
officer is eligible to receive an annual cash bonus award. These cash bonuses
generally are paid pursuant to an incentive compensation plan established at the
beginning of each fiscal year in connection with the Company's preparation of
its annual operating budget for such year. Consistent with the Company's
compensation philosophy, under the incentive compensation plan, each executive
(except the Company's Chairman of the Board, whose cash bonus opportunities are
discussed below) may receive a bonus for a given year amounting to a maximum of
80% of the executive's base salary.
Stock Option Awards. The Company maintains stock option plans which are
designed to align executives' and stockholders' interests in the enhancement of
stockholder value. Stock options are granted under these plans by the
Compensation Committee. Executive officers, including the Chief Executive
Officer, are eligible to receive options under these plans. To encourage
long-term performance, executive options typically vest over a three to
five-year period and remain outstanding for eleven years.
In making its decisions to approve stock option awards to executives, the
Compensation Committee evaluates the Company's consolidated profitability for
the year, the Company's growth plans, the desirability of long-term service from
an executive, the number of options held by other executives in the Company with
15
<PAGE> 18
similar responsibilities as the executive at issue, and the amount and terms of
options already held by the executive.
Long Term Incentive Plan. In 1998, the Board adopted the Company's Long
Term Incentive Plan (the "LTIP") to strengthen the link between management and
the stockholders by providing senior executives of the Company and its
subsidiaries with incentive awards earned based upon performance of the Common
Stock. Awards under the LTIP are payable in cash and are earned at the end of
twenty-four month measurement periods based upon a comparison of the Company's
shareholder return to the shareholder return of the Standard & Poor's 400
Mid-Cap Index, or in the event such index is no longer available, a comparable
stock market index selected by the Compensation Committee. Depending on the
results of such comparison, a factor of 0 to 4 is multiplied by a base award to
determine the actual cash award to be paid. An aggregate of $1,190,000 base
awards were granted under the LTIP in 1998.
Deductibility of Certain Compensation. Section 162(m) of the Code
generally disallows a tax deduction to publicly held corporations for
compensation in excess of $1 million in any taxable year that is paid to the
corporation's chief executive officer or to the four other most highly
compensated executive officers. The Compensation Committee has considered the
provisions of Section 162(m) and the Stock Option Plan was amended in 1996 to
make certain sections of the plan compatible with that provision of the Code,
while maintaining the Compensation Committee's flexibility to exercise business
judgment in determining awards to take account of business conditions or the
performance of individual executives. No named executive received compensation
in 1998 that will be subject to the Section 162(m) limitation on deductibility.
Chairman of the Board Compensation. Effective October 31, 1996, David E.
McDowell was appointed Chairman and Chief Executive Officer of the Company. In
connection with that appointment, the Compensation Committee determined that the
best interests of the Company's stockholders would be served by the procurement
from Mr. McDowell of an employment agreement, the terms of which are described
elsewhere in this Proxy Statement.
In addition, upon considering the Compensation Committee's desire to
augment Mr. McDowell's long-term incentive for continued employment with the
Company and the Compensation Committee's desire to shift annual cash
compensation opportunities into an equity-based program, the Compensation
Committee recommended, and the disinterested members of the Board approved the
following: (i) pursuant to the terms of his employment agreement, Mr. McDowell
is ineligible to participate in the Company's incentive compensation plan absent
written authorization of the Compensation Committee; and (ii) Mr. McDowell
instead received a grant of options to acquire 810,000 shares of Common Stock
under the Stock Option Plan. Six hundred thousand (600,000) of such options vest
ratably over a five-year period from the date of grant. The remaining 210,000
options are performance-based options and vest one-third upon 100% appreciation
in the closing price of the Common Stock over the closing price of the Common
Stock on the date of grant, one-third upon 200% appreciation and the remaining
one-third upon 300% appreciation. All unvested performance-based options shall
vest on November 19, 2001. In addition, on February 1, 1998, the Compensation
Committee awarded to Mr. McDowell a special bonus in the amount of $150,000 to
recognize his contributions to the Company in 1997. Mr. McDowell resigned from
his position as Chief Executive Officer of the Company on July 28, 1998, but
remains Chairman of the Board. In February 1999, the Compensation Committee
awarded to Mr. McDowell a special bonus in the amount of $75,000 to recognize
his contributions to the Company in 1998.
Chief Executive Officer Compensation. Effective July 28, 1998, Allen W.
Ritchie was appointed Chief Executive Officer and President of the Company. Mr.
Ritchie served as President and Chief Operating Officer of the Company from
April to July 1998, and as Executive Vice President and Chief Financial Officer
from January to April 1998. In connection with his initial position as Executive
Vice President and Chief Financial Officer, the Compensation Committee
determined that the best interests of the Company's stockholders would be served
by the procurement from Mr. Ritchie of an employment agreement, the terms of
which are
16
<PAGE> 19
described elsewhere in this Proxy Statement. The terms of his employment
agreement were not changed as a result of his appointment as Chief Executive
Officer and President. In addition to the 300,000 options granted pursuant to
his employment agreement, in 1998, in connection with his consecutive promotions
to positions of increased responsibility with the Company, Mr. Ritchie received
grants of options to acquire a total of 650,000 additional shares of Common
Stock under the Stock Option Plan.
COMPENSATION COMMITTEE
John C. Pope, Chairman
David R. Holbrooke, M.D.
April 6, 1999
The report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Acts, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As described earlier in this Proxy Statement, the Company has a
Compensation Committee of the Board which, during 1998, was composed of Robert
C. Bellas, Jr., Chairman, David R. Holbrooke, M.D., and John C. Pope. Mr. Bellas
resigned from the Committee on August 10, 1998. Mr. Pope was appointed Chairman
of the Committee on October 29, 1998. Each member of the Compensation Committee
is a "non-employee director" as defined in Rule 16b-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and is an "outside director" as
provided for in Section 162(m) of the Code.
CERTAIN TRANSACTIONS
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 the Company in
connection with the BSG Merger. The indemnification demand claims damages of $35
million (the maximum damages payable by the Company under the indemnification
agreement) for the alleged breach by the Company of its representations and
warranties made in the merger agreement for the BSG Merger. On January 13, 1999,
the parties entered into a definitive settlement agreement (as amended, the
"Settlement Agreement"). The Settlement Agreement provides for the issuance of
5.0 million shares of Common Stock to the BSG Principals. NFT Ventures, Inc.,
which is a beneficial owner of more than five percent of the Common Stock, is
one of the BSG Principals. NFT Ventures, Inc. is to be issued 3,650,000 shares
of Common Stock pursuant to the Settlement Agreement.
SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers,
directors and persons who own more than 10% percent of the Common Stock to file
certain reports with respect to each such person's beneficial ownership of the
Common Stock, including statements of changes in beneficial ownership on Form 4.
In addition, Item 405 of Regulation S-K requires the Company to identify in its
Proxy Statement each reporting person that failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year or prior fiscal years. Based solely upon a review of Forms 3, 4 and
5 and amendments thereto, for such persons there were no late reports, no
transactions that were not reported on a timely basis, and no known failures to
file a required form.
17
<PAGE> 20
SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected the firm of PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") to serve as independent accountants of the Company
for 1999. PricewaterhouseCoopers has served as independent accountants of the
Company since July 9, 1997. One or more representatives of
PricewaterhouseCoopers will be present at the annual meeting, will have the
opportunity to make a statement if he or she so desires and will be available to
respond to appropriate questions.
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed
indicating that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche"), the Company's then-current independent accountants,
provided to senior management of the Company a letter relating to the Company's
internal control structure resulting from Deloitte & Touche's audit of the
Company's financial statements for the year ended December 31, 1996. This letter
reflected Deloitte & Touche's view that inadequate internal controls over the
preparation of interim financial information for each fiscal quarter of 1996
constituted a material weakness in internal controls which resulted in certain
errors and irregularities in the financial information for such quarters. The
Company previously disclosed in its Form 10-K for its fiscal year ended December
31, 1996 that such errors and irregularities in its financial information had
occurred for each fiscal quarter of 1996. In connection with the issuance of
Deloitte & Touche's audit report dated March 31, 1997 on the Company's financial
statements for the year ended December 31, 1996, the Company recorded all
adjustments to its interim financial statements deemed appropriate for such
errors and irregularities and consequently restated such interim financial
statements. All adjustments were for interim period transactions and had no
effect on the Company's 1996 annual pro forma net loss.
The reports of Deloitte & Touche on the Company's financial statements for
the fiscal year ended December 31, 1996, dated March 31, 1997, included an
unqualified opinion with an explanatory paragraph that stated Deloitte &
Touche's conclusion that uncertainty then existed regarding the ability of the
Company to continue as a going concern due to a mandatory commitment reduction
in the Company's then existing credit facility that was required by July 31,
1997. However, the Company satisfied such commitment reduction on May 28, 1997
by applying the proceeds of the sale of its wholly-owned subsidiary, Healthcare
Recoveries, Inc.
On June 30, 1997, following a competitive review and request for proposal
process in which Deloitte & Touche and a number of other nationally recognized
accounting firms participated, the Company notified Deloitte & Touche that it
had been dismissed as the Company's principal accountants and that the Company
intended to engage new principal accountants. This action was recommended by the
Audit Committee of the Company's Board of Directors, and the Board approved such
change on June 27, 1997. On July 9, 1997, the Company engaged
PricewaterhouseCoopers as the Company's new principal accountants.
During the third quarter of 1997, in connection with a refinancing effort
of the Company's then existing credit agreement, management evaluated certain
revenue practices at Health Data Sciences Corporation ("HDS"), a wholly-owned
subsidiary of the Company which was acquired by the Company in a merger
transaction in June 1996 that was accounted for as a pooling-of-interests. These
practices related principally to revenue recognized in fiscal years 1994, 1995
and 1996. As disclosed by the Company in its Form 10-Q for its fiscal quarter
ending September 30, 1997, management determined that certain revenue of HDS was
improperly recognized and, accordingly, determined to restate its financial
statements for its 1994, 1995 and 1996 fiscal years and the first two fiscal
quarters of its 1997 fiscal year. The effect of such restatements on the
Company's net income (loss) for the years ended December 31, 1994, 1995 and 1996
was ($5.8) million, $(1.1) million and $(7.3) million, respectively. The
cumulative reduction in assets caused by such restatement was $20.5 million.
As a result of the HDS-related restatement, Deloitte & Touche withdrew its
audit opinion dated March 31, 1997 in respect of the Company's 1994, 1995 and
1996 fiscal years. Consequently, the Company engaged PricewaterhouseCoopers to
re-audit the Company's 1995 and 1996 fiscal years and audit the
18
<PAGE> 21
Company's nine-month period ending September 30, 1997. As indicated in a Current
Report on Form 8-K filed by the Company on January 8, 1998 (the "January 8-K"),
the Company determined to further restate the results of such periods to account
for the December 1995 acquisition by the Company of Medical Management Sciences,
Inc. ("MMS") on a purchase accounting basis. Such acquisition had previously
been accounted for as a pooling-of-interests.
Financial statements for the Company's 1995 and 1996 fiscal years and the
nine-month period ended September 30, 1997 reflecting the HDS and MMS-related
restatements were filed by the Company as an exhibit to the January 8-K. Such
financial statements were audited by PricewaterhouseCoopers and accompanied by
their audit opinion which was unqualified and was not subject to any modifying
paragraphs.
ANNUAL REPORT TO STOCKHOLDERS
The annual report of the Company for the year ended December 31, 1998,
including audited financial statements, accompanies this Proxy Statement.
ANNUAL REPORT ON FORM 10-K
The Company will provide without charge, at the written request of any
beneficial stockholder of record on March 22, 1999, a copy of the Company's
Annual Report on Form 10-K, including the financial statements and financial
statement schedule, as filed with the Securities and Exchange Commission, except
exhibits thereto. The Company will provide copies of the exhibits, should they
be requested by eligible stockholders, and the Company may impose a reasonable
fee for providing such exhibits. Requests for copies of the Company's Annual
Report on Form 10-K should be mailed to:
MEDAPHIS CORPORATION
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, Georgia 30339
Attention: Caryn Dickerson
Vice President and Treasurer
STOCKHOLDER PROPOSALS
REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF PROXY PROPOSALS AND
NOMINATIONS OF DIRECTORS BY STOCKHOLDERS
Nominations for the Board Of Directors. The Company expects to hold its
2000 annual meeting of stockholders in May of 2000, although the Company retains
the right to change this date, as it may determine. The By-laws provide, subject
to certain exceptions, that written notice of proposed stockholder nominations
for the election of directors at the 2000 annual meeting of stockholders must be
received by the Secretary of the Company on or before February 6, 2000. Notice
to the Company from a stockholder who proposes to nominate a person for election
as a director must satisfy the requirements of the Securities and Exchange
Commission and the By-laws. Stockholders wishing to nominate persons should
contact the Company's Secretary at 2840 Mt. Wilkinson Parkway, Suite 300,
Atlanta, Georgia 30339.
Proposals. Any stockholder who intends to present a proposal to be
included in the Company's proxy materials to be considered for action at the
2000 annual meeting of stockholders must satisfy the requirements of the
Securities and Exchange Commission and the Bylaws and, subject to certain
exceptions, the proposal must be received by the Secretary of the Company on or
before February 6, 2000, for review and consideration for inclusion in the
Company's proxy statement and proxy card relating to that meeting.
19
<PAGE> 22
OTHER MATTERS
The minutes of the annual meeting of stockholders held on April 30, 1998
will be presented to the meeting, but it is not intended that action taken under
the proxy will constitute approval of the matters referred to in such minutes.
The Board knows of no other matters to be brought before the meeting. However,
if any other matters should come before the meeting, the persons named in the
proxy will vote such proxy in accordance with their judgment.
EXPENSES OF SOLICITATION
The cost of solicitation of proxies will be borne by the Company. In an
effort to have as large a representation at the meeting as possible, special
solicitation of proxies may, in certain instances, be made personally or by
telephone, facsimile or mail by one or more employees of the Company. The
Company also may reimburse brokers, banks, nominees and other fiduciaries for
postage and reasonable clerical expenses of forwarding the proxy material to
their principals who are beneficial owners of the Company's Common Stock.
RANDOLPH L. M. HUTTO
Executive Vice President,
General Counsel and Secretary
April 6, 1999
20
<PAGE> 23
PROXY MEDAPHIS CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON MAY 6, 1999
The undersigned hereby appoints ALLEN W. RITCHIE and WAYNE A. TANNER, and
each of them, proxies, with full power of substitution and resubstitution, for
and in the name of the undersigned, to vote all shares of stock of Medaphis
Corporation which the undersigned would be entitled to vote if personally
present at the Annual Meeting of Stockholders to be held on Thursday, May 6,
1999, at 10:00 a.m., Atlanta time, at the Renaissance Waverly Hotel, 2450
Galleria Parkway, Atlanta, Georgia 30339, and at any adjournment thereof, upon
the matter described in the accompanying Notice of Annual Meeting of
Stockholders and Proxy Statement, receipt of which is hereby acknowledged, and
upon any other business that may properly come before the meeting or any
adjournment thereof. Said proxies are directed to vote on the matter described
in the Notice of Annual Meeting and Proxy Statement as follows, and otherwise in
their discretion upon such other business as may properly come before the
meeting or any adjournment thereof.
To elect seven (7) directors:
<TABLE>
<S> <C>
[ ] FOR all nominees listed (except as marked [ ] WITHHOLD AUTHORITY to vote for
below to the contrary) all nominees listed
</TABLE>
<TABLE>
<S> <C> <C>
Roderick M. Hills John C. Pope
David R. Holbrooke, M.D. Allen W. Ritchie
David E. McDowell C. Christopher Trower
Kevin E. Moley
</TABLE>
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE
NOMINEE'S NAME IN THE LIST ABOVE.)
(Continued, and to be signed, on the other side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSAL LISTED ON THE OTHER SIDE OF THIS PROXY.
Date , 1999
---------------------
-------------------------------
-------------------------------
Please sign exactly as your
name or names appear hereon.
Where more than one owner is
shown above, each should sign.
When signing in a fiduciary or
representative capacity, please
give full title. If this proxy
is submitted by a corporation,
it should be executed in the
full corporate name by a duly
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND
THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
