<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 1998
--------------
MEDIRISK, INC.
(Exact name of registrant
as specified in its charter)
Delaware 000-22005 58-2256400
--------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
<TABLE>
<S> <C>
Two Piedmont Center, Suite 400, 3565 Piedmont Road, N.E., Atlanta, Georgia 30305
- -----------------------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 364-6700
N/A
-----------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 31, 1998, Medirisk, Inc. (the "Company") acquired by merger
all of the capital stock of Healthdemographics, a California corporation, for
171,315 shares of the Company's $0.001 par value per share common stock (the
"Medirisk Common Stock"), approximately $2.7 million in cash and the assumption
of net liabilities (the "Acquisition"). The Acquisition was made pursuant to an
Acquisition Agreement and Plan of Merger dated as of March 26, 1998 by and among
the Company, a newly formed merger subsidiary of the Company
(Healthdemographics, Inc., a Delaware corporation), Healthdemographics and
certain shareholders of Healthdemographics (the "Acquisition Agreement"). The
Company used available corporate funds and borrowings under its existing
revolving credit facility with NationsBank to finance the cash portion of the
purchase price. The Acquisition Agreement provides for payment of additional
contingent consideration upon the achievement of certain performance objectives.
Such additional contingent consideration will be paid in combinations of cash
and Medirisk Common Stock or shares of a new Series 1998-A Preferred Stock
designated for this purpose. The Series 1998-A Preferred Stock will be issuable
only if, at the time a payment of additional contingent consideration is due,
the market price for Medirisk Common Stock is less than $22.6094 per share. If
the Series 1998-A Preferred Stock is issued, it will be issued at its
liquidation preference of $10,000 per share. See Item 5 below.
The Company and Healthdemographics also entered into Employment
Agreements with two senior executives of Healthdemographics. The purchase price
and other terms of the Acquisition were determined as a result of arms' length
negotiations between unrelated parties. At the closing date, there was no
material relationship between the Company and Healthdemographics or any of the
Healthdemographics shareholders, or any of their respective affiliates,
officers, directors or associates, except for a $300,000 working capital loan
that the Company made to Healthdemographics during the acquisition discussions
to fund current obligations of Healthdemographics. This working capital loan
was extinguished with a portion of the proceeds of the Acquisition.
Healthdemographics of San Diego, California, provides databases and
decision-support tools that allow customers to forecast the supply of and demand
for health care services. Health care delivery organizations, insurers,
equipment suppliers, consultants and other health care industry participants use
the information and software provided by Healthdemographics to make more
informed business decisions regarding strategic planning and market planning and
analysis. Healthdemographics uses statistical algorithms to project a particular
geographic market's supply of and demand for health care services.
ITEM 5. OTHER EVENTS.
In connection with the acquisition of Healthdemographics, the Company's
Board of Directors created a new series of Preferred Stock, par value $0.001, of
the Company, designated as the Series 1998-A Preferred Stock. The Board of
Directors designated 5,000 of the previously undesignated shares of Preferred
Stock as Series 1998-A Preferred Stock. The principal features of the Series
1998-A Preferred Stock, which shall apply if it is issued and until its
conversion, are summarized below. The following description of the Series 1998-A
Preferred Stock is only a summary of certain provisions and is qualified in its
entirety by reference to the copy of the Certificate of Designation filed
herewith as an exhibit.
DIVIDENDS: The holders of Series 1998-A Preferred Stock are entitled to
receive cash dividends payable before any dividends are paid to holders of
Medirisk Common Stock or any other securities ranking junior to the Series
1998-A Preferred Stock at the rate of 5% per annum of the initial liquidation
preference per share of the Series 1998-A Preferred Stock ($10,000). Dividends
on the Series 1998-A Preferred Stock accrue from and after the date shares are
issued and are payable annually on December 31 of each year. The Company may, in
the discretion of the Board of Directors, declare and pay dividends or
distributions, or make provision for the payment thereof, on the Medirisk Common
Stock or any security ranking junior to the Series 1998-A Preferred Stock, but
only if all accrued dividends on the Series 1998-A Preferred Stock have been
paid in full prior to the date of any such declaration, payment or provision.
-2-
<PAGE> 3
LIQUIDATION RIGHTS: Upon any liquidation, dissolution and winding up of
the Company, holders of Series 1998-A Preferred Stock will be entitled to
receive, from the assets of the Company available for distribution to
stockholders of the Company, an amount equal to $10,000 per share plus any
accrued and unpaid dividends on the Series 1998-A Preferred Stock (the
"Liquidation Preference") before any distribution is made to holders of Medirisk
Common Stock or any other class of stock ranking junior upon liquidation,
dissolution and winding up to the Series 1998-A Preferred Stock.
VOTING RIGHTS: Each share of Series 1998-A Preferred Stock is entitled
to a number of votes equal to the number of shares of Medirisk Common Stock into
which such share of Series 1998-A Preferred Stock is then convertible. Except as
otherwise provided by the Delaware General Corporation law, the holders of
Series 1998-A Preferred Stock will vote together with the holders of Medirisk
Common Stock as a single class on all matters on which the holders of Medirisk
Common Stock are entitled to vote.
REDEMPTION: Beginning on the fifth anniversary of any issue date of
shares of Series 1998-A Preferred Stock, the Company may, but is not required
to, redeem all of the shares of Series 1998-A Preferred Stock that were issued
on such issue date and that remain outstanding. Effective as of the twentieth
anniversary of each issue date of shares of Series 1998-A Preferred Stock, the
Company is required to redeem all of the shares of Series 1998-A Preferred Stock
that were issued on such issue date and that remain outstanding. Upon any
redemption of the Series 1998-A Preferred Stock, the Company will pay in cash
the Liquidation Preference in effect on the date established for redemption, and
dividends shall cease to accrue on that date. The Company will not establish any
retirement or sinking fund for the redemption of the Series 1998-A Preferred
Stock.
CONVERSION: Each share of Series 1998-A Preferred Stock is subject to
automatic conversion into Medirisk Common Stock if, at any time, the Market
Value (as defined in the Certificate of Designation) of Medirisk Common Stock
equals or exceeds $22.6094 (the "Conversion Price"). In such event, each share
of Series 1998-A Preferred Stock will, automatically and without action on the
part of the holder or the Company, be converted into a number of shares of
Medirisk Common Stock that results from dividing the Liquidation Preference in
effect at the time by the Conversion Price. To protect against dilution, the
Conversion Price is subject to adjustment if the Company effects a subdivision
or combination of the Medirisk Common Stock (whether by stock split, stock
dividend or otherwise). The Conversion Price and securities issuable upon
conversion are also subject to adjustment if the Company (i) conducts a capital
reorganization of the Medirisk Common Stock, (ii) engages in a merger,
consolidation or statutory share exchange in which the stockholders of the
Company prior to such transaction own less than a majority of the voting stock
of the resulting, surviving or exchanging corporation, or (iii) sells all or
substantially all of its properties or assets or capital stock.
RANK: The Series 1998-A Preferred Stock ranks prior to the Medirisk
Common Stock with respect to the payment of dividends and distributions of
assets upon the dissolution, liquidation and winding up of the Company. The
Board of Directors may at any time and from time to time include additional
shares in the designation of the Series 1998-A Preferred Stock, designate one or
more series or classes of preferred stock with liquidation preferences, voting
rights, dividend rights and other rights and privileges senior to the Series
1998-A Preferred Stock without the vote or consent of, or notice to, the holders
of Series 1998-A Preferred Stock.
-3-
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Healthdemographics
<TABLE>
<CAPTION>
<S> <C>
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Audited:
--------
Independent Auditors' Report .......................................................... F-1
Balance Sheets as of December 31, 1997 and 1996........................................ F-2
Statements of Operations for the years ended December 31, 1997 and 1996................ F-3
Statements of Stockholders' Deficit for the years ended December 31, 1997
and 1996.......................................................................... F-4
Statements of Cash Flows for the years ended December 31, 1997 and 1996................ F-5
Notes to Financial Statements.......................................................... F-6
(B) PRO FORMA FINANCIAL INFORMATION
Unaudited:
----------
Pro Forma Consolidated Condensed Balance Sheet as of December 31, 1997................. F-13
Pro Forma Consolidated Condensed Statement of Operations for the year
ended December 31, 1997........................................................... F-14
Notes to Unaudited Pro Forma Consolidated Financial Statements......................... F-15
</TABLE>
(C) EXHIBITS.
2.6 Acquisition Agreement and Plan of Merger, dated as of March
26, 1998, by and among Medirisk, Inc., Healthdemographics,
Inc., a Delaware corporation, Healthdemographics, a California
corporation, P. Timothy Garton, Michael D. Chermak, Richard D.
Propper, David Smith and Interim Advantage Fund, LLC. In
accordance with Item 601(b)(2) of Regulation S-K, the Exhibits
and Schedules to the Stock Purchase Agreement have not been
filed as exhibits to this Form 8-K. The Registrant agrees to
furnish supplementally a copy of the omitted Exhibits and
Schedules upon request.
3.1.1 Certificate of Designation of Series 1998-A Preferred Stock.
-4-
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Healthdemographics:
We have audited the accompanying balance sheets of Healthdemographics as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Healthdemographics as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 13, 1998, except as
to notes 7(e) and 9, which
are as of March 31, 1998
F-1
<PAGE> 6
HEALTHDEMOGRAPHICS
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42 $ 8,014
Accounts receivable, less allowance for doubtful accounts of
$51,887 and $1,936 as of December 31, 1997 and
1996, respectively 113,566 18,477
Note receivable - shareholder (note 3) -- 27,000
Other current assets 19,416 25,251
----------- -----------
Total current assets 133,024 78,742
----------- -----------
Property and equipment (note 2) 105,411 31,242
Less accumulated depreciation 23,086 4,961
----------- -----------
Net property and equipment 82,325 26,281
----------- -----------
$ 215,349 $ 105,023
=========== ===========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Due to officers $ 28,886 $ 17,675
Accounts payable 188,478 196,692
Accrued salaries and wages 288,492 80,062
Other accrued expenses 49,402 16,353
Deferred revenue 175,363 151,375
----------- -----------
Total current liabilities 730,621 462,157
Notes payable, net of unamortized discount of $136,088 and $ -0-
as of December 31, 1997 and 1996, respectively
(notes 4 and 7) 246,412 125,000
----------- -----------
Total liabilities 977,033 587,157
----------- -----------
Stockholders' deficit (notes 3, 7, and 9):
Preferred stock, no par value; 2,500,000 shares
authorized; 1,624,769 shares issued and outstanding at
December 31, 1997; no shares issued at December 31, 1996 -- --
Common stock, no par value; 5,000,000 shares
authorized; 2,385,000 and 180,707 shares issued and
outstanding at December 31, 1997 and 1996, respectively -- --
Additional paid-in capital 784,040 201,497
Accumulated deficit (1,545,724) (683,631)
----------- -----------
Total stockholders' deficit (761,684) (482,134)
Commitments and contingencies (notes 5 and 7)
----------- -----------
$ 215,349 $ 105,023
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 7
HEALTHDEMOGRAPHICS
Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue (note 8) $ 905,161 $ 411,023
Salaries, wages, and benefits 970,822 256,875
Other operating expenses 752,305 366,691
Depreciation and amortization 18,125 3,922
--------- ---------
Operating loss (836,091) (216,465)
Interest expense (notes 4 and 7(c)) 26,002 8,293
--------- ---------
Loss before income taxes (862,093) (224,758)
Income taxes (note 6) -- --
--------- ---------
Net loss $(862,093) $(224,758)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 8
HEALTHDEMOGRAPHICS
Statements of Stockholders' Deficit
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Preferred stock Common stock Additional Total
--------------- ------------ paid-in Accumulated stockholders'
Shares Amount Shares Amount capital deficit deficit
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(note 7(d)) -- $ -- 155,707 $ -- $ 198,997 $ (458,873) $ (259,876)
Issuance of common stock for
employee compensation
(note 7(b)) -- -- 25,000 -- 2,500 -- 2,500
Net loss -- -- -- -- (224,758) (224,758)
--------- ---- --------- ---- ---------- ---------- ----------
Balance at December 31, 1996 -- -- 180,707 -- 201,497 (683,631) (482,134)
Issuance of preferred stock in
satisfaction of notes payable
(note 7(e)) 1,624,769 -- -- -- 375,000 -- 375,000
Issuance of common stock to
prevent dilution (note 7(d)) -- -- 190,343 -- -- -- --
Common stock purchase warrants
(note 7(c)) -- -- -- -- 149,733 -- 149,733
Receipt of common stock in
exchange for cancellation of
notes receivable (note 3) -- -- (12,000) -- (27,000) -- (27,000)
Compensation expense resulting
from the issuance of options
(note 7(a)) -- -- -- -- 83,550 -- 83,550
Issuance of common stock for
employee compensation
(note 7(b)) -- -- 2,140,950 -- 21,410 -- 21,410
Common stock repurchased
and canceled -- -- (150,000) -- (20,500) -- (20,500)
Issuance of common stock
for cash -- -- 35,000 -- 350 -- 350
Net loss -- -- -- -- -- (862,093) (862,093)
--------- ---- --------- ---- ---------- ---------- ----------
Balance at December 31, 1997 1,624,769 $ -- 2,385,000 $ -- $ 784,040 $(1,545,724) $ (761,684)
========= ==== ========= ==== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 9
HEALTHDEMOGRAPHICS
Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(862,093) $(224,758)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 18,125 3,922
Amortization of discount on notes payable 13,645 --
Compensation expense from the issuance of
stock options and common stock 104,960 2,500
Decrease (increase) in:
Accounts receivable (95,089) 114,334
Other assets 5,835 (5,684)
Increase (decrease) in:
Due to officers 11,211 14,175
Accounts payable (8,214) 54,394
Accrued expenses and other liabilities 241,479 36,766
Deferred revenue 23,988 31,375
--------- ---------
Net cash provided by (used in) operating activities (546,153) 27,024
--------- ---------
Cash flows from investing activities - purchases of
property and equipment (74,169) (25,253)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable 757,500 --
Repayment of notes payable (125,000) --
Proceeds from issuance of common stock 350 --
Purchase of treasury stock (20,500) --
--------- ---------
Net cash provided by financing activities 612,350 --
--------- ---------
Net increase (decrease) in cash and cash equivalents (7,972) 1,771
Cash and cash equivalents at beginning of year 8,014 6,243
--------- ---------
Cash and cash equivalents at end of year $ 42 $ 8,014
========= =========
Supplemental disclosure of cash paid for interest $ 7,026 $ 6,479
========= =========
Supplemental disclosure of noncash activities:
Issuance of preferred stock in satisfaction
of notes payable $ 375,000 $ --
========= =========
Discount on issuance of notes payable arising from common
stock purchase warrants $ 149,733 $ --
========= =========
Receipt of common stock in exchange for cancellation of a
note receivable $ 27,000 $ --
========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 10
HEALTHDEMOGRAPHICS
Notes to Financial Statements
December 31, 1997 and 1996
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Healthdemographics (the "Company") was incorporated in California in
1993. The Company provides databases and decision-support applications
to forecast the supply of and demand for health care services. Health
care delivery organizations, insurers, equipment suppliers, consultants
and other health care industry participants use the information and
software provided by Healthdemographics to make more informed business
decisions regarding strategic planning and market planning and
analysis.
(b) Basis of Financial Statement Presentation
The Company's financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheets and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
(c) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(d) Revenue Recognition
Revenue on the sale of data is recognized upon shipment of the data.
Revenue arising from the right to use the Company's software and data
is primarily pursuant to single- and multi-year contracts which provide
for the payment of non refundable annual fees. Revenue from these
license and data sales is recognized annually upon shipment of the
software. Revenues from customer services, which include a six-month
software and data update and telephone support services, are recognized
ratably over the service contract period. All other revenue, including
consulting fees and other miscellaneous services, is recognized upon
the performance of the applicable services.
(e) Deferred Revenue
Deferred revenue represents accounts receivable and payments to the
Company by customers in advance of revenue recognition.
(f) Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided using accelerated methods over
the estimated useful lives of the assets ranging from five to seven
years.
(Continued)
F-6
<PAGE> 11
HEALTHDEMOGRAPHICS
Notes to Financial Statements
(g) Research and Development Costs and Software Development Costs
Research and development costs are expensed as incurred. Amounts
expensed for research and development for the years ended December 31,
1997 and 1996 were $306,000 and $100,000, respectively.
The Company's policy is to expense all software development costs
associated with establishing technological feasibility of new or
enhanced products. Historically, because of the short period of time
between technological feasibility and the release of new or enhanced
products to customers, capitalized software development costs have not
been significant.
(h) Stock Option Plan
Upon implementation of the Company's stock option plan in 1997, the
Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", which encourages
entities to recognize as compensation expense over the vesting period
the fair value of all stock-based awards on the date of the grant.
Alternatively, SFAS No. 123 allows entities to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, and provide
pro forma net income (loss) and pro forma income (loss) per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had
been applied. Under APB Opinion No. 25, compensation expense is
generally only recorded on the date of grant if the current market
price of the underlying stock granted exceeds the exercise price. The
Company has elected to apply the provisions of APB Opinion No. 25. The
effect of SFAS No. 123 for 1997 is not material to the Company's
financial statements and, therefore, the pro forma and other disclosure
requirements have not been presented.
(i) Income Taxes
Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(2) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Computer equipment $ 81,766 $ 23,987
Office furniture and equipment 23,645 7,255
-------- --------
$105,411 $ 31,242
======== ========
</TABLE>
(Continued)
F-7
<PAGE> 12
HEALTHDEMOGRAPHICS
Notes to Financial Statements
(3) Notes Receivable-Shareholder
Notes receivable-shareholder consists of a 10% unsecured promissory note
receivable from a shareholder related to the purchase of 12,000 shares of
the Company's common stock in 1994. The shares were returned to the Company
and, in exchange, the note was canceled in 1997.
(4) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
5% unsecured note payable; interest and principal due
April 1, 1999; paid in 1997 (see note 7(d)) $ - $125,000
12.5% unsecured notes payable with detachable stock
purchase warrants; interest payable quarterly;
principal due April 1, 1999 (see note 7(c)) 382,500 -
-------- --------
382,500 125,000
Less unamortized discount 136,088 -
-------- --------
$246,412 $125,000
======== ========
</TABLE>
(5) Leases
The Company has entered into noncancelable operating lease agreements for
office space and office equipment. Future minimum payments under all such
noncancelable operating leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1998 $117,490
1999 118,657
2000 111,234
2001 15,339
--------
$362,720
========
</TABLE>
Rental expense for 1997 and 1996 was $75,409 and $55,493, respectively.
(6) Income Taxes
Because of operating losses and net operating loss carryforwards, the
Company has not provided for any income tax expense for the years ended
December 31, 1997 and 1996.
(Continued)
F-8
<PAGE> 13
HEALTHDEMOGRAPHICS
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 500,000 $ 260,000
Allowance for doubtful accounts 20,000 1,000
Deferred revenue 65,000 60,000
--------- ---------
Total gross deferred income tax assets 585,000 321,000
Less valuation allowance (585,000) (321,000)
--------- ---------
Net deferred income tax assets $ - $ -
========= =========
</TABLE>
Under SFAS No. 109, deferred income tax assets and liabilities are
recognized for differences between the financial statement carrying amounts
and the tax bases of assets and liabilities which will result in future
deductible or taxable amounts and for net operating loss and tax credit
carryforwards. A valuation allowance is then established to reduce the
deferred income tax assets to the level at which it is "more likely than
not" that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss and tax credit
carryforwards depends on having sufficient taxable income within the
carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (1) taxable income in the
current year or prior years that is available through carryback, (2) future
taxable income that will result from the reversal of existing taxable
temporary differences, and (3) future taxable income generated by future
operations. The valuation allowance for deferred income tax assets at
January 1, 1997 was $321,000. The net increase in the valuation allowance
for the year ended December 31, 1997 was $264,000. At December 31, 1997, the
Company had net operating loss carryforwards of approximately $1,285,000,
which expire beginning in 2008 through 2012.
(Continued)
F-9
<PAGE> 14
HEALTHDEMOGRAPHICS
Notes to Financial Statements
(7) Stockholders' Equity (Deficit)
(a) Stock Options
The Company established a Stock Option Plan in 1997 to encourage stock
ownership by and retain the services of certain key employees and
directors. Options granted are determined at the discretion of the
Board of Directors. All options are immediately vested and have no
expiration date. The following table summarizes option plan activity
for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Exercise price
Shares per share
------ ---------
<S> <C> <C>
Options outstanding at December 31, 1996 - $ -
Granted 150,000 0.02
Exercised - -
Canceled - -
------- -----
Options outstanding at December 31, 1997 150,000 $0.02
======= =====
Options exercisable at December 31, 1997 150,000 $0.02
======= =====
</TABLE>
The Company recorded compensation expense of $83,550 in 1997 because
the fair market value of common stock at the date of grant exceeded the
$0.02 exercise price of the stock options.
(b) Stock Compensation Expense
The Company issued shares of common stock to certain key employees as
compensation for services provided in 1997 and 1996. The Company
recorded the fair market value of the shares issued as compensation
expense, amounting to $21,410 and $2,500 in 1997 and 1996,
respectively.
(c) Common Stock Purchase Warrants
The Company obtained $382,500 in financing in 1997 through the issuance
of 12.5% unsecured promissory notes payable with detachable warrants to
purchase 227,588 shares of the Company's common stock. Because the fair
value of the common stock exceeded the $0.12 per-share exercise price
of the warrants at the time of issuance, the Company allocated $149,733
of the proceeds to additional paid-in capital. The related discount on
the notes payable is being amortized over the term of the notes, which
are due on April 1, 1999. The common stock purchase warrants expire on
April 1, 1998.
A stockholder of the Company is the holder of $227,500 of the notes
payable and 135,363 of the common stock purchase warrants.
(Continued)
F-10
<PAGE> 15
HEALTHDEMOGRAPHICS
Notes to Financial Statements
(d) Return of Capital
As a condition of a 1995 agreement with a certain stockholder, the
Company was required to return a specified amount of the stockholder's
capital contribution if the Company did not meet certain 1996
operational benchmarks as defined in the agreement. The Company did not
meet the operational benchmarks and, as a result, signed an unsecured
5% promissory note payable due on April 1, 1999 to return $125,000 of
the stockholder's original investment. Additional paid-in capital
reflects the net proceeds received from this stockholder. An additional
provision of the agreement was that the stockholder's 8% ownership
percentage could not be diluted. The agreement was mutually rescinded
in 1997 after the Company issued an additional 190,343 shares of common
stock to the stockholder under the antidilution provision and the note
was paid in full.
(e) Preferred Stock
During May through July 1997, the Company borrowed $375,000 from a
director and other third-party investors. On July 15, 1997, the loans
of $375,000 were converted into 1,624,769 shares of preferred stock.
The terms and conditions of the preferred stock were not established at
the time of the conversion. In connection with the acquisition of the
Company described in note 9, each share of preferred stock was treated
as being equal to 1.1969 shares of common stock.
(8) Major Customers
For the years ended December 31, 1997 and 1996, one customer accounted for
approximately 15% and 6%, and another customer accounted for approximately
3% and 21% of total revenues, respectively.
(9) Subsequent Event
On March 31, 1998, the Company was acquired by Medirisk, Inc. ("Medirisk")
of Atlanta, Georgia for a purchase price of approximately $2.7 million in
cash and 171,315 shares of Medirisk unregistered common stock, plus
contingent consideration based upon a multiple of the Company's operating
income over a predetermined amount through the year 2000.
F-11
<PAGE> 16
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated condensed balance sheet set forth
below as of December 31, 1997 illustrates the estimated effects of the
Healthdemographics acquisition as if the acquisition had occurred on December
31, 1997. The unaudited pro forma consolidated condensed statement of operations
set forth below for the year ended December 31, 1997 gives effect to the
Company's acquisition of (i) Healthdemographics on March 31, 1998, (ii) CareData
Reports, Inc.("CareData") on August 28, 1997, and (iii) CIVS, Inc. ("CIVS"), on
June 24, 1997, as if they had occurred on January 1, 1997. The
Healthdemographics, CIVS and CareData acquisitions have each been accounted for
using the purchase method of accounting. The pro forma financial data should be
read in conjunction with the historical consolidated financial statements and
notes of the Company, included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission (the "Commission") on March 30,
1998, and the historical financial statements and notes of: (i)
Healthdemographics, included in this Report on Form 8-K; (ii) CIVS, included in
the Company's Current Report on Form 8-K/A, filed with the Commission on
September 5, 1997; and (iii) CareData, included in the Company's Current Report
on Form 8-K/A, filed with the Commission on November 14, 1997. The pro forma
combined results are not necessarily indicative of the results that would have
been achieved had the acquisitions of Healthdemographics, CIVS and CareData
occurred on January 1, 1997 or of future operations.
F-12
<PAGE> 17
MEDIRISK, INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
December 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MEDIRISK HEALTHDEMOGRAPHICS ADJUSTMENTS CONSOLIDATED
-------- ------------------ ----------- ------------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 3,516 $ -- $ (302)(4) $ 3,214
Accounts receivable, net 3,802 114 -- 3,916
Prepaid expenses 698 -- -- 698
Other current assets 474 19 -- 493
-------- ------- ------- --------
Total current assets 8,490 133 (302) 8,321
-------- ------- ------- --------
Property and equipment 3,083 105 -- 3,188
Less accumulated depreciation and amortization 1,444 23 -- 1,467
-------- ------- ------- --------
Property and equipment, net 1,639 82 -- 1,721
-------- ------- ------- --------
Excess of cost over net assets of businesses
acquired, less accumulated amortization 7,556 -- 3,957 (1) 11,513
Intangible assets, less accumulated amortization 1,794 -- 500 (2) 2,294
Software development costs, less accumulated
amortization 1,008 -- -- 1,008
Other assets 171 -- -- 171
-------- ------- ------- --------
Total other assets 10,529 -- 4,457 14,986
-------- ------- ------- --------
Total assets $ 20,658 $ 215 $ 4,155 $ 25,028
======== ======= ======= ========
Current liabilities
Current installments of long-term debt and obligations under
capital leases $ 168 $ -- $ -- $ 168
Accounts payable 258 218 3,000 (1) 3,476
Accrued expenses 1,574 338 150 (3) 2,062
Deferred revenue 2,309 175 -- 2,484
-------- ------- ------- --------
Total current liabilities 4,309 731 3,150 8,190
Long-term debt and obligations under capital leases, excluding
current installments 165 246 2,395 (4) 2,806
-------- ------- ------- --------
Total liabilities 4,474 977 5,545 10,996
-------- ------- ------- --------
Shareholders' equity (deficit):
Common stock 4 -- -- 4
Additional paid in capital 28,559 784 (784)(6) 31,657
3,098 (5)
Accumulated deficit (12,379) (1,546) 1,546 (6) (17,629)
(5,250)(7)
-------- ------- ------- --------
16,184 (762) (1,390) 14,032
-------- ------- ------- --------
Total liabilities and shareholders' equity (deficit) $ 20,658 $ 215 $ 4,155 $ 25,028
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
F-13
<PAGE> 18
MEDIRISK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------------
Historical
-------------------------------------------
Healthdemo- 1997 Pro forma Pro forma
Medirisk graphics(8) Acquisitions(9) Adjustments Consolidated
-------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 16,749 $ 905 $ 1,730 $ -- $ 19,384
Salaries, wages and benefits 7,910 971 1,296 -- 10,177
Other operating expenses 4,374 752 1,099 -- 6,225
Depreciation and amortization 1,304 18 47 563(10) 1,932
Acquired in-process research
and development costs and integration costs 4,575 -- -- (4,258)(11) 317
-------------------------------------------------------------------------
Operating income (loss) (1,414) (836) (712) 3,695 733
Interest income (expense), net 345 (26) 8 (523)(12) (196)
Provision for income taxes (707) -- -- 707 (13) --
-------------------------------------------------------------------------
Income (loss) before extraordinary item $ (1,776) $ (862) $ (704) $ 3,879 $ 537
=========================================================================
Unaudited pro forma income (loss) per common
share before extraordinary item - basic and diluted ($0.45) $0.13
Unaudited pro forma weighted average number of common ===== =====
shares used in calculating unaudited income (loss)
per common share before extraordinary item -
basic and diluted 3,918 4,214(14)
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
F-14
<PAGE> 19
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
Effective March 23, 1998, the Company acquired all of the outstanding
shares of Healthdemographics of San Diego, California, which provides databases
and decision-support tools that allow customers to forecast the supply of and
demand for health care services. The Company purchased Healthdemographics for
approximately $2.7 million in cash, 171,315 shares of common stock and the
assumption of net liabilities. The acquisition was accounted for using the
purchase method of accounting with the results of operations of the business
acquired included from the effective date of the acquisition. The acquisition
resulted in in-process research and development costs estimated to be
approximately $5.3 million, acquired products estimated to be approximately
$500,000, and excess of cost over net assets acquired estimated to be
approximately $1.0 million.
Effective June 1, 1997, the Company acquired all of the outstanding shares
of CIVS of Rockville, Maryland, a leading national provider of credentialing
services to hospitals and managed care organizations for approximately $3.5
million in cash and 129,166 shares of the Company's common stock and the
assumption of net assets of $76,000. The acquisition was accounted for using
the purchase method of accounting with the results of operations of the business
acquired included from the effective date of the acquisition. The acquisition
resulted in purchased in-process research and development costs of approximately
$3.1 million, acquired products of approximately $415,000, and excess of cost
over net assets acquired of approximately $1.1 million.
Effective August 1, 1997, the Company acquired all of the outstanding
shares of CareData of New York, New York, which creates reports analyzing
consumer satisfaction with more than 150 aspects of managed health care plans
and ranks specific health plans accordingly. The Company purchased CareData for
approximately $4.1 million in cash and 14,516 shares of Medirisk common stock.
The acquisition was accounted for using the purchase method of accounting with
the results of operations of the business acquired included from the effective
date of the acquisition. The acquisition resulted in in-process research and
development costs of approximately $975,000, acquired products of approximately
$200,000, and excess of cost over net assets acquired of approximately $2.9
million. Approximately $3.0 million of contingent consideration resulting from
the CareData acquisition will be due and payable at the end of April 1998.
This payment will be treated as an increase in excess of cost over net assets
acquired.
The unaudited pro forma consolidated condensed balance sheet as of
December 31, 1997 illustrates the estimated effects of the Healthdemographics
acquisition as if the acquisition had occurred on December 31, 1997. The
unaudited pro forma consolidated condensed statement of operations for the year
ended December 31, 1997 illustrates the estimated effects of all these
acquisitions had they occurred on January 1, 1997.
The unaudited pro forma consolidated condensed financial statements have
been prepared using the purchase method of accounting, whereby the total cost of
the acquisition is allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their respective fair values at the effective
date of such acquisition. For purposes of the unaudited pro forma consolidated
condensed financial statements, such allocations have been made based upon
currently available information and management's estimates.
F-15
<PAGE> 20
The historical financial statements are derived from the audited
financial statements of the Company and Healthdemographics as of and for the
year ended December 31, 1997, and the unaudited financial statements of CIVS and
CareData for the periods beginning January 1, 1997 and ending on the effective
dates of the respective acquisitions.
The unaudited pro forma consolidated condensed financial statements do
not purport to represent what the results of operations of the Company would
actually have been if the acquisitions had occurred on such dates or to
project the results of operations of the Company for any future date or
period. The unaudited pro forma consolidated condensed financial statements
should be read together with the Financial Statements and Notes thereto of the
Company, Healthdemographics, CIVS and CareData referred to above. The
unaudited pro forma consolidated condensed financial statements reflect the
following adjustments:
F-16
<PAGE> 21
(1) Reflects $957,000 of goodwill recorded as a result of the allocation of
the Healthdemographics purchase price and the $3.0 million of contingent
consideration for the CareData acquisition expected to be paid in April
1998.
(2) Reflects the technological know-how recorded as a result of the
allocation of the Healthdemographics purchase price.
(3) Reflects the accrual of direct acquisition costs recorded as a result
of the allocation of the Healthdemographics purchase price.
(4) Reflects the cash payment and borrowings against the Company's line
of credit to fund the cash portion of the Healthdemographics
acquisition.
(5) Reflects the value of the Company common stock issued in connection
with the acquisition of Healthdemographics.
(6) Reflects the elimination of the historical equity accounts of
Healthdemographics.
(7) Reflects the non-recurring write-off of acquired in-process research
and development costs recorded as a result of the allocation of the
Healthdemographics purchase price.
(8) Reflects the historical operating results of Healthdemographics for the
year ended December 31, 1997. An estimated $5.3 million charge for in-
process research and development costs was recorded by the Company on
March 23, 1998. This charge is being excluded from the year ended
December 31, 1997 unaudited proforma consolidated condensed statement
of operations.
(9) Reflects the historical operating results of CIVS for the five months
ended May 31, 1997 and CareData for seven months ending July 31, 1997.
The operating results of these entities subsequent to their acquisition
effective dates through December 31, 1997 are included in the Company's
operating results.
(10) Reflects the additional amortization of intangible assets recorded as a
result of the allocation of the respective purchase prices. These
amounts were as follows:
<TABLE>
<CAPTION>
1997
----
(Amounts in thousands)
<S> <C>
Healthdemographics $164
CIVS 64
CareData 335
---
Total $563
===
</TABLE>
(11) Reflects the reversal of the non-recurring acquired in-process research
and development costs and integration costs associated with the
acquisitions of CIVS and CareData.
These charges were included in the December 31, 1997 historical
statements of operations and are being excluded from the year ended
December 31, 1997 unaudited pro forma consolidated condensed statement
of operations.
<TABLE>
<CAPTION>
1997
----
(Amounts in thousands)
<S> <C>
CIVS $3,280
CareData 978
-----
Total $4,258
=====
</TABLE>
(12) Reflects the additional interest expense on the cash borrowings used
to fund the acquisitions. These amounts were as follows:
<TABLE>
<CAPTION>
1997
----
(Amounts in thousands)
<S> <C>
Healthdemographics $216
CIVS 115
CareData 192
---
Total $523
===
</TABLE>
(13) Reflects decrease in income tax expense due to pro forma losses
incurred.
(14) Reflects the increased shares of common stock outstanding resulting from
the acquisitions. These shares were as follows:
<TABLE>
<CAPTION>
1997
----
(In thousands)
<S> <C>
Healthdemographics 171
CIVS 115
CareData 10
---
Total 296
===
</TABLE>
F-17
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDIRISK, INC.
By: /s/Kenneth M. Goins, Jr.
--------------------------------------
Kenneth M. Goins, Jr.
Executive Vice President and Chief Financial Officer
Dated: April 13, 1998
-5-
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT INDEX
PAGE
----
<S> <C>
2.6 Acquisition Agreement and Plan of Merger, dated as of
March 26, 1998, by and among Medirisk, Inc.,
Healthdemographics, Inc., a Delaware corporation,
Healthdemographics, a California corporation, P. Timothy
Garton, Michael D. Chermak, Richard D. Propper, David Smith
and Interim Advantage Fund, LLC.
3.1.1 Certificate of Designation of Series 1998-A Preferred Stock.
</TABLE>
<PAGE> 1
EXHIBIT 2.6
ACQUISITION AGREEMENT AND PLAN OF MERGER
THIS ACQUISITION AGREEMENT AND PLAN OF MERGER (this "Agreement"), is
made this 26th day of March 1998, by and among MEDIRISK, INC., a Delaware
corporation ("Medirisk"), HEALTHDEMOGRAPHICS, INC., a Delaware corporation and
wholly-owned subsidiary of Medirisk ("Merger Sub"), HEALTHDEMOGRAPHICS, a
California corporation (the "Company"), and those shareholders of the Company
executing and delivering this Agreement (all of the shareholders of the Company
being collectively referred to as the "Shareholders," and each individually as
a "Shareholder").
W I T N E S S E T H:
WHEREAS, the parties desire to enter into this Agreement pursuant to
which the Company will merge with and into Merger Sub, such that Medirisk will
indirectly acquire all of the outstanding capital stock of the Company from the
Shareholders, upon the terms and subject to the conditions set forth herein
(the "Merger"); and
WHEREAS, the respective Boards of Directors of Medirisk, Merger Sub
and the Company have approved the transactions contemplated by this Agreement;
and
WHEREAS, P. Timothy Garton ("Garton") and Michael D. Chermak
("Chermak") are each Shareholders and are employees, officers and/or directors
of the Company, and will receive appreciable benefits from the Merger as
contemplated hereby (collectively, the "Responsible Shareholders"); and
WHEREAS, Shareholders Richard D. Propper, David Smith and Interim
Advantage Fund, together with the Responsible Shareholders, are hereinafter
collectively referred to as the "Signing Shareholders";
NOW, THEREFORE, in consideration of the premises and the mutual
promises, representations, warranties and covenants hereinafter set forth, the
parties hereto agree as follows:
ARTICLE I
MERGER OF THE COMPANY AND MERGER SUB
1.1 MERGER. Subject to the terms and conditions of this Agreement, at
the Merger Effective Time (as defined in Section 1.2), the Company shall be
merged with and into Merger Sub in accordance with the provisions of the
business corporation act under the California General Corporation Law (the
"CGCL ") and Delaware General Corporation Law (the "DGCL"). Merger Sub shall be
the surviving corporation resulting from the Merger and shall thereafter
conduct the business and operations of the Company as a wholly-owned subsidiary
of Medirisk. The Merger shall be consummated pursuant to the terms of this
Agreement.
1.2 FILING OF MERGER CERTIFICATES. Subject to the provisions of this
Agreement, the parties shall file Articles or a Certificate of Merger, as
appropriate (the "California Merger Certificate") executed in accordance with
the relevant provisions of the CGCL and a Certificate of Merger executed in
accordance with the relevant provisions of the DGCL (the "Delaware Merger
Certificate") and shall make all other filings or recordings required under
each such act as soon as practicable on or after the Closing
<PAGE> 2
Date. The Merger shall become effective on the date and at the time the
Delaware Merger Certificate becomes effective with the Secretary of State of
Delaware (the "Merger Effective Time"). Notwithstanding the foregoing, the
parties intend that this Agreement and the transactions contemplated hereby
shall be effective for accounting purposes on and as of the date and time
specified in Section 7.1(b) of this Agreement; provided, however, that neither
the Company nor any of the shareholders of the Company shall have any liability
as a result of Medirisk's or Merger Sub's inability to utilize for any purpose
the date and time specified in Section 7.1(b) as the Accounting Effective Date.
1.3 ARTICLES AND BYLAWS. The Articles of Incorporation and Bylaws of
Merger Sub in effect immediately prior to the Merger Effective Time shall be
the Articles of Incorporation and Bylaws of the surviving corporation until
otherwise amended or repealed; the directors of Merger Sub immediately prior to
the Merger Effective Time shall serve as the directors of the surviving
corporation from and after the Merger Effective Time; and the officers of
Merger Sub in office immediately prior to the Merger Effective Time shall serve
as the officers of the surviving corporation from and after the Merger
Effective Time.
1.4 DISSENTING SHAREHOLDERS. Any holder of shares of common stock of
the Company ("Company Stock") who perfects any available dissenters' rights or
appraisal rights in accordance with and as contemplated by the CGCL
("Dissenters' Rights") shall be entitled to receive the value of such shares in
cash from the surviving corporation after the Merger Effective Time as
determined pursuant to the CGCL; provided, however, that no such payment shall
be made to any dissenting shareholder unless and until such dissenting
shareholder has complied with the applicable provisions of the CGCL and has
surrendered to the surviving corporation the certificate or certificates
representing the shares for which payment is being made. In the event that a
dissenting shareholder of the Company fails to perfect, or effectively
withdraws or loses, its Dissenters' Rights, the surviving corporation shall
deliver the consideration to which such holder of shares of Company Stock is
entitled (without interest) upon surrender of certificates representing such
shares held by such holder.
1.5 MERGER CONSIDERATION. Subject to the provisions of this Section,
and in consideration for the transactions contemplated hereby, at the Merger
Effective Time, by virtue of the Merger and without any action on the part of
the parties hereto or the shareholders of any of the parties hereto, the shares
of the constituent corporations of the Merger shall be converted as follows:
(a) Each share of common stock of Merger Sub issued and
outstanding at the Merger Effective Time shall remain issued and outstanding
after the Merger Effective Time.
(b) Each share of Company Stock issued and outstanding at the
Merger Effective Time (excluding shares held by Shareholders who perfect their
Dissenters' Rights) shall cease to be outstanding and shall be converted into
and exchanged for the right to receive:
(i) An amount equal to (A) $2,299,500 divided by (B)
the number of Effective Company Shares (as hereinafter defined);
(ii) A number of unregistered shares of common stock
of Medirisk ("Medirisk Common Stock") equal to (A) $4,270,500 divided by (B)
the Closing Market Value (as defined below), with the quotient of (A) divided
by (B) then being divided by (C) the number of Effective Company Shares; and
(iii) The right to receive Additional Consideration
(as hereinafter defined).
-2-
<PAGE> 3
(c) Certain Definitions:
(i) "Additional Consideration" means the additional
consideration payable to the Shareholders for the Company Stock as calculated
and upon the terms set forth in SCHEDULE 1.5(C)(I) attached hereto.
(ii) "Cash Initial Consideration" means the cash
consideration payable pursuant to Section 1.5(b)(i).
(iii) "Closing Market Value" means the average
closing price of Medirisk Common Stock on the Nasdaq National Market over the
twenty (20) trading days immediately preceding the Closing Date (as defined in
Section 7.1 hereof).
(iv) "Effective Company Shares" means the shares of
Company Stock deemed to be issued and outstanding at the Merger Effective Time
as set forth on SCHEDULE 2.2A (the "Effective Company Shares")
(v) "Initial Merger Consideration" means the total
consideration payable pursuant to Sections 1.5(b)(i) and 1.5(b)(ii).
(vi) "Merger Consideration" means the total
consideration payable pursuant to Section 1.5(b).
(vii) "Stock Initial Consideration" means the
Medirisk Common Stock to be issued to the Shareholders pursuant to Sections
1.5(b)(ii).
(d) Notwithstanding the foregoing, each holder of shares
of Company Stock who would otherwise be entitled to receive a fraction of a
share of Medirisk Common Stock shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional part of a share of Medirisk
Common Stock multiplied by the Closing Market Value.
1.6 TAX EFFECT. Medirisk, the Company and the Signing Shareholders
intend the Merger be a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (a "Reorganization" and the "Code,"
respectively). In connection with that intention, the persons indicated below
make the following representations and warranties.
(a) The Company represents and warrants to Medirisk
and Merger Sub that, except as otherwise disclosed in the Schedules to this
Agreement, the Company has not taken or agreed to take any action, nor does the
Company have any Knowledge of any fact or circumstance that is reasonably likely
to prevent the Merger from qualifying as a Reorganization. The Company agrees to
use reasonable efforts to cause the Merger to qualify, and not to take action
which would cause the Merger not to qualify, as a Reorganization. As used in
this Agreement, when any statement is made to the "Knowledge" of a person, it
means to the actual knowledge of such person without any duty on the part of
such person to independently investigate or confirm the accuracy of such
statement.
(b) Medirisk and the Merger Sub represent and warrant
to the Company and the Shareholders of the Company that, except as otherwise
disclosed in the Schedules to this Agreement, neither Medirisk nor the Merger
Sub has taken or agreed to take any action, nor do either of Medirisk or the
Merger Sub have any Knowledge of any fact or circumstance that is reasonably
likely, to prevent the
-3-
<PAGE> 4
Merger from qualifying as a Reorganization. Medirisk and the Merger Sub agree
to use reasonable efforts to cause the Merger to qualify, and not to take
action which would cause the Merger not to qualify, as a Reorganization;
provided, however, that nothing in this Section 1.6 shall affect the
Shareholders' right to receive the Additional Consideration as described in
this Agreement.
(c) Medirisk, the Merger Sub, the Company and the Signing
Shareholders understand that (i) neither Medirisk, the Merger Sub, the Company,
nor any of the Shareholders makes any representation or warranty that the
Merger will be regarded as a Reorganization, (ii) the Closing is not subject to
a condition that an Internal Revenue Service ruling or tax opinion be obtained
as to the federal income tax consequences of this Agreement or the Merger, and
(iii) Medirisk, the Merger Sub, the Company and the Shareholders will rely
solely upon their respective advisors for advice concerning the tax
consequences of the Merger.
(d) The Company represents that, in the Merger, Merger Sub
will acquire assets representing at least ninety percent (90%) of the fair
market value of the net assets and at least seventy percent (70%) of the fair
market value of the gross assets held by the Company immediately prior to the
Merger. For this purpose, all redemptions and distributions (except for
regular, normal dividends) made by the Company immediately preceding the Merger
and all amounts paid out of the assets of the Company as Reorganization
expenses will be considered as assets held by the Company immediately prior to
the Merger. In addition, assets disposed of in contemplation of the Merger will
be considered as assets held by the Company immediately prior to the Merger.
(e) The Company warrants that the liabilities of the Company
to be assumed by Merger Sub or Medirisk in the Merger (and the liabilities to
which the assets to be transferred are subject) were incurred or will be
incurred by the Company in the ordinary course of its business.
(f) Medirisk and Merger Sub warrant that there is not now,
nor will there be at the time of the Merger Effective Time, any intercorporate
indebtedness existing between the Company and Medirisk or between Company and
Merger Sub that was issued, acquired, or will be settled at a discount.
(g) The Company represents that the Shareholders will pay, or
reimburse the Company as provided in Section 10.5 below, direct costs and
expenses incurred by the Shareholders, or by the Company on their behalf, in
connection with the Merger. Medirisk, Merger Sub, and the Company will pay
their respective expenses, if any, incurred in connection with the Merger.
(h) Each of Medirisk, Merger Sub and the Company represents
that it is not an Investment Company. As used in this Section 1.6(h),
"Investment Company" means a regulated investment company, a real estate
investment trust, or a corporation 50 percent or more of the value of whose
total assets are stock and securities and 80 percent or more of the value of
whose total assets are assets held for investment. In making the 50-percent and
80-percent determinations under the preceding sentence, stock and securities in
any subsidiary corporation shall be disregarded and the parent corporation
shall be deemed to own its ratable share of the subsidiary's assets, and a
corporation shall be considered a subsidiary if the parent owns 50 percent or
more of the combined voting power of all classes of stock entitled to vote, or
50 percent or more of the total value of shares of all classes of stock
outstanding.
(i) The Company and the Signing Shareholders represent that
the Company is not under the jurisdiction of a court in a case under Title 11
of the United States Code, a receivership, foreclosure, or similar proceeding
in a federal or state court.
-4-
<PAGE> 5
(j) The Company and the Signing Shareholders represent that
the fair market value of the assets to be transferred from the Company to
Merger Sub as a result of the Merger will equal or exceed the sum of the
liabilities of the Company to be assumed by Merger Sub or Medirisk (plus the
amount of liabilities to which the assets to be transferred are subject).
(k) Medirisk represents the payment of cash to the
Shareholders in lieu of fractional shares of Medirisk Stock will not be a
separately bargained for consideration, but will be undertaken solely for the
purpose of avoiding the expense and inconvenience of issuing and transferring
fractional shares, and the total cash consideration that will be paid to the
Company's Shareholders in lieu of fractional shares of Medirisk Stock will
represent less than one (1%) percent of the total consideration issued in the
Merger.
(l) Garton and Chermak severally represent that none of the
compensation to be received by him for services as an employee of the Company
represents separate consideration for, or is allocable to, any of his shares of
Company Stock. Medirisk represents that any compensation to be paid to a
Shareholder-employee who continues as an employee of Medirisk or Merger Sub
subsequent to the Merger will be for services rendered and will be not greater
in amounts than amounts that would be paid to third parties bargaining at arms
length for similar services.
(m) The Company represents that it has no plan or intention
to make prior to the Merger Effective Time, and except as set forth in SCHEDULE
1.6(M), it has not made, any distributions other than regular, normal dividends
to Shareholders in the three (3) year period prior to the Merger.
(n) The Company represents that except as set forth in
SCHEDULE 1.6(N), it has not reacquired or redeemed any of its stock within the
last three years.
(o) The Company represents that at all times during the
five-year period ending on the Merger Effective Time, the fair market value of
all of the Company's United States real property interests was and will have
been less than fifty (50%) percent of the total fair market value of (A) its
United States real property interests, (B) its interests in real property
located outside the United States, and (C) its other assets used or held for
use in a trade or business. For purposes of the preceding sentence, (X) United
States real property interests include all interests (other than an interest
solely as a creditor) in real property and associated personal property (such
as movable walls and furnishings) located in the United States or the Virgin
Islands and interests in any corporation (other than a controlled corporation)
owning any United States real property interest, (Y) the Company is treated as
owning its proportionate share (based on the relative fair market value of its
ownership interest to all ownership interests) of the assets owned by any
controlled corporation or any partnership, trust, or estate in which the
Company is a partner or beneficiary, and (Z) any such entity in turn is treated
as owning its proportionate share of the assets owned by any controlled
corporation or any partnership, trust, or estate in which the entity is a
partner or beneficiary. As used in this paragraph, "controlled corporation"
means any corporation at least fifty percent (50%) of the fair market value of
the stock of which is owned by the Company, in the case of a first-tier
subsidiary of the Company, or by a controlled corporation, in the case of a
lower-tier subsidiary.
(p) The Company represents that the Company is not a party
to, and holds no assets subject to, a "safe harbor lease" under former Section
168(f)(8) of the Code and the Regulations thereunder.
(q) The Agreement together with the other agreements to be
executed and delivered in connection with the Closing of the transactions
contemplated herein represent the entire understanding of Company, Medirisk,
and Merger Sub with respect to the Merger.
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<PAGE> 6
(r) Medirisk and Merger Sub represent that none of (i)
Medirisk, (ii) any member of Medirisk's affiliated group as defined in Section
1504 of the Code without regard to Section 1504(b) of the Code, (iii) any
corporation in which at least fifty percent (50%) of the total combined voting
power of all classes of stock entitled to vote or at least fifty percent (50%)
of the value of all classes of stock is owned directly or indirectly by
Medirisk or (iv) any entity that is treated as a partnership for federal income
tax purposes and has as an owner a corporation described in (I), (ii), or (iii)
of this paragraph has the intent at the time of the Closing to acquire or
redeem (directly or indirectly) any Medirisk shares issued in connection with
the transactions described herein.
(s) Medirisk and Merger Sub represent and warrant to the
Company that following the Merger, Merger Sub will not issue additional shares
of Merger Sub stock that would result in Medirisk losing control of Merger Sub
within the meaning of Section 368(c) of the Code.
(t) Medirisk represents and warrants to the Company that
Medirisk has no plan or intention to reacquire any of Medirisk's stock issued
in the Merger.
(u) Medirisk represents and warrants to the Company that
Medirisk has no plan or intention to: liquidate Merger Sub, merge Merger Sub
with and into another corporation; sell or otherwise dispose of the stock of
Merger Sub; or cause Merger Sub to sell or otherwise dispose of any of the
assets of the Company acquired in the Merger, except for dispositions made in
the ordinary course of business or transfers described in Section 368(a)(2)(C)
of the Code.
(v) Medirisk and Merger Sub represent and warrant to the
Company that, following the Merger, Merger Sub will continue the historic
business of the Company or use a significant portion of the Company's business
assets in a business.
(w) Medirisk represents and warrants to the Company that,
prior to the Merger, Medirisk will be in control of Merger Sub within the
meaning of Section 368(c) of the Code.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Medirisk as follows:
2.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California with the full power and authority to carry on its business in the
places and as it is now being conducted and to own and lease the properties and
assets it now owns or leases. Except as set forth on SCHEDULE 2.1, the Company
is duly qualified to transact business and in good standing in the other states
listed on SCHEDULE 2.1, which are the only additional jurisdictions in which
operations of the Company's business or the assets of the Company require such
qualification
2.2 AUTHORITY AND STATUS. The Company has the corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated by this Agreement
without the necessity of any act or consent not previously obtained of any
other person whomsoever. This Agreement and each and every agreement, document
and
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<PAGE> 7
instrument to be executed, delivered and performed in connection with this
Agreement (the "Transaction Documents") by the Company constitutes or will,
when executed and delivered, constitute the valid and legally binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as enforceability may be limited by applicable
equitable principles (whether applied with action at law or in equity) or by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting the enforcement of creditors' rights generally.
2.3 CAPITALIZATION; OWNERSHIP OF COMPANY STOCK. The authorized capital
stock of the Company consists of 5,000,000 shares of no par value common stock,
and 2,500,000 shares of no par value preferred stock. The Company has 4,871,719
shares of common stock which are issued and outstanding. The Company does not
have any shares of preferred stock issued or outstanding. All of the issued and
outstanding shares or Company Stock are duly and validly issued and
outstanding, are fully paid and nonassessable, and were issued pursuant to a
valid exemption from registration under the Securities Act of 1933, as amended,
and all applicable state securities laws. Except as set forth on SCHEDULE 2.3,
there are no outstanding warrants, options, rights, calls or other commitments
of any nature relating to the common stock or any other capital stock of the
Company, and there are no outstanding securities of the Company convertible
into or exchangeable for shares of common stock or any other capital stock of
the Company.
2.4 SUBSIDIARIES, INVESTMENTS AND PREDECESSORS. Except as set forth on
SCHEDULE 2.4, the Company has not owned and does not currently own, directly or
indirectly, of record, beneficially or equitably any capital stock or other
equity, ownership or proprietary interest in any corporation, partnership,
limited liability company, association, trust, joint venture or other entity.
Set forth on SCHEDULE 2.4 is a listing for the last five years of all
predecessor companies of the Company, including the names of any and all
entities from which the Company previously acquired material assets, and any
other entity of which the Company has been a subsidiary or division. Except as
listed on SCHEDULE 2.4, the Company has not sold or disposed of, by way of
asset sale, stock sale, spin-off, split-up or otherwise, any material assets or
business of the Company.
2.5 LIABILITIES AND OBLIGATIONS OF THE COMPANY.
(a) Attached as SCHEDULE 2.5 are true, correct and complete
copies of the Company's audited balance sheets as of 31 December 1996 and 1997
and the related statements of operations and cash flows for the fiscal years
ending on 31 December 1996 and 1997 (the "Financial Statements"). Also attached
as SCHEDULE 2.5 are true, correct and complete copies of the Company's
unaudited balance sheet as of 28 February 1998 and the related unaudited
statement of operations for the two-month period then ended (the "Interim
Financial Statements"). Except as specifically described in SCHEDULE 2.5, the
Financial Statements and the Interim Financial Statements are complete to the
extent required by generally accepted accounting principles, have been prepared
in accordance with generally accepted accounting principles (except that the
Interim Financial Statements do not contain cash flows, any notes thereto and
are subject to normal recurring year-end adjustments, which if made on the date
hereof would not, individually or in the aggregate, have a material adverse
effect on the Company). Subject to the foregoing sentence, the Financial
Statements and the Interim Financial Statements fairly present in accordance
with generally accepted accounting principles the Company's financial condition
of the Company and the results of its operations and changes in financial
position as of the dates and for the periods reflected therein.
(b) Effective following Closing, the Company will have no
indebtedness for borrowed money after giving effect to the payments reflected
on Section (ix) of SCHEDULE 2.11(A). Except as described in SCHEDULE 2.5, the
Company has no liability or obligation related to its assets or business
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<PAGE> 8
(whether accrued, absolute, contingent or otherwise), except for (i) the
liabilities and obligations of the Company that are disclosed or reserved
against in the Interim Financial Statements, to the extent and in the amounts
so disclosed or reserved against, (ii) liabilities that were incurred or
accrued in the ordinary course of the Company's business since the date of the
Interim Financial Statements, (iii) the liabilities and obligations of the
Company under the Material Agreements (as that term is defined in Section
2.11), and (iv) those nonmaterial liabilities and obligations of the Company
under contracts and agreements of the Company that are not Material Agreements.
2.6 AGREEMENT DOES NOT VIOLATE OTHER INSTRUMENTS. Except as set forth
on SCHEDULE 2.6, the execution and delivery of the Transaction Documents by the
Company does not, and the consummation of the transactions contemplated hereby
will not, (a) violate or conflict with any provision of the Articles of
Incorporation, as amended, or Bylaws, as amended, of the Company; (b) require
any consent or approval not previously obtained under, conflict with, result in
the breach, termination or acceleration of, or violate or constitute an
occurrence of default under any provision of any mortgage, deed of trust,
conveyance to secure debt, note, loan, lien, lease, agreement or instrument to
which the Company is a party or by which any of the Company's properties are
bound; (c) constitute a violation of any law, regulation, order, writ,
judgment, injunction, or decree applicable to the Company or by which any of
the Company's properties are bound; (d) result in the creation of any lien upon
any of the assets or business of the Company; or (e) have any impact on
Medirisk's right after the Closing to conduct the business of the Company as
being conducted by the Company prior to the Closing.
2.7 LITIGATION Except as set forth on SCHEDULE 2.7, there is no suit,
action, proceeding, claim or investigation pending or, to the knowledge of the
Company, threatened against, or affecting, the Company; and to the knowledge of
the Company, there exists no basis or grounds for any such suit, action,
proceedings, claim or investigation. SCHEDULE 2.7 also contains a brief
description of any suit, action, proceeding, claim or investigation involving
the Company settled or otherwise concluded since 1 January 1993.
2.8 PERMITS. Except as set forth on SCHEDULE 2.8, the Company holds,
and lists, all licenses, permits and other authorizations from all appropriate
federal, state or other public authorities necessary for the conduct of the
Company's business and the use of its assets, all of which are listed on
SCHEDULE 2.8. The Company is conducting and has conducted its business so as to
comply with all applicable statutes, rules, ordinances, regulations, orders,
injunctions, decrees or any other requirement of any governmental body, agency
or authority binding on it, or relating to its property or business or its
advertising, sales or pricing practices ("Applicable Law") except where the
failure to comply with such Applicable Law would not have a material adverse
affect on the Company, its properties, operations or financial condition.
2.9 TITLE TO ASSETS. Attached as SCHEDULE 2.9 is a list and summary
description of all real property owned or leased by the Company and of all
items of personal property with a fair market value in excess of $5,000.00
owned or leased by the Company (such list identifying the properties owned by
the Company and all of the leases or agreements under which the Company is
lessee of or holds or operates any property). Except as set forth on SCHEDULE
2.9, the Company has good and valid title to all of its property and assets,
other than leased property, free and clear of any liens, claims, charges,
options, rights of tenants or other encumbrances, except as disclosed or
reserved in the Financial Statements or the Interim Financial Statements and
except for liens for current taxes not yet due and payable.
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<PAGE> 9
2.10 COMPUTER SOFTWARE, INTELLECTUAL PROPERTY.
(a) Attached SCHEDULE 2.10(A) sets forth a complete and correct list
and summary description of all trademarks, trade names, service marks, service
names, brand names, copyrights and patents, registrations thereof and
applications therefor, applicable to or used by the Company in the conduct of
its business, together with a complete list of all licenses granted by or to
the Company with respect to any of the above. All such trademarks, trade names,
service marks, service names, brand names, copyrights and patents reflected on
SCHEDULE 2.10(A) as owned by the Company are owned by the Company free and
clear of all liens, claims, security interests and encumbrances of any nature
whatsoever. All such trademarks, trade names, service marks, service names,
brand names, copyrights and patents reflected on SCHEDULE 2.10(A) as licensed,
leased or otherwise used (but not owned) by the Company are used by the Company
pursuant to terms of binding agreements under which the Company has the right
to use such trademarks, trade names, service marks, service names, brand names,
copyrights and patents as currently used in the Company's business without
payment of any royalty or other fee, except as set forth on SCHEDULE 2.10(A).
The Company is not currently in receipt of any notice of violation of, and the
Company is not violating the rights of others in any trademark, trade name,
service mark, copyright, patent, trade secret, know-how or other intangible
asset.
(b) Attached SCHEDULE 2.10(B) contains a complete and
accurate list of the computer software, databases and other intellectual
property that is owned by the Company (the "Owned Software"). Except as set
forth on SCHEDULE 2.10(B), the Company has exclusive rights and title to the
Owned Software, free and clear of all liens, claims, security interests and
encumbrances of any nature whatsoever, including claims or rights of employees,
agents, consultants, customers, licensees or other parties involved in the
development, creation, marketing, maintenance, enhancement or licensing of such
Owned Software. Except as set forth on SCHEDULE 2.10(B), the Owned Software is
not dependent on any Licensed Software (as defined below) in order to operate
fully in the manner in which it is intended, except for operating systems and
third party applications that are stated in the Owned Software documentation
and are readily commercially available. No Owned Software has been published or
disclosed to any other parties, except as set forth on SCHEDULE 2.10(B) and
except pursuant to contracts requiring such other parties to keep such Owned
Software confidential. To the knowledge of the Company, no such other party has
breached any such obligation of confidentiality.
(c) Attached SCHEDULE 2.10(C) contains a complete and
accurate list of all computer software, databases and other intellectual
property that is used by the Company and for which the Company is the licensee
or lessee or otherwise has legal rights of use (other than commercially
available over-the-counter "shrinkwrap" software) (the "Licensed Software").
SCHEDULE 2.10(C) also sets forth a list of all license fees, rents, royalties
or other charges that the Company is required or obligated to pay with respect
to Licensed Software. Prior to the date of this Agreement, the Company has
delivered to Medirisk true and complete copies of all agreements under which
the Company has the right to use Licensed Software. Except as described on
SCHEDULE 2.10(C), the Company has the right and license to use, sublicense,
modify and copy the Licensed Software, free and clear of any limitations or
encumbrances other than the payment of license or royalty fees set forth on
SCHEDULE 2.10(C). The Company is in full compliance with all provisions of any
license, lease or other similar agreement pursuant to which the Company has
rights to use the Licensed Software. Except as disclosed on SCHEDULE 2.10(C),
none of the Licensed Software has been incorporated into or made a part of any
Owned Software or any other Licensed Software. The Company has not published or
disclosed any Licensed Software to any other party except, in the case of
Licensed Software that the Company leases or markets to others, in accordance
with and as permitted by any license, lease or similar agreement relating to
the Licensed Software and except pursuant
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<PAGE> 10
to contracts requiring such other parties to keep the Licensed Software
confidential. To the knowledge of the Company, no party to whom the Company has
disclosed Licensed Software has breached such obligation of confidentiality.
(d) The Owned Software and the Licensed Software constitute
all software used in relation to the business of the Company (the "Company
Software"). Attached SCHEDULE 2.10(D) sets forth a list of all contract
programmers, independent contractors, nonemployee agents and persons or other
entities (other than employees) who have performed computer programming
services for the Company in connection with any of the Owned Software and
identifies all contracts and agreements to which the Company is a party
pursuant to which such services were performed. The transactions contemplated
by this Agreement will not cause a breach or default under any license or
similar agreement relating to the Company Software or impair Medirisk's ability
to use the Company Software in the same manner as such Company Software is
currently used by the Company. The Company is not infringing any intellectual
property rights of any other person or entity with respect to the Company
Software, and, to the knowledge of the Company, no other person or entity is
infringing any intellectual property rights of the Company with respect to the
Company Software.
(e) The Company and, to the knowledge of the Company, all
other parties to any licensing or similar arrangements under which the Company
is the licensor or has otherwise granted the right to use the Company Software
are in full compliance with such licensing or similar arrangements and are not
in breach of their obligations with respect thereto. The Company is not a party
to any license, installation agreement, maintenance agreement, data processing
agreement, services agreement or other agreement pursuant to which it is
committed to perform software installation, modifications, enhancements or
services without payment or for payments which, in the aggregate, are less than
the reasonably anticipated cost to perform such installation, modifications,
enhancements or services. The Company has complied in all material respects
with its obligations to its customers and licensees in respect of the Company
Software.
(f) Except as set forth on SCHEDULE 2.10(F), the Company has
granted no marketing rights in the Company Software to any third party, and all
marketing rights granted by any third party to the Company have been granted
exclusively to the Company. SCHEDULE 2.10(F) lists and separately identifies
all agreements pursuant to which the Company has granted or been granted rights
to market software, databases and other intellectual property owned by third
parties.
2.11 CONTRACTS.
(a) Attached as SCHEDULE 2.11(A) is a true and correct list
of all contracts, agreements and other instruments to which the Company is a
party under which the aggregate liability of, or benefit to, the Company could
reasonably be expected to exceed $5,000.00, including without limitation
contracts, agreements and other instruments concerning the following matters
(collectively the "Material Agreements"):
(i) the lease (as lessee or lessor) or license (as
licensee or licensor) of any real or personal property (tangible or
intangible);
(ii) the employment, termination, severance or
engagement of or with respect to any officer, director, employee, consultant or
agent;
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(iii) any arrangement between or among the Company,
its affiliates, the Shareholders, any director, officer or employee thereof
and/or related persons, including without limitation loans, guarantees and
credit arrangements;
(iv) any arrangement limiting the freedom of the
Company to compete in any manner in any line of business or requiring the
Company to share profits;
(v) any arrangement that could reasonably be
anticipated to have a material adverse effect on the Company, financial or
otherwise;
(vi) any arrangement not in the ordinary course of
business;
(vii) any power of attorney, whether limited or
general, granted by or to the Company;
(viii) any other arrangement that requires
performance for a period of more than ten (10) days or that requires payments
in excess of $5,000.00;
(ix) any loan agreement, contract or other
arrangement relating to the borrowing of money by the Company and the amount
outstanding thereunder or the guarantee by the Company of any third party
obligation;
(x) any agreement or arrangement involving
intellectual property rights (other than contracts entered into in the ordinary
course of business with customers and "shrink-wrap" software licenses);
(xi) any contract or arrangement relating to the
provision of data processing, network communication or other technical services
to or by the Company or any affiliate thereof; and
(xii) any contract or arrangement relating to the
provision, purchase or sale of goods or services, other than contracts entered
into in the ordinary course of business and involving payments not in excess of
$5,000.00.
(b) Except as set forth on SCHEDULE 2.11(B), (a) the Material
Agreements are valid and effective in accordance with their terms, and (b)
there is not under any Material Agreement (i) any existing or claimed default
by the Company or (ii) to the knowledge of the Company, any existing or claimed
default by any other party. There is no actual or, to the knowledge of the
Company, threatened termination, cancellation or limitation of any Material
Agreements. To the knowledge of the Company, there is no pending or threatened
bankruptcy, insolvency or similar proceeding with respect to any other party to
any of the Material Agreements.
2.12 TAXES.
(a) The Company has timely and accurately filed all federal,
state, foreign and local tax and information returns and reports required to be
filed by it and has timely paid, or will prior to Closing timely pay, all taxes,
including, without limitation, any and all income, sales, use, withholding,
excise and other taxes (collectively "Taxes") due and owing for all periods
prior to Closing. No liens have been filed and no claims are being asserted or,
to the Knowledge of each of the Shareholders and the Company, contemplated with
respect to any Taxes. No restrictions on assessment or collection of Taxes have
been waived with respect to the Company, and the Company has not consented to
the extension of any statute of limitations with respect to the Company relating
to Taxes, except for waivers or consents that are no longer in effect. The
Company has received no notice of assessment or proposed assessment of any Taxes
claimed to be owed by it or any other person or entity on its behalf. No
returns, reports or forms filed by or on behalf of
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the Company with respect to Taxes are currently being audited or examined, and
the Company has not received any notice of any such audit or examination.
(b) The Company has withheld or collected from each payment made to
each of its employees the amount of all Taxes required to be withheld or
collected therefrom, and the Company has, to the extent due, paid the same to
the proper tax depositories or collecting authorities.
(c) All ad valorem property taxes for years prior to 1997 imposed on
the Company with respect to, or which may become a lien on, its assets have
been paid in full.
2.13 EMPLOYEE BENEFIT PLANS. Attached as SCHEDULE 2.13 is a list of
every pension, retirement, profit-sharing, deferred compensation, severance
pay, vacation, bonus or other incentive plan, any other written or unwritten
employee program, arrangement that involves the expenditure of more than
$1,000.00 per year, agreement or understanding that involves the expenditure of
more than $1,000.00 per year, any medical, vision, dental or other health plan,
any life insurance plan or any other employee benefit plan or fringe benefit
plan, including without limitation any "employee benefit plan," as that term is
defined in Section 3(3) of the Employee Retirement Security Act of 1974, as
amended ("ERISA"), currently or previously adopted, maintained, sponsored or
contributed to by the Company for the benefit of employees, retirees,
dependents, spouses, directors or other beneficiaries and under which
employees, retirees, dependents, spouses, directors or other beneficiaries are
eligible to participate (collectively, the "Benefit Plans"). All of the Benefit
Plans (and any related trusts subject to ERISA) comply with and have been
administered in compliance with the provisions of ERISA, all provisions of the
Code, all applicable state or federal securities laws and all other applicable
laws, rules and regulations. No event has occurred that will or could
reasonably be expected to give rise to a disqualification of any such plan
under Sections 401(a) or 501(a) of the Code or to a tax under Section 511 of
the Code. Neither the Company nor any administrator or fiduciary of any such
Benefit Plan (or agent or delegate of any of the foregoing) has engaged in any
transaction or acted or failed to act in any manner that could reasonably be
expected to subject the Company to any direct or indirect liability for a
breach of any fiduciary or co-fiduciary duty under ERISA. No "party in
interest" (as defined in Section 3(14) of ERISA) or "disqualified person" (as
defined in Section 4975(e)(2) of the Code) of any Benefit Plan has engaged in
any "prohibited transaction" (within the meaning of Section 4975(c) of the Code
or Section 406 of ERISA and not exempt under Section 408 of ERISA).
2.14 CUSTOMERS. Attached as SCHEDULE 2.14 is a true and correct list
of all of the customers doing in excess of $2,500.00 of business with the
Company during 1996 and 1997 and to date in 1998 setting forth as to each such
customer its name, address, telephone number and principal person of contact.
The Company has not received any notice, nor does it have any reason to
believe, that any such customer has taken or contemplates taking steps that
could disrupt the business relationship of the Company with such customer.
2.15 OFFICERS, DIRECTORS AND BANK ACCOUNTS. SCHEDULE 2.15(A) lists the
names of all directors and officers of the Company. SCHEDULE 2.15(B) lists the
name and location of each bank or other institution in which the Company has
any deposit account or safe deposit box, all account numbers and names of all
persons authorized to draw thereon or to have access thereto.
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2.16 INTERESTED TRANSACTIONS. Except as set forth on SCHEDULE 2.16,
the Company is not a party to any contract, agreement or other instrument or
transaction with any of the following persons, or in which any of the following
persons have any direct or indirect interest (other than as a shareholder or
employee of the Company);
(a) Any director or officer of the Company or any of
the Shareholders;
(b) Any of the spouses, parents, siblings, children,
aunts, uncles, nieces, nephews, in-laws or grandparents of any of the persons
described in clause (a); or
(c) Any corporation, trust, partnership or other
entity in which any of the persons described in clauses (a) or (b) has a
beneficial interest (other than in a corporation whose shares are publicly
traded and in which such persons own beneficially in the aggregate no more than
two percent of the equity interest).
2.17 ABSENCE OF CERTAIN CHANGES. Since 31 December 1997, and except as
set forth on SCHEDULE 2.17: (a) the Company has operated its business in the
ordinary course; (b) there has not been any change in the business, financial
condition or results of operations of the Company that has had or is reasonably
likely to have a material adverse effect on the Company or its assets or
business; (c) there has not been any damage, destruction or loss (whether or
not covered by insurance) to the Company's assets that has had or is reasonably
likely to have a material adverse effect on the Company or its assets or
business; (d) except as disclosed in SCHEDULE 2.17(D), no customer has
canceled, discontinued or given written or oral notice of its intention to
cancel, discontinue or substantially reduce its business with the Company; and
(e) except as disclosed in SCHEDULE 2.17(E), the Company is not in default and,
to the knowledge of the Company, no customer is in default, under the Company's
contracts with any customer, and each such contract is in full force and effect
on the date of this Agreement, and such customer contracts contain no material
changes from the standard form of agreement used by the Company (including,
without limitation, any deviation from the standard warranties or limitation of
the Company's liability).
2.18 BOOKS AND RECORDS. All books, records and other information
(financial and otherwise), if any, provided by the Company or any Shareholder
to Medirisk are true and correct and accurately reflect the existence of the
Company's assets and the results of operations of the Company's business for
the periods of time stated therein, and such books, records and financial
information reflect revenues and income from the Company's business and not
from other sources, except as expressly disclosed to Medirisk.
2.19 ACCOUNTS RECEIVABLE AND PAYABLE. The accounts receivable
outstanding as of the date of the Interim Financial Statements are, and the
accounts receivable of the Company outstanding as of the Closing Date will be,
(i) valid and genuine accounts receivable arising only out of bona fide sales
and delivery of goods, performance of services and other business transactions
in the ordinary course of the Company's business consistent with past practice;
(ii) subject to no asserted defenses, counterclaims or rights of setoff, and
(iii) except as set forth on SCHEDULE 2.19, collectible within sixty (60) days
after billing at the full recorded amount thereof less the recorded allowance
for doubtful accounts reflected on the Interim Financial Statements. Except as
set forth on SCHEDULE 2.19, no accounts payable of the Company are, as of the
date of this Agreement, over thirty (30) days old.
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2.20 EMPLOYMENT AND LABOR MATTERS.
(a) SCHEDULE 2.20(A) sets forth (i) the number of all
full-time and part-time employees of the Company; (ii) the number of
independent contractors utilized by the Company and (iii) the name and
compensation paid to each independent contractor, employee of or consultant to
the Company who received salary, bonuses or other compensation for either of
the Company's two most recently ended fiscal years in excess of $25,000.00.
(b) To the knowledge of the Company, the Company is in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment, wages
and hours, occupational safety and health, including laws concerning unfair
labor practices within the meaning of Section 8 of the National Labor Relations
Act, and the employment of non-residents under the Immigration Reform and
Control Act of 1986.
(c) Except as disclosed on SCHEDULE 2.20(C):
(i) There are no charges, governmental audits,
investigations, administrative proceedings or complaints concerning the
Company's employment practices pending or, to the knowledge of the Company,
threatened before any federal, state or local agency or court, and, to the
knowledge of the Company, no basis for any such matter exists;
(ii) The Company is not a party to any union or
collective bargaining agreement, and, to the knowledge of the Company, no union
attempts to organize the employees of the Company have been made, and no such
attempts are now threatened; and
(iii) The Company has not experienced any organized
slowdown, work interruption, strike, or work stoppage by its employees.
2.21 INSURANCE. Except as described on SCHEDULE 2.21, all of the
assets and business of the Company are insured in such amounts and against such
losses, casualties or risks as are customary for similar properties and
businesses, and SCHEDULE 2.21 contains a list of all policies of insurance
currently in force with respect to the Company and its assets and business.
2.22 ENVIRONMENTAL MATTERS. To the knowledge of the Company and except
as set forth in SCHEDULE 2.22, there is no present or past Environmental
Condition in any way relating to the business, properties or assets of the
Company. "Environmental Condition" means (a) the introduction into the
environment of any pollution, including without limitation any contaminant,
irritant or pollutant or other toxic or hazardous substance, in violation of
any federal, state or local law, ordinance or governmental rule or regulations,
as a result of any spill, discharge, leak, emission, escape, injection, dumping
or release of any kind whatsoever of any substance or exposure of any type in
any workplaces or to any medium, including without limitation air, land,
surface waters or ground waters, or from any generation, transportation,
treatment, discharge, storage or disposal of waste materials, raw materials,
hazardous materials, biomedical waste including blood, toxic materials or
products of any kind or from the storage, use or handling of any hazardous or
toxic materials or other substances, as a result of which the Company has or
may become liable to any person or by any reason of which any of the Assets of
the Company may suffer or be subjected to any lien, encumbrance or restriction
of any nature, or (b) any noncompliance with
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<PAGE> 15
any federal, state or local environmental law, rule, regulation or order as a
result of or in connection with any of the foregoing.
2.23 COMPANY PRODUCTS AND SERVICES. The Company's products and
services conform in all material respects with any specification,
documentation, performance standard, representation or statement made or
provided with respect thereto by or on behalf of the Company, and there has not
been during the last three (3) years any claim made against the Company by any
customer of the Company or by any other person alleging that any product or
service of the Company (including each version thereof that has been licensed
or otherwise made available by the Company to any person) does not conform in
all material respects with any specification, documentation, performance
standard, representation or statement made or provided by or on behalf of the
Company, and, to the knowledge of each of the Company and the Shareholders,
there is not a reasonable basis for any such claim. No material product
liability or warranty claims have been communicated in writing to or threatened
in writing against the Company. To the knowledge of the Company, the Company's
products and services, as of the date hereof, during and after the calendar
year 2000 A.D., include design, function and performance capabilities such that
the Company's products and services shall not abnormally end and/or have
invalid and/or incorrect results from and/or performance or functional
degradation because of the then-current date. To the knowledge of the Company,
the design and function of the Company's products and services ensure year 2000
A.D. functionality and include, but are not limited to, date data century
recognition, calculations that accommodate same century and multi-century
formulas and date values, and date data interface values that reflect the
century. The Company makes no representations or warranties with respect to
whether or not the products or services of any supplier (including licensors of
software) to the Company are Year 2000 compliant or that the performance of
such products, or the provision of such services, will not be interrupted by
Year 2000 issues.
2.24 SCHEDULES. All Schedules attached hereto are true, correct and
complete as of the date of this Agreement. Matters disclosed on each Schedule
shall be deemed disclosed only for purposes of the matters to be disclosed in
such Schedule and shall not be deemed to be disclosed for any other purpose
unless specifically provided therein.
ARTICLE IIA
2.1A CAPACITY AND AUTHORITY. Each Responsible Shareholder represents,
severally and not jointly and severally, that such Shareholder has the capacity
and authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated by this Agreement
without the necessity of any act or consent of any other person not previously
obtained. This Agreement and each and every agreement, document and instrument
to be executed, delivered and performed in connection with this Agreement by
such Shareholder constitutes or will, when executed and delivered, constitute
the valid and legally binding obligations of such Shareholder, enforceable
against such Shareholder in accordance with their respective terms, except as
enforceability may be limited by applicable equitable principles (whether
applied with action at law or in equity) or by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect
affecting the enforcement of creditors' rights generally.
2.2A CAPITALIZATION; OWNERSHIP OF COMPANY STOCK. Each Shareholder
represents, by execution and delivery of this Agreement and/or execution and
delivery of a letter of transmittal or similar instrument referred to in
Section 7.2 (a) hereof, that such Shareholder is the legal and beneficial
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<PAGE> 16
owner of the number of shares of Company Stock reflected opposite his, her or
its name on SCHEDULE 2.2A, free and clear of all liens, claims, charges,
encumbrances, security interests, pledges or other claims.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MEDIRISK AND MERGER SUB
Medirisk and Merger Sub, jointly and severally, represent and warrant
to the Shareholders as follows:
3.1 ORGANIZATION AND STANDING. Medirisk and Merger Sub are each
corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware with the full power and authority to carry on
their respective businesses in the places and as they are now being conducted.
3.2 AUTHORITY AND STATUS. Each of Medirisk and Merger Sub has the
capacity and authority to execute and deliver this Agreement, to perform under
it and to consummate the transactions contemplated by this Agreement without
the necessity of any act or consent of any other person whomsoever. This
Agreement and each and every agreement, document and instrument to be executed,
delivered and performed by Medirisk or Merger Sub in connection with this
Agreement constitute or will, when executed and delivered, constitute the valid
and legally binding obligations of Medirisk or Merger Sub, enforceable against
Medirisk or Merger Sub in accordance with their respective terms, except as
enforceability may be limited by applicable equitable principles (whether
applied with action at law or in equity) or by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect
affecting the enforcement of creditors' rights generally.
3.3 AGREEMENT DOES NOT VIOLATE OTHER INSTRUMENTS. Except as set forth
on SCHEDULE 3.3, the execution and delivery of the Transaction Documents by
Medirisk and Merger Sub do not, and the consummation of the transactions
contemplated hereby will not, (a) violate or conflict with any provision of the
Certificate of Incorporation, as amended, or Bylaws, as amended, of Medirisk or
Merger Sub; (b) require any consent or approval under, conflict with, result in
the breach, termination or acceleration of, or violate or constitute an
occurrence of default under any provision of any mortgage, deed of trust,
conveyance to secure debt, note, loan, lien, lease, agreement or instrument to
which Medirisk or Merger Sub is a party or by which the Company, any
Shareholder or any of their respective properties are bound; or (c) constitute
a violation of any law, regulation, order, writ, judgment, injunction, or
decree applicable to Medirisk or Merger Sub or any of Medirisk's or Merger
Sub's properties.
3.4 SEC FILINGS. True, correct and complete copies of the following
documents have been made available to the Shareholders: (i) Medirisk's Annual
Report on Form 10-K for the fiscal year ended 31 December 1996, as filed with
the Securities and Exchange Commission (the "SEC"); and (ii) Medirisk's
Quarterly Reports on Form 10-Q for the three-month period[s] ended 31 March
1997, 30 June 1997 and 30 September 1997, respectively, as filed with the SEC
(collectively the "SEC Reports"). Since 30 September 1997, there has been no
material adverse change in the condition (financial or otherwise), assets,
liabilities, business or operations of Medirisk that is unique to the business
of Medirisk and its consolidated subsidiaries and that is required to be
disclosed by applicable law or by the rules of the Nasdaq National Market. None
of the SEC Reports contains a misstatement of material fact or omits to state a
material fact necessary to be stated therein in order that the statements made
therein are not misleading.
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<PAGE> 17
ARTICLE IV
COVENANTS AND UNDERTAKINGS
4.1 COVENANT NOT TO COMPETE. At Closing, Garton and Chermak will each
enter into a Covenant Not to Compete with Medirisk and Merger Sub substantially
in the form of attached EXHIBIT 4.1 (the "Covenants Not to Compete").
4.2 EMPLOYMENT AGREEMENT AND CONSULTING AGREEMENT. At Closing, Garton
and Chermak shall each enter into an Employment Agreement with Merger Sub in
substantially the form attached hereto as EXHIBIT 4.2 (each an "Employment
Agreement").
4.3 INVESTMENT LETTER. At Closing, each Shareholder receiving Medirisk
Common Stock under SECTION 1.5 will execute and deliver to Medirisk an
investment letter with respect to the Medirisk Common Stock to be delivered to
such Shareholder at Closing substantially in the form of attached EXHIBIT 4.3
(the "Investment Letter").
4.4 SHAREHOLDER CONSENT. Each Shareholder shall execute and deliver a
Shareholder Consent and Power of Attorney substantially in the form of attached
EXHIBIT 4.4 (the "Shareholder Consent") appointing Michael D. Chermak to act as
his, her or its attorney-in-fact for purposes of this Agreement and the
obligations and covenants of such Shareholder hereunder. In such capacity
Michael D. Chermak (and any successor of Michael D. Chermak in such capacity as
provided in the Shareholder Consent) is referred to in this Agreement as the
"Shareholders' Representative."
4.5 CONSENTS AND APPROVALS. The Company agrees to use its best efforts
to obtain the waiver, consent and approval of all persons whose waiver, consent
or approval is required in order to consummate the transactions contemplated by
this Agreement, or is required by any agreement, lease, instrument,
arrangement, judgment, decree, order or license to which the Company is a party
or subject that would prohibit, or require the waiver, consent or approval of
any person to such transactions, or under which the consummation of such
transactions would constitute (or with notice or lapse of time would
constitute) an event of default.
4.6 CONDUCT OF THE BUSINESS PRIOR TO CLOSING. Except with the written
consent of Medirisk and except as may be required to effect the transactions
contemplated by this Agreement, between the date of this Agreement and the
earlier of (i) the Merger Effective Time and (ii) the termination of this
Agreement, the Company will (a) not make any distributions of its assets to any
persons except as expressly contemplated by the Schedules hereto; (b) conduct
its operations in the ordinary course of business; (c) keep and maintain its
properties and facilities in good condition, repair and working order,
reasonable wear and tear excepted, and fully insured for liability and property
damages; (d) use its reasonable best efforts to preserve intact its business;
(e) use its reasonable best efforts to retain the service of its employees,
agents and consultants involved with or employed by the Company on terms and
conditions not less favorable than those existing prior to the execution of
this Agreement; (f) cooperate with Medirisk's representatives (without
disclosure of this Agreement or the contemplated sale to the Company's
customers or suppliers without the consent of Medirisk) in reviewing facts and
establishing and implementing procedures necessary to effect the Merger as
contemplated by this Agreement; (g) conduct its activities in a manner
consistent with this Agreement; (h) not enter into, assume or make any
contract, loan, license, designation, loan commitment, purchase, sale or
disposition of assets of the Company outside the ordinary course of business;
(i) except for mailing invoices in the ordinary course of business, not contact
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<PAGE> 18
any customer regarding collection of any account receivable and not discount
any account receivable; (j) not declare any dividend or comparable distribution
of assets; and (k) promptly advise Medirisk in writing of any material adverse
change in the Company's financial condition or business affairs.
4.7 TERMINATION OF EMPLOYMENT AGREEMENTS. Chermak and Garton severally
agree that any employment or management agreement to which he is a party with
the Company will be terminated effective at the Closing without any further
action by such individual, the Company or Medirisk, and no party to any such
agreement will have any liability or obligation thereunder of any nature or
kind from and after the Closing Date.
4.8 RESIGNATIONS. At the Closing, the Company will deliver to Medirisk
resignations, effective on or before the Closing Date of each officer and each
director resigning from all director and/or officer positions held by such
person with the Company.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF MEDIRISK AND MERGER SUB
The obligations of Medirisk and Merger Sub to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction, on or before the Closing Date, of each and every one of the
following conditions:
5.1 REPRESENTATIONS TRUE AND COVENANTS PERFORMED AT CLOSING. The
representations and warranties made by the Company in this Agreement or any
document or instrument delivered to Medirisk or Merger Sub or its
representatives hereunder shall be true and correct on the Closing Date with
the same force and effect as if such representations and warranties had been
made on and as of the Closing Date. The Company shall have duly performed all
of the agreements, covenants, acts and undertakings to be performed by it on or
prior to the Closing Date.
5.2 NO INJUNCTION, ETC. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
prohibit, or obtain substantial damages in respect of, or which is related to,
or arises out of, this Agreement or the consummation of the transactions
contemplated hereby, or which is related to or arises out of the business of
the Company, if such action, proceeding, investigation, regulation or
legislation, in the judgment of Medirisk, would make it inadvisable to
consummate such transactions or would have a material adverse effect on the
Company or its assets or business.
5.3 NO MATERIAL ADVERSE CHANGE. There shall not have been any material
adverse change in the business, assets, liabilities or condition, financial or
otherwise, of the Company between the date of the Interim Financial Statements
and the Closing Date.
5.4 CONSENTS. The Shareholders shall have delivered to Medirisk the
written consents of third parties and all governmental consents and approvals,
if any, referred to in Section 4.5 hereof, which consents shall be in form,
scope and substance reasonably satisfactory to Medirisk and its counsel.
5.5 GOOD STANDING CERTIFICATE. Medirisk shall have received a
Certificate of Existence or Good Standing from the States of California and
Tennessee, and from each other state in which the
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<PAGE> 19
Company is qualified to transact business as a foreign corporation, with
respect to the Company as of the most recent practical date prior to the
Closing Date.
5.6 DUE DILIGENCE. Medirisk shall in all respects be satisfied in its
discretion with the results of its due diligence investigation of the Company
and its assets and business.
5.7 OPINION OF COUNSEL. Medirisk shall have received an opinion of
counsel to the Company substantially in the form of attached EXHIBIT 5.7.
ARTICLE VI
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF THE SHAREHOLDERS TO CLOSE
The obligations of the Company to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction, on or
before the Closing Date, of each and every one of the following conditions:
6.1 REPRESENTATIONS TRUE AND COVENANTS PERFORMED AT CLOSING. The
representations and warranties made by Medirisk and Merger Sub in this
Agreement or any document or instrument delivered to the Shareholders or their
representatives hereunder shall be true and correct on the Closing Date with
the same force and effect as though such representations and warranties had
been made on and as of such date. Medirisk and Merger Sub shall have duly
performed all of the agreements, covenants, acts and undertakings to be
performed by it on or prior to the Closing Date.
6.2 NO INJUNCTION, ETC. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
prohibit, or obtain substantial damages in respect of, or which is related to,
or arises out of, this Agreement or the consummation of the transactions
contemplated hereby.
6.3 OPINION OF COUNSEL. The Shareholders shall have received an
opinion of counsel to Medirisk substantially in the form of attached EXHIBIT
6.3.
ARTICLE VII
CLOSING
7.1 TIME AND PLACE OF CLOSING.
(a) The closing (the "Closing") of the transactions
contemplated by this Agreement will be held on 26 March 1998 or such other date
as the parties may agree. The Closing shall commence at 10:00 a.m. at the
offices of Medirisk, Inc., Two Piedmont Center, Suite 400, 3565 Piedmont Road,
N.E., Atlanta, Georgia 30305-1502 or at such other time or place upon which the
parties agree. The date on which Closing occurs shall be referred to as the
"Closing Date."
(b) The parties hereto agree that should the Closing occur,
the effective time and date of the Merger solely for accounting purposes shall
be 12:01 a.m. Eastern Time on 23 March 1998 (the "Accounting Effective Date").
By way of explanation, the parties intend, in light of the de facto control of
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the Company's business exerted by Medirisk from and after 23 March 1998, that
all revenue generated after 23 March 1998 shall be for the benefit of Medirisk.
The parties acknowledge that while for accounting purposes the effective date
of the Merger shall be 23 March 1998, no obligations that accrue under
contracts or agreements prior to the Merger Effective Time and no accrued
liabilities of the Company shall be assumed, directly or indirectly, by
Medirisk except unless and until the Merger Effective Time, that no employees
or other agents of the Company shall directly or indirectly become employees or
other agents of Medirisk for any period prior to the Merger Effective Time, and
that all covenants, representations and warranties in the certificates to be
provided by the Shareholders pursuant to Section 5.1 shall be made and dated as
of the Closing Date. Notwithstanding the foregoing, neither the Company nor the
Shareholders shall have any liability nor bear any cost arising from or
associated with Medirisk's inability to account, for any purpose, for the
transaction contemplated hereby on the basis set forth in this Section 7.1(b).
7.2 TRANSACTIONS AT CLOSING.
(a) The following deliveries shall be made at the
Closing:
(i) The Company shall deliver or cause to be
delivered to Medirisk Certificates of Good Standing of the Company, as of the
most recent practicable date, as contemplated by Section 5.5;
(ii) As contemplated by Section 4.1, Medirisk,
Merger Sub and each of Garton and Chermak shall execute and deliver to each
other the Covenants Not to Compete;
(iii) As contemplated by Section 4.2, Merger Sub and
each of Garton and Chermak shall execute and deliver to each other their
Employment Agreements;
(iv) As contemplated by Section 4.3, each of the
Shareholders receiving Medirisk Common Stock shall execute and deliver to
Medirisk an Investment Letter;
(v) As contemplated by Section 4.4, each of the
Shareholders shall execute and deliver to Medirisk a Shareholder Consent;
(vi) Each of the Shareholders (who actually have
been issued share certificates in Company Stock) shall deliver to Medirisk
certificates for the Company Stock formerly representing their shares of
Company Stock, duly endorsed for transfer or accompanied by blank stock powers
or equivalent letter of transmittal;
(vii) Counsel for the Company shall have delivered
to Medirisk the form of opinion attached hereto as Exhibit 5.7; and
(viii) Counsel for Medirisk shall have delivered to
the Shareholders' Representative, on behalf of the Shareholders, the form of
opinion attached hereto as Exhibit 6.3.
(b) At Closing (or as soon as practicable thereafter once
all the items referred to in Section 7.2(a) have been delivered) Medirisk shall:
(i) Cause Merger Sub to disburse the Cash Initial
Consideration as set forth in SCHEDULE 1.5(C) (that portion thereof deliverable
to the Shareholders' Representative on behalf of the Shareholders who have
tendered their certificates representing Company Stock to be allocated among
such
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<PAGE> 21
Shareholders as set forth on SCHEDULE 1.5(C) under the heading "Allocation of
Cash and Medirisk Common Stock Deliverable to Shareholders").
(ii) Medirisk shall cause Merger Sub to deliver
Medirisk Common Stock to the Shareholders' Representative for allocation to the
Shareholders as set forth on SCHEDULE 1.5(C) under the heading "Allocation of
Cash and Medirisk Common Stock Deliverable to Shareholders."
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION
The parties shall have the mutual rights of indemnification set forth
on Schedule 8.
ARTICLE IX
TERMINATION
9.1 METHOD OF TERMINATION. This Agreement and the transactions
contemplated by it may be terminated at any time prior to the Closing Date:
(a) By the mutual consent of the Shareholders' Representative
and Medirisk;
(b) By the Shareholders' Representative after 31 March 1998
if Medirisk or Merger Sub shall (i) fail to perform in any material respect its
agreements contained herein required to be performed by it on or prior to the
Closing Date, or (ii) materially breach any of its representations, warranties
or covenants contained herein;
(c) By Medirisk after 31 March 1998, if any Shareholder shall
(i) fail to perform in any material respect his, her or its agreements
contained herein required to be performed by him, her or it on or prior to the
Closing Date, or (ii) materially breach any of his, her or its representations,
warranties or covenants contained herein;
(d) By the Shareholders' Representative or Medirisk at any
time after 30 April 1998 if the Closing shall not have occurred for any reason
on or prior to 30 April 1998.
(e) By either Medirisk or the Shareholders' Representative if
there shall be any order, writ, injunction or decree of any court or
governmental or regulatory agency binding on Medirisk, Merger Sub, the Company
or any Shareholder, which prohibits or restrains Medirisk, Merger Sub, the
Company and/or any Shareholder from consummating the Merger hereunder, provided
that Medirisk and the Shareholders shall have used their reasonable best
efforts to have any such order, writ, injunction or decree lifted and the same
shall not have been lifted within ten (10) days after entry, by any such court
or governmental or regulatory agency.
9.2 NOTICE OF TERMINATION. Notice of termination of this Agreement, as
provided for in this Article IX, shall be given by the parties so terminating
to the other parties hereto in accordance with Section 10.1 of this Agreement.
9.3 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 9.1 hereof, this Agreement shall become void and of no further force
and effect, and each party shall pay the
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costs and expenses incurred by it in connection with this Agreement; and,
provided the Agreement was not terminated pursuant to subparagraph (b) or (c)
of Section 9.1, no party (or any of its officers, directors, employees, agents,
representatives or shareholders) shall be liable to any other party for any
costs, expenses, damages (direct or indirect) or loss of anticipated profits.
If, however, this Agreement is terminated pursuant to subparagraphs (b) or (c)
of Section 9.1, this Section 9.3 shall not relieve a breaching or defaulting
party from any liability to the other party.
9.4 RISK OF LOSS. The Company and the Shareholders shall bear all risk
of condemnation, destruction, loss or damage due to fire or other casualty from
the date of this Agreement through the Closing. If the condemnation,
destruction, loss or damage is such that the business of the Company is
interrupted or curtailed or the assets of the Company are materially affected,
then Medirisk shall have the right to terminate this Agreement. If the
condemnation, destruction, loss or damage is such that the business is neither
interrupted nor curtailed or the assets are not materially affected, or if the
business of the Company is curtailed or interrupted or the assets are
materially affected and Medirisk nevertheless forgoes the right to terminate
this Agreement, then the Merger Consideration shall be adjusted at Closing to
reflect such condemnation, destruction, loss or damage to the extent that
insurance proceeds are not sufficient to cover such destruction, loss or
damage. If Medirisk, on the one hand, and the Shareholders, on the other, are
unable to agree upon the amount of such adjustment, then the dispute shall be
resolved jointly by the independent accounting firms then employed by the
Company and Medirisk, and if said accounting firms do not agree, they shall
appoint a Designated Accountant (in the manner prescribed in SCHEDULE 1.5(B))
to make such determination, whose determination of the dispute shall be final
and binding. For purposes of this Section 9.4 the fees and expenses of the
Designated Accountant shall be borne one-half by Medirisk and one-half by
Shareholders.
ARTICLE X
GENERAL PROVISIONS
10.1 NOTICES. (a) All notices, requests, demands and other
communications hereunder shall be in writing and shall be delivered by hand,
facsimile or mailed by nationally recognized overnight delivery service or by
registered or certified mail, return receipt requested, first class postage
prepaid, addressed as follows:
If to any Shareholder:
Michael D. Chermak, Shareholders' Representative
Suite 701
4901 Morena Boulevard
San Diego, California 92117
Facsimile : (619) 581-3495
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<PAGE> 23
With a copy (which shall not constitute
notice) to:
Norman C. Davis, Esq.
Suite 400
2010 Main Street
Irvine, California 92614
Facsimile : (714) 832-9405
If to Medirisk:
Medirisk, Inc.
Two Piedmont Center, Suite 400
3565 Piedmont Road
Atlanta, Georgia 30305-1502
Attention: Legal Department
Facsimile: (404) 364-6703
(b) If delivered personally or by facsimile, the date on
which a notice, request, instruction or document is delivered shall be the date
on which such delivery is made and, if delivered by mail, the date on which
such notice, request, instruction or document is received shall be the date of
delivery.
(c) Any party hereto may change its address specified for
notices herein by designating a new address by notice in accordance with this
Section 10.1.
10.2 BROKERS. Medirisk and Merger Sub represent and warrant to the
Shareholders, and the Shareholders jointly and severally represent and warrant
to Medirisk and Merger Sub, that, except as disclosed in SCHEDULE 10.2, no
broker or finder has acted for it or them or any entity controlling, controlled
by or under common control with it or them in connection with this Agreement.
10.3 FURTHER ASSURANCES. Each party covenants that at any time, and
from time to time, after the Closing, it will execute such additional
instruments and take such actions as may be reasonably requested by the other
parties to confirm or perfect or otherwise to carry out the intent and purposes
of this Agreement.
10.4 WAIVER. Any failure on the part of any party hereto to comply
with any of its obligations, agreements or conditions hereunder may be waived
by any other party to whom such compliance is owed. No waiver of any provision
of this Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver.
10.5 EXPENSES. All expenses incurred by the parties hereto in
connection with or related to the authorization, preparation and execution of
this Agreement and the Closing of the transactions contemplated hereby,
including, without limitation of the generality of the foregoing, all fees and
expenses of agents, representatives, counsel and accountants employed by any
such party, shall be borne solely and entirely by the party which has incurred
the same. The Shareholders agree that the Company shall not pay any expenses in
connection with or related to the authorization, preparation and execution of
this
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<PAGE> 24
Agreement or the Closing of the transactions contemplated hereby (all such
expenses to be paid by the Shareholders from the Cash Initial Consideration
according to their proportionate interests in the Company) and that, if the
Company pays any such expenses, Shareholders shall promptly reimburse the
Company for any amount so paid.
10.6 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and assigns.
10.7 HEADINGS. The section and other headings in this Agreement are
inserted solely as a matter of convenience and for reference, and are not a
part of this Agreement.
10.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties hereto and supersedes and cancels any prior agreements,
representations, warranties, or communications, whether oral or written, among
the parties hereto relating to the transactions contemplated hereby or the
subject matter herein. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, but only by an agreement in
writing signed by the party against whom or which the enforcement of such
change, waiver, discharge or termination is sought.
10.9 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Georgia.
10.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.11 PRONOUNS. All pronouns used herein shall be deemed to refer to
the masculine, feminine or neuter gender as the context requires.
[Signatures Begin On Next Page]
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IN WITNESS WHEREOF, each party hereto has executed or caused this
Agreement to be executed on its behalf, all on the day and year first above
written.
MEDIRISK, INC.
By: /s/Kenneth M. Goins, Jr.
---------------------------------
KENNETH M. GOINS, JR.
Executive Vice President &
Chief Financial Officer
MERGER SUB:
HEALTHDEMOGRAPHICS, INC.
By: /s/Kenneth M. Goins, Jr.
---------------------------------
KENNETH M. GOINS, JR.
Executive Vice President &
Chief Financial Officer
COMPANY:
HEALTHDEMOGRAPHICS
By: /s/P. Timothy Garton
----------------------------------
P. TIMOTHY GARTON
Chief Executive Officer
RESPONSIBLE SHAREHOLDERS:
/s/Michael D. Chermak
----------------------------------
MICHAEL D. CHERMAK
/s/P. Timothy Garton
----------------------------------
P. TIMOTHY GARTON
-----------------
<PAGE> 26
SIGNING SHAREHOLDERS:
(The following Shareholders join in this
Agreement solely for purposes of those
representation specifically made by the
Signing Shareholders in Section 1.6 of this
Agreement):
/s/Richard D. Propper
-------------------------------------
RICHARD D. PROPPER
-------------------------------------
/s/David Smith
DAVID SMITH, both individually and as
Manager of Interim Advantage Fund, LLC
<PAGE> 27
LIST OF EXHIBITS
EXHIBIT 4.1 Form of Covenant Not to Compete
EXHIBIT 4.2(A) Form of Employment Agreement
EXHIBIT 4.3 Form of Investment Letter
EXHIBIT 4.4 Form of Shareholder Consent and Power of Attorney
EXHIBIT 5.7 Form of Opinion of Counsel to Company
EXHIBIT 6.3 Form of Opinion of Counsel to Medirisk
<PAGE> 28
LIST OF SCHEDULES
SCHEDULE 1.5(C) Allocation of Initial Merger Consideration
SCHEDULE 1.5(C)(I) Additional Consideration
SCHEDULE 1.6(M) Distributions Other Than Normal Dividends During
Preceding Three Years
SCHEDULE 1.6(N) Reacquisitions or Redemptions of Company Stock During
Preceding Three Years
SCHEDULE 2.1 Foreign Qualifications
SCHEDULE 2.3 Other Equity Rights
SCHEDULE 2.4 Subsidiaries, Investments, Dispositions & Predecessors
SCHEDULE 2.5 Financial Statements and Exceptions
SCHEDULE 2.6 Required Consents of the Company and Shareholders
SCHEDULE 2.7 Litigation
SCHEDULE 2.8 Permits
SCHEDULE 2.9 Owned and Leased Property & Exceptions to Title
SCHEDULE 2.10(A) Trademarks, Etc.
SCHEDULE 2.10(B) Owned Software
SCHEDULE 2.10(C) Licensed Software
SCHEDULE 2.10(D) Programmers of Company Software
SCHEDULE 2.10(F) Grants of Intellectual Property Marketing Rights
SCHEDULE 2.11(A) Material Agreements
SCHEDULE 2.11(B) Exceptions to Material Agreements
SCHEDULE 2.13 Employee Benefit Plans
SCHEDULE 2.14 Material Customers
SCHEDULE 2.15(A) Directors & Officers of the Company
SCHEDULE 2.15(B) Bank Accounts
SCHEDULE 2.16 Related-Party Transactions
SCHEDULE 2.17 Certain Changes Since 31 December 1997
SCHEDULE 2.17(A) Customer Cancellations
SCHEDULE 2.17(B) Defaults Under Customer Contracts
SCHEDULE 2.19 Delinquent Accounts Payable
SCHEDULE 2.20(A) Employees, Contractors & Material Compensation
SCHEDULE 2.20(C) Labor Matters
SCHEDULE 2.21 Insurance Matters
SCHEDULE 2.22 Environmental Matters
SCHEDULE 2.2A Shareholders and Shares Held
SCHEDULE 3.3 Required Consents of Medirisk
SCHEDULE 8 Indemnification
SCHEDULE 10.2 Participating Brokers
<PAGE> 1
EXHIBIT 3.1.1
CERTIFICATE OF DESIGNATION OF
SERIES 1998-A PREFERRED STOCK
OF
MEDIRISK, INC.
Pursuant to the authority in its Certificate of Incorporation and
Section 151 of the Delaware General Corporation Law, as amended (the "DGCL"),
Medirisk, Inc., a Delaware corporation (the "Corporation"), hereby adopts the
following designation of the Series 1998-A Preferred Stock and certifies:
FIRST: The name of the Corporation is Medirisk, Inc.
SECOND: The following designation of preferred stock is hereby added
to the Certificate of Incorporation of the Corporation in accordance with
Section 151 of the DGCL by the addition of a provision stating the number,
designation, powers, relative, participating, optional and other special rights
of a series of preferred stock of the Corporation, as fixed by the Board of
Directors of the Corporation under authority contained in Article IV of the
Corporation's Certificate of Incorporation.
To effect the foregoing, the following provisions designating a series
of preferred stock, to be known as the Series 1998-A Preferred Stock, as set
forth in EXHIBIT "A" attached hereto, are hereby added to Article IV of the
Corporation's Certificate of Incorporation.
THIRD: The foregoing designation as set forth in Article SECOND of
this Certificate of Designation was authorized and adopted by the Board of
Directors of the Corporation by unanimous written consent effective as of the
26th day of March 1998.
FOURTH: The designation has been duly adopted in accordance with the
provisions of Section 151 of the DGCL.
IN WITNESS WHEREOF, Medirisk, Inc. has caused this Certificate of
Designation to be executed by its duly authorized officer and declares and
certifies that this is the act and deed of the Corporation and that the facts
herein stated are true this 26th day of March 1998.
MEDIRISK, INC.
By: /s/ Barry W. Burt
-----------------
BARRY W. BURT
Secretary
<PAGE> 2
EXHIBIT "A"
TO
CERTIFICATE OF DESIGNATION OF
SERIES 1998-A REDEEMABLE PREFERRED STOCK
1. DESIGNATION. There is hereby designated a series of preferred
stock to be known as the "Series 1998-A Redeemable Preferred Stock" consisting
of Five Thousand (5,000) shares of the undesignated preferred stock of the
Corporation (the "Series 1998-A Preferred Stock"), which series shall have the
following rights, terms and privileges:
2. DIVIDENDS.
(a) The holders of record of the then outstanding Series
1998-A Preferred Stock shall be entitled to receive when, as and if declared by
the Board of Directors of the Corporation, out of the funds legally available
therefor, cumulative dividends at the annual rate of five percent (5%) per
share. Such dividends shall accrue on each share of Series 1998-A Preferred
Stock from and after the date on which each such share is issued by the
Corporation (the "Issue Date"), shall accrue from day to day, shall be declared
and paid annually on December 31 of each year, and shall be payable in cash.
(b) Subject to the provisions of this Section 2, the
Corporation may, in the Board's discretion, declare and pay dividends or
distributions, or make provision for the payment thereof, on any equity
security of the Corporation, but only if all accrued dividends and
distributions on the Series 1998-A Preferred Stock shall have been paid and
made in full prior to the date of any such declaration, payment, provision or
distribution.
3. LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding
up of the affairs of the Corporation, whether voluntary or involuntary, after
payment or provision for payment of the debts and other liabilities and
obligations of the Corporation and payment of the liquidation preference with
shares to any shares of preferred stock of the Corporation ranking senior to
Series 1998-A Preferred Stock upon dissolution, each holder of Series 1998-A
Preferred Stock then outstanding shall be entitled to be paid out of the net
assets of the Corporation available for distribution to the stockholders of the
Corporation prior and in preference to any payment or declaration and setting
apart for payment of any amount in respect of the Common Stock of the
Corporation (the "Common Stock"), an amount equal to the sum of the following:
(i) Ten Thousand Dollars ($10,000.00) per share of Series 1998-A Preferred
Stock held by such holder, and (ii) an amount equal to all accrued and unpaid
dividends thereon, whether or not declared, to and including the date full
payment shall be tendered to the holders of the Series 1998-A Preferred Stock
with respect to such liquidation, dissolution or winding up (clauses (i) and
(ii), collectively the "Series 1998-A Liquidation Preference"); if upon any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed to the holders of the Series 1998-A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aggregate amount of the Series 1998-A Liquidation Preference, then all
of the net assets of the Corporation available for distribution to its
shareholders shall be distributed ratably among the holders of the Series
1998-A Preferred Stock in proportion to the then applicable Series 1998-A
Liquidation Preference.
(b) Upon the completion of the distribution required by
Section 3(a) above, if assets of the Corporation remain to be distributed, the
holders of Common Stock of the Corporation and any shares
<PAGE> 3
ranking on liquidation junior to the Series 1998-A Preferred Stock shall be
entitled to the remaining assets of the Corporation.
(c) Written notice of any such liquidation, dissolution or
winding up, stating a payment date, the place where such payment shall be made,
shall be given to the holders of the Series 1998-A Preferred Stock not later
than ten (10) business days prior to such payment date.
(d) Whenever the distribution provided for in this Section 3
shall be payable in property other than cash, the value of such distribution
shall be the fair market value of such property as determined in good faith by
the Corporation's Board of Directors.
4. VOTING RIGHTS. Except as otherwise expressly provided herein
or as required by law, the holders of Series 1998-A Preferred Stock shall be
entitled to vote on all matters upon which holders of Common Stock have the
right to vote and, with respect to such vote, shall be entitled to notice of
any meeting of the Corporation's stockholders in accordance with the bylaws of
the Corporation, and shall be entitled to a number of votes per share of Series
1998-A Preferred Stock equal to the number of shares of Common Stock into which
a share of Series 1998-A Preferred Stock is then convertible as provided in
Section 6 below. Except as otherwise expressly provided herein, or to the
extent class or series voting is otherwise required by law, the holders of
Series 1998-A Preferred Stock and Common Stock shall vote together as a single
class and not as separate classes. Notwithstanding any provision of the
Certificate of Incorporation or the Delaware General Corporation Law, as
amended, to the contrary, the Board of Directors may at any time and from time
to time include additional shares in the designation of Series 1998-A Preferred
Stock, designate one or more series or classes of preferred stock with
liquidation preferences, voting rights, dividend rights and other rights and
privileges senior to the Series 1998-A Preferred Stock without the vote or
consent of, or notice to, the holders of the Series 1998-A Preferred Stock.
5. REDEMPTION RIGHTS.
(a) Effective upon the fifth anniversary of any Issue Date,
the Corporation may redeem for cash all, but not less than all, of the shares
of Series 1998-A Preferred Stock issued on such Issue Date that are then
outstanding by giving notice to the holders thereof of such redemption.
Dividends shall cease to accrue on any share of Series 1998-A Preferred Stock
for which notice of redemption has been given by the Corporation as of the date
fixed in such notice for redemption, and such shares to be redeemed shall cease
to be outstanding as of such date and shall represent only the right to receive
the Redemption Price therefor, without interest. With such notice of redemption
the Corporation shall include a letter of transmittal or other instructions
regarding the surrender of certificates representing Series 1998-A Preferred
Stock and the receipt of payment therefor. The redemption price for any shares
redeemed pursuant to this Section 5(b) shall be the Series 1998-A Liquidation
Preference (the "Redemption Price"), and the Redemption Price shall be paid by
the Corporation to the holder of Series 1998-A Preferred Stock upon surrender
to the Corporation of the certificate(s) representing the Series 1998-A
Preferred Stock being redeemed duly endorsed for transfer or accompanied by
blank stock powers.
(b) Effective upon the twentieth anniversary of each Issue
Date, the Corporation shall redeem for cash all, but not less than all, of the
shares of Series 1998-A Preferred Stock issued on such Issue Date that are then
outstanding by giving notice to the holders thereof of such redemption.
Dividends shall cease to accrue on any share of Series 1998-A Preferred Stock
for which notice of redemption has been given by the Corporation as of the date
fixed in such notice for redemption, and such shares to be redeemed shall cease
to be outstanding as of such date upon payment of, or provision for payment of,
the
-2-
<PAGE> 4
redemption price therefor, and shall represent only the right to receive
the Redemption Price therefor, without interest. With such notice of redemption
the Corporation shall include a letter of transmittal or other instructions
regarding the surrender of certificates representing Series 1998-A Preferred
Stock and the receipt of payment therefor. The redemption price for any shares
redeemed pursuant to this Section 5(b) shall be the Redemption Price, and the
Redemption Price shall be paid by the Corporation to the holder of Series
1998-A Preferred Stock upon surrender to the Corporation of the certificate(s)
representing the Series 1998-A Preferred Stock being redeemed duly endorsed for
transfer or accompanied by blank stock powers.
6. MANDATORY CONVERSION.
(a) If, while any shares of Series 1998-A Preferred Stock are
outstanding, the Market Value (as defined below) equals or exceeds the Series
1998-A Conversion Price (as defined below), then each share of Series 1998-A
Preferred Stock shall automatically and without any action on the part of the
holder thereof or the Corporation be converted into a number of shares of
Common Stock that results from dividing the Series 1998-A Liquidation
Preference by the Series 1998-A Conversion Price in effect at the time of
conversion of such Series 1998-A Preferred Stock.
(b) For purposes of this Certificate of Designation, the term
"Market Value" means, on any date, the average of the daily closing prices per
share of Common Stock for the twenty (20) consecutive Trading Days (as defined
below) immediately prior to such date; provided that such twenty (20)
consecutive Trading Days shall in no event include any Trading Day (i) before
the first full Trading Day after the first public announcement of the issuance
of a dividend or other distribution on the Common Stock, or (ii) after the last
full Trading Day prior to the commencement of "ex-dividend" trading on the
exchange or market specified in the following sentence. The closing price for
each day shall be the last sale price or, in case no sale takes place on such
day, the average of the closing bid and asked prices, in either case as
reported in the principal consolidated transaction reporting system with
respect to the principal national securities exchange or Nasdaq National Market
on which the Common Stock is then listed or admitted to trading or, if the
Common Stock is not so listed or admitted to trading, the last quoted sale
price or, if not so quoted, the average of the bid and asked prices in the
over-the-counter market as reported by the Nasdaq Stock Market or such other
system then in use, or, if on any such date the Common Stock is not quoted by
any such organization, the average closing bid and asked prices as furnished by
a professional market maker making a market in the Common Stock selected by the
Board of Directors of the Corporation. For purposes of this Certificate of
Designation, the term "Trading Day" means a day on which the principal
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not so
listed or admitted to trading, any day other than a Saturday, Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
(c) For purposes of this Certificate of Designation, the term
"Series 1998-A Conversion Price" means $22.6094, adjusted as provided in the
next succeeding sentence. If the Corporation shall at any time or from time to
time after March 31, 1998 effect a subdivision or combination of its
outstanding Common Stock (whether by stock split, stock dividend or otherwise),
the Series 1998-A Conversion Price in effect immediately before that
subdivision or combination shall be proportionately adjusted by multiplying the
then effective Series 1998-A Conversion Price by a fraction, (i) the numerator
of which is the number of shares of Common Stock issued and outstanding
immediately prior to such subdivision or combination, and (ii) the denominator
of which is the number of shares of Common Stock issued and outstanding
immediately after such subdivision or combination. The number of shares of
Common Stock outstanding at any time shall, for the purposes of this Section
6(c), include the
-3-
<PAGE> 5
number of shares of Common Stock into which any convertible securities of the
Corporation may be converted, or for which any warrant, option or rights of the
Corporation may be exchanged. Any adjustment under this Section 6(c) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(d) If at any time or from time to time there shall be (i) a
capital reorganization of the Common Stock (other than a subdivision or
combination of shares provided for in Section 6(c) above) or (ii) a merger,
consolidation or statutory share exchange of the Corporation with or into
another corporation in which consolidation, merger or statutory share exchange
persons owning capital stock of the Corporation immediately prior to the
consolidation, merger or share exchange own less than a majority of the voting
stock of the resulting, surviving or exchanging corporation, or (iii) the sale
of all or substantially all the Corporation's properties and assets or capital
stock to any other person, then, as a part of such reorganization, merger,
consolidation, share exchange or sale (a "Transaction"), provision shall be
made so that the holders of the Series 1998-A Preferred Stock shall receive in
the Transaction payment of the Series 1998-A Liquidation Preference or shall,
after the Transaction, be entitled to receive, upon conversion of the Series
1998-A Preferred Stock, the number of shares of stock or other securities or
property of the Corporation, or of the successor corporation resulting from the
Transaction, to which a holder of the maximum number of Common Stock into which
such Series 1998-A Preferred Stock would then be converted would have been
entitled on the Transaction. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 6 with respect to the
rights of the holders of the Series 1998-A Preferred Stock after the
Transaction to the end that the provisions of this Section 6 (including
adjustment of the Series 1998-A Conversion Price then in effect and the number
of shares issuable upon conversion of the Series 1998-A Preferred Stock) shall
be applicable after that event as nearly equivalent as may be practicable.
(e) The provisions of subsections (c) and (d) of this Section
6 shall apply to successive issuances, dividends or other distributions,
subdivisions and combinations or Transactions on or of Common Stock after March
31, 1998.
(f) In each case of an adjustment or readjustment of the
Series 1998-A Conversion Price, the Corporation, at its expense, shall cause
independent certified public accountants of recognized standing selected by the
Corporation (who may be the independent certified public accounts then auditing
the books of the Corporation) to compute such adjustment or readjustment in
accordance with this Certificate of Designation and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first-class mail, postage prepaid, to each registered holder of the Series
1998-A Preferred Stock at the holder's address as shown in the Corporation's
books.
(g) No fractional shares of Common Stock shall be issued upon
conversion of Series 1998-A Preferred Stock. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to the product of such fraction multiplied by the Market Value on the
date of conversion. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series 1998-A Preferred Stock held by the holder that is at the time being
converted into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(h) The Corporation shall at all times reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as may from time to time be required, at such time, to be
issued by the Corporation upon exercise of all then-exercisable warrants and
options to purchase shares of Common Stock or the right to convert other
convertible securities into shares
-4-
<PAGE> 6
of Common Stock and such number of shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of Series
1998-A Preferred Stock.
(i) Any notice required by the provisions of this Section 6
to be given to the holders of the Series 1998-A Preferred Stock shall be deemed
given when personally delivered to such holder or five business days after the
same has been deposited in the United States mail, certified or registered
mail, return receipt requested, postage prepaid, and addressed to each holder
of record at this address appearing on the books of the Corporation.
(j) The Corporation will pay all taxes and other governmental
charges (other than taxes measured by the revenue or income of the holders of
the Series 1998-A Preferred Stock) that may be imposed in respect of the issue
or delivery of Common Stock upon conversion of the Series 1998-A Preferred
Stock.
(k) No Series 1998-A Preferred Stock acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued, and all such shares shall be canceled, retired and eliminated from
the shares which the Corporation shall be authorized to issue.
