1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 31, 1996
REGISTRATION NO. 333-04451
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDAPHIS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 7374 58-1651222
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2700 CUMBERLAND PARKWAY, SUITE 300
ATLANTA, GEORGIA 30339
(770) 444-5300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
RANDOLPH G. BROWN
2700 CUMBERLAND PARKWAY, SUITE 300
ATLANTA, GEORGIA 30339
(770) 444-5300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
ROBERT W. MILLER WILLIAM R. SPALDING EDWARD J. PIERCE
KING & SPALDING SENIOR VICE PRESIDENT-- ROBERT F. WEBER
191 PEACHTREE STREET ADMINISTRATION, GENERAL COUNSEL SEYFARTH, SHAW, FAIRWEATHER &
ATLANTA, GEORGIA 30303 AND SECRETARY GERALDSON
(404) 572-4600 MEDAPHIS CORPORATION 2029 CENTURY PARK EAST
2700 CUMBERLAND PARKWAY SUITE 3300
SUITE 300 LOS ANGELES, CALIFORNIA 90067
ATLANTA, GEORGIA 30339 (310) 277-7200
(770) 444-5300
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable following the effectiveness of this Registration Statement.
If any securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
MEDAPHIS CORPORATION
CROSS REFERENCE TABLE
LOCATION IN PROXY STATEMENT/PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-4
ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover of Proxy
Statement/Prospectus; Facing Page of the
Registration Statement
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Available Information; Incorporation of
Certain Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Summary
4. Terms of the Transaction................... Summary; The Merger
5. Pro Forma Financial Information............ Summary; Unaudited Pro Forma Combined
Financial Information
6. Material Contacts with the Company Being
Acquired................................. Summary; The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable
8. Interests of Named Experts and Counsel..... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
10. Information With Respect to S-3
Registrants.............................. Summary; Unaudited Pro Forma Combined
Financial Information; Business of
Medaphis
11. Incorporation of Certain Information by
Reference................................ Incorporation of Certain Documents by
Reference
12. Information With Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrants........ Not Applicable
15. Information With Respect to S-3
Companies................................ Not Applicable
16. Information With Respect to S-2 or S-3
Companies................................ Not Applicable
3
ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies................ Summary; Selected Consolidated Financial
Information of HDS; Management's
Discussion and Analysis of Financial
Condition and Results of Operations of
HDS; Business of HDS; Ownership of HDS
Capital Stock; Index to Consolidated
Financial Statements of HDS
18. Information if Proxies, Consents or
Authorizations Are to be Solicited....... Summary; The Merger; Ownership of HDS
Capital Stock; The HDS Special Meeting;
Stockholder Proposals
19. Information if Proxies, Consents or
Authorizations Are not to be Solicited,
or in an Exchange Offer.................. Not Applicable
4
[HDS LOGO]
268 W. Hospitality Lane
San Bernardino, CA 92408 (909) 888-3282
Telex: 298889 HDSC UR Facsimile: (909) 885-0124
June 3, 1996
Dear Stockholder:
You are cordially invited to attend an important Special Meeting of the
Stockholders of Health Data Sciences Corporation ("HDS") to be held on June 29,
1996, at 10:00 a.m., local time, at the Mission Inn, 3649 Seventh Street,
Riverside, California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the Amended and Restated Merger Agreement dated as of May
23, 1996 (the "Merger Agreement"), by and among HDS, Medaphis Corporation
("Medaphis") and HDSSub, Inc., a wholly-owned subsidiary of Medaphis ("Newco"),
which provides for (i) the acquisition of HDS by Medaphis, and (ii) the merger
of Newco with and into HDS (the "Merger"). If the Merger is consummated, each
outstanding share of HDS Common Stock, HDS Series B Preferred Stock, HDS Series
C Preferred Stock and HDS Series F Preferred Stock will be converted into the
right to receive .7912 of a share of Medaphis Common Stock.
The Merger Agreement has been approved and adopted by the Boards of
Directors of HDS and Medaphis and is subject to approval by (i) the holders of a
majority of the outstanding shares of HDS Common Stock, HDS Series B Preferred
Stock, HDS Series C Preferred Stock and HDS Series F Preferred Stock, voting
together as a single class, and (ii) the holders of at least 85% of the
outstanding shares of HDS Series F Preferred Stock, voting as a separate class.
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
Details of the background and reasons for the proposed Merger appear and
are explained in the accompanying Proxy Statement/Prospectus. Additional
information regarding HDS and Medaphis also is set forth in the Proxy
Statement/Prospectus and, with respect to Medaphis, incorporated therein by
reference to other documents.
It is important that your shares be represented at the Special Meeting
either in person or by proxy. HDS has prepared a proxy card for the HDS Common
Stock, the HDS Series B Preferred Stock and the HDS Series C Preferred Stock,
and a separate proxy card for the HDS Series F Preferred Stock. A proxy card or
cards for the HDS Common Stock or HDS Preferred Stock you own is enclosed.
Whether or not you plan to attend the Special Meeting, please complete, sign and
date the appropriate enclosed proxy card(s) and return such card(s) in the
enclosed postage paid envelope. Holders of HDS Series F Preferred Stock who are
also holders of any other class of HDS stock are requested to sign and return
both proxy cards enclosed. If you attend the Special Meeting, you may vote in
person if you wish, even if you have previously returned your proxy card. Your
prompt cooperation will be greatly appreciated.
Sincerely,
/s/ Ralph A. Korpman, M.D.
Ralph A. Korpman, M.D.
Chairman of the Board and Chief
Executive Officer
5
HEALTH DATA SCIENCES CORPORATION
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 29, 1996
---------------------
Notice is hereby given that a Special Meeting of Stockholders of Health
Data Sciences Corporation ("HDS") will be held on June 29, 1996, at 10:00 a.m.,
local time, at the Mission Inn, 3649 Seventh Street, Riverside, California, for
the following purposes:
(1) To consider and vote upon a proposal to approve the Amended and
Restated Merger Agreement (the "Merger Agreement") dated as of May 23,
1996, by and among HDS, Medaphis Corporation ("Medaphis") and HDSSub, Inc.,
a wholly owned subsidiary of Medaphis ("Newco"), pursuant to which (i)
Newco will be merged with and into HDS (the "Merger"), and (ii) each
outstanding share of HDS Common Stock, HDS Series B Preferred Stock, HDS
Series C Preferred Stock and HDS Series F Preferred Stock will be converted
into the right to receive .7912 of a share of Medaphis Common Stock.
(2) To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of shares of HDS Common Stock, HDS Series B Preferred Stock, HDS
Series C Preferred Stock and HDS Series F Preferred Stock have the right to
dissent from the Merger and receive payment for the statutory "fair value" of
their shares, upon compliance with the provisions of the Delaware General
Corporation Law regarding appraisal rights, a copy of which is attached as Annex
B to the accompanying Proxy Statement/Prospectus and is summarized therein under
the caption "The Merger -- Appraisal Rights."
The Board of Directors has fixed the close of business on May 28, 1996, as
the record date for the determination of stockholders entitled to receive notice
of and to vote at the Special Meeting and at any adjournment thereof.
Your attention is directed to the Proxy Statement/Prospectus submitted with
this Notice.
By order of the Board of Directors
/s/ Janice E. Ticich
Janice E. Ticich
Secretary
San Bernardino, California
June 3, 1996
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD(S) AND RETURN SUCH
CARD(S) PROMPTLY IN THE ENCLOSED ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD(S).
6
HEALTH DATA SCIENCES CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 29, 1996
---------------------
MEDAPHIS CORPORATION
PROSPECTUS
SHARES OF COMMON STOCK
This Proxy Statement/Prospectus is being furnished to stockholders of
Health Data Sciences Corporation ("HDS") in connection with the solicitation of
proxies on behalf of the Board of Directors of HDS for use at the Special
Meeting of Stockholders of HDS to be held on June 29, 1996, and at any
adjournment thereof (the "Special Meeting"). At the Special Meeting,
stockholders of HDS will be asked to consider and vote upon a proposal to
approve the Amended and Restated Merger Agreement (the "Merger Agreement"),
dated as of May 23, 1996, by and among HDS, Medaphis Corporation ("Medaphis")
and HDSSub, Inc., a wholly owned subsidiary of Medaphis ("Newco"), pursuant to
which Newco will be merged with and into HDS (the "Merger"). If the Merger is
consummated, each outstanding share of common stock, $.10 par value per share,
of HDS ("HDS Common Stock"), Series B Convertible Preferred Stock, $.10 par
value per share, of HDS ("HDS Series B Preferred Stock"), Series C Convertible
Preferred Stock, $.10 par value per share, of HDS ("HDS Series C Preferred
Stock") and Series F Convertible Preferred Stock, $.10 par value per share, of
HDS ("HDS Series F Preferred Stock" and, along with the HDS Series B Preferred
Stock and the HDS Series C Preferred Stock, the "HDS Preferred Stock") (other
than treasury shares or shares held by HDS stockholders who perfect their
appraisal rights under Delaware law) will be converted into the right to receive
.7912 of a share of the Common Stock, par value $.01 per share, of Medaphis
("Medaphis Common Stock").
This Proxy Statement/Prospectus and the form(s) of proxy for the Special
Meeting will first be sent to stockholders of HDS on or about June 3, 1996.
FOR A DESCRIPTION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
MEDAPHIS COMMON STOCK, SEE "RISK FACTORS.
This Proxy Statement/Prospectus also constitutes a prospectus of Medaphis
relating to the issuance of shares of Medaphis Common Stock to stockholders of
HDS pursuant to the terms of the Merger Agreement. Medaphis has filed a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "Commission") covering the shares of Medaphis
Common Stock to be issued in connection with the Merger.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer of
Medaphis Common Stock to be issued in connection with the Merger, and, if given
or made, such information or representation must not be relied upon as having
been authorized by Medaphis, HDS or any other person. This Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to purchase Medaphis Common Stock in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it would be
unlawful. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of such Medaphis Common Stock shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.
THE SHARES OF MEDAPHIS COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is May 31, 1996.
7
AVAILABLE INFORMATION
Medaphis is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed with the
Commission by Medaphis can be inspected and copied at the office of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at
its Regional Offices located at 7 World Trade Center, Suite 1300, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661,
and copies of such materials can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
Medaphis has filed with the Commission the Registration Statement under the
Securities Act. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information relating to Medaphis and the shares of Medaphis Common Stock
offered hereby, reference is hereby made to the Registration Statement,
including the exhibits and schedules thereto, which may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of which may be obtained from the Commission at
prescribed rates. Statements contained in this Proxy Statement/Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Medaphis
are incorporated by reference into this Proxy Statement/Prospectus:
(i) Medaphis' Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, filed on April 1, 1996;
(ii) Medaphis' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, filed on May 15, 1996;
(iii) Medaphis' Current Reports on Form 8-K filed on April 3, 1995 (as
amended by Form 8-K/A filed on April 5, 1995), October 13, 1995, January
19, 1996, February 12, 1996, February 29, 1996, April 3, 1996, May 21,
1996, May 24, 1996 and May 29, 1996; and
(iv) The description of the Medaphis Common Stock in Medaphis'
Registration Statement on Form 8-A/A filed on May 22, 1996.
In addition, all documents filed by Medaphis pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference into this Proxy Statement/Prospectus and
to be a part hereof from the date of filing of such documents. Any statements
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein (or in any other subsequently filed
document which also is incorporated by reference herein) modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Proxy Statement/Prospectus except as so modified or
superseded.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST, FROM MELISSA COLEY, INVESTOR RELATIONS
COORDINATOR, MEDAPHIS CORPORATION, 2700 CUMBERLAND PARKWAY, SUITE 300, ATLANTA,
GEORGIA 30339; TELEPHONE NUMBER (770) 444-5300. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY SUCH REQUEST SHOULD
BE MADE BY JUNE 24, 1996.
ii
8
TABLE OF CONTENTS
PAGE
----
Available Information................................................................. ii
Incorporation of Certain Documents by Reference....................................... ii
Summary............................................................................... 1
The Parties......................................................................... 1
The HDS Special Meeting............................................................. 2
The Merger.......................................................................... 3
Results of Operations............................................................... 8
Markets and Market Prices........................................................... 8
Comparative Per Share Information................................................... 9
Selected Historical and Pro Forma Financial Data.................................... 11
Risk Factors.......................................................................... 15
General Information................................................................... 18
The HDS Special Meeting............................................................... 18
Time, Date, Place and Purpose....................................................... 18
Record Date and Shares Entitled to Vote............................................. 18
Vote Required; Security Ownership of Management..................................... 19
Solicitation and Revocation of Proxies.............................................. 19
The Merger............................................................................ 20
Background of the Merger............................................................ 20
Reasons for the Merger.............................................................. 20
Terms of the Merger Agreement....................................................... 21
Effective Time of the Merger........................................................ 23
Recommendation of the HDS Board of Directors........................................ 23
Opinion of Financial Advisor to HDS................................................. 23
Interests of Certain Persons in the Merger.......................................... 27
Certain Agreements in Connection with the Merger.................................... 27
HDS Options......................................................................... 27
Accounting Treatment................................................................ 28
Certain Federal Income Tax Consequences............................................. 28
Resale of Medaphis Common Stock..................................................... 29
Comparison of Rights of Holders of Medaphis Common Stock and HDS Common Stock and
HDS Preferred Stock.............................................................. 30
Comparison of Rights of Holders of Medaphis Common Stock and HDS Preferred Stock.... 32
HDS Preferred Stock Purchase Agreements............................................. 33
Certain Repurchase Rights and Transfer Restrictions................................. 34
Appraisal Rights.................................................................... 34
Business of Medaphis.................................................................. 37
General............................................................................. 37
Medaphis Re-Engineering Project..................................................... 37
Recently Completed and Future Acquisitions.......................................... 38
Completed Acquisitions.............................................................. 38
Future Acquisitions................................................................. 39
Results of Operations............................................................... 39
Other events........................................................................ 39
Unaudited Pro Forma Combined Financial Information.................................... 40
Selected Consolidated Financial Information of HDS.................................... 45
Management's Discussion and Analysis of Financial Condition and Results of Operations
of HDS.............................................................................. 46
Overview............................................................................ 46
Results of Operations............................................................... 46
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995....... 47
Fiscal Year Ended March 31, 1995 Compared to Fiscal Year Ended March 31, 1994....... 47
Liquidity and Capital Resources..................................................... 48
iii
9
PAGE
----
Business of HDS....................................................................... 49
Industry Background................................................................. 49
Demand for Information Technology................................................... 49
The HDS Approach.................................................................... 49
The ULTICARE System................................................................. 50
Security and Privacy Assurance...................................................... 50
Other Products...................................................................... 51
Services............................................................................ 51
Market and Customers................................................................ 51
Sales and Marketing................................................................. 52
Business Relationships.............................................................. 52
HDS Employees....................................................................... 52
Competition......................................................................... 53
Proprietary Technology.............................................................. 53
Facilities.......................................................................... 54
Legal Proceedings................................................................... 54
Ownership of HDS Capital Stock........................................................ 54
Experts............................................................................... 57
Legal Matters......................................................................... 58
Stockholder Proposals................................................................. 58
Index to Consolidated Financial Statements............................................ F-1
Annex A: Merger Agreement............................................................. A-1
Annex B: Text of Section 262 of the Delaware General Corporation Law.................. B-1
Annex C: Fairness Opinion of Hambrecht & Quist........................................ C-1
iv
10
SUMMARY
The following is a summary of certain information contained, or
incorporated by reference, elsewhere in this Proxy Statement/Prospectus. This
summary is not intended to be complete and is qualified in its entirety by
reference to, and should be read in conjunction with, the detailed information
and financial statements appearing elsewhere, or incorporated by reference, in
this Proxy Statement/Prospectus.
THE PARTIES
MEDAPHIS
Medaphis is a leading provider of business management services and systems
to the healthcare industry. Medaphis' services and systems are designed to
assist its clients with the business management functions associated with the
delivery of healthcare services, thereby permitting physicians and hospitals to
focus on providing quality medical services to their patients. Medaphis also
provides subrogation and related recovery services primarily to healthcare
payors, scheduling and information management systems to hospitals and emerging
integrated healthcare delivery systems and systems integration and work flow
engineering systems. Medaphis' scheduling and information systems are designed
to improve efficiency by automating certain scheduling and related management
functions within a healthcare facility; and its systems integration and work
flow engineering systems and services are designed to increase flexibility,
improve end-user access to information and increase decision-making capabilities
through the strategic use and development of client/server, imaging and other
advanced technologies. Medaphis currently provides business management services
and systems to approximately 19,700 physicians and over 2,200 hospitals in all
50 states, subrogation and recovery services to healthcare plans covering in
excess of 24 million people throughout the United States and systems integration
and work flow engineering services in the United States and abroad.
Medaphis is incorporated under the laws of the State of Delaware. Medaphis
Common Stock is traded on The Nasdaq Stock Market under the symbol "MEDA."
Unless the context otherwise requires, reference to Medaphis includes Medaphis
Corporation and its subsidiaries. Medaphis' principal executive offices are
located at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia 30339, and its
telephone number is (770) 444-5300.
HDS
HDS is a developer and supplier of healthcare information systems to
institutions, payers, healthcare networks, and providers. HDS offers a product
line generally known as ULTICARE(R), an integrated information system which
addresses a healthcare enterprise's information needs through the integrated
monitoring, scheduling, documentation, and control of patient care activities.
To accomplish this, patient care workstations are situated throughout the
enterprise: at patient bedsides, at nursing stations, in ancillary departments
(laboratory, radiology, pharmacy, etc.), in physician offices and with mobile
health workers such as home care staff. HDS forms relationships throughout the
organization, especially with senior management of integrated delivery systems
(whether payer, provider, or practitioner based).
HDS has extensive experience in most phases of patient care automation:
nursing, physicians, laboratories, radiology, pharmacy, case management, and
quality assurance, among others. HDS customers include hospitals, integrated
healthcare enterprises, health maintenance organizations, municipal healthcare
systems and elder care organizations.
1
11
ULTICARE offers functional modules to meet the specific information needs
of each customer. They may be purchased together as a package or separately, by
module. ULTICARE Modular, a four-module package, is a way to obtain patient
information throughout an enterprise without having to purchase the entire
system at once. It combines HDS's patient-centered Registration/ADT (admission,
discharge, transfer), order communications, nursing, and results reporting
modules to provide a core clinical information system. A wide selection of
additional modules are also available for integration. The following ULTICARE
modules are currently available:
- Patient Registration/ADT
- Point-of-Care Nursing Support
- Physician Support
- Health Maintenance Record
- Case Management/Critical Pathways
- Order Communication/Charge Capture
- Result Reporting
- Quality Assurance/Utilization Review
- Laboratory Departmental Processing
- Medical Records Departmental Processing
- Pharmacy Departmental Processing
- Radiology Departmental Processing
- Other Ancillary Departmental Processing
- Patient Scheduling and Control
- Call Center Management
- Physician/Professional Staff Registry
- Cost Finding and Analysis
- Outpatient Appointment and Encounter Processing
- Report Writer/Query Processor
- Criteria Evaluation Processor
- Electronic Mail
HDS is incorporated under the laws of the State of Delaware. There is no
public market for the HDS Common Stock or the HDS Preferred Stock. HDS's
principal executive offices are located at 268 West Hospitality Lane #300, San
Bernardino, California 92408, and its telephone number is (909) 888-3282.
THE HDS SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Special Meeting will be held on June 29, 1996, at 10:00 a.m. local
time, at the Mission Inn, 3649 Seventh Street, Riverside, California. At the
Special Meeting, holders of HDS Common Stock and HDS Preferred Stock, voting
together as a single class, as well as holders of HDS Series F Preferred Stock,
voting as a separate class, will be asked to consider and vote upon a proposal
to approve the Merger Agreement. A copy of the Merger Agreement is attached
hereto as Annex A and is incorporated herein by this reference.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of shares of HDS Common Stock and HDS Preferred
Stock at the close of business on May 28, 1996 (the "Record Date"), are entitled
to notice of and to vote at the Special Meeting. As of such date, there were
issued and outstanding: 4,083,990 shares of HDS Common Stock held by 158 holders
of record, 742,000 shares of HDS Series B Preferred Stock held by 147 holders of
record, 1,312,500 shares of HDS Series C Preferred Stock held by 49 holders of
record and 1,605,353 shares of HDS Series F Preferred Stock held by 12 holders
of record. Holders of record of HDS Common Stock and HDS Preferred Stock on the
Record Date for the Special Meeting are entitled to one vote per share on any
matter that may properly come before the Special Meeting.
2
12
VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
The presence in person or by proxy of the holders of a majority of the
shares of HDS Common Stock and HDS Preferred Stock (collectively, the "HDS
Capital Stock") outstanding as of the Record Date is necessary to constitute a
quorum at the Special Meeting. The affirmative vote of (i) the holders of a
majority of the outstanding shares of HDS Common Stock and HDS Preferred Stock,
voting together as a single class, and (ii) the holders of at least 85% of the
outstanding shares of HDS Series F Preferred Stock, voting as a separate class,
in each case, outstanding as of the Record Date, voting in person or by proxy,
is necessary to approve the Merger Agreement. As of the Record Date, the
executive officers and directors of HDS beneficially owned an aggregate of (i)
1,950,423 shares of HDS Common Stock and HDS Preferred Stock (not including any
shares which might be deemed to be beneficially owned on account of outstanding
options), or approximately 25.19% of the shares of HDS Common Stock and HDS
Preferred Stock then outstanding and (ii) 2,040 shares of HDS Series F Preferred
Stock, or less than 1% of the HDS Series F Preferred Stock then outstanding.
Approval of the Merger Agreement by the stockholders of Medaphis is not
required.
PROXIES
HDS has prepared a form of proxy card for the HDS Common Stock, the HDS
Series B Preferred Stock and the HDS Series C Preferred Stock, and a separate
form of proxy card for the HDS Series F Preferred Stock. HDS has enclosed the
applicable proxy card or cards with this Proxy Statement/Prospectus. Holders of
HDS Common Stock, HDS Series B Preferred Stock or HDS Series C Preferred Stock
are requested to sign and return the proxy marked "HDS Common and Series B and C
Preferred Stock." Holders of the HDS Series F Preferred Stock are requested to
sign and return the proxy marked "HDS Series F Preferred Stock." Holders of HDS
Series F Preferred Stock who are also holders of any other class of HDS Capital
Stock are requested to sign and return both proxy cards enclosed. All shares of
HDS Common Stock and HDS Preferred Stock represented by properly executed
proxies, unless such proxies have been previously revoked, will be voted in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such shares will be voted for approval of the Merger Agreement
and, in the discretion of the proxy holder, as to any other matter which may
properly come before the Special Meeting. See "The HDS Special Meeting --
Solicitation and Revocation of Proxies."
THE MERGER
BACKGROUND OF THE MERGER
Beginning in early May 1996, Medaphis and HDS engaged in substantive
discussions regarding a possible acquisition transaction. A definitive Merger
Agreement was executed on May 23, 1996. Prior to the execution of the Merger
Agreement, there was no material relationship between Medaphis and HDS.
REASONS FOR THE MERGER
HDS. The Board of Directors of HDS formed a special committee consisting
of the three non-employee members of the Board (the "Special Committee") to
consider the proposed terms of the Merger. In approving and adopting the Merger
Agreement and formulating its recommendation that the stockholders of HDS
approve and adopt the Merger Agreement and consummate the Merger, the HDS Board
of Directors considered a number of factors, including, without limitation, the
following: (i) the recommendation of the Special Committee that the Board of
Directors approve and adopt the Merger Agreement; (ii) the current
privately-held status of HDS; (iii) the quality of, and risks associated with,
Medaphis Common Stock to be received by HDS stockholders in the Merger; (iv) the
terms of the Merger Agreement; (v) the expectation that the Merger will be
treated as a tax-free reorganization for federal income tax purposes so that
generally no gain or loss will be recognized by HDS stockholders in connection
with the exchange of HDS Common Stock or HDS Preferred Stock for Medaphis Common
Stock in the Merger; (vi) the opinion rendered to the HDS Board of Directors by
Hambrecht & Quist LLC ("Hambrecht & Quist") that the consideration to be
received by the holders of HDS Common Stock and HDS Preferred Stock in the
Merger is fair, from a financial point
3
13
of view, to such stockholders, the full text of which is set forth as Annex C to
the Proxy Statement/Prospectus (see "The Merger -- Opinion of Financial Advisor
to HDS"); and (vii) certain strategic and business reasons for the Merger, as
set forth below as Medaphis' reasons for pursuing the Merger.
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
Medaphis. In approving the Merger, the Merger Agreement and the
transactions contemplated thereby, the Board of Directors of Medaphis
considered, among other things, the following strategic and business reasons for
the Merger.
First, the Merger provides Medaphis with an advanced clinical information
management system which organizes data and processes around a patient-centered
model and facilitates the delivery of protocol-based care on a real-time basis.
ULTICARE, HDS's lead system, represents an integrated information management
system which addresses a healthcare enterprise's information needs through the
integrated monitoring, scheduling, documentation and control of all patient care
activities. As the evolving healthcare environment continues to promote
consolidation among healthcare providers and the growth of managed care,
Medaphis believes that the demand for clinical information management systems
designed to reduce costs within a healthcare enterprise and improve the quality
of care across the enterprise should increase. The Merger provides Medaphis with
established and deliverable products and expertise to take immediate advantage
of this market opportunity. Moreover, management of Medaphis believes that
ULTICARE will complement Medaphis' existing product and service offerings.
Second, Medaphis believes that the Merger will present opportunities for
Medaphis to cross sell systems and services among the consolidated Medaphis/HDS
customer base. Through its recent acquisitions of BSG Corporation ("BSG") and
Rapid Systems Solutions, Inc. ("Rapid Systems"), Medaphis has become one of the
leading client/server systems integration and work flow engineering companies in
the United States. Management of Medaphis believes that Medaphis' systems
integration and work flow engineering resources and expertise should prove
helpful in connection with the sale and installation of HDS's clinical
information systems, particularly in integrated healthcare delivery systems
("IHDS") and other large healthcare enterprises which have an ever increasing
need for integration of clinical, financial, operational, administrative and
analytical systems and data across the enterprise. Similarly, management of
Medaphis believes that opportunities exist for Medaphis to provide business
management outsourcing services and information management systems to the HDS
client base, and to offer HDS's clinical information systems to Medaphis'
existing base of healthcare providers and payor clients. Medaphis currently
provides business management services and systems to approximately 19,700
physicians and over 2,200 hospitals in all 50 states and subrogation and
recovery services to 45 payors covering in excess of 24 million lives.
Third, Medaphis believes that the Merger will enhance Medaphis' ability to
pursue its mission of seeking to achieve an unequaled level of measurable
quality and productivity in the delivery of information technology systems and
business services which respond to the wants, needs and values of its customers.
Management believes that HDS's clinical information systems and expertise
together with Medaphis' existing product development expertise should assist
Medaphis in developing a proprietary data model for its clients which captures
and organizes data relating to the delivery of healthcare services and utilizes
such data in real-time to reduce costs, increase efficiency and improve the
quality of care provided. It has been estimated that the healthcare industry
spends in excess of $40 billion per year and employs in excess of 1 million
people to capture data relating to the provision of healthcare services and then
to price, bill and collect for such services. The industry is impacted by
increasing administrative and other costs and ever increasing information needs.
The Merger will provide Medaphis with an advanced clinical information
management system which, in management's opinion, represents an integral part of
the overall technology and systems needed to address in a meaningful manner the
cost and management problems currently confronting the healthcare industry.
4
14
TERMS OF THE MERGER AGREEMENT
General. The Merger Agreement provides that, following approval of the
Merger Agreement by the stockholders of HDS and the satisfaction or waiver of
the other conditions to the Merger, at the Effective Time (as hereinafter
defined), Newco will be merged with and into HDS in accordance with the
provisions of the Delaware General Corporation Law ("DGCL"). HDS will be the
surviving corporation in the Merger. As a result of the Merger, the separate
corporate existence of Newco will cease, and HDS will become a wholly owned
subsidiary of Medaphis.
Conversion Ratio. Each share of HDS Capital Stock issued and outstanding
at the time of the Merger (other than treasury shares and shares held by HDS
stockholders who perfect their appraisal rights under the DGCL) will be
converted into the right to receive .7912 of a share of Medaphis Common Stock
(the "Conversion Ratio"). The Conversion Ratio was determined in arms' length
negotiations between representatives of Medaphis and HDS. See "The
Merger -- Background of the Merger."
Cash will be paid in lieu of issuing fractional shares of Medaphis Common
Stock in an amount equal to the average closing price of Medaphis Common Stock,
as reported on The Nasdaq Stock Market, for the ten consecutive trading days
ending on the trading day immediately prior to the date of the Special Meeting
(the "Average Closing Price"), multiplied by the fraction of a share which the
holder of HDS Capital Stock would otherwise be entitled to receive. See "The
Merger -- Terms of the Merger Agreement -- Conversion Ratio."
Issuance of Additional Options. In connection with the Merger, Medaphis
has agreed to issue additional options covering 100,000 shares of Medaphis
Common Stock to certain employees of HDS. The exercise price for such options
will be the fair market value of Medaphis Common Stock at the time of grant and
the options shall vest over five years.
Conditions to the Merger. In addition to approval of the Merger Agreement
by the stockholders of HDS and certain customary conditions, consummation of the
Merger is subject to the satisfaction or waiver of, among others, the following
conditions: (i) that HDS and Medaphis shall have received the written opinion of
King & Spalding concerning certain federal income tax consequences of the
Merger; (ii) that HDS and Medaphis shall have been advised in writing by
Deloitte & Touche LLP that, in accordance with generally accepted accounting
principles, the Merger qualifies to be treated as a pooling of interests for
accounting purposes; (iii) that holders of not more than 10% of the outstanding
shares of HDS Capital Stock shall have elected to exercise appraisal rights
pursuant to the DGCL; (iv) that the Registration Statement of which this Proxy
Statement/Prospectus forms a part shall be effective; and (v) that the
applicable waiting periods shall have terminated under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). See "The
Merger -- Terms of the Merger Agreement -- Conditions to the Merger."
Amendment. The Merger Agreement may be amended by mutual agreement of the
parties thereto. Any amendment to the Merger Agreement must be in writing and
signed by the parties to the Merger Agreement.
Termination. The Merger Agreement may be terminated (i) by mutual
agreement of the Boards of Directors of HDS and Medaphis; (ii) by HDS or
Medaphis if any of the conditions to such party's obligations to consummate the
Merger have not been complied with or performed, and such noncompliance or
nonperformance has not been cured or eliminated on or before August 15, 1996;
(iii) by HDS or by Medaphis if the Merger Agreement has not been approved by the
holders of a majority of the outstanding shares of HDS Common Stock and HDS
Preferred Stock, voting together as a single class, and the holders of at least
85% of the outstanding shares of HDS Series F Preferred Stock, voting as a
separate class; and (iv) by HDS if the Average Closing Price is less than $37.
Fees and Expenses. Medaphis will pay its own fees, costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby. HDS will pay its own fees, costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
but such fees, costs and expenses shall not exceed certain specified amounts and
the reasonable fees and expenses of accountants and counsel for HDS. In
addition, HDS has agreed that, if (i) the Merger Agreement is terminated solely
as a result of the failure of HDS's stockholders to approve the Merger
Agreement, (ii) on or prior to the date scheduled for the Special Meeting, HDS
receives a proposal or offer from another entity
5
15
concerning a merger, sale of substantial assets or stock or similar transaction
involving HDS (an "Acquisition Transaction"), (iii) HDS engages in negotiations
or enters into a letter of intent, agreement in principle or definitive
agreement with another entity concerning an Acquisition Transaction within 182
days after the date of such termination of the Merger Agreement and (iv) such
Acquisition Transaction is consummated during or after such 182-day period, then
HDS shall pay Medaphis $7,500,000 to reimburse and compensate Medaphis for its
expense, time and effort in connection with the matters contemplated by the
Merger Agreement.
EFFECTIVE TIME OF THE MERGER AND EXCHANGE OF SHARES
Effective Time of the Merger. The Merger will become effective upon the
filing of a certificate of merger relating thereto with the Secretary of State
of the State of Delaware (the "Effective Time"). The Merger Agreement provides
that the parties thereto will cause such certificate of merger to be filed as
soon as practicable after all of the conditions to the consummation of the
Merger have been satisfied or waived. See "The Merger -- Effective Time of
Merger."
Exchange of HDS Stock Certificates. Prior to the Effective Time,
instructions and a letter of transmittal will be furnished to all stockholders
of HDS for use in exchanging their stock certificates for certificates
evidencing the shares of Medaphis Common Stock they will be entitled to receive
as a result of the Merger. STOCKHOLDERS OF HDS SHOULD NOT SUBMIT THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL INSTRUCTIONS AND THE LETTER OF TRANSMITTAL ARE
RECEIVED. See "The Merger -- Terms of the Merger Agreement -- Exchange of HDS
Stock Certificates."
RECOMMENDATION OF THE HDS BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT, AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, holders of HDS Capital Stock should be aware
that certain executive officers and directors of HDS have certain interests that
may present them with potential conflicts of interest with respect to the
Merger. See "The Merger -- Interests of Certain Persons in the Merger."
Ownership of HDS Capital Stock. As of the date of this Proxy
Statement/Prospectus, executive officers and directors of HDS beneficially owned
an aggregate of 1,950,423 shares of HDS Capital Stock (not including any shares
which might be deemed to be beneficially owned on account of outstanding
options). If the Special Meeting had been held on May 30, 1996, the trading day
before the date of this Proxy Statement/Prospectus (the "Last Trading Date"),
executive officers and directors of HDS would have been entitled to receive in
the Merger an aggregate of 1,543,175 shares of Medaphis Common Stock having an
aggregate market value of approximately $60.1 million based on the closing price
per share of Medaphis Common Stock reported on The Nasdaq Stock Market on the
Last Trading Date. See "Ownership of HDS Capital Stock."
Employment Agreements. In connection with the Merger, Ralph A. Korpman,
M.D., Jere Chrispens, Peter Gladkin, Janice E. Ticich and Karen C. Miller
(collectively, the "Key Employees" and individually a "Key Employee") will enter
into employment agreements (the "Employment Agreements") pursuant to which
Medaphis will agree to employ each of them for a term of two years. Certain
other employees of HDS will enter into Employment Agreements with terms varying
from one to two years. Each person entering into an Employment Agreement will be
paid an agreed upon annual salary and will be entitled to receive certain
incentive compensation payments. The Employment Agreements will contain certain
non-competition and non-solicitation covenants and will be in form and substance
mutually satisfactory to each party. Each Key Employee will also enter into a
separate Non-competition and Non-solicitation Agreement with Medaphis (the
"Non-Compete Agreement") that will be in form and substance mutually
satisfactory to each party. See
6
16
"The Merger -- Certain Agreements in Connection with the Merger -- Employment
Agreements" and "-- Certain Agreements in Connection with the
Merger -- Non-competition and Non-solicitation Agreement."
HDS OPTIONS
Pursuant to the Merger, Medaphis shall assume all of HDS's rights and
obligations with respect to the outstanding and unexercised options to acquire
shares of HDS Common Stock (the "HDS Options"). Prior to the Effective Time,
Medaphis will request that each holder of an HDS Option enter into an Option
Notice and Assumption Agreement (an "Option Assumption Agreement") with
Medaphis. Upon receipt of an Option Assumption Agreement from a holder of an HDS
Option following the Effective Time, Medaphis will issue to such holder a
non-qualified option (a "Non-Qualified Option") to be granted under Medaphis'
Non-Qualified Stock Option Plan for Employees of Acquired Companies (the
"Medaphis Stock Option Plan"). Each Non-Qualified Option issued to a holder of
an HDS Option will be subject to vesting as follows: the Option shall vest as to
25% of the shares of Medaphis Common Stock for which it may be exercised for
each year that the Optionholder has been employed by HDS.
Pursuant to the Merger Agreement, Medaphis is not entitled or required to
substitute a Non-Qualified Option for an HDS Option until it has received from
the holder of an HDS Option a properly completed and executed Option Assumption
Agreement with respect to the HDS Option. Each Non-Qualified Option issued in
substitution for an HDS Option will evidence the right to purchase the number of
shares of Medaphis Common Stock equal to the product of the number of shares of
HDS Common Stock covered by the HDS Option immediately prior to the Effective
Time multiplied by the Conversion Ratio. The exercise price for each such
Non-Qualified Option will be equal to the quotient obtained by dividing the
exercise price of the HDS Option immediately prior to the Effective Time by the
Conversion Ratio.
In addition, Medaphis has agreed to issue new options to certain employees
of HDS. See "The Merger -- Terms of the Merger Agreement -- Issuance of
Additional Options."
ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
purposes. The obligations of Medaphis and HDS to consummate the Merger are
conditioned upon the receipt of an opinion from Deloitte & Touche LLP that, in
accordance with generally accepted accounting principles, the Merger qualifies
to be treated as a pooling of interests for accounting purposes. Medaphis and
HDS have agreed that neither they nor any of their respective subsidiaries or
affiliates will knowingly take or fail to take any action that would jeopardize
the treatment of the Merger as a pooling of interests for accounting purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Medaphis and HDS expect the Merger to be a tax-free reorganization for
federal income tax purposes so that no gain or loss will be recognized by
stockholders of HDS, except in respect of cash received in lieu of fractional
shares or payments received by stockholders exercising appraisal rights. The
obligations of Medaphis and HDS to consummate the Merger are conditioned upon
the receipt of an opinion of King & Spalding, counsel to Medaphis, to the effect
that, subject to the assumptions, qualifications and limitations set forth
therein, the Merger will qualify as a tax-free reorganization for federal income
tax purposes under the Internal Revenue Code of 1986, as amended ("Code"). In
addition, Non-Qualified Options substituted for outstanding HDS Options will, as
a result of such substitution, no longer qualify as incentive stock options for
federal income tax purposes. See "The Merger--Certain Federal Income Tax
Consequences."
APPRAISAL RIGHTS
Holders of HDS Common Stock and HDS Preferred Stock are entitled to
appraisal rights and, if the Merger is consummated, to receive payment in cash
for the statutory "fair value" of their shares (excluding any element of value
arising from the accomplishment or expectation of the Merger), upon compliance
with the provisions of Section 262 of the DGCL. In order to perfect these
rights, a stockholder must not vote in
7
17
favor of the Merger and must deliver to HDS a written demand for appraisal of
such stockholder's shares prior to the vote on the Merger at the HDS Special
Meeting. The delivery of a proxy or vote against the Merger will not constitute
such a demand. Failure to follow any of these or other applicable procedures may
result in the loss of statutory appraisal rights. Holders of Medaphis Common
Stock are not entitled to appraisal rights in connection with the Merger. See
"The Merger -- Appraisal Rights" and Annex B, which sets forth the full text of
Section 262 of the DGCL relating to appraisal rights.
RESULTS OF OPERATIONS
Medaphis expects to record charges of approximately $900,000 and $6.5
million in the quarter ended June 30, 1996 associated with the acquisitions of
Rapid Systems and BSG, respectively, which are being accounted for as
poolings-of-interests. The charges relate to transaction fees, costs and
expenses incurred in connection with the mergers. Medaphis also expects to incur
an additional charge of $4.8 million for similar fees, costs and expenses in
connection with the Merger. The charge is expected to be recorded in the period
in which the Merger is consummated.
MARKETS AND MARKET PRICES
Medaphis Common Stock is listed on The Nasdaq Stock Market under the symbol
"MEDA." No cash dividends have ever been declared or paid on Medaphis Common
Stock.
The following table sets forth for the calendar quarter indicated the high
and low closing prices per share of Medaphis Common Stock as reported on The
Nasdaq Stock Market.
MEDAPHIS COMMON
STOCK(1)
---------------------
HIGH LOW
------ ------
1994:
First Quarter..................................................... $18.88 $15.69
Second Quarter.................................................... 18.50 13.25
Third Quarter..................................................... 18.13 12.50
Fourth Quarter.................................................... 23.44 17.88
1995:
First Quarter..................................................... $31.50 $22.19
Second Quarter.................................................... 34.00 21.25
Third Quarter..................................................... 29.38 20.88
Fourth Quarter.................................................... 37.00 26.50
1996:
First Quarter..................................................... $52.50 $34.50
Second Quarter (through May 30, 1996)............................. 53.82 38.63
- ---------------
(1) On May 3, 1995, Medaphis' Board of Directors declared a two-for-one stock
split of the outstanding shares of Medaphis Common Stock. The stock split
was effected in the form of a stock dividend payable on May 31, 1995, to
Medaphis stockholders of record as of May 24, 1995. The high and low
closing prices per share of Medaphis Common Stock have been retroactively
adjusted to reflect the stock split. As of the date hereof, Medaphis had
approximately 450 stockholders of record.
On (i) May 23, 1996, the last trading date prior to public announcement of
the Merger, and (ii) May 30, 1996, the closing sale price of Medaphis Common
Stock, as reported on The Nasdaq Stock Market, was $39.38 and $38.88 per share,
respectively.
HDS is privately held and there is no established public market for any of
the HDS Common Stock or HDS Preferred Stock. As of the date of this Proxy
Statement/Prospectus, there were 158 holders of record of HDS Common Stock and
181 holders of record of HDS Preferred Stock.
8
18
COMPARATIVE PER SHARE INFORMATION
The following table sets forth certain per common share information for
Medaphis and HDS on both historical and pro forma combined bases (giving effect
to the Merger using the pooling-of-interests method of accounting) and certain
information on an equivalent pro forma combined basis for each share of HDS
Common Stock. No cash dividends have ever been declared or paid on Medaphis
Common Stock or HDS Common Stock.
PER SHARE OF COMMON STOCK
---------------------------------
INCOME CASH BOOK
(LOSS) DIVIDENDS(9) VALUE
--------- ------------ ------
Medaphis -- Historical(1)(2)(3)(4)
Year ended December 31, 1993.................................. $ 0.16 $ -- $ --
Year ended December 31, 1994.................................. 0.45 -- --
Year ended December 31, 1995.................................. (0.00) -- 6.85
Quarter ended March 31, 1996.................................. 0.18 -- 7.68
Medaphis -- Pro Forma Combined(1)(2)(3)(4)(5)(6)
Year ended December 31, 1993.................................. $ 0.36 $ -- $ --
Year ended December 31, 1994.................................. 0.56 -- --
Year ended December 31, 1995.................................. 0.08 -- 6.89
Quarter ended March 31, 1996.................................. 0.17 -- 7.57
HDS -- Historical(7)
Year ended March 31, 1994..................................... $ 1.13 $ -- $ --
Year ended March 31, 1995..................................... 1.15 -- --
Year ended March 31, 1996..................................... (0.98) -- 0.50
HDS -- Equivalent Pro Forma Combined(8)
Year ended December 31, 1993.................................. $ 0.28 $ -- $ --
Year ended December 31, 1994.................................. 0.44 -- --
Year ended December 31, 1995.................................. 0.06 -- 5.45
Quarter ended March 31, 1996.................................. 0.13 -- 5.99
- ---------------
(1) Income (loss) represents income (loss) from continuing operations.
(2) Historical book value per share information for Medaphis as of the end of
each period presented is computed by dividing historical stockholders'
equity by the number of shares of Medaphis Common Stock outstanding at the
end of each period presented, excluding common stock equivalents. Pro forma
combined book value per share information as of the end of each period
presented is computed by dividing pro forma stockholders' equity by the
number of shares of Medaphis Common Stock outstanding on such dates and the
shares of Medaphis Common Stock to be issued in the Merger.
(3) On April 3, 1996, Medaphis acquired Rapid Systems in a merger transaction
accounted for as a pooling-of-interests. In addition, on May 6, 1996,
Medaphis acquired BSG in a merger transaction accounted for as a
pooling-of-interests. Accordingly, the historical financial statements of
Medaphis have been restated to reflect the mergers.
(4) In 1995 and 1996, Medaphis acquired Automation Atwork and affiliates
("Atwork"), Medical Management Sciences, Inc. ("MMS"), Rapid Systems and
BSG in merger transactions that were accounted for as poolings of
interests. Prior to such mergers, Atwork, MMS, Rapid Systems and a company
acquired by BSG prior to the BSG merger had elected "S" corporation status
for income tax purposes. As a result of such mergers (or, in the case of
the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Per share of Common Stock
information for Medaphis is presented on a pro forma basis as if the
entities had been "C" corporations during the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996.
(5) The Medaphis Pro Forma Combined Income (Loss) per share amounts for the
years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1996 give effect to (i) the Merger as if it had occurred on
January 1, 1993 and (ii) certain pro forma adjustments related to the
mergers
9
19
with Atwork, MMS, Rapid Systems and BSG. The amounts for the year ended
December 31, 1995 also give effect to the 1995 Acquisitions, as hereinafter
defined, as if each had occurred on January 1, 1995.
(6) For purposes of preparing Pro Forma Combined per share information, HDS's
operating results for the years ended March 31, 1994 and 1995 were combined
with Medaphis' operating results for the years ended December 31, 1993 and
1994, respectively. For the year ended December 31, 1995, Medaphis' 1995
operating results were combined with HDS's 1995 operating results which
were restated to a calendar year basis. See "Unaudited Pro Forma Combined
Financial Information."
(7) Historical book value per share information for HDS as of the end of each
period presented is computed by dividing historical stockholders' equity
attributable to holders of HDS Common Stock by the number of shares of HDS
Common Stock outstanding at the end of the period.
(8) Equivalent pro forma combined per share information for HDS is determined
by multiplying the Medaphis pro forma combined amounts by the Conversion
Ratio to represent equivalent per share amounts to stockholders of HDS.
(9) Medaphis has entered into pooling-of-interests transactions with entities
that were formerly "S" corporations for federal income tax purposes.
Distributions made by the "S" corporations prior to the related merger
transactions are not included in Cash Dividends Per Share.
10
20
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following tables set forth (i) selected consolidated financial
information for Medaphis for and as of each of the five fiscal years in the
period ended December 31, 1995, for the three months ended March 31, 1995 and
1996 and as of March 31, 1996; (ii) selected consolidated financial information
for HDS for and as of each of the three fiscal years in the period ended March
31, 1996, for and as of the six month period ended March 31, 1993 and for and as
of the two fiscal years ended September 30, 1992; (iii) selected unaudited pro
forma combined financial information for the years ended December 31, 1993 and
1994, giving effect to the Merger using the pooling-of-interests method of
accounting and certain pro forma adjustments related to the Atwork, MMS, Rapid
Systems and BSG mergers; and (iv) selected unaudited pro forma combined
financial information for the year ended December 31, 1995, and for and as of
the three months ended March 31, 1996, giving effect to the Merger using the
pooling-of-interests method of accounting and certain pro forma adjustments
related to the Atwork, MMS, Rapid Systems and BSG mergers and the 1995
Acquisitions (as hereinafter defined) that were recorded using the purchase
method of accounting. For purposes of preparing the unaudited pro forma combined
statements of operations for the years ended December 31, 1993 and 1994, HDS's
operating results for the years ended March 31, 1994 and 1995 were combined with
Medaphis' operating results for the years ended December 31, 1993 and 1994,
respectively. The pro forma combined statement of operations for the year ended
December 31, 1995 was prepared by combining Medaphis' 1995 operating results
with HDS's 1995 operating results which were restated to a calendar year basis.
Accordingly, HDS's historical operating results for the three months ended March
31, 1995 were included in each of the years ended December 31, 1994 and 1995.
HDS's revenues and net income for that three month period were $12,716,000 and
$6,314,000, respectively. The selected consolidated financial information of
Medaphis for each of the three fiscal years in the period ended December 31,
1995, and as of December 31, 1994 and 1995, has been derived from the audited
supplemental consolidated financial statements of Medaphis, which give
retroactive effect to the Rapid Systems and BSG mergers, both of which have been
accounted for as poolings-of-interests. The selected consolidated financial data
of Medaphis for the two fiscal years in the period ended December 31, 1992, as
of December 31, 1991, 1992 and 1993, for the three-month periods ended March 31,
1995 and 1996 and as of March 31, 1996, have been derived from the unaudited
supplemental consolidated financial statements of Medaphis, which give
retroactive effect to the Rapid Systems and BSG mergers. Management of Medaphis
believes the unaudited supplemental consolidated financial statements referred
to above include all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the financial
position and results of operations for such periods. The selected consolidated
financial information of HDS for all of the periods presented has been derived
from the audited financial statements of HDS. The pro forma information is
provided for informational purposes only and is not necessarily indicative of
actual results that would have been achieved had the Merger been consummated at
the beginning of the periods presented or of future results. The selected
unaudited pro forma combined financial information is derived from the Unaudited
Pro Forma Combined Financial Information appearing elsewhere herein.
The information set forth below should be read in conjunction with (i) the
supplemental consolidated financial statements of Medaphis and the historical
consolidated financial statements of HDS and in each case the notes thereto
which are, in the case of Medaphis, incorporated herein by reference and, in the
case of HDS, included elsewhere herein; (ii) the Unaudited Pro Forma Combined
Financial Information and notes thereto appearing elsewhere herein; and (iii)
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Medaphis and HDS, which is, in the case of Medaphis, incorporated
herein by reference and, in the case of HDS, included elsewhere herein.
11
21
MEDAPHIS -- HISTORICAL
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Revenue............... $ 94,579 $160,252 $259,575 $376,870 $552,132 $130,367 $159,869
Salaries and wages.... 60,022 100,607 158,703 221,575 318,014 74,811 88,963
Other operating
expenses........... 29,043 47,246 66,412 90,836 130,714 29,027 38,618
Depreciation.......... 3,140 4,405 6,960 9,269 14,346 3,376 4,917
Amortization.......... 532 2,170 5,317 7,748 14,112 3,522 4,023
Interest expense,
net................ 1,763 966 6,517 5,896 10,417 3,931 2,242
Restructuring and
other charges...... -- -- -- 1,905 54,950 31,750 150
Income before
extraordinary items
and cumulative
effect of
accounting change.. (181) 2,288 8,617 26,486 2,676 (7,118) 12,343
Net income (loss)..... (181) 5,764(1) 8,617 26,486 2,676 (7,118) 12,343
Pro forma net
income (loss)(2)... $ -- $ 6,383 $ 7,437 $ 24,669 $ (207) $(10,992) $ 12,697
Weighted average
shares
outstanding........ 27,014 41,338 45,505 54,623 53,362 47,704 69,164
PRO FORMA PER SHARE
DATA(2):
Pro forma income
(loss) before
extraordinary items
and cumulative
effect of
accounting
change............. -- $ 0.07 $ 0.16 $ 0.45 $ (0.00) $ (0.23) $ 0.18
Pro forma net income
(loss)............. -- $ 0.15 $ 0.16 $ 0.45 $ (0.00) $ (0.23) $ 0.18
AS OF DECEMBER 31, AS OF
--------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................... $41,126 $ 27,940 $ 57,176 $ 66,502 $ 79,009 $ 114,017
Intangible assets................. 22,158 109,478 175,368 368,813 448,613 463,278
Total assets...................... 99,988 205,102 331,833 580,622 746,826 810,035
Long-term debt.................... 22,965 16,059 9,803 148,261 150,566 191,823
Convertible subordinated
debentures..................... -- 60,000 63,375 63,375 63,375 --
Stockholders' equity.............. 42,196 70,292 173,296 234,808 381,649 468,230
- ---------------
(1) Reflects the extraordinary loss of $2.1 million relating to the prepayment
of certain indebtedness net of income tax benefit and the cumulative
benefit for the change in accounting for income taxes arising from the
adoption of Statement of Financial Accounting Standards No. 109 of $5.6
million.
(2) In 1995 and 1996, Medaphis acquired Atwork, MMS, Rapid Systems and BSG in
merger transactions which were recorded as poolings-of-interests. Prior to
such mergers, Atwork, MMS, Rapid Systems and a company acquired by BSG
prior to the BSG merger had elected "S" corporation status under the Code
for income tax purposes. As a result of such mergers (or, in the case of
the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Pro forma net income (loss) and
pro forma net income (loss) per common share are presented as if the
entities had been "C" corporations during the years ended December 31,
1992, 1993, 1994 and 1995 and the three months ended March 31, 1995 and
1996. Pro forma net income per common share is not presented for the year
ended December 31, 1991.
12
22
HDS -- HISTORICAL(1)
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED YEAR ENDED MARCH 31,
----------------- MARCH 31, ---------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA(1)
Net sales.............................. $20,593 $24,451 $4,646 $26,040 $30,454 $22,727
Cost of sales.......................... 10,953 12,419 739 11,875 13,767 15,185
Gross margin........................... 9,640 12,032 3,907 14,165 16,687 7,542
Expenses:
Research and development............. 1,145 1,308 903 1,775 1,754 1,793
Sales and marketing.................. 3,044 2,577 1,406 3,028 3,672 4,870
General and administrative........... 2,029 2,873 1,676 3,219 2,194 6,107
Interest............................. 735 8 45 129 232 265
Income (loss) from operations........ 2,687 5,266 (123) 6,014 8,835 (5,493)
Interest income...................... 86 58 36 73 202 620
Income (loss) before provision for
income taxes...................... 2,773 5,324 (87) 6,087 9,037 (4,873)
Provision (benefit) for income
taxes............................. -- -- -- -- 3,000 (1,700)
Net income (loss).................... 2,773 5,324 (87) 6,087 6,037 (3,173)
AS OF SEPTEMBER
30, AS OF MARCH 31,
----------------- ----------------------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA(1)
Working capital........................ $ 4,931 $ 9,046 $8,630 $14,102 $22,760 $23,689
Intangible assets...................... 4,360 6,226 6,905 7,822 8,014 7,768
Total assets........................... 20,297 26,973 23,203 35,448 46,529 55,043
Convertible subordinated debentures.... 7,000 -- -- -- -- --
Redeemable preferred stock............. -- -- -- 6,910 6,565 --
Stockholders' equity................... 12,284 17,672 17,584 16,554 22,289 44,781
- ---------------
(1) HDS changed its fiscal year end in 1993 from September 30 to March 31.
13
23
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------ ENDED MARCH
1993 1994 1995 31, 1996
-------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA(1):
Revenue............................................ $279,338 $398,985 $597,060 $163,612
Salaries and wages................................. 155,684 220,261 331,213 90,527
Other operating expenses........................... 71,569 95,425 147,391 39,378
Depreciation....................................... 7,192 9,383 15,059 4,950
Amortization....................................... 7,878 10,691 17,902 4,909
Interest expense, net.............................. 6,573 5,926 11,987 2,105
Restructuring and other charges.................... -- 1,905 54,200 150
Income before income taxes......................... 30,442 55,394 19,308 21,593
Income per share................................... $ 0.36 $ 0.56 $ 0.08 $ 0.17
Weighted average shares outstanding................ 52,045 61,163 68,060 75,704
AS OF MARCH
31, 1996
--------------
(IN THOUSANDS)
BALANCE SHEET DATA(2):
Working capital................................................................ $132,956
Intangible assets.............................................................. 471,046
Total assets................................................................... 865,078
Long-term debt................................................................. 191,823
Stockholders' equity........................................................... 508,261
- ---------------
(1) The Unaudited Pro Forma Combined Statement of Operations Data for the years
ended December 31, 1993, 1994 and 1995 and for the three months ended March
31, 1996, gives effect to (i) the Merger as if it had occurred as of
January 1, 1993 and (ii) certain pro forma adjustments related to the
Atwork, MMS, Rapid Systems and BSG mergers. The Unaudited Pro Forma
Combined Statement of Operations Data for the year ended December 31, 1995
also gives effect to the 1995 Acquisitions (as hereinafter defined) as if
each had occurred as of January 1, 1995.
(2) The Unaudited Pro Forma Combined Balance Sheet Data as of March 31, 1996
gives effect to the Merger as if it had occurred as of March 31, 1996.
14
24
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
the following factors should be considered carefully in evaluating the proposed
Merger. This Proxy Statement/Prospectus contains and incorporates by reference
certain forward-looking statements, including, but not limited to, statements
regarding product development initiatives, the status of Medaphis' physician
billing operations, the status and future prospects of Medaphis' re-engineering
and consolidation project and the status and scope of the investigation
described below. The actual results may differ materially from such
forward-looking statements due to risks and uncertainties set forth under this
caption and in other reports and registration statements filed by Medaphis under
the Securities Act and the Exchange Act.
Acquisitions; Future Operating Results; Re-Engineering Project; Margin
Pressure. Medaphis' expansion strategy involves both acquisitions and internal
growth. Although Medaphis has successfully acquired businesses and effectively
integrated their operations in the past, there can be no assurance that Medaphis
will be able to continue to make successful acquisitions in the future or that
any such acquisitions will be successfully integrated into Medaphis' operations.
Furthermore, there can be no assurance that an acquisition will not have an
adverse effect upon Medaphis' operating results, particularly in the fiscal
quarters immediately following the consummation of such acquisition. There can
be no assurance that Medaphis will be able to continue to operate an acquired
business in a profitable manner. Although Medaphis has reported net income for
each of the past four fiscal years (and would have reported net income in fiscal
1991 but for the restatement of its financial statements as a result of previous
acquisitions accounted for under the pooling of interests method of accounting)
and has expanded its operations through acquisitions and internal growth, there
can be no assurance that Medaphis will be able to sustain profitability or
revenue growth on an annual or quarterly basis in the future, that fluctuations
in quarter-to-quarter or year-to-year operating results will not occur or that
any such quarter-to-quarter or year-to-year fluctuations will not be material.
In addition, Medaphis recorded restructuring and other charges in the first
quarter of 1995 relating to its announced re-engineering and consolidation
project. There can be no assurance that this re-engineering and consolidation
project will be successful, will achieve any cost or labor efficiencies or will
not have an adverse effect upon Medaphis' operations, particularly during the
initial stages of the project. Finally, Medaphis is experiencing margin pressure
in the billing and accounts receivable management services operations of
Medaphis Physician Services Corporation ("MPSC"). MPSC did not significantly
contribute to Medaphis' overall results of operations during the second half of
1995. During the first quarter of 1996, Medaphis' Services Division contributed
positively to the operating results of Medaphis. However, MPSC adversely
affected the results of operations of the Services Division for the quarter
ended March 31, 1996. Management does not expect this trend to improve
materially until further progress is made with, among other things, Medaphis'
re-engineering and consolidation project and overall operations of the business.
To date, Medaphis has been able to offset margin pressure in MPSC's operations
through growth in its technology operations, but there can be no assurance that
Medaphis will be able to continue such trend in the future.
Pending Federal Investigation; Putative Class Action Lawsuits. The United
States Attorney's Office for the Central District of California is conducting an
investigation (the "Federal Investigation") of Medaphis' billing and collection
practices in its offices located in Calabasas and Cypress, California (the
"Designated Offices"). Medaphis first became aware of the Federal Investigation
when it received search warrants and grand jury subpoenas on June 13, 1995.
Although the precise scope of the Federal Investigation is not known at this
time, Medaphis believes that the U.S. Attorney's Office is investigating
allegations of billing fraud and that the inquiry is focused upon Medaphis'
billing and collection practices in the Designated Offices. Numerous federal and
state civil and criminal laws govern medical billing and collection activities.
In general, these laws provide for various fines, penalties, multiple damages,
assessments and sanctions for violations, including possible exclusion from
Medicare, Medicaid and certain other federal and state healthcare programs.
Although the Designated Offices represent less than 2% of Medaphis' annual
revenue, there can be no assurance that the Federal Investigation will be
resolved promptly, that additional subpoenas or warrants will not be received by
Medaphis or that the Federal Investigation will not have a material adverse
effect upon Medaphis. Medaphis reported a charge of $12 million in 1995 for the
administrative fees, costs and expenses it anticipates incurring in connection
with the Federal Investigation and the putative class action lawsuits
15
25
described below. The charge is intended to cover only the anticipated
administrative expenses of the Federal Investigation and the lawsuits and does
not include any provision for fines, penalties, damages, assessments, judgments
or sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its officers and directors and the lead underwriter associated with Medaphis'
public offering of common stock in April 1995 were named as defendants in
putative stockholder class action lawsuits filed in federal district court for
the Northern District of Georgia. In general, these lawsuits alleged violations
of the federal securities laws in connection with Medaphis' filings under the
federal securities acts, including the registration statement filed in
connection with Medaphis' public offering in April 1995. On October 13, 1995,
the named plaintiffs in these lawsuits filed a consolidated class action
complaint (the "Consolidated Complaint"). On January 3, 1996, the court denied
defendants' motion to dismiss the Consolidated Complaint which argued that the
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contains any claims based on the Securities
Act, and Medaphis' underwriters and outside directors are no longer named as
defendants. Medaphis believes that it has meritorious defenses to this action
and intends to assert them vigorously.
Governmental Budgetary Constraints and Healthcare Reform. In the 1995
session of the United States Congress, the focus of healthcare legislation was
on budgetary and related funding mechanism issues. A number of reports,
including the 1995 Annual Report of the Board of Trustees of the Federal
Hospital Insurance Program (Medicare), have projected that the Medicare "trust
fund" is likely to become insolvent by the year 2002 if the current growth rate
of approximately 10% per annum in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the federal
budget, both the Congress and the Clinton Administration have made proposals to
reduce the rate of increase in projected Medicare and Medicaid expenditures and
to change funding mechanisms and other aspects of both programs. Congress has
passed legislation that would reduce projected expenditure increases
substantially and would make significant changes in the Medicare and the
Medicaid programs. The Clinton Administration has proposed alternate measures to
reduce, to a lesser extent, projected increases in Medicare and Medicaid
expenditures. As of the date of this Proxy Statement/Prospectus, neither
proposal has become law.
The Medicare legislation that has been adopted by Congress would reduce
projected expenditure increases by a variety of means, including limitations on
payments to providers, increased beneficiary premiums for physician and certain
other services, and limited incentives for Medicare beneficiaries to enroll in
health maintenance organizations and other managed care plans or to accept
Medicare coverage with a substantially increased deductible, with the savings
being available to the beneficiaries to pay non-covered expenses. Medaphis
cannot predict the effect on it if such Medicare legislation is adopted into
law. The proposed changes in physician payments alter the formula for
determining aggregate Medicare funds available for physician payments and are
designed to ensure that such payments do not decline in the 1996-2002 federal
fiscal years, but Medaphis cannot determine whether the physician payment
changes would in future years have an adverse effect on its revenues or
earnings. If the incentives for Medicare beneficiaries to enroll in health
maintenance organizations and other managed care plans result in an increase in
physician payments made by health maintenance organizations and other managed
care plans, fees paid to Medaphis by physicians for billing and collection
services provided by Medaphis could be adversely affected. Changes in the
Medicaid program would reduce the number and extent of federal mandates
concerning how state Medicaid programs operate (including levels of benefits
provided and levels of payments to providers) and would change the funding
mechanism from a sharing formula between the federal government and a state to
"block grant" funding. Medaphis cannot predict the effect of any such
legislation, if adopted, on its operations.
Although Congress, in 1995, did not consider healthcare reform proposals,
Medaphis anticipates that numerous healthcare reform proposals will continue to
be introduced in future sessions of Congress. Medaphis cannot predict whether
any such proposal will be adopted or the effect on Medaphis of any proposal that
does become law.
16
26
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
These state reform laws have, in many cases, not been fully implemented.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These market reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services by integrated delivery systems may result in a decrease in
demand for Medaphis' billing and collection services for particular physician
practices, but this decrease may be offset by an increase in demand for
Medaphis' consulting and comprehensive business management services (including
billing and collection services) for the new provider systems.
Existing Government Regulation. Existing governmental regulation can
adversely affect Medaphis' business through, among other things, its potential
to reduce the amount of reimbursement received by Medaphis' clients for
healthcare services. A significant portion of Medaphis' revenue is derived from
management fees which are based upon a percentage of net collections of
healthcare receivables. During the past decade, federal and state governments
have implemented legislation designed to stimulate a reduction in the increase
in healthcare costs and it is anticipated that such legislative initiatives will
continue. Medaphis also is subject to applicable federal and state billing and
credit collection agency laws and regulations. There can be no assurance that
current or future government regulations or healthcare reform measures will not
have a material adverse effect upon Medaphis' business.
Competition; Industry and Market Changes. The management services business
to physicians and hospitals is highly competitive. Medaphis competes with
certain national and regional physician and hospital reimbursement organizations
and collection businesses, certain national information and data processing
organizations and certain physician groups and hospitals which provide their own
business management services. Potential industry and market changes that could
adversely affect the billing and collection aspects of Medaphis' business
include (i) a significant increase in managed care providers relative to
conventional fee-for-service providers, potentially resulting in substantial
changes in the medical reimbursement process, and (ii) new alliances between
healthcare providers and third-party payors in which healthcare providers are
employed by such third-party payors. The business of providing healthcare
information systems and system integration services also is highly competitive
and Medaphis faces competition from certain national and regional companies in
connection with its technology operations.
Evolving Industry Standards; Rapid Technological Changes. The markets for
Medaphis' and HDS's software products are characterized by rapidly changing
technology, evolving industry standards and frequent new products and product
enhancements. Medaphis' success in its business will depend upon its continued
ability to enhance its existing products, to introduce new products on a timely
and cost effective basis to meet evolving customer requirements, to achieve
market acceptance for new product offerings and to respond to emerging industry
standards and other technological changes. There can be no assurance that
Medaphis will be able to respond effectively to technological changes or new
industry standards. Moreover, there can be no assurance that competitors of
Medaphis will not develop competitive products, or that any such competitive
products will not have an adverse effect upon Medaphis' operating results.
Systems Integration Projects. Medaphis' systems integration operations
typically have large projects which involve re-engineering various client
operations through the use of imaging, client/server and other advanced
technologies. Certain of Medaphis' systems integration contracts have included
significant initial license fees. Failure to meet expectations with respect to a
major project could damage Medaphis' reputation as a systems integrator, affect
its ability to attract new systems integration business, result in the payment
of liquidated or other damages to the client and jeopardize Medaphis' ability to
collect for systems integration services already performed on the project.
Moreover, given the size and complexity of the large-scale systems integration
contracts entered into by Medaphis and the license fees associated therewith,
the results of operations for Medaphis' Technology Systems Division could be
subject to significant quarterly fluctuations
17
27
based upon the timing of receipt of large-scale re-engineering contracts.
However, management of Medaphis anticipates that the episodic nature of its
existing systems integrations operations should be partially offset over time by
the results of operations of BSG and Rapid Systems, which historically have had
a larger number of smaller systems integration projects that have not included
initial license fees.
Possible Volatility of Stock Price. Medaphis believes factors such as
announcements with respect to healthcare reform measures, the Federal
Investigation, acquisitions and quarter-to-quarter and year-to-year variations
in financial results could cause the market price of Medaphis Common Stock to
fluctuate substantially. Any adverse announcement with respect to healthcare
reform measures, the Federal Investigation, acquisitions or any shortfall in
revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Medaphis Common
Stock in any given period. As a result, the market for Medaphis Common Stock may
experience material adverse price and volume fluctuations.
Dependence on Senior Management. Medaphis' success depends upon the
continued contributions of its senior management. Medaphis enters into
confidentiality and non-solicitation agreements with its executive officers and
key employees. In general, these agreements contain certain covenants on the
part of the executive or key employee concerning confidential and proprietary
information of Medaphis and preclude the executive or key employee from
soliciting customers or employees of Medaphis during the twelve-month period
following termination of employment. The loss of services of certain of
Medaphis' executive officers could have a material adverse effect upon the
respective businesses of Medaphis.
GENERAL INFORMATION
This Proxy Statement/Prospectus is being furnished to stockholders of HDS
in connection with the solicitation of proxies by the Board of Directors of HDS
from holders of outstanding shares of HDS Capital Stock for use at the Special
Meeting. At the Special Meeting, the stockholders of HDS will be asked to
consider and vote upon a proposal to approve the Merger Agreement. If the Merger
is consummated, each outstanding share of HDS Capital Stock (other than treasury
shares and shares held by stockholders of HDS who perfect their appraisal rights
under Delaware law) will be converted into the right to receive .7912 of a share
of Medaphis Common Stock, plus cash for any fractional shares of Medaphis Common
Stock after such conversion.
This Proxy Statement/Prospectus also constitutes the Prospectus of Medaphis
with respect to the shares of Medaphis Common Stock to be issued in the Merger.
Information in this Proxy Statement/Prospectus with respect to Medaphis has been
supplied by Medaphis and the information with respect to HDS has been supplied
by HDS.
THE HDS SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Special Meeting will be held on June 29, 1996, at 10:00 a.m. local
time, at the Mission Inn, 3649 Seventh Street, Riverside, California. At the
Special Meeting, holders of HDS Common Stock and HDS Preferred Stock, voting
together as a single class, and holders of Series F Preferred Stock, voting as a
separate class, will be asked to consider and vote upon a proposal to approve
the Merger Agreement.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of shares of HDS Common Stock, HDS Series B
Preferred Stock, HDS Series C Preferred Stock, and HDS Series F Preferred Stock
at the close of business on May 28, 1996 (the "Record Date"), are entitled to
notice of and to vote at the Special Meeting. As of such date, there were
4,083,990 shares of HDS Common Stock issued and outstanding held by 158 holders
of record, 742,000 shares of HDS Series B Preferred Stock issued and outstanding
held by 147 holders of record, 1,312,500 shares of HDS Series C Preferred Stock
issued and outstanding held by 49 holders of record, and 1,605,353 shares of HDS
Series F Preferred Stock issued and outstanding held by 12 holders of record.
Holders of record of HDS
18
28
Common Stock and HDS Preferred Stock on the Record Date for the Special Meeting
are entitled to one vote per share on any matter that may properly come before
the Special Meeting.
VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
The presence in person or by proxy of the holders of a majority of the
shares of HDS Common Stock and HDS Preferred Stock outstanding as of the Record
Date is necessary to constitute a quorum at the Special Meeting. The affirmative
vote of (i) the holders of a majority of the total outstanding shares of HDS
Common Stock and HDS Preferred Stock, voting together as a single class, and
(ii) the holders of at least 85% of the total outstanding shares of HDS Series F
Preferred Stock, voting as a separate class, in each case present (in person or
by proxy) and entitled to vote at the Special Meeting, is necessary to approve
the Merger Agreement. Abstentions will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a quorum at the
Special Meeting. Abstentions and broker nonvotes with respect to the proposal to
approve the Merger Agreement will have the effect of a vote against such
proposal at the Special Meeting.
As of the Record Date, the executive officers and directors of HDS
beneficially owned an aggregate of 1,950,423 shares of HDS Common Stock and HDS
Preferred Stock (not including any shares which might be deemed to be
beneficially owned on account of outstanding options), or approximately 25.19%
of the shares of HDS Common Stock and HDS Preferred Stock then outstanding, and
2,040 shares of HDS Series F Preferred Stock, or less than 1% of the shares of
HDS Series F Preferred Stock outstanding.
SOLICITATION AND REVOCATION OF PROXIES
HDS has prepared a form of proxy card for the HDS Common Stock, the HDS
Series B Preferred Stock and the HDS Series C Preferred Stock and a separate
form of proxy card for the HDS Series F Preferred Stock. HDS has enclosed the
applicable proxy card or cards with this Proxy Statement/Prospectus. Holders of
HDS Common Stock, HDS Series B Preferred Stock or HDS Series C Preferred Stock
are requested to sign and return the proxy marked "HDS Common and Series B and C
Preferred Stock." Holders of HDS Series F Preferred Stock are requested to sign
and return the proxy marked "HDS Series F Preferred Stock." Holders of HDS
Series F Preferred Stock who are also holders of any other class of HDS Capital
Stock are requested to sign and return both proxy cards enclosed. All shares of
HDS Common Stock and HDS Preferred Stock represented by properly executed
proxies, unless such proxies have been previously revoked, will be voted in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such shares will be voted for approval of the Merger Agreement
and, in the discretion of the proxy holder, as to any other matter which may
properly come before the Special Meeting.
Any HDS stockholder who has previously delivered a properly executed proxy
may revoke such proxy at any time before its exercise. A proxy may be revoked
either by (i) filing with the Secretary of HDS prior to the Special Meeting, at
HDS's principal executive offices, either a written revocation of such proxy or
a duly executed proxy bearing a later date or (ii) attending the Special Meeting
and voting in person, regardless of whether a proxy has previously been given.
Presence at the Special Meeting will not revoke a stockholder's proxy unless
such stockholder votes in person.
19
29
THE MERGER
BACKGROUND OF THE MERGER
Beginning in early May 1996, Medaphis and HDS engaged in substantive
discussions regarding a possible acquisition transaction. A definitive merger
agreement was executed on May 23, 1996. Prior to the execution of the Merger
Agreement, there was no material relationship between Medaphis and HDS.
REASONS FOR THE MERGER
HDS. The Board of Directors of HDS formed a Special Committee consisting
of the three non-employee members of the Board to consider the proposed terms of
the Merger. In approving and adopting the Merger Agreement and formulating its
recommendation that the stockholders of HDS approve and adopt the Merger
Agreement and consummate the Merger, the HDS Board of Directors considered a
number of factors, including, without limitation, the following: (i) the
recommendation of the Special Committee that the Board of Directors approve and
adopt the Merger Agreement; (ii) the current privately-held status of HDS; (iii)
the quality of, and risks associated with, Medaphis Common Stock to be received
by HDS stockholders in the Merger; (iv) the terms of the Merger Agreement; (v)
the expectation that the Merger will be treated as a tax-free reorganization for
federal income tax purposes so that generally no gain or loss will be recognized
by HDS stockholders in connection with the exchange of HDS Common Stock and HDS
Preferred Stock for Medaphis Common Stock in the Merger; (vi) the opinion
rendered to the HDS Board of Directors by Hambrecht & Quist that the
consideration to be received by the holders of HDS Common Stock and HDS
Preferred Stock in the Merger is fair, from a financial point of view, to such
stockholders, the full text of which opinion is set forth as Annex C to this
Proxy Statement/Prospectus (See "-- Opinion of Financial Advisor to HDS"); and
(vii) certain strategic and business reasons for the Merger as set forth below
as Medaphis' reasons for pursuing the Merger.
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
Medaphis. In approving the Merger, the Merger Agreement and the
transactions contemplated thereby, the Board of Directors of Medaphis
considered, among other things, the following strategic and business reasons for
the Merger.
First, the Merger provides Medaphis with an advanced clinical information
management system which organizes data and processes around a patient-centered
model and facilitates the delivery of protocol-based care on a real-time basis.
ULTICARE, HDS's lead system, represents an integrated information management
system which addresses a healthcare enterprise's information needs through the
integrated monitoring, scheduling, documentation and control of all patient care
activities. As the evolving healthcare environment continues to promote
consolidation among healthcare providers and the growth of managed care,
Medaphis believes that the demand for clinical information management systems
designed to reduce costs within a healthcare enterprise and improve the quality
of care across the enterprise should increase. The Merger provides Medaphis with
established and deliverable products and expertise to take immediate advantage
of this market opportunity. Moreover, management of Medaphis believes that
ULTICARE will complement Medaphis' existing product and service offerings.
Second, Medaphis believes that the Merger will present opportunities for
Medaphis to cross sell systems and services among the consolidated Medaphis/HDS
customer base. Through its recent acquisitions of BSG and Rapid Systems,
Medaphis has become one of the leading client/server systems integration and
work flow engineering companies in the United States. Management of Medaphis
believes that Medaphis' systems integration and work flow engineering resources
and expertise should prove helpful in connection with the sale and installation
of HDS's clinical information systems, particularly in IHDS and other large
healthcare enterprises which have an ever increasing need for integration of
clinical, financial, operational, administrative and analytical systems and data
across the enterprise. Similarly, management of Medaphis believes that
opportunities exist for Medaphis to provide business management outsourcing
services and information
20
30
management systems to the HDS client base, and to offer HDS's clinical
information systems to Medaphis' existing base of healthcare providers and
payers clients. Medaphis currently provides business management services and
systems to approximately 19,700 physicians and over 2,200 hospitals in all 50
states and subrogation and recovery services to 45 payors covering in excess of
24 million lives.
Third, Medaphis believes that the Merger will enhance Medaphis' ability to
pursue its mission of seeking to achieve an unequaled level of measurable
quality and productivity in the delivery of information technology systems and
business services which respond to the wants, needs and values of its customers.
Management believes that HDS's clinical information systems and expertise
together with Medaphis' existing product development expertise should assist
Medaphis in developing a proprietary data model for its clients which captures
and organizes data relating to the delivery of healthcare services and utilizes
such data in real-time to reduce costs, increase efficiency and improve the
quality of care provided. It has been estimated that the healthcare industry
spends in excess of $40 billion per year and employs in excess of 1 million
people to capture data relating to the provision of healthcare services and then
to price, bill and collect for such services. The industry is impacted by
increasing administrative and other costs and ever increasing information needs.
The Merger will provide Medaphis with an advanced clinical information
management system which, in management's opinion, represents an integral part of
the overall technology and systems needed to address in a meaningful manner the
cost and management problems currently confronting the healthcare industry.
TERMS OF THE MERGER AGREEMENT
General. The Merger Agreement provides that, following approval of the
Merger Agreement by the stockholders of HDS and the satisfaction or waiver of
the other conditions to the consummation of the Merger, Newco will be merged
with and into HDS at the Effective Time in accordance with the DGCL. HDS will be
the surviving corporation in the Merger. As a result of the Merger, the separate
corporate existence of Newco will cease, and HDS will become a wholly owned
subsidiary of Medaphis.
Conversion Ratio. Each share of HDS Common Stock and HDS Preferred Stock
issued and outstanding at the time of the Merger (other than treasury shares and
shares held by HDS stockholders who perfect their appraisal rights under the
DGCL) will be converted into the right to receive .7912 of a share of Medaphis
Common Stock (the "Conversion Ratio").
Cash will be paid in lieu of issuing fractional shares of Medaphis Common
Stock in an amount equal to the Average Closing Price of Medaphis Common Stock
multiplied by the fraction of a share which the holder of HDS Capital Stock
would otherwise be entitled to receive.
Issuance of Additional Options. In connection with the Merger, Medaphis
has agreed to issue additional options covering 100,000 shares of Medaphis
Common Stock to certain employees of HDS. The exercise price for such options
will be the fair market value of Medaphis Common Stock at the time of grant and
the options shall vest over five years.
Conditions to the Merger. The obligations of both Medaphis and HDS to
consummate the Merger are subject to the satisfaction of certain conditions,
including, among others: (i) the approval of the Merger Agreement by the
stockholders of HDS; (ii) the absence of any injunction, writ or preliminary
restraining order or any order of any nature issued by a court or governmental
agency of competent jurisdiction to the effect that the Merger may not be
consummated as provided in the Merger Agreement and the absence of any lawsuit
or proceeding (actual or as to which written notice has been received) by any
governmental or regulatory agency for the purpose of obtaining any such
injunction, writ or preliminary restraining order; (iii) the receipt by Medaphis
and HDS of a written opinion of King & Spalding concerning certain federal
income tax consequences of the Merger; (iv) the receipt by Medaphis and HDS of a
written opinion from Deloitte & Touche LLP that, in accordance with generally
accepted accounting principles, the Merger qualifies to be treated as a pooling
of interests for accounting purposes; (v) the effectiveness of the Registration
Statement under the Securities Act and the absence of (a) any stop order
suspending the effectiveness of the Registration Statement or any proceedings by
the Commission (actual or threatened) for such purpose and (b) the absence of
any stop order suspending the effectiveness of any qualification or registration
of the Medaphis Common Stock under the state securities laws or any proceeding
by authorities of
21
31
any such state (actual or threatened) for such purpose; (vi) the shares of
Medaphis Common Stock to be issued pursuant to the Merger Agreement shall have
been listed on The Nasdaq Stock Market; and (vii) the applicable waiting periods
shall have terminated under the HSR Act.
The obligation of Medaphis to consummate the Merger is subject to certain
additional conditions, including, among other things, that: (i) HDS's
representations and warranties contained in the Merger Agreement shall be true
and correct as of the date of the Merger Agreement and as of the Effective Time;
(ii) HDS shall have performed in all material respects all covenants and
agreements required to be performed by it under the Merger Agreement; (iii)
Medaphis shall have received legal opinions and accountants' letters with
respect to various matters; (iv) all corporate action necessary by HDS to
authorize the execution, delivery and performance of the Merger Agreement and
the consummation of the transactions contemplated thereby shall have been duly
and validly taken; (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement shall have been made (with certain limited
exceptions); (vi) Medaphis shall have received consents to assignment of certain
material contracts of HDS or written waivers of the provisions under any such
contracts requiring the consents of third parties; (vii) HDS shall have received
letters from each stockholder of HDS who is an affiliate of HDS regarding
certain restrictions on the transfer of the Medaphis Common Stock received
pursuant to the Merger for a specified period of time; (viii) Medaphis shall
have received certificates from certain officers of HDS as to compliance with
certain conditions of the Merger Agreement; (ix) holders of not more than 10% of
the outstanding shares of HDS Capital Stock shall have elected to exercise
appraisal rights pursuant to the DGCL; (x) 70% of the holders of HDS Options
shall have executed and delivered to Medaphis Option Assumption Agreements; (xi)
during the course of its due diligence review following the execution of the
Merger Agreement, Medaphis shall not have discovered prior to the close of
business on June 20, 1996, specified types of information that would have a
material adverse effect on the assets, liabilities, results of operations,
financial condition or business of HDS; and (xii) each of the directors of HDS
shall have tendered resignation letters to Medaphis.
The obligation of HDS to consummate the Merger also is subject to certain
additional conditions, including, among others, that: (i) Medaphis'
representations and warranties contained in the Merger Agreement shall be true
and correct as of the date of the Merger Agreement and as of the Effective Time;
(ii) Medaphis shall have performed in all material respects all covenants and
agreements required to be performed by it under the Merger Agreement; (iii) HDS
shall have received legal opinions and accountants' letters with respect to
various matters; (iv) all corporate action necessary by Medaphis to authorize
the execution, delivery and performance of the Merger Agreement and the
consummation of the transactions contemplated thereby shall have been duly and
validly taken; (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement shall have been obtained (with certain
limited exceptions); (vi) the Board of Directors of HDS shall have received a
written opinion of Hambrecht & Quist to the effect that the Merger is fair to
HDS and its stockholders from a financial point of view; and (vii) Medaphis
shall have furnished HDS with a certificate of certain officers of Medaphis as
to compliance with certain conditions of the Merger Agreement.
Amendment. The Merger Agreement may be amended by the mutual agreement of
the parties thereto. Any amendment to the Merger Agreement must be in writing
and signed by the parties to the Merger Agreement.
Termination. The Merger Agreement may be terminated (i) by mutual
agreement of the Boards of Directors of HDS and Medaphis; (ii) by HDS or
Medaphis, if the conditions to such parties' obligations to consummate the
Merger have not been complied with or performed and such noncompliance or
nonperformance has not been cured or eliminated on or before August 15, 1996;
(iii) by Medaphis or HDS, if the Merger Agreement has not been approved by the
holders of a majority of the outstanding shares of HDS Common Stock and HDS
Preferred Stock, voting together as a single class, and the holders of at least
85% of the outstanding shares of HDS Series F Preferred Stock, voting as a
separate class; and (iv) by HDS if the Average Closing Price is less than $37.
22
32
Fees and Expenses. Medaphis will pay its own fees, costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby. HDS will pay its own fees, costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
but such fees, costs and expenses shall not exceed certain specified amounts and
the reasonable fees and expenses of accountants and counsel for HDS. In
addition, HDS has agreed that, if (i) the Merger Agreement is terminated solely
as a result of the failure of HDS's stockholders to approve the Merger
Agreement, (ii) on or prior to the date scheduled for the Special Meeting, HDS
receives a proposal or offer from another entity concerning an Acquisition
Transaction, (iii) HDS engages in negotiations or enters into a letter of
intent, agreement in principle or definitive agreement with another entity
concerning an Acquisition Transaction within 182 days after the date of such
termination of the Merger Agreement and (iv) such Acquisition Transaction is
consummated during or after such 182-day period, then HDS shall pay Medaphis
$7,500,000 to reimburse and compensate Medaphis for its expense, time and effort
in connection with the matters contemplated by the Merger Agreement.
Exchange of HDS Stock Certificates. Prior to the Effective Time,
instructions and a letter of transmittal will be furnished to all stockholders
of HDS for use in exchanging their stock certificates for certificates
evidencing the shares of Medaphis Common Stock they will be entitled to receive
as a result of the Merger. STOCKHOLDERS OF HDS SHOULD NOT SUBMIT THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL INSTRUCTIONS AND THE LETTER OF TRANSMITTAL ARE
RECEIVED.
No Solicitation. The Merger Agreement provides that until the Effective
Time or until the Merger Agreement is terminated in accordance with its terms,
HDS will not directly or indirectly solicit or initiate (including by way of
furnishing information) discussions with any third party (other than Medaphis or
its authorized representatives pursuant to the Merger Agreement) concerning an
Acquisition Transaction involving HDS. HDS has agreed to notify Medaphis
promptly in writing if HDS receives any inquiries or proposals with respect to
an Acquisition Transaction and shall provide Medaphis with copies of any such
written proposals or inquiries actually received.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
relating thereto with the Secretary of State of the State of Delaware. The
Merger Agreement provides that the parties thereto will cause such certificate
of merger to be filed after each of the conditions to consummation of the Merger
has been satisfied or waived. The Merger cannot become effective until the HDS
stockholders have approved the Merger Agreement. Thus, there can be no assurance
as to whether or when the Merger will become effective.
RECOMMENDATION OF THE HDS BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR TO HDS
HDS engaged Hambrecht & Quist to act as its financial advisor in connection
with the Merger and to render an opinion as to the fairness from a financial
point of view to the holders of the outstanding shares of HDS Common Stock and
HDS Preferred Stock of the consideration to be received in the Merger. Hambrecht
& Quist undertook a presentation to the Board of Directors of HDS on May 20,
1996 and to a special committee of the Board of Directors on May 22, 1996 and
rendered its oral opinion (subsequently confirmed in writing) that, as of such
date, the consideration to be received in the Merger is fair to the holders of
the HDS Common Stock and the HDS Preferred Stock from a financial point of view.
A COPY OF HAMBRECHT & QUIST'S OPINION DATED MAY 22, 1996, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS OF THE REVIEW
UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST, IS ATTACHED AS
ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS. HDS STOCKHOLDERS ARE ADVISED
23
33
TO READ THE OPINION IN ITS ENTIRETY. No limitations were placed on Hambrecht &
Quist by the Board of Directors of HDS with respect to the investigation made or
the procedures followed in preparing and rendering its opinion.
In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things, (i) reviewed the publicly available consolidated
financial statements of Medaphis for recent years and interim periods to date
and certain other relevant financial and operating data of Medaphis made
available to Hambrecht & Quist from published sources and from the internal
records of Medaphis; (ii) discussed with certain members of the management of
Medaphis the business, financial condition and prospects of Medaphis; (iii)
reviewed certain financial and operating information, including certain
projections of Medaphis, relating to Medaphis and discussed such projections
with certain members of the management of Medaphis; (iv) reviewed the
consolidated financial statements of HDS for recent years and interim periods to
date and certain other relevant financial and operating data of HDS made
available to Hambrecht & Quist from the internal records of HDS; (v) reviewed
certain internal financial and operating information, including certain
projections, relating to HDS prepared by the senior management of HDS; (vi)
discussed the business, financial condition and prospects of HDS with certain
members of its senior management; (vii) compared certain financial information
of HDS and Medaphis with certain financial information and the recent reported
common stock prices and trading activity of companies engaged in businesses
Hambrecht & Quist considered comparable to that of HDS and Medaphis; (viii)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions; (ix) reviewed the Merger
Agreement and certain ancillary agreements; and (x) performed such other
analyses and examinations and considered such other information, financial
studies, analyses and investigations and financial, economic and market data as
Hambrecht & Quist deemed relevant.
In rendering its opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all of the information concerning Medaphis or HDS
considered in connection with its review of the Merger, and Hambrecht & Quist
did not assume any responsibility for independent verification of such
information. Hambrecht & Quist did not prepare any independent valuation or
appraisal of any of the assets or liabilities of Medaphis or HDS, nor did it
conduct a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections made available
to Hambrecht & Quist and used in its analysis, Hambrecht & Quist assumed that
they reflect the best currently available estimates and judgments of the
expected future financial performance of Medaphis and HDS, respectively. For
purposes of its opinion, Hambrecht & Quist assumed that neither Medaphis nor HDS
was a party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Merger and
those activities undertaken in the ordinary course of conducting their
respective businesses. Hambrecht & Quist's opinion is necessarily based upon
market, economic, financial and other conditions as they exist and can only be
evaluated as of the date of its opinion and any change in such conditions would
require a reevaluation of such opinion. Hambrecht & Quist expressed no opinion
as to the price at which Medaphis common stock will trade subsequent to the
Effective Time (as defined in the Merger Agreement). Hambrecht & Quist was not
requested to, and did not, solicit indications of interest from any other
parties in connection with a possible acquisition of, or business combination
with, HDS.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Accordingly,
in arriving at its opinion, Hambrecht & Quist did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor. No
company or transaction used in Hambrecht & Quist's analyses is identical to
Medaphis, HDS or the Merger. Accordingly, the analyses performed by Hambrecht &
Quist were not purely mathematical; rather they involved complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading values
of the companies or company to which they are compared. Accordingly, Hambrecht &
Quist believes that its analyses and the summary set forth below must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the summary, without considering all factors and
analyses, could create an
24
34
incomplete view of the processes underlying the analyses set forth in the
Hambrecht & Quist presentation to the HDS Board and its opinion. In performing
its analyses, Hambrecht & Quist made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of HDS and Medaphis. The analyses
performed by Hambrecht & Quist (and summarized below) are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Additionally, analyses
relating to the values of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
Comparable Public Company Analyses. Hambrecht & Quist compared selected
historical and projected financials, operating and stock market performance data
of HDS to the corresponding data of certain publicly traded healthcare
information services companies that Hambrecht & Quist considered comparable
based on market value and strategic focus. Comparisons were analyzed for the
following companies in the healthcare information services business: Cerner
Corp., Citation Computer Systems, Inc., Enterprise Systems, Inc., HBO & Co.,
Medicus Systems Corp., Oacis Healthcare Systems, Inc., Pace Health Management
Systems, Inc., Phamis, Inc., and Shared Medical Systems Corp. For each of the
foregoing companies, Hambrecht & Quist analyzed the equity market value of each
company as a multiple of 1995 net income, 1996 estimated net income, and 1997
forecasted net income, and Hambrecht & Quist analyzed the enterprise value of
each company (calculated as market equity value plus preferred stock and
long-term debt minus cash) as a multiple of each company's last twelve months'
revenue and last twelve months' EBIT. All multiples were based on closing stock
prices on May 21, 1996. All forecasted data for such comparable companies were
based on publicly-available independent estimates by selected investment banking
firms. With respect to the financial forecasts for HDS, Hambrecht & Quist
analyzed three distinct cases: a management case (the "Management Case"), a base
case (the "Base Case"), and a more conservative case (the "Conservative Case").
Relative to the Management Case, the Base Case included a 25% reduction in the
revenue forecasts for 1996 and 1997, a 20% reduction in operating expenses in
1996 and 1997, and a 40% reduction in pre-tax income for 1996 and 1997. Relative
to the Management Case, the Conservative Case included a 25% reduction in the
revenue forecasts for 1996 and 1997, a 14% reduction in operating expenses in
1996 and 1997, and a 45% reduction in pre-tax income for 1996 and 1997.
Specifically, the average 1995 net income multiple for the comparable companies
implied an equity value for HDS of $406 million; the average 1996 net income
multiple for the comparable companies implied an equity value for HDS of $776
million in the case of the Management Case, $459 million in the Base Case, and
$438 million for the Conservative Case; and the average 1997 net income multiple
for the comparable companies implied an equity value for HDS of $884 million in
the Management Case, $523 million in the Base Case, and $499 million for the
Conservative Case. The average last twelve months' net revenue multiple implied
an equity value for HDS of $337 million, and the average last twelve months'
EBIT multiple implied an equity value of $293 million. In its discussion with
the Board of Directors of HDS regarding the range of potential valuation,
Hambrecht & Quist placed somewhat greater reliance on the historic multiples,
rather than the multiples of projected operating performance. Hambrecht & Quist
also observed that the creation of the implied public market values for HDS was
not meant to suggest that HDS could undertake an initial public offering in the
then-current environment, and that financing in the private equity market would
typically be undertaken at a 40% discount to public market valuations. The
foregoing implied values were compared with a valuation of HDS of approximately
$245 million as implied by the Merger.
Selected Acquisitions Analysis. Using publicly-available information,
Hambrecht & Quist analyzed the purchase prices and transaction values (as equity
value multiples of net income, tangible book value, cash flow from operations,
and as enterprise value multiples of revenue, EBIT, EBITDA, and net operating
assets) in the following selected completed and pending merger and acquisition
transactions in the healthcare information services industry in 1995 and 1996:
CyCare Systems, Inc./HBO & Co., BSG Corp./Medaphis, Rapid Systems Solutions,
Inc./Medaphis, Pyxis Corp./Cardinal Health, Inc., Medical Management Sciences,
Inc./Medaphis, Consort Technologies, Inc./Medaphis, Clinicom, Inc./HBO & Co.,
Healthcare Recoveries, Inc./Medaphis, Medical Consultants, Inc./Medaphis, Health
Systems Group, Inc./HBO & Co., MMC Healthcare - Software Systems/Medicus Systems
Corp., and Automation Atwork/Medaphis. Specifically, the average last twelve
months' net income multiple for the comparable transactions implied an equity
25
35
value for HDS of approximately $225 million; the average tangible book value
multiple for the comparable transactions implied an equity value for HDS of
approximately $857 million; the average operating cash flow multiple for the
comparable transactions implied a negative equity value for HDS. The average
1996 forecasted net income multiple for comparable transactions implied an
equity value for HDS of $548 million in the Management Case, $324 million in the
Base Case, and $310 million in the Conservative Case. The average last twelve
months' revenue multiple for comparable transactions implied an equity value for
HDS of $199 million; the average last twelve months' EBIT multiple for
comparable transactions implied an equity value for HDS of $288 million; the
average net operating asset multiple for comparable transactions implied an
equity value for HDS of $799 million. The average 1996 forecasted revenue
multiple for comparable transactions implied an equity value for HDS of $214
million in the Management Case, $166 million in the Base Case, and $164 million
in the Conservative Case.
Stock Trading History Analysis. Hambrecht & Quist examined the history of
the trading prices and volume of the shares of the common stock of Medaphis, and
the relationship between movement in the prices of such shares and movements in
the NASDAQ Composite Index and an index derived from the comparable companies
(the "Inpatient Systems Companies") during the period from May 20, 1995 to May
20, 1996. Such data was used to analyze the historical public market valuation
of Medaphis as compared with the historic public market valuation of the
companies comprising the Inpatient Systems Companies. At any given point in the
period, such data indicated whether the Medaphis share value was higher or lower
relative to such blended indices. For such period, Medaphis common stock
under-performed on a relative basis the public stocks comprising the Inpatient
Systems Companies and performed approximately comparably with the NASDAQ
composite index.
Contribution Analysis. Hambrecht & Quist reviewed certain historical and
estimated future operating and financial information (including revenues,
operating income and pretax income) for HDS, Medaphis and the pro forma combined
entity resulting from the Merger based on Medaphis management estimates and the
Management Case, Base Case and Conservative Case. Hambrecht & Quist observed
that HDS shareholders would own approximately 8.2% (or 8.6% including the
assumption of HDS options) of the post-Merger entity. Hambrecht & Quist further
observed that HDS accounted for approximately 5.5% of the revenues, 6.8% of the
operating income, and 11.0% of the pretax income of the combined company in
1995. With respect to 1996 and 1997 and relying on the Management Case,
Hambrecht & Quist noted that HDS would account for approximately 7.2% of 1996
combined revenues, 15.3% of 1996 combined operating income, 19.4% of 1996
combined pretax income, 7.5% of 1997 combined revenues, 13.2% of 1997 combined
operating income, and 19.5% of 1997 combined operating income. Relying on the
Base Case, Hambrecht & Quist noted that HDS would account for approximately 5.6%
of 1996 combined revenues, 11.5% of 1996 combined operating income, 12.7% of
1996 combined pretax income, 5.8% of 1997 combined revenues, 9.8% of 1997
combined operating income, and 12.7% of 1997 combined operating income. Relying
on the Conservative Case, Hambrecht & Quist noted that HDS would account for
approximately 5.5% of 1996 combined revenues, 9.1% of 1996 combined operating
income, 12.0% of 1996 combined pretax income, 5.7% of 1997 combined revenues,
7.8% of 1997 combined operating income, and 12.0% of 1997 combined operating
income.
The foregoing description of Hambrecht & Quist's opinion is qualified in
its entirety by reference to the full text of such opinion which is attached at
Annex C to this Proxy Statement/Prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, strategic transactions, corporate restructurings,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Hambrecht & Quist, together with its affiliates, owns approximately 0.5% of the
outstanding HDS Common Stock (on an as-converted basis). Hambrecht & Quist was
familiar with Medaphis and provided investment banking and other financial
advisory services to Medaphis in the past, and they have received fees for
rendering these services. Specifically, Hambrecht & Quist acted as financial
advisor to Medaphis in 1995 in connection with its acquisition of Healthcare
Recoveries, Inc. In the ordinary course of business, Hambrecht & Quist acts as a
market maker and broker in the publicly traded securities of Medaphis and
receives customary compensation in connection therewith, and also provides
research coverage for Medaphis. In the ordinary course of business, Hambrecht &
Quist actively
26
36
trades in the equity securities of Medaphis for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. Hambrecht & Quist may in the future provide
additional investment banking or other financial advisory services to Medaphis.
Pursuant to an engagement letter dated May 12, 1996, HDS agreed to pay
Hambrecht & Quist a fee of $400,000 upon the delivery of a fairness opinion and
an additional fee of $1,587,000 upon the consummation of the Merger. HDS has
agreed to reimburse Hambrecht & Quist for its reasonable out of pocket expenses,
and to indemnify Hambrecht & Quist against certain liabilities, including
liabilities under the federal securities laws or relating to or arising out of
Hambrecht & Quist's engagement as financial advisor.
See "HDS Options" for a discussion of a prior opinion concerning valuation
of the HDS Capital Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, holders of HDS Common Stock and HDS Preferred
Stock should be aware that certain executive officers and directors of HDS have
certain interests that may present them with potential conflicts of interest
with respect to the Merger.
Ownership of HDS Capital Stock. As of the date of this Proxy
Statement/Prospectus, executive officers and directors of HDS beneficially owned
an aggregate of 1,950,423 shares of HDS Capital Stock (not including any shares
which might be deemed to be beneficially owned on account of outstanding
options). If the Special Meeting had been held on the Last Trading Date, the
executive officers and directors of HDS would have been entitled to receive in
the Merger an aggregate of 1,543,175 shares of Medaphis Common Stock having an
aggregate market value of approximately $60.1 million based on the closing price
per share of Medaphis Common Stock reported on The Nasdaq Stock Market on the
Last Trading Date. See "Ownership of HDS Capital Stock."
Employment Agreements. In connection with the Merger, each Key Employee
will enter into an Employment Agreement, pursuant to which Medaphis will agree
to employ each of them for a term of two years. It is also contemplated that
certain other employees of HDS will enter into Employment Agreements with terms
varying from one to two years. Each person entering into an Employment Agreement
will be paid an annual salary and will also be entitled to receive certain
incentive compensation payments. The Employment Agreements will contain certain
non-competition and non-solicitation covenants and will be in form and substance
mutually satisfactory to each party. Each Key Employee will also enter into a
Non-Compete Agreement with Medaphis that will be in form and substance mutually
satisfactory to each party.
CERTAIN AGREEMENTS IN CONNECTION WITH THE MERGER
Certain additional agreements will be entered into in connection with the
consummation of the Merger.
Employment Agreements. In connection with the Merger, each Key Employee
will enter into an Employment Agreement. See "-- Interests of Certain Persons in
the Merger -- Employment Agreements." These Employment Agreements generally will
provide for a term of employment of two years and will contain certain
non-competition and non-solicitation covenants. It is also contemplated that
certain other employees of HDS will enter into Employment Agreements.
Non-competition and Non-solicitation Agreement. In connection with the
Merger, the Key Employees will enter into a Non-Compete Agreement with Medaphis.
The Non-Compete Agreement will be in form and substance mutually satisfactory to
each party.
HDS OPTIONS
Pursuant to the Merger, Medaphis shall assume all of HDS's rights and
obligations with respect to outstanding and unexercised HDS Options. Prior to
the Effective Time, Medaphis will request that each holder of an HDS Option
enter into an Option Assumption Agreement with Medaphis. Upon receipt of an
Option Assumption Agreement from a holder of an HDS Option following the
Effective Time, Medaphis will issue to such holder a Non-Qualified Option to be
granted under the Medaphis Stock Option Plan. Each Non-
27
37
Qualified Option issued to a holder of an HDS Option will be subject to vesting
as follows: the Option shall vest as to 25% of the shares of Medaphis Common
Stock for which it may be exercised for each year that the Optionholder has been
employed by HDS.
Pursuant to the Merger Agreement, Medaphis is not entitled or required to
substitute a Non-Qualified Option for an HDS Option until it has received from
the holder of an HDS Option a properly completed and executed Option Assumption
Agreement with respect to the HDS Option. Each Non-Qualified Option issued in
substitution for an HDS Option will evidence the right to purchase the number of
shares of Medaphis Common Stock equal to the product of the number of shares of
HDS Common Stock covered by the HDS Option immediately prior to the Effective
Time multiplied by the Conversion Ratio. The exercise price for each such
Non-Qualified Option will be equal to the quotient obtained by dividing the
exercise price of the HDS Option immediately prior to the Effective Time by the
Conversion Ratio.
In addition, Medaphis has agreed to issue new options to certain employees
of HDS. See "-- Terms of the Merger Agreement -- Issuance of Additional
Options."
HDS has granted to employees options to purchase shares of HDS Common Stock
having exercise prices of not less than 100% of the fair market value of the
shares at the time such options are granted. In connection therewith, HDS
received in February 1996 an opinion from an investment banking firm relating to
options covering 181,750 shares of HDS Common Stock having an exercise price of
$2.50 per share granted from November 1, 1990 through June 1, 1992, and options
covering 387,400 shares of HDS Common Stock having an exercise price of $3.00
per share granted from January 1, 1995 through January 15, 1996. Among other
things, such opinion noted the 1995 private sale of HDS Series F Preferred Stock
for $16.50 per share. The opinion states that "[a]s is the case with [HDS], the
Common Stock usually has a value much less than the Preferred Stock." The
opinion concludes that the exercise prices of the HDS Options "represent a fair
and reasonable value for such stock." See "Opinion of Financial Advisor to HDS"
for a discussion of a more recent opinion concerning valuation of HDS Capital
Stock.
ACCOUNTING TREATMENT
The Merger is expected to qualify to be treated as a pooling of interests
for financial accounting purposes. The obligations of Medaphis and HDS to
consummate the Merger are conditioned upon the receipt of an opinion of Deloitte
& Touche LLP that, in accordance with generally accepted accounting principles,
the Merger will qualify to be treated as a pooling of interests for accounting
purposes. Accordingly, the Merger will be treated as a continuation of the
existing businesses of Medaphis and HDS accounted for by combining the
historical balances and results of Medaphis and HDS. The assets and liabilities
of Medaphis and HDS will be carried forward at their recorded amounts. Income of
Medaphis after the Merger will include the income of Medaphis and HDS for the
entire fiscal period in which the Merger occurs. The reported income of Medaphis
and HDS for prior periods will be combined and restated as income of the
combined company. See "Unaudited Pro Forma Combined Financial Information."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General. The following summary has been included in reliance upon the
opinion of King & Spalding, counsel to Medaphis, as to the material federal
income tax consequences of the Merger to the stockholders of HDS. The summary is
based on the provisions of the Code, the Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect as of the date hereof. Such laws or interpretations may differ at the
Effective Time, and relevant facts also may differ.
Tax Consequences to Stockholders of HDS. HDS and Medaphis expect that the
Merger will be treated as a tax-free reorganization for federal income tax
purposes so that no gain or loss will be recognized by stockholders of HDS,
except in respect of cash received in lieu of fractional shares of Medaphis
Common Stock or payments received by stockholders exercising appraisal rights.
The obligations of Medaphis and of HDS to consummate the Merger are conditioned
upon the receipt of an opinion of King & Spalding to the effect that the Merger
will qualify as a tax-free reorganization for federal income tax purposes under
the Code. The opinion of King & Spalding, however, will not be binding upon the
Internal Revenue Service or the
28
38
courts, and will be subject to a number of assumptions, qualifications and
limitations. If the Merger is consummated, and it is later determined that the
Merger did not qualify as a tax-free reorganization under the Code, stockholders
of HDS would recognize taxable gain or loss upon the receipt of Medaphis Common
Stock in the Merger.
Cash received in the Merger by a stockholder of HDS in lieu of a fractional
share of Medaphis Common Stock will be treated under Section 302 of the Code as
having been received by such stockholder in exchange for such fractional share,
and such stockholder generally will recognize capital gain or loss in such
exchange equal to the difference between the cash received and such
stockholder's tax basis allocable to the fractional share.
Any gain or loss recognized will be capital gain or loss if such HDS or
Medaphis fractional share interest was a capital asset in the hands of the
stockholder of HDS, and will be long-term capital gain or loss if such HDS
fractional share interest was held by such stockholder for more than one year.
In general, the federal income tax rates applicable to long-term capital gains
and ordinary income (including short-term capital gains) of taxpayers who are
individuals may differ, while for corporations capital gains and ordinary income
are generally taxed at the same rate. The deductibility of capital losses is
subject to limitations for both individuals and corporations.
Tax Consequences of Converting HDS Options. Holders of HDS Options will
not be required to recognize taxable income on receipt of Non-Qualified Options
granted by Medaphis. However, the Non-Qualified Options will not qualify as
incentive stock options under Section 422 of the Code, and a holder of a
Non-Qualified Option will recognize ordinary compensation income upon the
exercise of such option in an amount equal to the excess of the fair market
value of the Medaphis Common Stock at the time of exercise over the amount such
holder pays for such stock. Additionally, Medaphis will be required to treat the
amount of ordinary compensation income attributable to an employee's exercise of
a Non-Qualified Option as wages subject to employment taxes and income tax
withholding. Medaphis will be allowed compensation expense deductions for
federal income tax purposes equal to the compensation income recognized by the
holders upon exercise of the Non-Qualified Options.
THE DISCUSSION SET FORTH ABOVE DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN
TAX ASPECTS OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE
SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF
THIS DISCUSSION. EACH STOCKHOLDER AND OPTION HOLDER OF HDS SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER
TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
TAX LAWS.
RESALE OF MEDAPHIS COMMON STOCK
Shares of Medaphis Common Stock to be issued to stockholders of HDS in
connection with the Merger will be freely transferrable under the Securities
Act, except for shares issued to any person or entity who, at the time of the
Special Meeting, may be deemed an "affiliate" of HDS within the meaning of Rule
145 under the Securities Act. In general, affiliates of HDS include its
executive officers and directors and any other person or entity who controls, is
controlled by or is under common control with HDS. Rule 145, among other things,
imposes certain restrictions upon the resale of securities received by
affiliates in connection with certain reclassifications, mergers, consolidations
or asset transfers. These restrictions will consist of volume and manner of sale
restrictions on the resale of shares of Medaphis Common Stock issued to such
person and entities. It is a condition to Medaphis' obligation to consummate the
Merger that HDS shall cause each stockholder of HDS who is identified by HDS as
an affiliate of HDS to deliver to Medaphis on or prior to the Effective Time a
written statement to the effect that such person will not sell any shares of
Medaphis Common Stock received in the Merger in any transaction, private or
public, or in any other way reduce such affiliate's risk, except in accordance
with applicable accounting provisions of the Securities Act and the rules
29
39
and regulations of the Commission, including the Commission's accounting rules
for pooling of interests transactions. Medaphis may place legends on
certificates representing shares of Medaphis Common Stock that are issued to
stockholders of HDS in the Merger to restrict such transfers.
COMPARISON OF RIGHTS OF HOLDERS OF MEDAPHIS COMMON STOCK AND HDS COMMON STOCK
AND HDS PREFERRED STOCK
The following is a summary of material differences between the rights of
holders of Medaphis Common Stock and the rights of holders of HDS Common Stock
and HDS Preferred Stock, which votes as a class with and is convertible into HDS
Common Stock, other than the rights of holders of HDS Preferred Stock described
below under "Comparison of Rights of Holders of Medaphis Common Stock and HDS
Preferred Stock" and the rights of certain holders of HDS Common Stock and
certain holders of HDS Preferred Stock described below under "HDS Preferred
Stock Purchase Agreements" and "Certain Repurchase Rights and Transfer
Restrictions." As each of Medaphis and HDS is organized under the laws of
Delaware, these differences arise from various provisions of the Amended and
Restated Certificate of Incorporation of Medaphis (the "Medaphis Charter") and
the Amended and Restated Bylaws of Medaphis (the "Medaphis Bylaws") and the
Certificate of Incorporation, as amended (the "HDS Charter"), and the Restated
Bylaws of HDS (the "HDS Bylaws"). HDS stockholders' rights are currently
governed by the HDS Charter and the HDS Bylaws. Upon consummation of the Merger
and to the extent they receive shares of Medaphis Common Stock, HDS stockholders
will become stockholders of Medaphis and their rights thereafter will be
governed by the Medaphis Charter and the Medaphis Bylaws. The following summary
does not purport to be a complete statement of the rights of the stockholders of
Medaphis and HDS. This summary is qualified in its entirety by reference to the
full text of the Medaphis Charter, the Medaphis Bylaws, the DGCL, the HDS
Charter and the HDS Bylaws.
Authorized Shares. Under the Medaphis Charter, Medaphis is authorized to
issue 200 million shares of Medaphis Common Stock and 600,000 shares of
Nonvoting Common Stock, par value $.01 per share ("Medaphis Nonvoting Common
Stock"). The powers, preferences and rights of the Medaphis Common Stock and the
Medaphis Nonvoting Common Stock are identical except that (i) the Medaphis
Common Stock has one vote per share on all matters submitted to a vote of
stockholders and the Medaphis Nonvoting Common Stock has no right to vote on any
such matters except as provided by law, and (ii) the Medaphis Nonvoting Common
Stock may be converted at any time into shares of Medaphis Common Stock on a
share-for-share basis and the Medaphis Common Stock has no such conversion
rights. Under the HDS Charter, HDS is authorized to issue 10 million shares of
HDS Common Stock, par value $.10 per share, and 5 million shares of Preferred
Stock, par value $.10 per share, the terms of which shall be fixed by HDS's
Board of Directors at the time of issuance.
Special Meeting of Stockholders. Under the Medaphis Bylaws, a special
meeting of the stockholders of Medaphis may be called by the Chairman of the
Board of Directors, the President, by order of the Board of Directors, or, upon
the written request of the holders of at least 50% of the outstanding shares of
Medaphis Common Stock entitled to vote at such meeting, by the President or
Secretary of Medaphis. Under the HDS Bylaws, special meetings of the
stockholders of HDS may be called by the Chief Executive Officer, the Board of
Directors, or the holders of shares entitled to cast not less than 25% of the
votes at the meeting.
Stockholder Nominations. Under the Medaphis Bylaws, only persons nominated
in accordance with the procedures set forth therein will be eligible for
election as directors. Stockholders who are entitled to vote for the election of
directors are entitled to nominate persons for election to the Board of
Directors of Medaphis only if a timely notice in writing is sent to the
Secretary of Medaphis. To be timely, a stockholder's notice must be received at
the principal executive offices of Medaphis not less than 60 days nor more than
90 days prior to the date of the meeting at which directors are to be elected
(subject to limited exceptions). Such notice must set forth certain information,
including, among other things, (i) with respect to each person whom the
stockholder proposes to nominate for election as a director, (a) the name, age,
business address and residence address of such person, (b) the principal
occupation or employment of such person, (c) the number of shares of Medaphis
Common Stock beneficially owned by such person and (d) other information that
would be required to be disclosed in connection with the solicitation of proxies
for the election of directors
30
40
pursuant to Regulation 14A under the Exchange Act, and (ii) with respect to such
stockholder giving such notice, (x) the name and address of such stockholder and
(y) the number of shares of Medaphis Common Stock beneficially owned by such
stockholder. The HDS Charter and HDS Bylaws do not contain provisions
prescribing requirements relating to nomination of directors by stockholders.
Stockholder Proposals. Under the Medaphis Bylaws, at an annual meeting of
stockholders, only business properly brought before the meeting may be
conducted. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of Medaphis. To be timely, a stockholder's notice must be received
at the principal executive offices of Medaphis not less than 60 days nor more
than 90 days prior to the annual meeting (with limited exceptions). Such notice
must set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business to be brought and the
reasons for conducting such business; (ii) the name and address of such
stockholder; (iii) the number of shares of Medaphis Common Stock beneficially
owned by such stockholder; and (iv) any material interests of the stockholder in
such proposed business. The HDS Charter and HDS Bylaws do not contain provisions
prescribing requirements relating to stockholder proposals.
Action without a Meeting. Under the Medaphis Bylaws, any action required
to be taken at any annual or special meeting of stockholders or any action which
may be taken at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing setting forth the actions so taken shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing. Under
the HDS Bylaws, any action which may be taken at any meeting of stockholders may
be taken without a meeting and without prior notice if written consents setting
forth the actions so taken are signed by the holders of the outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. If the unanimous written consent of all such
stockholders shall not have been received, prompt notice of any corporate action
approved by the stockholders without a meeting shall be given to those
stockholders entitled to vote on such matters that have not consented thereto in
writing.
Board of Directors. Under the Medaphis Bylaws, the Board of Directors of
Medaphis consists of such number of directors as determined from time to time by
the Board of Directors, which cannot in any case be less than three nor more
than 10. The Board of Directors of Medaphis currently consists of six members,
all of whom are elected at each annual meeting of stockholders. Under the HDS
Bylaws, the HDS Board of Directors consists of such number of directors as is
determined by resolution of the HDS Board of Directors or by the HDS
stockholders at the annual meeting; provided, however, that such number of
directors cannot in any case be less than five nor more than eight. The HDS
Board of Directors currently consists of five members.
Quorum. Under the Medaphis Bylaws, the presence of 50% of the total number
of directors currently comprising the Board of Directors is necessary to
constitute a quorum. Under the HDS Bylaws, the presence of a majority of the
directors is necessary to constitute a quorum.
Indemnification of Directors and Officers. Under the Medaphis Bylaws,
Medaphis is required to indemnify, to the fullest extent permitted by the DGCL,
any person who is involved in any action, suit or proceeding by reason of the
fact that the person is or was a director, officer, employee or agent of
Medaphis, provided that if such person initiated the action, suit or proceeding,
such person will be entitled to indemnification only if the proceeding was
authorized by the Board of Directors of Medaphis. Medaphis is also required to
advance expenses to any such director, officer, employee or agent of Medaphis
provided that, in the case of a director or officer of Medaphis, he or she
delivers the undertaking required by the DGCL. Under the HDS Bylaws, HDS is
required to indemnify its officers, directors, employees and agents to the
extent permitted by the DGCL.
31
41
COMPARISON OF RIGHTS OF HOLDERS OF MEDAPHIS COMMON STOCK AND HDS PREFERRED STOCK
The following is a summary of material differences between the rights of
holders of Medaphis Common Stock and the rights of holders of HDS Preferred
Stock, other than the rights of holders of HDS Preferred Stock described above
under "Comparison of Rights of Holders of Medaphis Common Stock and HDS Common
Stock and HDS Preferred Stock" and described below under "HDS Preferred Stock
Purchase Agreements." These differences arise primarily from various provisions
of the Medaphis Charter and the Medaphis Bylaws and the HDS Charter and the HDS
Bylaws. The following summary does not purport to be a complete statement of the
rights of the stockholders of Medaphis and the holders of HDS Preferred Stock.
This summary is qualified in its entirety by reference to the text of the
Medaphis Charter, the Medaphis Bylaws, the DGCL, the HDS Charter and the HDS
Bylaws.
Voting Rights. The Medaphis Charter provides that each holder of Medaphis
Common Stock shall have one vote for each share of stock held by such holder.
The HDS Charter provides that holders of HDS Preferred Stock are entitled to
vote with HDS Common Stock as a single class on all matters on which holders of
HDS Common Stock are entitled to vote. In any such vote, each holder of shares
of HDS Preferred Stock is entitled to such number of votes as shall be equal to
the whole number of shares of HDS Common Stock into which such holder's
aggregate number of shares of HDS Preferred Stock are convertible.
In addition, so long as any shares of HDS Series B Preferred Stock or HDS
Series C Preferred Stock remain outstanding, the vote or consent of at least a
majority of the outstanding shares of either such series is required to: (i)
amend the HDS Charter or HDS Bylaws in a manner which would alter the rights of
the holders of either such series; (ii) reclassify any HDS Common Stock into
shares with priority over the shares of either such series or (iii) pay a
dividend upon or redeem any shares of HDS Common Stock (with certain limited
exceptions). So long as any shares of HDS Series F Preferred Stock remain
outstanding, the vote or consent of at least 85% of the outstanding shares of
such series is required to: (i) amend the HDS Charter or HDS Bylaws in a manner
which would alter the rights of the HDS Series F Preferred Stock; (ii) pay a
dividend on any shares of junior stock; (iii) increase the authorized number of
shares of HDS Series F Preferred Stock; (iv) redeem any shares of junior stock
(with certain limited exceptions); or (v) reclassify any junior stock into
shares with priority over the shares of HDS Series F Preferred Stock.
Additionally, in connection with any merger, consolidation or sale of all or
substantially all of HDS's assets (including without limitation the Merger), at
least 85% of the shares of the HDS Series F Preferred Stock outstanding must
vote in favor of or consent to the consideration to be received by such holders
in such transaction.
Dividend Preference. Holders of Medaphis Common Stock are not entitled to
any dividend preference. Holders of HDS Series B Preferred Stock and HDS Series
C Preferred Stock are entitled to receive non-cumulative dividends, when and if
declared by the HDS Board of Directors, at the rate of $.40 and $.56,
respectively, per share per annum, before any dividend is paid on HDS Common
Stock; provided, however, that such dividends may not exceed 25% of HDS's
pre-tax income for any quarter. Holders of HDS Series F Preferred Stock are
entitled to receive dividends at the rate of $1.15 per share per annum, payable
in preference to any dividends on any shares of junior stock. Dividends on HDS
Series F Preferred Stock shall only accrue and be cumulative if HDS declares a
cash dividend on any shares of capital stock; in such case, unpaid dividends
shall bear interest at the rate of 10% per annum.
Liquidation Preference. In the event of any liquidation of Medaphis, the
holders of Medaphis Common Stock and the holders of Medaphis Non-Voting Common
Stock are entitled to share pro rata in all assets of Medaphis available for
distribution to its stockholders. Upon any liquidation, dissolution or winding
up of HDS, before any distribution or payment shall be made to the holders of
HDS Common Stock, the holders of HDS Series B Preferred Stock, HDS Series C
Preferred Stock and HDS Series F Preferred Stock are concurrently entitled to be
paid out of the assets of HDS an amount per share equal to $5.63, $8.00 and
$16.50, respectively, plus any accrued and unpaid dividends. If the assets and
funds thus distributed among the holders of the HDS Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount, then the entire assets of HDS legally available for distribution shall
be distributed ratably among the holders of the HDS Preferred Stock in
proportion to the preferential amount each such holder would have been entitled
to receive.
32
42
Conversion. Each share of HDS Preferred Stock may be converted into shares
of HDS Common Stock. The number of shares of HDS Common Stock to which a holder
of HDS Preferred Stock is entitled upon conversion is equal to the product
obtained by multiplying the number of shares of HDS Preferred Stock being
converted by the conversion rate. The current conversion rate for each of the
HDS Series B Preferred Stock, HDS Series C Preferred Stock and HDS Series F
Preferred Stock is one-to-one. Medaphis Common Stock is not convertible.
HDS PREFERRED STOCK PURCHASE AGREEMENTS
Certain holders of HDS Common Stock (consisting of those holders of HDS
Common Stock who originally purchased HDS Series A Preferred Convertible Stock,
par value $0.10 per share ("HDS Series A Preferred Stock"), which was
subsequently converted into HDS Common Stock ("HDS Converted Common Stock")),
and the holders of HDS Preferred Stock, have certain additional rights, and
their shares are subject to certain additional restrictions, under the terms of
the respective HDS Preferred Stock Purchase Agreements ("HDS Preferred Stock
Purchase Agreements") pursuant to which such shares of HDS Series A Preferred
Stock and HDS Preferred Stock were originally issued. These rights and
restrictions include, among others, the following:
Rights of First Refusal. Holders of HDS Converted Common Stock and
HDS Preferred Stock have rights of first refusal to purchase, subject to
certain exceptions, on a pro rata basis with all other holders holding such
rights of first refusal, all or any portion of "New Securities" which HDS
may, from time to time, propose to sell and issue. "New Securities" means
any capital stock of HDS, including HDS Common Stock or HDS Preferred Stock
whether now authorized or not, and rights, options or warrants to purchase
HDS Capital Stock, and securities of any type whatsoever that are, or may
become, convertible into HDS Capital Stock, subject to certain exceptions.
These rights, as they relate to the HDS Converted Common Stock, HDS Series
B Preferred Stock and HDS Series C Preferred Stock, will expire at the
Effective Time. These rights, as they relate to the holders of the HDS
Series F Preferred Stock, will continue following the Effective Time. It is
a condition to Medaphis' obligation to consummate the Merger that it shall
have obtained a waiver of such rights from the holder of the HDS Series F
Preferred Stock that may be deemed at the time of the Special Meeting to be
an "affiliate" of HDS within the meaning of Rule 145 under the Securities
Act.
Registration Rights. Holders of HDS Converted Common Stock and HDS
Preferred Stock have demand registration rights pursuant to which they may
cause HDS to register their shares of HDS Converted Common Stock and the
shares of HDS Common Stock into which the shares of HDS Preferred Stock are
convertible (collectively, "HDS Registerable Securities"), subject to
certain limitations. Additionally, holders of HDS Registerable Securities
have certain piggyback registration rights which they may exercise in the
event of a registration of HDS Common Stock initiated by HDS, subject to
certain limitations. To date, no holders of HDS Registerable Securities
have exercised any of their demand registration rights or piggyback
registration rights. HDS is required to pay the expenses arising from a
registration of HDS Common Stock as to which holders of HDS Registerable
Securities exercise their piggyback registration rights, subject to certain
exceptions. With respect to a registration undertaken in response to an
exercise by holders of HDS Registerable Securities of their demand
registration rights, expenses incurred in connection therewith are payable
in certain instances and to a certain extent by HDS, and in other instances
and to another extent, by the holders of HDS Registerable Securities. These
rights will not apply to the shares of Medaphis Common Stock to be issued
pursuant to the Merger.
Restrictions on Transferability. The HDS Converted Common Stock, the
HDS Preferred Stock and shares of HDS Common Stock that would be issued
upon conversion of the HDS Preferred Stock are subject to certain
restrictions on transfer, and a holder of any of such shares must cause any
proposed transferee thereof to agree to take and hold those shares subject
to the provisions and upon the conditions specified in the respective HDS
Preferred Stock Purchase Agreement pursuant to which the shares in question
were issued. Subject to certain exceptions, such shares are not
transferable to any person who directly or indirectly is a competitor of
HDS, or who is an officer, director, employee, consultant,
33
43
substantial creditor or stockholder of any such competitor. These
restrictions will not apply to the shares of Medaphis Common Stock to be
issued pursuant to the Merger.
Holders of HDS Converted Common Stock and HDS Preferred Stock should refer
to the HDS Preferred Stock Purchase Agreements pursuant to which the HDS
Converted Common Stock and HDS Preferred Stock were issued for a complete
description of the rights and restrictions relating to HDS and holders of HDS
Converted Common Stock and HDS Preferred Stock thereunder. The foregoing summary
is qualified in its entirety by reference to the HDS Preferred Stock Purchase
Agreements.
CERTAIN REPURCHASE RIGHTS AND TRANSFER RESTRICTIONS
Certain shares of HDS Common Stock owned by employees of HDS are subject to
Revised Buy-Out Agreements with HDS (the "Buyout Agreements"). Pursuant to the
Buyout Agreements, until the later of (i) four years from the start of such
employee's employment by HDS, or (ii) the date of an initial public offering of
HDS as specified therein, such shares of Common Stock are subject to (a)
restriction upon transfer, including the right of HDS to purchase such shares of
Common Stock from the holder at the price and upon the terms of the proposed
transfer, or at the option of HDS at the cost of such shares of Common Stock,
and (b) the right of HDS to purchase such shares in the event of termination of
the employment of the holder by HDS. These provisions will not apply to the
shares of Medaphis Common Stock to be issued to such employees pursuant to the
Merger.
APPRAISAL RIGHTS
Holders of HDS Common Stock and HDS Preferred Stock are entitled to
appraisal rights under Section 262 of the DGCL. A person having a beneficial
interest in shares of HDS Common Stock or HDS Preferred Stock held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect whatever appraisal rights the beneficial owner may
have.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by the full
text of Section 262, which is reprinted in its entirety as Annex B to this Proxy
Statement/Prospectus. All references in Section 262 and in this summary to a
"stockholder" are to the record holder of the shares of HDS Common Stock or HDS
Preferred Stock as to which appraisal rights are asserted.
Under the DGCL, holders of shares of HDS Common Stock and HDS Preferred
Stock who follow the procedures set forth in Section 262 will be entitled to
have their shares of HDS Common Stock or HDS Preferred Stock or both, as the
case may be, appraised by the Delaware Court of Chancery and to receive payment
of the "fair value" of such shares, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair rate
of interest, if any, as determined by such court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, the corporation,
not less than 20 days prior to the meeting, must notify each of its stockholders
who was a stockholder on the record date of the meeting with respect to shares
for which appraisal rights are available that such appraisal rights are
available and include in such notice a copy of Section 262. This Proxy
Statement/Prospectus shall constitute such notice to the holders of shares of
HDS Common Stock and HDS Preferred Stock and the applicable statutory provisions
of the DGCL are attached to this Proxy Statement/Prospectus as Annex B. Any
stockholder who wishes to exercise such appraisal rights or who wishes to
preserve his or her right to do so should review the following discussion and
Annex B carefully because failure to timely and properly comply with the
procedures specified will result in the loss of appraisal rights under the DGCL.
A holder of shares of HDS Common Stock or HDS Preferred Stock or both, as
the case may be, wishing to exercise his or her appraisal rights must deliver to
HDS, before the vote on the Merger Agreement at the Special Meeting, a written
demand for appraisal of his or her shares of HDS Common Stock or HDS Preferred
Stock or both, as the case may be, and must not vote in favor of adoption of the
Merger Agreement.
34
44
Because a proxy which does not contain voting instructions will, unless revoked,
be voted for adoption of the Merger Agreement, a holder of shares of HDS Common
Stock or HDS Preferred Stock or both, as the case may be, who votes by proxy and
who wishes to exercise his or her appraisal rights must (i) vote against
adoption of the Merger Agreement or (ii) abstain from voting on adoption of the
Merger Agreement. A vote against adoption of the Merger Agreement, in person or
by proxy, or an abstention with respect thereto, will not in and of itself
constitute a written demand for appraisal satisfying the requirements of Section
262. In addition, a holder of shares of HDS Common Stock or HDS Preferred Stock
or both, as the case may be, wishing to exercise his or her appraisal rights
must hold of record such shares on the date the written demand for appraisal is
made and must continue to hold such shares until the Effective Time.
Only a holder of record of shares of HDS Common Stock or HDS Preferred
Stock is entitled to assert appraisal rights for the shares of HDS Common Stock
or HDS Preferred Stock registered in that holder's name. A demand for appraisal
should be executed by or on behalf of the holder of record, fully and correctly,
as his or her name appears on his or her stock certificates. If the shares of
HDS Common Stock or HDS Preferred Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the shares of HDS Common Stock or HDS
Preferred Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or owners. A
record holder such as a broker who holds shares of HDS Common Stock or HDS
Preferred Stock as nominee for several beneficial owners may exercise appraisal
rights with respect to the shares of HDS Common Stock or HDS Preferred Stock
held for one or more beneficial owners while not exercising such rights with
respect to the shares of HDS Common Stock or HDS Preferred Stock held for other
beneficial owners; in such case, the written demand should set forth the number
of shares of HDS Common Stock or HDS Preferred Stock as to which appraisal is
sought, and where no number of shares of HDS Common Stock or HDS Preferred Stock
is expressly mentioned, the demand will be presumed to cover all shares of HDS
Common Stock or HDS Preferred Stock held in the name of the record owner.
Stockholders who hold their shares of HDS Common Stock or HDS Preferred Stock in
brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such a nominee. All
written demands for appraisal should be sent or delivered to HDS at 268 West
Hospitality Lane #300, San Bernardino, California 92408 Attention: Secretary.
Within ten days after the Effective Time, HDS, as the surviving corporation
in the Merger, must send a notice as to the effectiveness of the Merger to each
person who has satisfied the appropriate provisions of Section 262 and did not
vote for approval and adoption of the Merger Agreement. Within 120 days after
the Effective Time, but not thereafter, HDS or any stockholder entitled to
appraisal rights under Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares of HDS Common
Stock or HDS Preferred Stock, or both, as the case may be. HDS is under no
obligation to, and has no present intention to, file a petition with respect to
the appraisal of the fair value of the shares of HDS Common Stock or HDS
Preferred Stock. Accordingly, it is the obligation of the stockholders to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262.
Within 120 days after the Effective Time, any stockholder who has complied
with the requirements for exercise of appraisal rights will be entitled, upon
written request, to receive from HDS a statement setting forth the aggregate
number of shares of HDS Common Stock and HDS Preferred Stock not voted in favor
of adoption of the Merger Agreement and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such statements must be mailed within ten days after a written request therefor
has been received by HDS.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which stockholders are
entitled to appraisal rights and thereafter will appraise the shares of HDS
Common Stock or HDS Preferred Stock, or both, as the case may be, owned by such
35
45
stockholders, determining the fair value of such shares of HDS Common Stock or
HDS Preferred Stock, or both, as the case may be, exclusive of any element of
value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest to be paid, if any, upon the amount determined to
be the fair value. In determining fair value, the Delaware Court of Chancery is
to take into account all relevant factors. In Weinberger v. UOP Inc., et. al.,
the Delaware Supreme Court discussed factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered and
that "[f]air price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that in
making this determination of fair value the court must consider "market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which were known or which could be ascertained as of the date of
merger which throw any light on future prospects of the merged corporation." The
Delaware Supreme Court has construed Section 262 to mean that "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered." However, the court noted that Section 262
provides that fair value is to be determined "exclusive of any element of value
arising from the accomplishment or expectation of the merger."
HDS stockholders considering seeking appraisal rights should be aware that
the fair value of their shares of HDS Common Stock or HDS Preferred Stock, or
both, as the case may be, determined under Section 262 could be more than, the
same as, or less than the value of the merger consideration they will be
entitled to receive pursuant to the Merger Agreement if they do not seek
appraisal of their shares of HDS Common Stock or HDS Preferred Stock, and that
opinions of investment banking firms as to fairness from a financial point of
view are not necessarily opinions as to fair value under Section 262. The cost
of the appraisal proceeding may be determined by the Delaware Court of Chancery
and taxed upon the parties as the Delaware Court of Chancery deems equitable in
the circumstances. Upon application of a dissenting stockholder, the Delaware
Court of Chancery may order that all or a portion of the expenses incurred by
any dissenting stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts, be charged pro rata against the value of all shares of HDS
Common Stock and HDS Preferred Stock entitled to appraisal. In the absence of
such a determination or assessment, each party bears such party's own expenses.
Any holder of HDS Common Stock or HDS Preferred Stock, or both, as the case
may be, who has duly demanded an appraisal in compliance with Section 262 will
not, after the Effective Time, be entitled to vote the shares of HDS Common
Stock or HDS Preferred Stock, or both, as the case may be, subject to such
demand for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares of HDS Common Stock or HDS Preferred Stock as of
a date prior to the Effective Time).
If any stockholder who demands appraisal of his or her shares of HDS Common
Stock or HDS Preferred Stock, or both, as the case may be, under Section 262
fails to perfect, or effectively withdraws or loses, his or her right to
appraisal, as provided in the DGCL, the shares of HDS Common Stock or HDS
Preferred Stock, or both, as the case may be, of such stockholder will be
converted into the right to receive the merger consideration. A stockholder will
fail to perfect, or effectively lose or withdraw, his or her right to appraisal
if no petition for appraisal is filed within 120 days after the Effective Time,
or if the stockholder delivers to HDS a written withdrawal of his or her demand
for appraisal and acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time will require the
written approval of HDS as the surviving corporation.
Failure to follow any of the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights (in which
event a stockholder will be entitled to receive the merger consideration). In
view of the complexity of these provisions of Delaware law, stockholders who are
considering dissenting from the approval and adoption of the Merger Agreement
and exercising their rights under Section 262 should consult their legal
advisors.
36
46
BUSINESS OF MEDAPHIS
GENERAL
Medaphis is a leading provider of business management services and systems
to the healthcare industry. Medaphis' business management services are designed
to assist its hospital and physician clients with the business management
functions associated with the delivery of healthcare services, thereby
permitting such clients to focus on providing quality medical services to their
patients. Medaphis also provides subrogation and related recovery services to
healthcare payors and a multi-specialty physician group. These services assist
healthcare payors in recovering the related benefits provided to insureds who
are injured in accidents or under other circumstances where a third-party is
ultimately responsible for such benefits. Medaphis currently provides business
management services and systems to approximately 19,700 physicians and over
2,200 hospitals and subrogation and recovery services to healthcare plans
covering in excess of 24 million people throughout the United States.
Medaphis also is a leading provider of information management systems and
systems integration and workflow engineering systems and services to various
participants in the healthcare and other industries. Medaphis currently provides
scheduling and information management systems to hospitals, emerging IHDS and
certain specialty departments or staffs within a hospital or IHDS. Medaphis'
scheduling and information management systems are designed to enable healthcare
providers to control costs and improve efficiency by automating certain
scheduling and related management functions within a facility, department or
staff group. Medaphis' systems integration and workflow engineering systems and
services are designed to increase flexibility, improve end-user access to
information and increase decision making through the strategic use and
development of client/server, imaging and other advanced technologies. Medaphis
currently provides systems integration and workflow engineering systems and
services to participants in the healthcare and other industries.
Medaphis' business strategy is to develop a national organization which
provides high quality business management services and systems to the healthcare
industry. In addition, Medaphis intends to continue to develop and exploit its
core competencies in the systems integration and workflow engineering fields in
various industries outside of healthcare which are experiencing similar demands
for more effective and open client/server IT systems. Management anticipates
that the demand for systems integration and workflow engineering systems and
services within and outside the healthcare industry will continue to grow as
companies increasingly face rapidly changing competitive landscapes and enhanced
demands for improved customer service, greater employee satisfaction and
increased profitability. Medaphis intends to pursue its business strategy
through both internal growth and acquisitions. Since 1988, Medaphis has acquired
42 businesses which provide business management services and systems primarily
to physicians and hospitals involving aggregate consideration of approximately
$1.3 billion.
Medaphis is incorporated under the laws of the State of Delaware. Medaphis
Common Stock is traded on The Nasdaq Stock Market under the symbol "MEDA."
Unless the context otherwise requires, reference to Medaphis includes Medaphis
Corporation and its subsidiaries. Medaphis' principal executive offices are
located at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia 30339, and its
telephone number is (770) 444-5300.
MEDAPHIS RE-ENGINEERING PROJECT
In order to increase efficiency and position Medaphis to take advantage of
the opportunities being created by ongoing changes in the healthcare industry,
Medaphis has commenced a re-engineering project which will involve, among other
things, the consolidation of the billing and accounts receivable processing
function of its billing and accounts receivable management business, which is
currently operated out of approximately 300 local business offices around the
country, into approximately 10 remote processing centers. In addition to the
consolidation of processing operations, the re-engineering project will involve
the establishment of advanced client/server computing at the local sales and
service offices and at remote processing centers. This computing infrastructure
will be designed to significantly reduce paper handling and greatly increase the
speed
37
47
of record recovery while permitting communication over a wide-area network and
across geographic markets and linking together all of Medaphis' operating
divisions. The local sales and service offices and remote processing centers
will operate in a client/server environment in which client work stations and
graphical user interfaces connect with distributed file, database, transaction
and groupware servers. Concurrent with the consolidation of processing
operations and the establishment of an advanced client/server environment,
Medaphis will continue to assess the processing practices of each office, as
well as the practices of successful transaction processors in other industries.
The purpose of this assessment is to identify the best practices for each core
process, and then adopt these best practices as standards and engineer the
workflow and new technology to achieve or exceed each of the identified
standards. Medaphis believes the re-engineering project will provide its
customers and employees with the full information processing and communications
power of an advanced distributed computing system. The re-engineering project is
designed to enable Medaphis to continue to grow and achieve economies of scale
in several areas, including training, client service, patient and payor
relations, transaction processing operations and electronic data interchange
capabilities. The project is expected to be substantially completed during 1997.
Although the re-engineering project will involve consolidation of the processing
functions of its billing and accounts receivable management services, Medaphis
intends to continue to maintain and place increased emphasis on the sales and
customer service functions of this business on a local basis.
RECENTLY COMPLETED AND FUTURE ACQUISITIONS
Medaphis has recently completed three major acquisitions and intends to
continue to pursue additional acquisitions in the future. A general summary of
the major acquisitions is set forth below.
COMPLETED ACQUISITIONS
BSG Corporation. On May 6, 1996, Medaphis acquired BSG in a merger
transaction for approximately 7.5 million shares of Medaphis Common Stock. In
addition, Medaphis assumed BSG stock options representing approximately 2.3
million additional shares of Medaphis Common Stock. BSG provides information
technology and change management services to organizations seeking to transform
their operations through the strategic use of client/server and other advanced
technologies. BSG focuses on customers and industries where technology-enabled
change and re-engineering can have a significant competitive impact. BSG seeks
to establish long-term alliances with its customers, enabling them to increase
revenue, raise productivity and improve product quality. Management believes
that the acquisition of BSG, when combined with Rapid Systems and Medaphis'
existing systems integration and workflow engineering operations, will position
Medaphis as one of the leading client/server systems integration and workflow
engineering companies in the United States.
Rapid System Solutions, Inc. On April 3, 1996, the Medaphis acquired Rapid
Systems in a merger transaction for approximately 1.1 million shares of Medaphis
Common Stock. Rapid Systems is a client server/systems integration company whose
core competencies include: network design integration and management; database
design and development; graphical user interface application design, development
and implementation; and strategic systems engineering and computer security.
Medical Management Sciences, Inc. On December 29, 1995, Medaphis acquired
MMS in a merger transaction for approximately 4 million shares of Medaphis
Common Stock. MMS is a provider of practice management and billing and accounts
receivable management services to radiologists and radiation oncologists.
Through a network of nine service centers, MMS currently provides its services
in 12 states to approximately 100 radiology and radiation oncology practices
consisting of approximately 1,700 radiologists and radiation oncologists. MMS'
practice management and billing and accounts receivable management services
assist physicians in improving their cash flow through better management of
their billing and accounts receivable and through reducing the administrative
costs associated with the delivery of healthcare services.
MMS also operates a management service organization located in Maryland,
which specializes in providing network formation and administration, marketing,
contracting, management and information systems services to physicians and
physician networks in connection with managed care, capitation and alternative
reimbursement systems. MMS currently provides these services to approximately
220 primary and specialty network physicians serving more than 200,000 covered
lives.
38
48
FUTURE ACQUISITIONS
An important component of Medaphis' business strategy involves growth
through acquisitions. In connection therewith, Medaphis evaluates various
acquisition candidates on an ongoing basis. In general, these acquisition
candidates include companies which provide business management systems or
services to healthcare providers or system integration services. Management of
Medaphis currently anticipates that Medaphis will place increased emphasis over
the next several quarters on expanding Medaphis' technology business, including
its systems integration operations.
As of the date of this Proxy Statement/Prospectus, Medaphis has no
definitive agreement to acquire any other specific business whose operations
would be material or significant to Medaphis. However, Medaphis may, prior to
the consummation of the Merger, acquire certain additional businesses whose
operations are not material or significant to Medaphis. Moreover, Medaphis
currently anticipates that it will continue to make acquisitions of businesses
which provide business management systems or services to healthcare providers
and/or systems integration services. The consummation of future acquisitions
will be subject to, among other things, favorable market conditions, the
availability of financing on terms and conditions satisfactory to Medaphis and
suitable acquisition candidates.
RESULTS OF OPERATIONS
Medaphis expects to record charges of approximately $900,000 and $6.5
million in the quarter ended June 30, 1996 associated with the acquisitions of
Rapid Systems and BSG, respectively, which are being accounted for as
poolings-of-interests. The charges relate to transaction fees, costs and
expenses incurred in connection with the mergers. Medaphis also expects to incur
an additional charge of $4.8 million for similar fees, costs and expenses in
connection with the Merger. The charge is expected to be recorded in the period
in which the Merger is consummated.
OTHER EVENTS
For a discussion of the Federal Investigation and certain putative
stockholder class action lawsuits, see "Risk Factors -- Pending Federal
Investigation; Putative Class Action Lawsuits."
39
49
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Combined Financial Statements are based on the
historical presentation of the consolidated financial statements of Medaphis and
the historical presentation of the consolidated financial statements of HDS. The
Unaudited Pro Forma Combined Statements of Operations for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996 give
effect to (i) the Merger as if it had occurred on January 1, 1993 and (ii)
certain pro forma adjustments related to the Atwork, MMS, Rapid Systems and BSG
mergers. The Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1995 also gives effect to the 1995 acquisitions, which
include the acquisition of Medical Management, Inc., Medical Billing Service,
Computers Diversified, Inc. and The Receivables Management Division of MedQuist
Inc. (the "1995 Acquisitions") as if each had occurred as of January 1, 1995.
The Unaudited Pro Forma Combined Balance Sheet as of March 31, 1996 gives effect
to the Merger as if it had occurred on March 31, 1996. The Unaudited Pro Forma
Combined Financial Statements do not include the effects of the Decisions
Support Group, Medical Office Consultants, Inc., Consort Technologies, Inc.
("Consort"), Billing and Professional Services, Inc., The Halley Exchange, Inc.,
Medical Management Computer Sciences, Inc., CBT Financial Services, Inc.,
Intelligent Visual Computing, Inc. and The MEDICO Group, Ltd. acquisitions, as
they are not considered significant individually or in the aggregate.
The Merger is expected to be accounted for under the pooling-of-interests
method of accounting. Each of the 1995 Acquisitions has been accounted for under
the purchase method of accounting. The total purchase price for each of these
acquisitions has been allocated to tangible and identifiable intangible assets
and liabilities based upon management's estimate of their respective fair market
values with the excess of cost over the fair value of net assets acquired
allocated to goodwill. The allocation of the purchase price for certain of the
1995 Acquisitions is subject to revision when additional information concerning
asset and liability valuation is obtained. Management believes the asset and
liability valuations utilized for these acquisitions will not be materially
different from the pro forma information presented herein.
For purposes of preparing the Unaudited Pro Forma Combined Statements of
Operations for the years ended December 31, 1993 and 1994, HDS's operating
results for the years ended March 31, 1994 and 1995 were combined with Medaphis'
operating results for the years ended December 31, 1993 and 1994, respectively.
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1995 was prepared by combining Medaphis' 1995 operating results
with HDS's 1995 operating results, which were restated to a calendar year basis.
Accordingly, HDS's operating results for the three months ended March 31, 1995
were duplicated in each of the years ended December 31, 1994 and 1995. HDS's
revenues and net income for that three-month period were $12,716,000 and
$6,314,000, respectively.
Each of the Unaudited Pro Forma Combined Statements of Operations includes
the historical operating results of each of the acquired companies included
therein from the beginning of the period covered by such statement until the
earlier of the date of acquisition or the end of the period covered by such
statement.
The Unaudited Pro Forma Combined Financial Statements do not purport to be
indicative of the results that actually would have been obtained if the combined
operations had been conducted during the periods presented and they are not
necessarily indicative of operating results to be expected in future periods.
The Unaudited Pro Forma Combined Financial Statements and notes thereto should
be read in conjunction with the supplemental consolidated financial statements
and notes thereto of Medaphis, which are incorporated herein by reference, and
the historical financial statements and notes thereto of HDS, which are included
elsewhere herein, and the historical financial statements and notes thereto of
certain of the companies acquired in the 1995 Acquisitions, which are contained
in certain documents incorporated herein by reference.
40
50
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
------------------------------------------------------------------------
MEDAPHIS HDS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue............................... $259,575 $ -- $259,575 $19,763 $-- $279,338
Salaries and wages.................... 158,703 (8,689)(1) 150,014 5,670 -- 155,684
Other operating expenses.............. 66,412 -- 66,412 5,157 -- 71,569
Depreciation.......................... 6,960 -- 6,960 232 -- 7,192
Amortization.......................... 5,317 -- 5,317 2,561 -- 7,878
Interest expense, net................. 6,517 -- 6,517 56 -- 6,573
Restructuring and other charges....... -- -- -- -- -- --
-------- ----------- --------- ------- --- ---------
Total expenses............... 243,909 (8,689) 235,220 13,676 -- 248,896
Income (loss) before taxes............ 15,666 8,689 24,355 6,087 -- 30,442
Income taxes.......................... 7,049 4,655(5) 11,704 -- -- 11,704
-------- ----------- --------- ------- --- ---------
Net income (loss)..................... $ 8,617 $ 4,034 $ 12,651 $6,087 $-- 18,738
========= =========== ========== ======== =========== ==========
Net income per common share........... $ 0.19 $ 0.28 0.36
========= ========== ==========
Weighted average shares outstanding... 45,505 45,505 6,540 52,045
========= ========== ======== ==========
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------
MEDAPHIS HDS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................................. $376,870 $ -- $376,870 $22,115 $-- $398,985
Salaries and wages...................... 221,575 (6,716)(1) 214,859 5,402 -- 220,261
Other operating expenses................ 90,836 -- 90,836 4,589 -- 95,425
Depreciation............................ 9,269 -- 9,269 114 -- 9,383
Amortization............................ 7,748 -- 7,748 2,943 -- 10,691
Interest expense, net................... 5,896 -- 5,896 30 -- 5,926
Restructuring and other charges......... 1,905 -- 1,905 -- -- 1,905
-------- ----------- --------- ------- --- ---------
Total expenses................. 337,229 (6,716) 330,513 13,078 -- 343,591
Income (loss) before taxes.............. 39,641 6,716 46,357 9,037 -- 55,394
Income taxes............................ 13,155 5,147(5) 18,302 3,000 -- 21,302
-------- ----------- --------- ------- --- ---------
Net income (loss)....................... $ 26,486 $ 1,569 $ 28,055 $6,037 $-- $ 34,092
========= =========== ========== ======== =========== ==========
Net income per common share............. $ 0.48 $ 0.51 $ 0.56
========= ========== ==========
Weighted average shares outstanding..... 54,623 54,623 6,540 61,163
========= ========== ======== ==========
41
51
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------------------
MEDAPHIS HDS
PRIOR PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ACQUISITIONS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ------------ ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................. $552,132 $ 22,679 $ -- $ 574,811 $22,249 $ -- $ 597,060
Salaries and wages...... 318,014 10,794 (2,925)(1) 325,883 5,330 -- 331,213
Other operating
expenses.............. 130,714 6,586 -- 137,300 10,091 -- 147,391
Depreciation............ 14,346 628 -- 14,974 85 -- 15,059
Amortization............ 14,112 580 75(2) 14,767 3,135 -- 17,902
Interest expense, net... 10,417 (16) 1,787(3) 12,188 (201) -- 11,987
Restructuring and other
charges............... 54,950 -- (750)(4) 54,200 -- -- 54,200
-------- ------------ ----------- --------- ------- ----------- ---------
Total
expenses.... 542,553 18,572 (1,813) 559,312 18,440 -- 577,752
Income (loss) before
taxes................. 9,579 4,107 1,813 15,499 3,809 -- 19,308
Income taxes............ 6,903 -- 5,648(5) 12,551 1,524 14,075
-------- ------------ ----------- --------- ------- ----------- ---------
Net income (loss)....... $ 2,676 $ 4,107 $(3,835) $ 2,948 $ 2,285 $ -- $ 5,233
======== ========= ========= ======== ======= ========= ========
Net income per common
share................. $ 0.04 $ 0.05 $ 0.08
======== ======== ========
Weighted average shares
outstanding........... 61,520 61,520 6,540 68,060(6)
======== ======== ======= ========
THREE MONTHS ENDED MARCH 31, 1996
------------------------------------------------------------------------
MEDAPHIS HDS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ----------- --------- ------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue......................... $159,869 $ -- $ 159,869 $3,743 $ -- $ 163,612
Salaries and wages.............. 88,963 -- 88,963 1,564 -- 90,527
Other operating expenses........ 38,618 -- 38,618 760 -- 39,378
Depreciation.................... 4,917 -- 4,917 33 -- 4,950
Amortization.................... 4,023 -- 4,023 886 -- 4,909
Interest expense, net........... 2,242 -- 2,242 (137 ) -- 2,105
Restructuring and other
charges....................... 150 -- 150 -- -- 150
-------- ----------- --------- ------ ----------- ---------
Total expenses........ 138,913 -- 138,913 3,106 -- 142,019
Income (loss) before taxes...... 20,956 -- 20,956 637 -- 21,593
Income taxes.................... 8,613 (354)(5) 8,259 255 -- 8,514
-------- ----------- --------- ------ ----------- ---------
Net income (loss)............... $ 12,343 $ 354 $ 12,697 $ 382 $ -- 13,079
======== ========= ======== ====== ========= ========
Net income per common share..... $ 0.18 $ 0.18 $ 0.17
======== ======== ========
Weighted average shares
outstanding................... 69,164 69,164 6,540 75,704
======== ======== ====== ========
42
52
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
-----------------------------------------------
HDS PRO
FORMA PRO FORMA
MEDAPHIS HDS(9) ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 3,308 $ 14,167 $ -- $ 17,475
Restricted cash.................................. 16,473 -- -- 16,473
Accounts receivable, billed...................... 98,811 7,544 -- 106,355
Accounts receivable, unbilled.................... 85,100 10,834 -- 95,934
Other............................................ 18,523 106 -- 18,629
-------- -------- ----------- ---------
222,215 32,651 -- 254,866
Property and equipment............................. 120,202 687 -- 120,889
Intangible assets.................................. 463,278 7,768 -- 471,046
Other.............................................. 4,340 13,937 -- 18,277
-------- -------- ----------- ---------
$810,035 $ 55,043 $ -- $ 865,078
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable................................. $ 9,431 $ 5,244 $ -- $ 14,675
Accrued compensation............................. 29,711 992 -- 30,703
Accrued expenses................................. 58,405 2,726 4,750(7) 65,881
Current portion of long-term debt................ 10,651 -- -- 10,651
-------- -------- ----------- ---------
Total current liabilities................ 108,198 8,962 4,750 121,910
Long-term debt..................................... 191,823 -- -- 191,823
Other obligations.................................. 17,710 -- -- 17,710
Deferred income taxes.............................. 24,074 1,300 -- 25,374
Convertible subordinated debentures................ -- -- -- --
-------- -------- ----------- ---------
Total liabilities........................ 341,805 10,262 4,750 356,817
Stockholders' Equity:
Preferred Stock.................................. 16 366 (366)(8) 16
Common stock..................................... 609 274 (213)(8) 670
Paid-in capital.................................. 454,387 42,134 579(8) 497,100
Retained earnings (accumulated deficit).......... 13,218 2,007 (4,750)(7) 10,475
-------- -------- ----------- ---------
Total stockholders' equity............... 468,230 44,781 (4,750) 508,261
-------- -------- ----------- ---------
$810,035 $ 55,043 $ -- $ 865,078
======== ======== ========= ========
43
53
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) The pro forma adjustment to salaries and wages represents the
elimination of distributions that are non-recurring net of the compensation
expected to be paid to the former shareholders of Atwork and shareholders and
executive officers of MMS and the companies acquired in certain of the 1995
Acquisitions pursuant to employment contracts with Medaphis.
(2) The pro forma adjustment to amortization expense represents the change
in amortization expense recorded in conjunction with the 1995 Acquisitions,
which results from the adjustments to intangible assets recorded as part of the
purchase price allocations and conforming the historical amortization policies
to those of Medaphis, whereby goodwill is amortized using the straight-line
method generally over 25-40 years, client lists are amortized over their
estimated useful lives of 7-20 years and capitalized software is amortized over
its estimated useful life of 4-7 years.
(3) The pro forma adjustment to interest expense represents the interest
expense on indebtedness incurred by Medaphis (which accrued at an annual rate of
approximately 7.75% in 1995) in connection with the 1995 Acquisitions, net of
reductions in interest expense for obligations not assumed by Medaphis or for
obligations that Medaphis assumed and refinanced under the Medaphis Senior
Credit Facility to obtain lower interest rates.
(4) The pro forma adjustment to restructuring and other charges represents
the elimination of distributions that are non-recurring net of the compensation
to be paid to the former shareholders of Atwork pursuant to employment contracts
with Medaphis.
(5) The pro forma adjustment to income taxes represents (i) the imputed tax
expense on the operating results of Atwork, MMS, Consort, Rapid Systems and a
company acquired by BSG prior to BSG's merger with Medaphis, at statutory rates
in effect during the periods presented (as Atwork, MMS, Consort, Rapid Systems
and such company acquired by BSG were "S" corporations for income tax purposes
and therefore did not provide for federal income taxes), (ii) the tax impact of
applying Medaphis' pro forma effective tax rate to the income of certain of the
1995 Acquisitions (which were not "S" corporations for income tax purposes) as
well as the pro forma adjustments and (iii) the reversal of the adjustment
recorded to historical income taxes for the change in the tax status of Atwork,
MMS and Consort in 1995.
(6) The pro forma weighted average shares outstanding give effect to the
additional shares of Medaphis Common Stock to be issued and common stock
equivalents assumed in connection with the Merger.
(7) The pro forma adjustment to accrued expenses and retained earnings
represents the estimated costs associated with the Merger.
(8) The pro forma adjustments to preferred stock, common stock and paid-in
capital represent the adjustments necessary to give effect to the issuance of
Medaphis common stock to effect the Merger.
(9) Certain HDS amounts have been reclassified in order to conform to
Medaphis' presentation.
44
54
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF HDS
The following table sets forth selected consolidated financial information
for HDS for and as of each of the three fiscal years in the period ended March
31, 1996, for and as of the six month period ended March 31, 1993 and for and as
of the two fiscal years ended September 30, 1992. The selected consolidated
financial information of HDS for all of the periods presented has been derived
from the audited consolidated financial statements of HDS. The following
selected consolidated financial information is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of HDS
and related Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of HDS," included elsewhere
herein.
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED YEAR ENDED MARCH 31,
----------------- MARCH 31, ---------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA(1)
Net sales.............................. $20,593 $24,451 $4,646 $26,040 $30,454 $22,727
Cost of sales.......................... 10,953 12,419 739 11,875 13,767 15,185
Gross margin........................... 9,640 12,032 3,907 14,165 16,687 7,542
Expenses:
Research and development............. 1,145 1,308 903 1,775 1,754 1,793
Sales and marketing.................. 3,044 2,577 1,406 3,028 3,672 4,870
General and administrative........... 2,029 2,873 1,676 3,219 2,194 6,107
Interest............................. 735 8 45 129 232 265
Income from operations................. 2,687 5,266 (123) 6,014 8,835 (5,493)
Interest income........................ 86 58 36 73 202 620
Income (loss) before provision for
income
taxes................................ 2,773 5,324 (87) 6,087 9,037 (4,873)
Provision (benefit) for income taxes... -- -- -- -- 3,000 (1,700)
Net income (loss)...................... 2,773 5,324 (87) 6,087 6,037 (3,173)
AS OF SEPTEMBER
30, AS OF MARCH 31,
----------------- ----------------------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA(1)
Working capital........................ $ 4,931 $ 9,046 $8,630 $14,102 $22,760 $23,689
Intangible assets...................... 4,360 6,226 6,905 7,822 8,014 7,768
Total assets........................... 20,297 26,973 23,203 35,448 46,529 55,043
Convertible subordinated debentures.... 7,000 -- -- -- -- --
Redeemable preferred stock............. -- -- -- 6,910 6,565 --
Stockholders' equity................... 12,284 17,672 17,584 16,554 22,289 44,781
- ---------------
(1) HDS changed its fiscal year end in 1993 from September 30 to March 31.
45
55
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HDS
OVERVIEW
HDS provides information technology services and products to healthcare
organizations through the strategic use of standards-based approaches, such as
client/server and UNIX, that support HDS's proprietary applications products,
such as HDS's integrated patient care system known as ULTICARE(R). HDS has
experienced substantial growth since its inception in 1983, deriving most of its
revenue from software sales, consulting services, hardware sales, software
maintenance and support, training services, and ongoing upgrade and
implementation services. HDS typically provides its products under fixed fee
arrangements, and provides its services under both fixed fee and time and
materials arrangements. Software revenue is recognized when software is
delivered and there are no further significant vendor obligations. Hardware
revenues are recognized upon shipment. Maintenance and service revenues are
recognized as services are delivered. Some large integrated projects are
recognized on a percentage-of-completion basis whereby revenue is recorded over
the term of a contract based upon the percentage of work performed to date.
HDS's strategy has been to increase staffing in anticipation of revenue
increases. At times, this strategy has had the effect of adversely affecting net
income. A significant portion of HDS's revenues has been, and will continue to
be, derived from substantial contracts signed with large customers. The timing
of such contracts and their fulfillment can cause material fluctuations in
operating results, particularly on a quarterly basis. HDS manages this situation
by closely monitoring the sales process and staffing levels and requirements,
adjusting staffing levels as necessary.
In fiscal 1996, HDS realigned operations in order to devote greater
resources to its core service and product offerings and to expand its customer
relationships and capabilities. The realignment included, among other things,
the reduction of headcount, streamlining of processes and contracts, settlement
of longstanding vendor/term issues, and more effective utilization management.
HDS believes the realignment will reduce its annual operating expenses, enhance
its long-term growth strategy and support higher levels of earnings.
RESULTS OF OPERATIONS
The following table sets forth certain items from HDS's consolidated
statements of operations as a percentage of revenue for the periods indicated:
YEAR ENDED MARCH 31,
----------------------
1994 1995 1996
---- ---- ----
Net sales....................................................... 100% 100% 100%
Cost of sales................................................... 46 45 67
--- --- ---
Gross margin.................................................... 54 55 33
Expenses:
Research and development...................................... 7 6 8
Sales and marketing........................................... 12 12 21
General and administrative.................................... 12 7 27
Interest...................................................... 0 1 1
--- --- ---
Income (loss) from operations................................... 23 29 (24)
Interest income................................................. -- 1 3
--- --- ---
Income before provision for income taxes........................ 23 30 (21)
Provision for income taxes...................................... -- 10 (7)
--- --- ---
Net income...................................................... 23 20 (14)
=== === ===
46
56
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
Net Sales. Net sales in fiscal 1996 decreased 25% to $22.7 million from
$30.5 million in fiscal 1995. Timing issues associated with software and service
delivery delayed the recognition of significant revenue into fiscal 1997.
Cost of Sales. Cost of sales consists primarily of compensation and
benefits paid to professionals providing services to customers, costs of
hardware and hardware maintenance. Cost of sales increased by 10% to $15.2
million (67% of revenue) from $13.8 million (45% of revenue) in fiscal 1995. The
higher cost of sales was due primarily to the impact of hiring professional
staff in anticipation of future project needs and change in product mix that
resulted in an increase in the hardware component for fiscal 1996.
Research and Development Expenses. Research and development expenses
remained constant at $1.8 million from fiscal 1995 to fiscal 1996. HDS is the
recipient of a grant from the Department of Commerce to fund product
development. Amounts received under this grant are recorded as a reduction of
incurred research and development expenses. Incurred research and development
expenditures increased in fiscal 1996 from fiscal 1995 but were offset by grant
funding of $912,000.
Sales and Marketing Expenses. Sales and marketing expenses increased 33%
to $4.9 million from $3.7 million in fiscal 1995. This increase was due
primarily to increased provisions for doubtful accounts.
General and Administrative Expenses. General and administrative expenses
increased 178% to $6.1 million in fiscal 1996 from $2.2 million in fiscal 1995.
This increase was due primarily to the settlement of a dispute regarding pricing
and contractual issues with a vendor, the outcome of which was a renegotiated,
extended contract with terms beneficial to HDS, which resulted in a $2.7 million
charge in fiscal 1996. Legal fees increased approximately $372,000.
Loss from Operations. The loss from operations was $5.5 million in fiscal
1996 compared to income from operations of $8.8 million in fiscal 1995. The
decline was due primarily to timing differences in several large contracts in
which software delivery was delayed. In addition, in fiscal 1996 HDS realigned
operations in order to devote greater resources to its core service and product
offerings and to expand its customer relationships and capabilities.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
Net Sales. Net sales increased 17% to $30.5 million from $26.0 million in
fiscal 1994 as demand for HDS's products and services increased and as an
increasing number of customers commenced system operations.
Cost of Sales. Cost of sales increased by 16% to $13.8 million from $11.9
million in fiscal 1994. The higher cost of sales was primarily due to the
increased costs of professional staff and hardware to support the growth in
sales.
Research and Development Expenses. Research and development expenses
remained constant at $1.8 million in fiscal 1995 when compared to fiscal 1994.
Sales and Marketing Expenses. Sales and marketing expenses increased 21%
in fiscal 1995 to $3.7 million from $3.0 million in fiscal 1994. This was due to
increases in advertising, commissions and growth in sales related personnel
costs, recruiting and related expenses.
General and Administrative Expenses. General and administrative expenses
decreased 32% in fiscal 1995 to $2.2 million from $3.2 million in fiscal 1994.
This was due primarily to a decrease in legal fees and a reduction in exchange
loss from Canadian activity when compared to the prior period.
Income from Operations. Income from operations was $8.8 million in fiscal
1995 compared to $6.0 million in fiscal 1994. This improvement was due primarily
to the increase in revenue and the improved operating performance of the
organization.
47
57
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of March 31, 1996 was $23.7 million compared to $22.8
million as of the prior year end. The increase resulted from the proceeds from
the sale of Series F Preferred Stock which were used to retire the Series E
Preferred Stock, pay down bank loans and accounts payable, and increase cash and
cash equivalents by $10.4 million over the prior year.
HDS has a $3 million unsecured revolving line of credit with Riverside
National Bank due October 1, 1997, bearing interest at prime. As of March 31,
1996, HDS had no borrowings under its line of credit. The credit line contains
certain financial covenants and requires maintenance of certain financial
ratios. At March 31, 1996, HDS was not in compliance with one of these covenants
and has obtained a waiver of default from the bank.
Capital expenditures of $493,000 in the year ended March 31, 1996,
including additions to capital leases, consisted principally of computer
equipment and office equipment expenditures to support HDS's operations. HDS
also incurred software development costs of $3,052,000 which were capitalized
during the year ended March 31, 1996. As of March 31, 1996, HDS had no material
or unusual purchase commitments outstanding.
HDS believes that existing cash balances and cash flow from operations will
be sufficient to support HDS's working capital requirements for at least the
next 12 months. Thereafter, if cash generated from operations is insufficient to
satisfy HDS's working capital requirements and if the Merger is not consummated,
HDS may be required to raise additional funds. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on terms favorable to HDS. To the extent HDS raises
additional capital by issuing equity or convertible debt securities, ownership
dilution to HDS's stockholders will result. In the event that adequate funds are
not available, HDS's business may be adversely affected.
48
58
BUSINESS OF HDS
HDS is a developer and supplier of healthcare information systems to
institutions, payers, healthcare networks, and providers. HDS offers a product
line generally known as ULTICARE(R), an integrated information system which
addresses a healthcare enterprise's information needs through the integrated
monitoring, scheduling, documentation, and control of patient care activities.
To accomplish this, patient care workstations are situated throughout the
enterprise: at patient bedsides, at nursing stations, in ancillary departments
(laboratory, radiology, pharmacy, etc.), in physician offices and with mobile
health workers such as home care staff. HDS forms relationships throughout the
organization, especially with senior management of integrated delivery systems
(whether payer, provider, or practitioner based).
HDS has extensive experience in most phases of patient care automation:
nursing, physicians, laboratory, radiology, pharmacy, case management, and
quality assurance, among others. HDS customers include hospitals, integrated
healthcare enterprises, health maintenance organizations, municipal healthcare
systems, and elder care organizations.
INDUSTRY BACKGROUND
Changes in the healthcare industry over the past ten years have
significantly altered the information needs of healthcare providers.
Historically, healthcare information systems were developed primarily to serve
the needs of financial departments. Because providers and practitioners were
reimbursed by payers on a fee-for-service basis, the focus was on billing,
procedure, and revenue maximization rather than cost controls, operational
efficiency, and patient outcomes. The costs associated with inefficient data
management and information systems were passed on to payers as part of overhead
and the organization's overall cost structure. Changes in the payment system,
from fee-for-service to capitated arrangements (whether called capitation, case
management, managed care, or by other terms), have shifted risk to providers.
Providers must now focus on cost controls, operational efficiency, and patient
outcomes.
DEMAND FOR INFORMATION TECHNOLOGY
Competition and experience have forced modern managed care organizations to
realize that a key to effective cost control and quality management is the
compilation and analysis of comprehensive medical information regarding provider
utilization, pricing, and outcomes.
While many computer systems have been developed to ensure that the right
person was billed for the correct amount in a timely fashion after a procedure
was performed, few systems are available that enable the user to decide whether
the procedure was necessary in the first place. It has been estimated by some
that as much as one-half of the time spent by patients in hospitals is medically
unnecessary, while 24% of all hospital stays and 15% of all office visits are
unwarranted. Wide variations in the practice of medicine exist throughout the
United States, even within small geographic areas. These variations include
discrepancies in the number of procedures performed, the way they are performed,
where they are performed, and how much they cost. Significant savings can be
achieved by the elimination of unnecessary care; however, it is only with
accurate information systems that payers can begin to distinguish between care
which is necessary and care which is not.
THE HDS APPROACH
HDS provides a comprehensive and integrated set of products and services to
the healthcare industry. Utilizing client/server, UNIX, and other advanced
technologies, HDS systems and services allow customers, whether providers,
payers, or practitioners, to better respond to new healthcare requirements.
HDS has pioneered the concept of patient-centered, point-of-care based,
fully integrated approaches. Because HDS systems are important to continued
organizational progress, HDS's relationships with its customers generally extend
for several years. Under its customer support program, HDS upgrades customers
regularly to its most current product release, providing them with new features
and functions. This kind of service differentiates HDS from many of its
competitors.
49
59
THE ULTICARE SYSTEM
ULTICARE is a UNIX-based software system which collects and reviews patient
information on a patient-centered basis. This means that physician activities,
nursing activities, and ancillary activities are merged into a single,
operations-based, patient-centered approach. Because system integration is the
cornerstone of the ULTICARE System, nurses, doctors, and other care providers
can immediately retrieve necessary information from any location where access is
available, including bedsides, mobile units, and providers' homes.
The ULTICARE System has been designed to operate unattended most of the
time. As a result, the System requires minimal intervention and support from
computer personnel and ULTICARE software specialists. The functional
applications are designed to be supported by applications-oriented users in
hospital departments.
ULTICARE offers functional modules to meet the specific information needs
of each customer. They may be purchased together as a package or separately, by
module. ULTICARE Modular, a four-module package, is a way to obtain patient
information throughout an enterprise without having to purchase the entire
system at once. It combines HDS's patient-centered Registration/ADT (admission,
discharge, transfer), order communications, nursing, and results reporting
modules to provide a core clinical information system. A wide selection of
additional modules are also available for integration. The following ULTICARE
modules are currently available:
- Patient Registration/ADT
- Point-of-Care Nursing Support
- Physician Support
- Health Maintenance Record
- Case Management/Critical Pathways
- Order Communication/Charge Capture
- Result Reporting
- Quality Assurance/Utilization Review
- Laboratory Departmental Processing
- Medical Records Departmental Processing
- Pharmacy Departmental Processing
- Radiology Departmental Processing
- Other Ancillary Departmental Processing
- Patient Scheduling and Control
- Call Center Management
- Physician/Professional Staff Registry
- Cost Finding and Analysis
- Outpatient Appointment and Encounter Processing
- Report Writer/Query Processor
- Criteria Evaluation Processor
- Electronic Mail
Utilizing a common patient database, a single application support
environment, and a unified hardware environment, data entered anywhere in the
ULTICARE System, or in a legacy system connected to the ULTICARE Integration
Engine, is immediately available to all authorized users. Not only does this
improve communications throughout the enterprise, it reduces the duplicate entry
of data.
SECURITY AND PRIVACY ASSURANCE
Access to the ULTICARE System is controlled by means of a
magnetically-encoded key (an "ULTIKEY(TM)") or a magnetic striped card (an
"ULTICARD(TM)") and a keyboard sign-on password corresponding to the inserted
key or card. Both the ULTIKEY/ULTICARD and the appropriate sign-on password for
that key or card for that time period must be present to obtain system access.
In addition,
50
60
functionality is restricted so that users can only view on a menu selection
display and have access to those functions for which they are authorized.
Extensive audit trails are provided throughout the ULTICARE System.
Data-generating transactions and accesses to the patient medical record are
logged with the date, time, and the identification code of the person signed
onto the terminal at the time the transaction is recorded. The ULTICARE System
allows for automatic supervisor intervention in those cases in which a problem
should be referred to higher levels. The addition, changing, and deletion of
security parameters are under the control of the healthcare enterprise. Audit
and control data are available for review by administration.
OTHER PRODUCTS
HDS supports several other products as adjuncts to its core ULTICARE
System. These include:
ULTI-DATA(TM). This is a near-real-time copy of transaction data
modified for access by standard query tools, designed for data queries,
searches, and analyses. ULTI-Data is designed to allow extensive data
manipulation and analysis without compromising the power, throughput and
responsiveness of the on-line environment.
ULTI-NET(TM). ULTI-Net provides connection to the Internet for the
operation of ULTICARE from remote sites and locations. Using the Netscape
browser, it supports secure operations from remote sites with transparent
connection to the ULTICARE host.
ULTI-LINK(TM). HDS was the development partner with AT&T cellular
communications for the use of CDPD digital cellular in healthcare. The
ULTI-Link product fully supports real-time cellular access to all
authorized ULTICARE functionality.
SERVICES
In addition to providing the various core and adjunctive ULTICARE products,
HDS provides service support to its customers. Such services include:
Implementation Consulting. ULTICARE systems are typically large and
complex, and proper configuration and System building are key to achieving
anticipated economies and operational enhancements. HDS provides implementation
services covering hardware, networking, and software.
Reengineering Consulting. HDS's products may be differentiated from those
of its competitors by the existence of a comprehensive model of healthcare
delivery processes, together with an integral model of healthcare data. The
process model allows work within the enterprise to be reengineered, and HDS
provides services to support and optimize this process.
System Support. HDS's systems typically have hundreds or thousands of
access points impacting thousands or tens of thousands of users. The requirement
for the System to be operational and capable of servicing the enterprise's needs
at all times is critical. Support services ensure that questions are answered,
problems are addressed, and that uptime is maximized.
Interface/Integration Consulting. ULTICARE is often connected to a large
number of disparate legacy systems. HDS often provides integration services,
using its integration engine, to ensure effective incorporation of such legacy
systems into the ULTICARE environment.
Database Consulting. Although users' databases are customizable by them,
many users procure additional services from HDS to assist in such database
building and maintenance.
MARKET AND CUSTOMERS
HDS focuses on providing services to organizations in the healthcare
delivery system, including IHDS, payers, elder-care providers, acute care
hospitals, physicians and others.
Since its inception in 1983, HDS has provided services to organizations
representing bedded institutions with over 30,000 beds, and well over 100,000
providers. Thousands of physicians' offices are also using the ULTICARE System.
51
61
SALES AND MARKETING
HDS markets its services to prospective customers through its three
regional managers and its five person direct sales force operating regionally
out of offices in Dallas, Chicago, Orlando, Phoenix, Boston, Washington, D.C.,
and in Canada. Because healthcare enterprises are increasingly making decisions
about their information technology and systems at the highest executive levels,
HDS's sales and marketing staff generally focus their customer communications on
the appropriate decision makers, often the chief executive officer, chief
operating officer, or chief information officer. HDS is often represented in
these discussions by members of its senior staff. HDS believes this approach
provides customers with the full breadth of HDS's expertise while also providing
local contact and support.
Marketing to existing customers is also an increasingly important part of
HDS's sales and marketing strategy. HDS professionals working with customers
invest significant time in understanding customer's issues and future business
and information technology needs. HDS uses that understanding to develop new
products and to market such products or other products to its customers.
HDS's sales efforts are supplemented by HDS's marketing professionals.
These marketing professionals support HDS's sales efforts through organizing
seminars and other support activities, addressing RFPs, and coordinating HDS's
participation in trade shows. In addition, collaterals and newsletters are
prepared by this group.
BUSINESS RELATIONSHIPS
HDS has developed a number of formal and informal relationships with
various manufacturers of computer hardware and software and serves as a reseller
of hardware and software products on a commission basis. These relationships
also support HDS's services offerings to its customers. From many of its
vendors, HDS receives the latest information concerning the vendor's product and
strategic plans, the performance features and weaknesses of specific products,
access to technical support, and, depending on the customer's volume
requirements and HDS's vendor relationship, favorable pricing with respect to
the vendor's products.
HDS is a party to several agreements with vendors of hardware and software
products; these agreements, among other things, enable HDS to receive discounts
from the vendor's list prices for certain hardware and software products. Under
these agreements, HDS serves as an intermediary between the vendor and its
customer and does not maintain inventory of products. The percentage of revenue
attributable to customer sales under these agreements has generally decreased
over the last few years, and is expected to continue to do so.
HDS also conducts product evaluation, including beta testing, and
contributes to product development activities with certain hardware and software
manufacturers. As a result of these activities, HDS receives free or discounted
licenses for software products, semi-permanent loans of hardware, and access to
product support and information concerning future plans for new products and
product enhancements.
Medaphis, HDS and Health Systems International, Inc. ("HSI"), an HDS
customer and a significant stockholder of HDS (see "Ownership of HDS Capital
Stock"), are negotiating an arrangement for the use and marketing by HDS and
Medaphis of certain software products developed by HSI and the use and marketing
by HSI of certain software products developed by HDS and Medaphis. The
arrangement might also include an extension of the term of the existing customer
agreement between HDS and HSI from seven years (with a seven year extension
period) to twenty years and provisions for the development by Medaphis for HSI
of a financial system for health maintenance organizations.
HDS EMPLOYEES
As of March 31, 1996, HDS employed 179 people, including 51 in research and
development; 68 in installation, consulting, and support; 24 in sales, marketing
and publications; and 36 in finance and administration, including all clerical
support for the organization.
52
62
HDS's business depends to a significant degree upon the continuing
contributions of its key management, research and development, installation and
support, and sales and marketing staff, including Ralph A. Korpman, M.D., HDS's
Chief Executive Officer; Peter Gladkin, HDS's Chief Operating Officer; and
Janice E. Ticich, Jere E. Chrispens and John A. Lauer, all vice-presidents, as
well as others. Any loss of such key people could have a material adverse effect
on HDS. HDS believes that its business will continue to depend upon its ability
to attract and retain additional high-skilled managerial, professional,
development, and sales and marketing staff. Competition for such staff is
intense, and there can be no assurance that HDS will be successful in attracting
and retaining such people. The failure to attract and retain key people could
have a material adverse effect on HDS's business, operating results, and
financial condition.
None of HDS's employees is represented by a collective bargaining
agreement, nor has HDS experienced any work stoppages. HDS believes that its
relations with its employees are good.
COMPETITION
The healthcare information systems industry is highly fragmented and
characterized by rapid change and intense competition. The healthcare
marketplace includes competitors from a variety of service areas, including
financial systems, ancillary systems, analytical systems, and consulting. In
addition, the software and product development units of major computer equipment
manufacturers sometimes compete in this area.
Many of HDS's competitors have long operating histories, substantially
greater financial, technical and marketing resources, and generate greater
revenues than HDS. The introduction of lower priced competition or significant
product development coupled with significant price reductions by HDS's current
or potential competitors, or such competitors' ability to respond more quickly
than HDS to new or emerging changes in customer requirements or technology
trends, could have a material adverse effect on HDS's business, financial
condition, and results of operations.
HDS believes that the principal competitive factors in the healthcare
information systems industry are product strength, customer responsiveness,
technical expertise and service, ability to analyze and address healthcare
business systems needs, ability to reengineer critical healthcare processes,
price, rapid development of product functionality to respond to marketplace
changes, ability to transfer knowledge of products to customer personnel, and
ability to effectively and efficiently implement systems. There can be no
assurance that competition from current or potential competitors will not have a
material adverse effect on HDS's business, financial condition, or results of
operations.
PROPRIETARY TECHNOLOGY
HDS has proprietary rights in products developed by it, either alone or
with customer partners. HDS relies on a combination of trade secret, copyright
and trademark laws, nondisclosure agreements, and other contractual arrangements
and technical measures to protect its proprietary rights. To the extent
possible, HDS seeks to protect its software, as well as documentation and other
written materials relating to its business, under trade secret and copyright
laws, which provide only limited protection. HDS does not currently hold any
patents, nor does HDS have any applications pending with respect to any
patentable technology. HDS generally enters into confidentiality agreements with
its employees and consultants, customers, and business partners and limits
access to and dissemination of its proprietary information. There can be no
assurance, however, that the steps taken by HDS to protect its proprietary
technology will be adequate to deter misappropriation of such technology or that
HDS will be able to detect unauthorized use and take sufficient measures to
enforce its rights. HDS believes that its trademarks and proprietary technology
do not infringe upon the proprietary rights of third parties, although there can
be no assurance that competitors or other parties will not develop technology
and software with features similar to that of HDS's proprietary technology and
software. Furthermore, there can be no assurance that third parties will not
assert infringement claims against HDS in the future or that such claims will
not require HDS to enter into royalty arrangements or result in costly
litigation, any of which could have a material adverse effect on HDS's business,
financial condition, and results of operations.
53
63
FACILITIES
HDS currently maintains an office in San Bernardino, California which
accounts for approximately 50,000 square feet of leased space. The lease for
this facility expires in 2004. Employees in other cities work from their homes
or from small offices on leases of one year or less.
HDS believes that its current facilities are adequate for its current level
of business. HDS anticipates that additional space will be needed as its
business expands in various geographic regions and as new customer alliances are
established which require regional space to be leased. HDS believes that it will
be able to obtain suitable space as required to meet such needs.
LEGAL PROCEEDINGS
HDS is currently not a party to any material litigation and is currently
not aware of any pending or threatened litigation that could have a materially
adverse effect on HDS's business, financial condition, or operating results.
OWNERSHIP OF HDS CAPITAL STOCK
The following table sets forth certain information regarding the beneficial
ownership of HDS Common Stock and HDS Preferred Stock determined in accordance
with Rule 13d-3 under the Exchange Act, as of May 24, 1996, by (i) each person
who is known by HDS to own beneficially more than five percent of HDS's Common
Stock, the HDS Series B Preferred Stock, the HDS Series C Preferred Stock or the
HDS Series F Preferred Stock; (ii) each of HDS's directors and executive
officers; and (iii) all executive officers and directors of HDS as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares of HDS
Common Stock, HDS Series B Preferred Stock, HDS Series C Preferred Stock or HDS
Series F Preferred Stock shown as beneficially owned by them, subject to
community property laws where applicable.
Application of Rule 13d-3 under the Exchange Act may have the effect of
increasing the amount of securities required to be disclosed as beneficially
owned by a person.
COMMON STOCK (1) SERIES B(2) SERIES C(2) SERIES F(2)
--------------------- --------------------- ------------------- ---------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
OF OF OF OF OF OF OF OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
- ---------------------------------- --------- ------- --------- ------- ------- ------- --------- -------
Ralph A. Korpman, M.D............. 843,640(3) 20.59 11,750 (3) 1.58 1,350(3) * 1,440(3) *
268 W. Hospitality Lane
San Bernardino, CA 92408
Jere E. Chrispens................. 543,000(4) 13.27 10,000 (4) 1.35 1,000(4) * -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
Charles S. Grobe.................. 276,001(5) 6.74 -- -- -- -- -- --
501 N. Cliffwood Avenue
Los Angeles, CA 90049
Brian S. Bull..................... 294,796(6) 7.16 -- -- -- -- -- --
24489 Barton Road
Loma Linda, CA 92354
Janice E. Ticich.................. 179,350 4.38 5,500 * 3,000 * 600 *
268 W. Hospitality Lane
San Bernardino, CA 92408
Kingsbury Capital Partners,....... 375,000 8.41 -- -- 375,000 28.57 -- --
L.P.
c/o Kingsbury Associates
3655 Nobel Drive
Suite 490
San Diego, CA 92122
54
64
COMMON STOCK (1) SERIES B(2) SERIES C(2) SERIES F(2)
--------------------- --------------------- ------------------- ---------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
OF OF OF OF OF OF OF OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
- ---------------------------------- --------- ------- --------- ------- ------- ------- --------- -------
William Beaumont Hospital......... 250,000 5.77 -- -- 250,000 19.05 -- --
3601 W. Thirteen Mile Rd.
Royal Oak, MI 48073-6769
Helix (PEI) Inc................... -- -- -- -- 125,000 9.52 -- --
c/o Helix Investments
(Canada) Inc.
70 York Street
Suite 1700
Toronto, Ontario M5J 1S9
US West Master Trust.............. -- -- -- -- 85,602 6.52 -- --
c/o Boston Safe Deposit
and Trust Co.
One Boston Place
Boston, MA 02106
Pitt & Co......................... -- -- -- -- 75,912(7) 5.78 -- --
c/o Bankers Trust Company
P.O. Box 2444
Church Street Station
New York, NY 10008
RCS III........................... -- -- 95,948 12.93 88,847 6.77 -- --
c/o Robertson, Stephens & Co.
Bank of America Building
555 California Street
Suite 2600
San Francisco, CA 94104
Pioneer Associates................ -- -- 84,369.44(8) 11.37 -- -- -- --
c/o Asen & Co., Inc.
224 East 49th Street
First Floor
New York, NY 10017
Pioneer III....................... -- -- 65,472.08(9) 8.82 -- -- -- --
c/o Asen & Co., Inc.
224 East 49th Street
First Floor
New York, NY 10017
GeoCapital Ventures............... -- -- 43,028.45 5.80 -- -- -- --
One Bridge Plaza
Fort Lee, NJ 07024
RCS Ltd........................... -- -- 39,964 5.39 -- -- -- --
c/o Robertson, Stephens & Co.
Bank of America Building
555 California Street
Suite 2600
San Francisco, CA 94104
Health Systems.................... 1,234,544 23.22 -- -- -- -- 1,234,544 76.90
International, Inc.
225 North Main Street
Pueblo, CO 81003
Genesis Holdings, Inc............. 303,030 6.91 -- -- -- -- 303,030 18.88
c/o Genesis Health Ventures
148 West State Street
Kennett Square, PA 19348
Herbert J. Richman................ 283,759(10) 6.50 23,231 3.13 -- -- -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
55
65
COMMON STOCK (1) SERIES B(2) SERIES C(2) SERIES F(2)
--------------------- --------------------- ------------------- ---------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
OF OF OF OF OF OF OF OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
- ---------------------------------- --------- ------- --------- ------- ------- ------- --------- -------
Peter Gladkin..................... 228,000(11) 5.29 -- -- -- -- -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
Peter P. Tong..................... 167,200(12) 4.09 6,750 (12) * 350(12) * -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
James J. Harrison................. 64,474(13) 1.42 1,332 * -- -- -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
All Executive Officers and
Directors of HDS
as a group...................... 2,309,423(14) 51.24 58,563 7.89 5,700 * 2,040 *
- ---------------
* Less than one percent (1%).
(1) The number of shares of HDS Common Stock and the percent for each
beneficial owner reflect the conversion of all shares of HDS Preferred
Stock owned by such beneficial owner, but not any shares of HDS Preferred
Stock owned by any other beneficial owners, into shares of HDS Common
Stock.
(2) Each share of HDS Series B, C and F Preferred Stock is convertible into one
share of HDS Common Stock, subject to adjustment in certain events.
(3) These shares are held of record by Ralph A. Korpman, M.D., as Trustee under
declaration of trust.
(4) These shares are held of record by Jere and Marian Chrispens, as Trustees
under declaration of trust. Mrs. Chrispens shares voting and investment
power to such shares with Mr. Chrispens.
(5) These shares are held of record by Charles S. Grobe and Ila S. Grobe, as
Trustees under declaration of trust. Mrs. Grobe shares voting and
investment power to such shares with Mr. Grobe.
(6) These shares are held of record by Brian S. Bull and Maureen H. Bull, as
Trustees under declaration of trust. Mrs. Bull shares voting and investment
power to such shares with Mr. Bull.
(7) Chancellor Capital Management has sole voting and investment power with
respect to these shares. Chancellor Capital Management disclaims beneficial
ownership of these shares.
(8) R. Scott Asen and James G. Niven, general partners of Pioneer Associates,
share investment and voting power with respect to these shares. Each of Mr.
Asen and Mr. Niven disclaims beneficial ownership of 50% of the total
number of shares owned by Pioneer Associates.
(9) R. Scott Asen has sole voting and investment power with respect to these
shares. Mr. Asen, a general and limited partner of Pioneer III, disclaims
beneficial ownership of all shares owned by the partnership, except those
shares in which he has a pecuniary interest, which shares will be
determined by the final performance of the partnership.
(10) Includes 100,000 shares subject to options exercisable within 60 days of
May 24, 1996.
(11) Includes 228,000 shares subject to options exercisable within 60 days of
May 24, 1996.
(12) These shares are held of record by Peter P. Tong and Janet L. Tong, as
Trustees under declaration of trust. Mrs. Tong shares voting and investment
power to such shares with Mr. Tong.
(13) Includes 100 shares held of record by Brian Harrison, 100 shares held of
record by Timothy Harrison and 31,000 shares subject to options exercisable
within 60 days of May 24, 1996.
(14) The number of shares of Common Stock and the percent reflect the conversion
of all shares of Preferred Stock owned by the executive officers and
directors of the Corporation and include 359,000 shares subject to options
exercisable within 60 days of May 24, 1996.
56
66
EXPERTS
The supplemental consolidated financial statements of Medaphis as of
December 31, 1994 and 1995, and for each of the three years in the period ended
December 31, 1995 included in Medaphis' Current Report on Form 8-K filed on May
24, 1996 and incorporated by reference herein and the financial statement
schedule of Medaphis included in Medaphis' Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports thereon included in Medaphis' Current Report on Form 8-K filed on May
24, 1996 and in Medaphis' Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference. Such supplemental consolidated
financial statements and financial statement schedule have been incorporated
herein in reliance upon such reports given upon the authority of that firm as
experts in accounting and auditing.
The combined financial statements of MMS as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 included
in Medaphis' Current Report on Form 8-K filed on January 19, 1996 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing in Medaphis' Current Report on Form 8-K filed on January 19,
1996 and incorporated herein by reference. Such combined financial statements
have been incorporated herein by reference in reliance upon such report given
upon the authority of that firm as experts in accounting and auditing.
The financial statements of The Receivables Management Division of MedQuist
Inc. as of and for the year ended December 31, 1994 included in Medaphis'
Current Report on Form 8-K filed on January 19, 1996 incorporated by reference
in this Form S-4 have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in giving said reports.
The balance sheets of Healthcare Recoveries, Inc. as of June 30, 1993 and
1994 and the statements of operations, changes in stockholders' (deficit) and
cash flows for each of the three years in the period ended June 30, 1994
included in Medaphis' Current Report on Form 8-K filed on October 13, 1995 and
incorporated herein by this reference have been incorporated herein in reliance
on the report, which includes an explanatory paragraph regarding a change in the
method of accounting for income taxes, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of BSG as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
included in Medaphis' Current Report on Form 8-K filed on April 3, 1996 have
been audited by Price Waterhouse LLP, independent accountants, as stated in
their report appearing in Medaphis' Current Report on Form 8-K filed on April 3,
1996 and incorporated herein by reference. Such consolidated financial
statements have been incorporated herein by reference in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing.
The combined financial statements of the Atwork Companies as of and for the
years ended December 31, 1993 and 1994 included in Medaphis' Current Report on
Form 8-K filed on April 3, 1995 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in Medaphis' Current
Report on Form 8-K filed on April 3, 1995 and incorporated herein by reference.
Such combined financial statements have been incorporated herein by reference in
reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of HDS as of March 31, 1995 and 1996
and for each of the three years in the period ended March 31, 1996 included in
this Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in this Proxy
Statement/ Prospectus, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
57
67
LEGAL MATTERS
The legality of the shares of Medaphis Common Stock being registered under
the Registration Statement of which this Proxy Statement/Prospectus forms a part
will be passed upon for Medaphis by King & Spalding, Atlanta, Georgia. Certain
legal matters in connection with the Merger will be passed upon for HDS by
Seyfarth, Shaw, Fairweather & Geraldson, Los Angeles, California. A partner in
the firm of Seyfarth, Shaw, Fairweather & Geraldson is the beneficial owner of
4,768 shares of HDS Preferred Stock.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in Medaphis' proxy solicitation
materials for its 1997 annual meeting of stockholders, any stockholder proposal
to be considered at such meeting must be received by Medaphis on or before
December 1, 1996. Any such proposal will be subject to the requirements
contained in the Medaphis Bylaws relating to stockholder proposals and the proxy
rules under the Exchange Act. See "The Merger -- Comparison of Rights of Holders
of Medaphis Common Stock and HDS Common Stock and HDS Preferred Stock."
58
68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
PAGE
NUMBER
------
Consolidated Financial Statements:
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1995......................... F-3
Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and
1994........................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31,
1996, 1995 and 1994............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and
1994........................................................................... F-6
Notes to Consolidated Financial Statements........................................ F-7
F-1
69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Health Data Sciences Corporation
San Bernardino, California
We have audited the accompanying consolidated balance sheets of Health Data
Sciences Corporation and subsidiary (the "Company") as of March 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 1996. 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 audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 1996, in conformity with
generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Health Data Sciences Corporation
and subsidiary as of March 31, 1994 and 1993 and September 30, 1992 and 1991,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the six months ended March 31, 1993 and the years ended September
30, 1992 and 1991 (none of which are presented herein); and we expressed
unqualified opinions on those consolidated financial statements.
In our opinion, the information set forth in the selected financial data of the
Company for each of the three years in the period ended March 31, 1996, for the
six months ended March 31, 1993, and for each of the two years in the period
ended September 30, 1992 appearing on page 45 is fairly stated, in all material
respects, in relation to the consolidated financial statements from which it has
been derived.
DELOITTE & TOUCHE LLP
Los Angeles, California
May 23, 1996
F-2
70
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 1)................................ $14,167,000 $ 3,724,000
Accounts receivable, net of allowance for doubtful accounts of
$475,000 (1996) and $75,000 (1995) (Notes 4 and 12)............ 10,377,000 6,109,000
Contractual accounts receivable (Note 1).......................... 8,001,000 26,871,000
Prepaid expenses and other current assets......................... 106,000 731,000
----------- -----------
Total current assets...................................... 32,651,000 37,435,000
SOFTWARE DEVELOPMENT COSTS, Net (Notes 1 and 2)..................... 7,768,000 8,014,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
Net (Notes 1 and 3)............................................... 687,000 330,000
ACCOUNTS RECEIVABLE, Long-term (Note 4)............................. 423,000 750,000
CONTRACTUAL ACCOUNTS RECEIVABLE -- LONG-TERM (Note 1)............... 13,514,000
----------- -----------
TOTAL..................................................... $55,043,000 $46,529,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 6)...................................... $ $ 3,000,000
Accounts payable and accrued expenses............................. 7,430,000 10,609,000
Accrued salaries, payroll taxes and pension (Note 10)............. 992,000 654,000
Deferred revenue (Note 1)......................................... 540,000 412,000
----------- -----------
Total current liabilities................................. 8,962,000 14,675,000
----------- -----------
DEFERRED INCOME TAXES (Notes 1 and 9)............................... 1,300,000 3,000,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8, 10, 12 and 13)
VOLUNTARILY/MANDATORILY REDEEMABLE PREFERRED STOCK (Note 7)
Series E, 830,000 shares authorized; 735,567 shares issued
and outstanding................................................ 6,565,000
STOCKHOLDERS' EQUITY (Notes 6, 7 and 8)
Convertible preferred stock, $.10 par value, authorized, 5,000,000
shares:
Series B, issued and outstanding, 742,000 shares............... 74,000 74,000
Series C, issued and outstanding, 1,312,500 shares............. 131,000 131,000
Series F, issued and outstanding, 1,605,353 shares............. 161,000
Common stock, authorized, 10,000,000 shares, issued and
outstanding, 4,081,990 shares (1996) and 4,079,990 shares
(1995), stated at.............................................. 274,000 274,000
Additional paid-in capital........................................ 42,314,000 15,985,000
Notes receivable from directors (Note 12)......................... (180,000) (180,000)
Retained earnings................................................. 2,132,000 6,095,000
Cumulative translation adjustment (Note 1)........................ (125,000) (90,000)
----------- -----------
Total stockholders' equity................................ 44,781,000 22,289,000
----------- -----------
TOTAL..................................................... $55,043,000 $46,529,000
========== ==========
See notes to consolidated financial statements.
F-3
71
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
NET SALES (Notes 1 and 12).............................. $22,727,000 $30,454,000 $26,040,000
COST OF SALES (Note 2).................................. 15,185,000 13,767,000 11,875,000
----------- ----------- -----------
GROSS MARGIN............................................ 7,542,000 16,687,000 14,165,000
----------- ----------- -----------
EXPENSES:
Research and development.............................. 1,793,000 1,754,000 1,775,000
Sales and marketing (Note 12)......................... 4,870,000 3,672,000 3,028,000
General and administrative (Note 11).................. 6,107,000 2,194,000 3,219,000
Interest.............................................. 265,000 232,000 129,000
----------- ----------- -----------
Total expenses................................ 13,035,000 7,852,000 8,151,000
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS........................... (5,493,000) 8,835,000 6,014,000
INTEREST INCOME......................................... 620,000 202,000 73,000
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES......... (4,873,000) 9,037,000 6,087,000
(BENEFIT) PROVISION FOR INCOME TAXES (Notes 1 and 9).... (1,700,000) 3,000,000
----------- ----------- -----------
NET (LOSS) INCOME....................................... $(3,173,000) $ 6,037,000 $ 6,087,000
========== ========== ==========
See notes to consolidated financial statements.
F-4
72
HEALTH DATA SCIENCES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
SERIES B STOCK SERIES C STOCK SERIES D STOCK SERIES F STOCK STOCK
---------------- ------------------- ------------------ ------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, APRIL 1, 1993.................... 742,000 $74,000 1,312,500 $131,000 583,333 $ 58,000 4,033,190
Conversion of preferred Series D to
preferred Series E stock............... (583,333) (58,000)
Accretion of redemption value (Note 7)...
Common stock repurchased................. (11,600)
Common stock options exercised........... 400
Common stock issued...................... 50,000
Translation adjustment...................
Net income...............................
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, MARCH 31, 1994................... 742,000 74,000 1,312,500 131,000 4,071,990
Accretion of redemption value (Note 7)...
Common stock repurchased................. (17,000)
Common stock issued...................... 25,000
Translation adjustment...................
Net income...............................
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, MARCH 31, 1995................... 742,000 $74,000 1,312,500 $131,000 -- $ -- 4,079,990
======== ======== ========== ========= ========= ========= ========== ======== =========
Accretion of redemption
(Note 7)...............................
Preferred stock issued................... 1,605,353 $161,000
Common stock issued...................... 2,000
Translation adjustments..................
Net income (loss)........................
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, MARCH 31, 1996................... 742,000 $74,000 1,312,500 $131,000 -- -- 1,605,353 $161,000 4,081,990
======== ======== ========== ========= ========= ========= ========== ======== =========
NOTES RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS CUMULATIVE TOTAL
------------ PAID-IN FROM (ACCUMULATED TRANSLATION SHAREHOLDERS
AMOUNT CAPITAL DIRECTORS DEFICIT) ADJUSTMENT EQUITY
------------ ----------- ---------- ------------ ---------- -----------
BALANCE, APRIL 1, 1993.................... $ 270,000 $22,737,000 $(5,519,000) $(167,000) $17,584,000
Conversion of preferred Series D to
preferred Series E stock............... (6,942,000) (7,000,000)
Accretion of redemption value (Note 7)... (204,000) (204,000)
Common stock repurchased................. (1,000) (6,000) (7,000)
Common stock options exercised........... 1,000 1,000
Common stock issued...................... 5,000 145,000 $ (120,000) 30,000
Translation adjustment................... 63,000 63,000
Net income............................... 6,087,000 6,087,000
----------- ----------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1994................... 274,000 15,935,000 (120,000) 364,000 (104,000) $16,554,000
Accretion of redemption value (Note 7)... (306,000) (306,000)
Common stock repurchased................. (2,000) (22,000) (24,000)
Common stock issued...................... 2,000 72,000 (60,000) 14,000
Translation adjustment................... 14,000 14,000
Net income............................... 6,037,000 6,037,000
----------- ----------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1995................... $ 274,000 $15,985,000 $ (180,000) $ 6,095,000 $ (90,000) $22,289,000
============ ============ ========== =========== ========= ===========
Accretion of redemption
(Note 7)............................... (790,000) (790,000)
Preferred stock issued................... 26,327,000 26,488,000
Common stock issued...................... 2,000 2,000
Translation adjustments.................. (35,000) (35,000)
Net income (loss)........................ (3,173,000) (3,173,000)
----------- ----------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1996................... $ 274,000 $42,314,000 $ (180,000) $ 2,132,000 $(125,000) $44,781,000
=========== =========== ========== =========== ========== ===========
See notes to consolidated financial statements.
F-5
73
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ (3,173,000) $ 6,037,000 $ 6,087,000
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization.............................. 3,436,000 3,104,000 2,886,000
Deferred income taxes...................................... (1,700,000) 3,000,000
Provision of doubtful accounts............................. 1,237,000 51,000 12,000
Changes in operating assets and liabilities:
Accounts receivable and contractual accounts
receivable............................................ (149,000) (11,031,000) (11,402,000)
Prepaid expenses and other assets........................ 625,000 (73,000) (438,000)
Accounts payable and accrued expenses.................... (3,448,000) 2,709,000 5,061,000
Accrued salaries, payroll taxes and pension.............. 338,000 (14,000) (127,000)
Deferred revenue......................................... 128,000 (4,000) (69,000)
------------ ------------ ------------
Net cash (used in) provided by operating activities... (2,706,000) 3,779,000 2,010,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in software development costs....................... (3,052,000) (3,135,000) (3,478,000)
Long-term customer (financing) payments, net................. 327,000 130,000 258,000
Purchase of equipment and leasehold improvements............. (226,000) (38,000) (74,000)
------------ ------------ ------------
Net cash used in investing activities................. (2,951,000) (3,043,000) (3,294,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings (repayments)................................. (3,000,000) 1,500,000
Common stock issued and repurchased, net..................... (9,000) 23,000
Repurchase of Series E preferred stock....................... (7,355,000) (651,000) (294,000)
Issuance of Series F preferred stock......................... 26,488,000
Exercise of stock options.................................... 2,000 1,000
------------ ------------ ------------
Net cash provided by (used in) financing activities... 16,135,000 (660,000) 1,230,000
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................ (35,000) 14,000 63,000
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS.......................... 10,443,000 90,000 9,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................... 3,724,000 3,634,000 3,625,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR......................... $ 14,167,000 $ 3,724,000 $ 3,634,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest....................... $ 288,000 $ 185,000 $ 118,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
During fiscal 1995, the Company issued 25,000 common shares to one director
in exchange for $60,000 in the form of a note and $15,000 in cash. During fiscal
1994, the Company issued 50,000 common shares to two directors in exchange for
$120,000 in notes and $30,000 in cash.
During fiscal 1994, the Company exchanged Series E preferred stock for
Series D preferred stock.
During the years ended March 31, 1996, 1995 and 1994, $790,000, $306,000
and $204,000, respectively, of the excess of the redemption amount over the
stated value were recorded as a charge to retained earnings.
During fiscal 1996, the Company acquired $269,000 of computer equipment
under capital lease arrangements.
See notes to consolidated financial statements.
F-6
74
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- Health Data Sciences Corporation and its wholly-owned
subsidiary, Health Data Sciences, Ltd. (collectively, the "Company"), are
engaged in the development, marketing, installation and maintenance of a
computerized health care information system. Health Data Sciences, Ltd. was
formed for the purpose of developing and marketing the health care information
system in Canada. Due to the specialized nature of the Company's product, a
significant amount of sales in any given year is attributable to a small number
of major customers in the health care industry. During the years ended March 31,
1996, 1995 and 1994, four, three and one customers accounted for approximately
60%, 52% and 44%, respectively, of the Company's revenues. Customers
representing 10% or more of the Company's revenues were Candler Hospital, Inc.,
Graduate Health Systems, New York City Health and Hospital Corporation (NYCHHC)
and Toronto Hospital Corporation (1996); Genesis Health Ventures, Health Systems
International and NYCHHC (1995) and NYCHHC (1994).
Principles of Consolidation -- The consolidated financial statements
include the accounts of Health Data Sciences Corporation and Health Data
Sciences, Ltd. All intercompany transactions and balances have been eliminated.
Foreign Currency Translation -- Assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at the exchange rate in effect at
the close of the period. Revenues and expenses of the subsidiary are translated
at the average exchange rate in effect during the year. The aggregate effect of
translating the financial statements of the foreign subsidiary is included in a
separate component of stockholders' equity.
Use of Estimates in the Preparation of Financial Statements -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, accounts receivable and contractual accounts receivable.
The Company performs ongoing credit evaluations of its customers and maintains
an allowance for potential losses.
Cash and Cash Equivalents -- Cash and cash equivalents include cash and
commercial paper with maturities of 90 days or less.
Software Development Costs -- The Company capitalizes certain software
development costs related to enhancements to the software system. The
amortization of software development costs is computed on the straight-line
method based on the estimated useful life of the software and enhancements to
software over approximately five years.
Equipment and Leasehold Improvements -- Equipment and leasehold
improvements are recorded at cost. Depreciation and amortization are computed
using the straight-line method based on the estimated useful lives of the
related assets, ranging from five to ten years.
Revenue Recognition -- The Company recognizes software license revenues
when the software is delivered and there are no further significant vendor
obligations. The Company accrues an estimate of the costs of completing any
remaining insignificant obligations.
Software maintenance revenues are recognized ratably over the term of the
maintenance agreement.
Hardware sales are recognized on shipment of the hardware.
F-7
75
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred revenue arises from advance payments received from customers.
The Company recognizes revenue on one contract in progress as the work is
performed using the percentage of completion method. The Company has applied the
percentage of completion method to appropriately match revenues and costs over
an extended installation period. The basis for the percentage of completion
measurement is time incurred on the installation compared to estimated time to
complete. The majority of the revenues recognized under the contract are
included in contractual accounts receivable which are unbilled.
Income Taxes -- Deferred income taxes are determined based on the temporary
differences between the financial statement carrying amounts and income tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
Research and Development -- In June 1995, the Company was awarded a $7.5
million cooperative agreement by the Department of Commerce to fund product
development for a five-year period. Funding under this agreement began during
the year ended March 31, 1996 and amounted to $912,000, which is reflected in
the accompanying statement of operations as a reduction in research and
development expenses. Receipt of additional funding is dependent upon
satisfactory performance under the agreement.
New Accounting Pronouncements -- In March 1995, the Financial Accounting
Standards Board ("FASB") released Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." This statement, effective for fiscal years
beginning after December 15, 1995, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company is currently in
the process of determining the impact of adopting this statement.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years beginning
after December 15, 1995. The Company plans to elect to continue to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, and to
provide appropriate disclosures as permitted by SFAS No. 123.
2. SOFTWARE DEVELOPMENT COSTS
Software development costs capitalized for the years ended March 31, 1996
and 1995 were $3,052,000 and $3,135,000, respectively. Amortization of deferred
software development costs for 1996, 1995 and 1994 was $3,296,000, $2,943,000
and $2,561,000, respectively. The amortization is included in cost of sales.
F-8
76
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
ESTIMATED MARCH 31
USEFUL -----------------------
LIVES 1996 1995
--------- ---------- ----------
Computer equipment................................. 5 years $2,901,000 $2,424,000
Furniture and equipment............................ 5 years 1,368,000 1,368,000
Office equipment................................... 5 years 499,000 483,000
Leasehold improvements............................. 10 years 368,000 368,000
---------- ----------
5,136,000 4,643,000
Less accumulated depreciation and amortization..... 4,449,000 4,313,000
---------- ----------
$ 687,000 $ 330,000
========= =========
4. ACCOUNTS RECEIVABLE LONG-TERM
During 1991, the Company financed the sale of a software license to one
customer. Payments under this arrangement are to be made over an eight-year
period. As of March 31, 1996 and 1995, accounts receivable -- current include
$600,000 due from this sale. Accounts receivable, long-term of $423,000 and
$750,000 at March 31, 1996 and 1995, respectively, represent the present value
of the payments due monthly through 2002, discounted at the rate of 7.75%.
5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, bank
line of credit, accounts payable and deferred revenue approximate fair value due
to the short maturities of such instruments.
The fair value of long-term accounts receivable is estimated by discounting
the future cash flows using the Company's incremental borrowing rate. The
carrying and fair values of the long-term accounts receivable were $1,080,000
and $1,016,000, respectively, at March 31, 1996.
It was not practicable to estimate the fair value of contractual accounts
receivable, as the timing of the future cash flows from this receivable is not
determinable. No interest applies to this receivable, which has a carrying
amount of $21,515,000 in the consolidated balance sheet at March 31, 1996.
6. BANK LINE OF CREDIT
Health Data Sciences Corporation has an unsecured line of credit of
$3,000,000. Outstanding borrowings under the line at March 31, 1996 and 1995
were $0 and $3,000,000, respectively. Interest is payable on the outstanding
balance at a rate of 8.25% and 9% at March 31, 1996 and 1995, respectively. The
line of credit agreement contains, among other restrictions, covenants for
various financial ratios, as well as provisions limiting the issuance of
additional debt and the payment of dividends. At March 31, 1996, the Company was
not in compliance with certain covenants and has obtained a waiver of default
from the lender. The line expires on October 1, 1997.
7. PREFERRED STOCK
Convertible preferred Series B, C and F stock are convertible to common
shares at the option of the stockholder on a one-for-one basis. A total of
3,659,853 shares are subject to conversion. The Series B, C and F preferred
shares carry no guaranteed dividend features and have no mandatory redemption
features. The Series B, C and F preferred shares have equal preference rights
over common stock to the proceeds, if any,
F-9
77
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from a voluntary or involuntary liquidation; however, such proceeds are limited
to the amount invested. On August 5, 1993, the Company exchanged Series D
preferred stock for Series E preferred stock as part of a settlement of a
lawsuit. The Series E preferred stock consisted of 830,000 shares redeemable at
$10 per share. On November 1, 1994 and 1993, 65,083 and 29,350 shares,
respectively, were redeemed. The excess of the redemption amount of Series E
over the stated value of Series D was $1.3 million and has been accreted through
equal annual charges to retained earnings over the mandatory redemption period.
During the years ended March 31, 1996, 1995 and 1994, $790,000, $306,000 and
$204,000, respectively, of the excess was recorded as a charge to retained
earnings. On June 30, 1995, the Company redeemed all of the remaining shares of
Series E preferred stock outstanding (735,567) at $10 per share. During the year
ended March 31, 1996, the Company issued 1,605,353 shares of Series F
convertible preferred stock at $16.50 per share. There are certain defaults on
the part of the Company with respect to the delivery by the Company of its
financial statements and other information to the other parties thereto. The
agreements do not contain any provisions with respect to such parties' remedies
upon such defaults.
8. STOCK OPTIONS
The Company has a stock option plan for the benefit of key employees. The
plan is administered by the Board of Directors. At March 31, 1996, the aggregate
number of shares for which options may be granted is 725,000, of which 187,950
and 397,050 were available for grant at March 31, 1996 and 1995, respectively.
The exercise price is determined by the Board of Directors but may not be less
than the estimated fair market value of the shares at the date of grant. The
options must be exercised within ten years of the date of grant. At March 31,
1996, options to purchase 175,650 shares were exercisable under the plan.
A summary of changes in stock options is as follows:
NUMBER OF PRICE
SHARES RANGE
--------- ---------
Outstanding at March 31, 1993.................................. 237,050 .80-3.00
Options canceled............................................... (31,200) .80-3.00
Options exercised.............................................. (400) 2.00
---------
Outstanding at March 31, 1994.................................. 205,450 .80-3.00
Options canceled............................................... (15,100) 2.00-3.00
Outstanding at March 31, 1995.................................. 190,350 .80-3.00
Options granted................................................ 387,400 3.00
Options canceled............................................... (40,700) 1.60-3.00
Options exercised.............................................. (2,000) 1.60-3.00
---------
Outstanding at March 31, 1996.................................. 535,050
=======
In 1987, the Company offered to sell 80,000 shares of the Company's common
stock to various employees at an exercise price of $1.60 per share which
represented the then-current fair market price as determined by the Board of
Directors at the time. At March 31, 1996, certain employees, representing 39,750
shares, had not accepted the Company's offer.
9. INCOME TAXES
The income tax benefit for the year ended March 31, 1996 was $1,700,000,
primarily attributable to the net taxable loss for the current year. The
provision for income taxes for the year ended March 31, 1995 was $3,000,000 due
to the exhaustion of the net operating loss carryforwards for financial
reporting purposes in 1995. There was no provision for income taxes for the year
ended March 31, 1994 due to the income tax benefit arising from the utilization
of the net operating loss carryforwards of approximately $2,105,000.
F-10
78
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1996 and 1995, the Company had deferred income tax liabilities
of $15,320,000 and $13,466,000, respectively, and deferred income tax assets of
$14,020,000 and $10,466,000, respectively.
The components of the provision for income taxes are:
MARCH 31,
------------------------
1996 1995
----------- ----------
Deferred:
Federal.................................................... $(1,445,000) $2,550,000
State...................................................... (255,000) 450,000
----------- ----------
Total.............................................. $(1,700,000) $3,000,000
========== =========
The components of deferred income taxes are as follows:
MARCH 31,
-------------------------
1996 1995
----------- -----------
Capitalized software development costs...................... $(8,321,000) $(7,007,000)
Capitalized software amortization........................... 5,119,000 3,801,000
Unbilled revenues........................................... (6,999,000) (6,469,000)
Net operating loss carryforward............................. 7,361,000 5,597,000
Research and development credit............................. 1,078,000 1,078,000
Other....................................................... 462,000
----------- -----------
Net deferred tax liability.................................. $(1,300,000) $(3,000,000)
========== ==========
The following are the Company's net operating loss and tax credit
carryforwards as of March 31, 1996 for income tax purposes:
RESEARCH
AND
YEAR U.S. CANADA DEVELOPMENT
EXPIRATION TAX TAX CREDITS
--------------------------------------------------- ----------- -------- -----------
1998............................................. $ 21,000
1999............................................. $ 76,000 77,000
2000............................................. 2,517,000 108,000
2001............................................. 3,137,000 195,000
2002............................................. 5,305,000 210,000
2003............................................. 1,147,000 273,000
2004............................................. 1,368,000 $405,000 194,000
2005............................................. 2,000
2006.............................................
2007............................................. 4,488,000
2008............................................. 1,934,000
----------- -------- -----------
$19,974,000 $405,000 $ 1,078,000
========== ======== =========
10. PENSION AND PROFIT-SHARING PLAN
The Company has a profit-sharing/401(k) plan covering substantially all
employees who meet certain length-of-service requirements. Participants begin
vesting after their third year of service. Pension costs, net of capitalized
portion (see Note 2) for the years ended March 31, 1996, 1995 and 1994, were
approximately $138,000, $139,000 and $190,000, respectively.
F-11
79
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FOREIGN CURRENCY TRANSACTIONS
During the years ended March 31, 1996, 1995 and 1994, the Company
experienced foreign currency transaction gains (losses) of approximately
$121,000, ($63,000) and ($494,000), respectively. Such losses result from the
effects of currency fluctuations on the intercompany balances between Health
Data Sciences Corporation and Health Data Sciences, Ltd. and on payables not
denominated in the subsidiary's functional currency. The amounts are included in
general and administrative expenses.
12. RELATED PARTIES
During the year ended March 31, 1995, the Company sold 25,000 common shares
to a director in exchange for $15,000 in cash and $60,000 in notes receivable.
During the year March, 31, 1994, the Company sold 50,000 common shares to
directors in exchange for $30,000 in cash and $120,000 in notes receivable. The
sale of these shares were in accordance with the terms of agreements dated
August 24, 1993. The notes receivable are due on August 24, 1996. Interest at
9%, subject to certain adjustments as defined, is payable yearly. The notes are
secured by the related common stock.
In connection with the preferred stock issuance that occurred on June 30,
1995 (see Note 7), two of the Company's customers became preferred shareholders
of the Company. A Series C preferred shareholder is also a customer of the
Company. Sales to these affiliates were $2,277,000, $12,698,000 and $2,000,000
for the years ended March 31, 1996, 1995 and 1994, respectively. Accounts
receivable from these affiliates were $6,124,000 and $8,762,000 at March 31,
1996 and 1995, respectively.
During 1994 the Company executed a consulting agreement for strategic
planning with a nonemployee stockholder of the Company. The agreement required
annual payments of $696,000 due on November 1 through 1997 and a down payment of
$232,000. On June 30, 1995, the Company terminated this agreement. During 1996,
1995 and 1994, $324,000, $754,000 and $314,000, respectively, were expensed and
are included in sales and marketing expenses in the accompanying consolidated
statements of income.
13. COMMITMENTS
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense, net of capitalized portion (see Note 2) for
1996, 1995 and 1994, was $611,000, $539,000 and $623,000, respectively. Future
minimum rental payments are as follows:
EQUIPMENT
YEAR ENDING MARCH 31, BUILDINGS AND OTHER TOTAL
---------------------------------------------------- ---------- --------- ----------
1997......................................... $ 779,000 $32,000 $ 811,000
1998......................................... 798,000 24,000 822,000
1999......................................... 821,000 22,000 843,000
2000......................................... 846,000 10,000 856,000
2001......................................... 872,000 4,000 876,000
Thereafter................................... 3,505,000 3,505,000
---------- --------- ----------
Total................................... $7,621,000 $92,000 $7,713,000
========= ======== =========
14. SUBSEQUENT EVENTS
Beginning in May 1996, the Company and a major provider of business
management services and systems to the health care industry engaged in
substantive discussions regarding a possible business combination. As currently
proposed, at the consummation of the merger, the Company would become a wholly
owned subsidiary of the acquirer.
F-12
80
ANNEX A
AMENDED AND RESTATED
MERGER AGREEMENT
BY AND AMONG
MEDAPHIS CORPORATION,
HDSSUB, INC.
AND
HEALTH DATA SCIENCES CORPORATION
AS OF MAY 23, 1996
A-1
81
PAGE
----
ARTICLE 1 THE MERGER...................................................................... A-8
Section 1.1. Surviving Corporation................................................... A-8
Section 1.2. Certificate of Incorporation............................................ A-8
Section 1.3. Bylaws.................................................................. A-8
Section 1.4. Directors............................................................... A-8
Section 1.5. Officers................................................................ A-8
Section 1.6. Effective Time.......................................................... A-8
Section 1.7. Tax-Free Reorganization................................................. A-8
ARTICLE 2 CONVERSION OF SHARES; TREATMENT OF OPTIONS...................................... A-9
Section 2.1. HDS Common Stock and Preferred Stock.................................... A-9
Section 2.2. Fractional Shares....................................................... A-9
Section 2.3. Dissenting Shares....................................................... A-9
Section 2.4. Treatment of HDS Employee Stock Options................................. A-10
Section 2.5. Exchange of HDS Capital Stock........................................... A-10
Section 2.6. Conversion Ratio and Adjustment Event................................... A-11
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF HDS........................................... A-11
Section 3.1. Organization............................................................ A-11
Section 3.2. Authorization........................................................... A-12
Section 3.3. Absence of Restrictions and Conflicts................................... A-12
Section 3.4. Capitalization.......................................................... A-12
Section 3.5. Financial Statements.................................................... A-13
Section 3.6. Absence of Certain Changes.............................................. A-13
Section 3.7. Legal Proceedings....................................................... A-14
Section 3.8. Compliance with Law..................................................... A-14
Section 3.9. Material Contracts...................................................... A-14
Section 3.10. HDS Client Contracts.................................................... A-15
Section 3.11. Tax Returns; Taxes...................................................... A-15
Section 3.12. Officers, Directors and Employees....................................... A-16
Section 3.13. Employee Benefit Plans.................................................. A-16
Section 3.14. Labor Relations......................................................... A-18
Section 3.15. Insurance............................................................... A-18
Section 3.16. Title to Properties and Related Matters................................. A-18
Section 3.17. Environmental Matters................................................... A-19
Section 3.18. Patents, Trademarks, Trade Names........................................ A-19
Section 3.19. HDS Computer Software and Hardware...................................... A-20
Section 3.20. Proxy Statement and Registration Statement.............................. A-21
Section 3.21. Transactions with Affiliates............................................ A-21
Section 3.22. Brokers, Finders and Investment Bankers................................. A-21
Section 3.23. Disclosure.............................................................. A-22
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF MEDAPHIS...................................... A-22
Section 4.1. Organization............................................................ A-22
Section 4.2. Authorization........................................................... A-22
Section 4.3. Absence of Restrictions and Conflicts................................... A-22
Section 4.4. Capitalization of Medaphis.............................................. A-23
Section 4.5. Capital Stock of Medaphis Subsidiaries.................................. A-23
Section 4.6. Medaphis Commission Reports............................................. A-23
Section 4.7. Financial Statements.................................................... A-23
Section 4.8. Absence of Certain Changes.............................................. A-24
Section 4.9. Legal Proceedings....................................................... A-24
Section 4.10. Compliance with Law..................................................... A-25
Section 4.11. Proxy Statement and Registration Statement.............................. A-25
A-2
82
PAGE
----
Section 4.12. Tax Returns; Taxes...................................................... A-25
Section 4.13. Billing and Collection Practices........................................ A-25
Section 4.14. Medaphis Employee Benefit Plans......................................... A-25
Section 4.15. Labor Relations......................................................... A-27
Section 4.16. Medaphis Computer Software and Hardware................................. A-27
Section 4.17. Title to Properties and Related Matters................................. A-28
Section 4.18. Environmental Matters................................................... A-29
Section 4.19. Brokers, Finders and Investment Bankers................................. A-29
Section 4.20. Disclosure.............................................................. A-29
ARTICLE 5 CERTAIN COVENANTS AND AGREEMENTS................................................ A-29
Section 5.1. Conduct of Business by HDS.............................................. A-29
Section 5.2. Conduct of Business by Medaphis......................................... A-30
Section 5.3. Inspection and Access to Information.................................... A-31
Section 5.4. Registration Statement.................................................. A-31
Section 5.5. HDS Stockholder Matters................................................. A-32
Section 5.6. The Nasdaq National Market Additional Shares Notification............... A-32
Section 5.7. HDS Affiliates.......................................................... A-32
Section 5.8. No Solicitation; Acquisition Proposals.................................. A-32
Section 5.9. Reasonable Efforts; Further Assurances; Cooperation..................... A-33
Section 5.10. Public Announcements.................................................... A-34
Section 5.11. Financial Statements and Commission Reports............................. A-34
Section 5.12. Supplements to Disclosure Letters....................................... A-34
Section 5.13. Pooling of Interests Accounting......................................... A-35
Section 5.14. Accountant's Review Report.............................................. A-35
Section 5.15. Special Indemnification by Medaphis..................................... A-35
Section 5.16 Employees............................................................... A-35
Section 5.17 Certain Other Benefits.................................................. A-36
ARTICLE 6 CONDITIONS...................................................................... A-36
Section 6.1. Conditions to Each Party's Obligations.................................. A-36
Section 6.2. Conditions to Obligations of Medaphis................................... A-37
Section 6.3. Conditions to Obligations of HDS........................................ A-38
ARTICLE 7 CLOSING......................................................................... A-39
ARTICLE 8 TERMINATION..................................................................... A-39
Section 8.1. Termination............................................................. A-39
Section 8.2. Specific Performance and Other Remedies................................. A-39
Section 8.3. Effect of Termination................................................... A-39
Section 8.4. Termination Fee......................................................... A-39
ARTICLE 9 MISCELLANEOUS PROVISIONS........................................................ A-40
Section 9.1. Notices................................................................. A-40
Section 9.2. Disclosure Letters and Exhibits......................................... A-41
Section 9.3. Assignment; Successors in Interest...................................... A-41
Section 9.4. Representations and Warranties.......................................... A-41
Section 9.5. Number; Gender.......................................................... A-41
Section 9.6. Captions................................................................ A-41
Section 9.7. Controlling Law; Integration; Amendment................................. A-41
Section 9.8. HDS and Medaphis Knowledge.............................................. A-41
A-3
83
PAGE
----
Section 9.9. Severability............................................................ A-41
Section 9.10. Counterparts............................................................ A-42
Section 9.11. Enforcement of Certain Rights........................................... A-42
Section 9.12. Waiver.................................................................. A-42
Section 9.13. Fees and Expenses....................................................... A-42
A-4
84
DEFINED TERMS
TERM SECTION
- --------------------------------------------------------------------------------- ---------
Acquisition Transaction.......................................................... 5.8
Agreement........................................................................ Page A-8
Average Closing Price............................................................ 2.2
Certificate and Certificates..................................................... 2.5(a)
Closing.......................................................................... Page A-39
Closing Date..................................................................... Page A-39
Code............................................................................. 1.7
Commission....................................................................... 2.4(c)
Conversion Ratio................................................................. 2.6(a)
Delaware Certificate of Merger................................................... Page A-8
Deloitte & Touche................................................................ 3.5(a)
Deloitte & Touche Review Report.................................................. 5.14
DGCL............................................................................. Page A-8
Dissenting Shares................................................................ 2.3
EEOC............................................................................. 3.14
Effective Time................................................................... 1.6
Employee Benefit Plan............................................................ 3.13(a)(ii)
ERISA............................................................................ 3.13(a)(ii)
Excess Parachute Payment......................................................... 3.13(k)
Exchange Act..................................................................... 3.3
HDS.............................................................................. Page A-8
HDS Benefit Plan................................................................. 3.13(a)
HDS Capital Stock................................................................ 2.1(a)
HDS Client Contracts............................................................. 3.10
HDS Common Stock................................................................. 2.1(a)
HDS Detrimental Information...................................................... 6.2(l)
HDS Disclosure Letter............................................................ Article 3
HDS ERISA Affiliate.............................................................. 3.13(b)
HDS Executives................................................................... 9.8
HDS Financial Statements......................................................... 3.5(a)
HDS Hardware..................................................................... 3.19(a)
HDS License Agreements........................................................... 3.19(b)
HDS Licensed Software............................................................ 3.19(a)
HDS Material Adverse Effect...................................................... 3.1
HDS Material Contracts........................................................... 3.9
HDS Preferred Stock.............................................................. 2.1(a)
HDS Proprietary Software......................................................... 3.19(a)
HDS Qualified Plans.............................................................. 3.13(g)
HDS Series B Stock............................................................... 2.1(a)
HDS Series C Stock............................................................... 2.1(a)
HDS Series F Stock............................................................... 2.1(a)
HDS Software..................................................................... 3.19(a)
HDS Stockholder.................................................................. 2.2
HDSSub........................................................................... Page A-8
HSR Act.......................................................................... 3.3
Intellectual Property............................................................ 3.18
IRS.............................................................................. 3.13(f)
Licensed Intellectual Property................................................... 3.18
Medaphis......................................................................... Page A-8
A-5
85
TERM SECTION
- --------------------------------------------------------------------------------- ---------
Medaphis Balance Sheet........................................................... 4.7
Medaphis Benefit Plan............................................................ 4.14(a)
Medaphis Commission Reports...................................................... 4.6
Medaphis Common Stock............................................................ 2.1(a)
Medaphis Disclosure Letter....................................................... Article 4
Medaphis Due Diligence Review.................................................... 5.3(a)
Medaphis ERISA Affiliate......................................................... 4.14(b)
Medaphis Executives.............................................................. 9.8
Medaphis Financial Statements.................................................... 4.7
Medaphis Hardware................................................................ 4.16(a)
Medaphis License Agreements...................................................... 4.16(b)
Medaphis Licensed Software....................................................... 4.16(b)
Medaphis Material Adverse Effect................................................. 4.1
Medaphis Premises................................................................ 4.18
Medaphis Proprietary Software.................................................... 4.16(a)
Medaphis Qualified Plans......................................................... 4.14(e)
Medaphis Software................................................................ 4.16(b)
Medaphis Subsidiaries............................................................ 4.5
Merger........................................................................... Page A-8
NLRB............................................................................. 3.14
Non-Qualified Options............................................................ 2.4(a)
Option Assumption Agreement...................................................... 2.4(b)
Options.......................................................................... 2.4(a)
PBGC............................................................................. 3.13(f)
Pension Benefit Plan............................................................. 3.13(n)
Premises......................................................................... 3.17
Proprietary Intellectual Property................................................ 3.18
Proxy Statement.................................................................. 3.20
Qualified Beneficiaries.......................................................... 5.16(b)
Registration Statement........................................................... 3.20
SO Plans......................................................................... 2.4(a)
Scheduled Leases................................................................. 3.16(b)
Securities Act................................................................... 3.3
Special Indemnified Parties...................................................... 5.15(a)
Specified Employees.............................................................. 5.1(m)
Specified Stockholders........................................................... 5.1(m)
Subsidiary....................................................................... 3.1
Successor Plans.................................................................. 5.16(b)
Surviving Corporation............................................................ 1.1
The knowledge of the HDS Executives.............................................. 9.8
The knowledge of the Medaphis Executives......................................... 9.8
Total HDS Shares................................................................. 2.7(a)
1996 Balance Sheet............................................................... 3.5(a)
A-6
86
EXHIBITS
EXHIBIT NUMBER
- -------------------------------------------------------------------------------- ----------
Delaware Certificate of Merger.................................................. 1.1
Option Assumption Agreement..................................................... 2.4
Noncompetition and Nonsolicitation Agreement.................................... 5.1(m)(A)
Employment Agreements........................................................... 5.1(m)(B)
Tax Opinion of King & Spalding.................................................. 6.1(c)
Opinion of Seyfarth, Shaw, Fairweather & Geraldson.............................. 6.2(c)
Opinion of King & Spalding...................................................... 6.3(c)
A-7
87
AMENDED AND RESTATED
MERGER AGREEMENT
THIS AMENDED AND RESTATED MERGER AGREEMENT, dated as of May 23, 1996 (the
"Agreement"), by and among MEDAPHIS CORPORATION, a Delaware corporation
("Medaphis"), HDSSUB, INC., a Delaware corporation and a wholly-owned subsidiary
of Medaphis ("HDSSub"), and HEALTH DATA SCIENCES CORPORATION, a Delaware
corporation ("HDS").
WHEREAS, the respective Boards of Directors of Medaphis, HDSSub and HDS
each have approved this Agreement and the merger (the "Merger"), pursuant to
this Agreement and a certificate of merger in the form attached as Exhibit 1.1
proposed to be filed in the State of Delaware (the "Delaware Certificate of
Merger"), of HDSSub with and into HDS on the terms and conditions contained in
this Agreement and in accordance with the Delaware General Corporation Law (the
"DGCL");
WHEREAS, Medaphis, as the sole stockholder of HDSSub, has approved this
Agreement, the Merger and the transactions contemplated by this Agreement
pursuant to action taken by unanimous written consent in accordance with the
requirements of the DGCL and the Certificate of Incorporation and the Bylaws of
HDSSub;
WHEREAS, the parties to this Agreement intend that the Merger qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
ARTICLE 1.
THE MERGER
Section 1.1. Surviving Corporation. Subject to the provisions of this
Agreement and the DGCL, at the Effective Time, HDSSub shall be merged with and
into HDS, and the separate corporate existence of HDSSub shall cease. HDS shall
be the surviving corporation in the Merger (sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. The Merger shall have the effects set forth in Section 259 of
the DGCL.
Section 1.2. Certificate of Incorporation. The Certificate of
Incorporation of HDS shall be the Certificate of Incorporation of the Surviving
Corporation until amended after the Effective Time.
Section 1.3. Bylaws. The Bylaws of HDS shall be the Bylaws of the
Surviving Corporation until amended after the Effective Time.
Section 1.4. Directors. The directors of the Surviving Corporation shall
consist of the directors of HDSSub immediately prior to the Effective Time, such
directors to hold office from the Effective Time until their respective
successors are elected and qualify.
Section 1.5. Officers. The officers of the Surviving Corporation shall
consist of the officers of HDSSub immediately prior to the Effective Time, such
officers to hold office from the Effective Time until their respective
successors are elected and qualify.
Section 1.6. Effective Time. If all of the conditions set forth in Article
6 have been fulfilled or waived in accordance with the terms of this Agreement
and this Agreement has not been terminated in accordance with Article 8, the
parties shall cause the Delaware Certificate of Merger to be properly executed
and filed on the Closing Date with the Secretary of State of the State of
Delaware. The Merger shall become effective as of the time of filing of a
properly executed Delaware Certificate of Merger. The date and time when the
Merger becomes effective is referred to in this Agreement as the Effective Time.
Section 1.7. Tax-Free Reorganization. The Merger is intended to be a
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and this
A-8
88
Agreement is intended to be a "plan of reorganization" within the meaning of the
regulations promulgated under Section 368 of the Code.
ARTICLE 2.
CONVERSION OF SHARES; TREATMENT OF OPTIONS
Section 2.1. HDS Common and Preferred Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of any HDS Stockholder
(as defined below):
(a) Subject to Section 2.2, (i) each share of common stock, par value
$0.10 per share, of HDS ("HDS Common Stock"), (ii) each share of Series B
Convertible Preferred Stock, par value $0.10 per share, of HDS ("HDS Series
B Stock"), (iii) each share of Series C Convertible Preferred Stock, par
value $0.10 per share of HDS ("HDS Series C Stock"), and (iv) each share of
Series F Convertible Preferred Stock, par value $0.10 per share of HDS
("HDS Series F Stock"), issued and outstanding immediately prior to the
Effective Time (except for Dissenting Shares and treasury shares) shall be
converted, without any further action, into the right to receive such
number of shares of voting common stock, par value $.01 per share, of
Medaphis ("Medaphis Common Stock") as is equal to the Conversion Ratio. The
HDS Series B Stock, HDS Series C Stock and HDS Series F Stock are together
referred to as the "HDS Preferred Stock"; and the HDS Common Stock and HDS
Preferred Stock are together referred to as the "HDS Capital Stock."
(b) Each share of HDS Capital Stock issued immediately prior to the
Effective Time that is then held in HDS's treasury shall be canceled and
retired and all rights in respect of such HDS Capital Stock shall cease to
exist, without any conversion thereof or payment of any consideration
therefor.
(c) Each share of common stock, par value $0.01 per share, of HDSSub
that is issued and outstanding immediately prior to the Effective Time
shall be converted into one share of common stock, par value $0.10 per
share, of the Surviving Corporation.
Section 2.2. Fractional Shares. No scrip or fractional shares of Medaphis
Common Stock shall be issued in the Merger. All fractional shares of Medaphis
Common Stock to which a holder of HDS Capital Stock (each an "HDS Stockholder")
immediately prior to the Effective Time would otherwise be entitled at the
Effective Time shall be aggregated. If a fractional share results from such
aggregation, an HDS Stockholder shall be entitled, after the later of (a) the
Effective Time or (b) the surrender of such HDS Stockholder's Certificate(s)
that represent such shares of HDS Capital Stock, to receive from Medaphis an
amount in cash in lieu of such fractional share, based on the Average Closing
Price. For purposes of this Agreement, the "Average Closing Price" shall be the
arithmetic average of the closing price per share of Medaphis Common Stock, as
reported on the Nasdaq National Market, for each of the ten consecutive trading
days ending on the trading day immediately prior to the date of the annual or
special meeting of HDS Stockholders at which the Merger and this Agreement will
be voted on by HDS Stockholders entitled so to vote.
Section 2.3. Dissenting Shares. To the extent that appraisal rights are
available under Section 262 of the DGCL, shares of HDS Capital Stock that are
issued and outstanding immediately prior to the Effective Time and that have not
been voted for adoption of the Merger and with respect to which appraisal rights
have been properly demanded in accordance with Section 262 of the DGCL
("Dissenting Shares") shall not be converted into the right to receive the
consideration provided for in Sections 2.1 and 2.2 at or after the Effective
Time unless and until the holder of such shares becomes ineligible for such
appraisal. If a holder of Dissenting Shares becomes ineligible for appraisal,
then, as of the Effective Time or the occurrence of such event, whichever later
occurs, such holder's Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into and represent the right to receive the consideration
provided for in Sections 2.1 and 2.2. If any HDS Stockholder asserts the right
to be paid for the fair value of such HDS Capital Stock as described above, HDS
shall give Medaphis notice of such assertion and Medaphis shall have the right
to participate in all negotiations and proceedings with respect to any such
demands. HDS shall not, except with the prior written
A-9
89
consent of Medaphis, voluntarily make any payment with respect to, or settle or
offer to settle, any such demand for payment. Payment for Dissenting Shares
shall be made as required by the DGCL.
Section 2.4. Treatment of HDS Employee Stock Options. (a) At the Effective
Time, Medaphis shall assume all of HDS's rights and obligations with respect to
the outstanding stock options held by certain employees, officers and directors
of HDS pursuant to the HDS stock option plans (the "SO Plans"), as such SO Plans
and such options are set forth in the HDS Disclosure Letter, which are
outstanding and unexercised at the Effective Time (together, the "Options"),
whether or not the Options are then exercisable. Promptly following such
assumption, Medaphis shall, subject to Section 2.4(b), substitute for the
Options non-qualified options to be granted under the Medaphis Non-Qualified
Stock Option Plan for Employees of Acquired Companies (the "Non-Qualified
Options"). The Non-Qualified Options shall have the vesting and other terms and
conditions described in the Option Assumption Agreement (as defined in Section
2.4(b)) and shall, in addition, have a term or terms mutually agreed upon by
Medaphis and HDS that will result in any Option that had been an "incentive
stock option" (as defined in the Code) being disqualified from its status as an
"incentive stock option." At and after the Effective Time, each Non-Qualified
Option and each Option for which a Non-Qualified Option is not issued in
substitution shall thereafter evidence the right to purchase the number of
shares of Medaphis Common Stock equal to the product (rounded up or down to the
nearest whole share) of (i) the number of shares of HDS Common Stock covered by
such option immediately prior to the Effective Time, multiplied by (ii) the
Conversion Ratio. The exercise price of such Non-Qualified Options for each
share of Medaphis Common Stock subject to such options shall be equal to the
quotient (rounded up or down to the nearest whole cent) obtained by dividing (i)
the per-share exercise price for shares of HDS Common Stock subject to such
option immediately prior to the Effective Time, by (ii) the Conversion Ratio.
(b) At least ten days prior to the Effective Time, Medaphis shall deliver
to each holder of an Option an Option Notice and Assumption Agreement in the
form attached as Exhibit 2.4 (the "Option Assumption Agreement") setting forth
Medaphis' assumption of the Option and substitution of the Non-Qualified Option
in accordance with the terms of Section 2.4(a). Medaphis shall not be entitled
to or required to substitute a Non-Qualified Option for an Option in accordance
with Section 2.4(a) until it has received from the holder of an Option a
properly executed and completed Option Assumption Agreement with respect to the
Option. HDS shall not grant any options to purchase shares of HDS Capital Stock
under any SO Plan or otherwise after the date of this Agreement.
(c) Medaphis agrees to cause the shares of Medaphis Common Stock issuable
upon exercise of the Non-Qualified Options (and, to the extent Non-Qualified
Options were not issued in substitution therefor, the Options) and all other
Options assumed by Medaphis or issued by Medaphis in replacement of the Options
to be registered with the Securities and Exchange Commission (the "Commission")
on a Form S-8 Registration Statement within thirty days following the Effective
Time. Medaphis further agrees to cause the shares of Medaphis Common Stock
issuable upon exercise of the Non-Qualified Options (and, to the extent Non-
Qualified Options were not issued in substitution therefor, the Options) to be
registered or exempt from the registration requirements of all applicable state
securities laws, rules and regulations.
(d) Approval by the HDS Stockholders of this Agreement shall constitute
authorization and approval of any and all of the actions described in this
Section 2.4.
Section 2.5. Exchange of HDS Capital Stock. (a) On or prior to the Closing
Date, Medaphis shall make available to each record holder who, as of the
Effective Time, was a holder of an outstanding certificate or certificates which
immediately prior to the Effective Time represented shares of HDS Capital Stock
(the "Certificate" or "Certificates"), a form of letter of transmittal and
instructions for use in effecting the surrender of the Certificates for
conversion into Medaphis Common Stock and payment for fractional shares.
Delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to Medaphis; and the form of
letter of transmittal shall so reflect. Upon surrender to Medaphis of a
Certificate, together with a properly completed and executed letter of
transmittal, the holder of such Certificate is entitled to receive in exchange
(i) one or more certificates as requested by the holder (properly issued,
executed and countersigned, as appropriate) representing that number of whole
fully paid and nonassessable shares of Medaphis Common Stock to which such HDS
Stockholder shall have become
A-10
90
entitled pursuant to the provisions of Section 2.1(a) and (ii) as to any
fractional share of Medaphis Common Stock, a check representing the cash
consideration to which such holder shall have become entitled pursuant to
Section 2.2. The Certificate so surrendered shall forthwith be canceled. No
interest will be paid or accrued on any cash payable upon the surrender of the
Certificates. From the Effective Time until surrender in accordance with the
provisions of this Section 2.4, each Certificate shall represent for all
purposes only the right to receive the consideration provided in Sections 2.1
and 2.2. All payments of respective shares of Medaphis Common Stock and cash for
fractional shares that are made upon surrender of Certificates in accordance
with the terms of this Agreement shall be deemed to have been made in full
satisfaction of rights pertaining to the shares of HDS Common Stock evidenced by
such Certificates.
(b) In the case of any lost, mislaid, stolen or destroyed Certificate, the
holder of such Certificate may be required, as a condition precedent to delivery
to such holder of the consideration described in Sections 2.1 and 2.2, to
deliver to Medaphis a bond in such reasonable sum or a reasonably satisfactory
indemnity agreement as Medaphis may direct as indemnity against any claim that
may be made against Medaphis or the Surviving Corporation with respect to the
Certificate alleged to have been lost, mislaid, stolen or destroyed.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of the shares of HDS Capital Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
transfer, they shall be canceled and exchanged for the consideration described
in Sections 2.1 and 2.2.
(d) Any shares of Medaphis Common Stock or cash due former HDS Stockholders
pursuant to Sections 2.1 and 2.2 that remains unclaimed by such former HDS
Stockholder for six months after the Effective Time shall be held by Medaphis;
and any former HDS Stockholder who has not prior to that date complied with
Section 2.5(a) can thereafter look only to Medaphis for issuance of the number
of shares of Medaphis Common Stock and other consideration to which such holder
has become entitled pursuant to the provisions of Sections 2.1 and 2.2, except
that neither Medaphis nor any other party to this Agreement shall be liable to a
former HDS Stockholder for any amount required to be paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
Section 2.6. Conversion Ratio and Adjustment Event. (a) The Conversion
Ratio is 6,125,000 divided by Total HDS Shares. Total HDS Shares is 7,741,843,
which represents the sum of the number of shares of HDS Preferred Stock and HDS
Common Stock that are issued and outstanding on the date of this Agreement.
(b) The Conversion Ratio shall be calculated to the nearest 1/10,000th of a
whole number.
(c) If, after the date of this Agreement and prior to the Effective Time,
Medaphis shall have declared a stock split (including a reverse split) or
combination of Medaphis Common Stock or a dividend payable in Medaphis Common
Stock, or any other distribution of Medaphis Common Stock to holders of Medaphis
Common Stock with respect to their Medaphis Common Stock (including such a
distribution or dividend made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization or similar transaction),
or otherwise have changed the Medaphis Common Stock into any other securities,
then the Conversion Ratio shall be appropriately adjusted to reflect such stock
split, combination or dividend or other distribution or change of securities.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF HDS
With such exceptions as are set forth in a letter (the "HDS Disclosure
Letter") delivered by HDS to Medaphis prior to the date of this Agreement, HDS
represents and warrants to Medaphis as follows:
Section 3.1. Organization. HDS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and the
subsidiary of HDS listed as such in the HDS Disclosure Letter (the "Subsidiary")
is a corporation existing under the laws of the Province of Ontario, and HDS and
Subsidiary have all requisite corporate power and authority to own, lease and
operate their respective
A-11
91
properties and to carry on their respective businesses as now being conducted.
HDS and Subsidiary are each qualified to transact business, and are in good
standing, as a foreign corporation in each jurisdiction where the character of
their activities requires such qualification, except where the failure to so
qualify would not have a material adverse effect on the assets, liabilities,
results of operations, financial condition or business of HDS and Subsidiary
taken as a whole (such an effect, an "HDS Material Adverse Effect"). HDS has
made available to Medaphis accurate and complete copies of the Certificate of
Incorporation (including all certificates of designation relating to the HDS
Preferred Stock) and Bylaws, as currently in effect, of HDS, the minute books
and stock records of HDS and the corresponding documents of Subsidiary. The HDS
Disclosure Letter contains a true and correct list of the jurisdictions in which
HDS or Subsidiary is qualified to do business as a foreign corporation.
Section 3.2. Authorization. HDS has full corporate power and authority to
execute and deliver this Agreement and to perform its obligations under this
Agreement and to consummate the Merger and the other transactions contemplated
by this Agreement. Other than the stockholder approval contemplated in Section
6.1(a), the execution and delivery of this Agreement by HDS and the performance
by HDS of its obligations under this Agreement and the consummation of the
Merger and the other transactions provided for by this Agreement have been duly
and validly authorized by all necessary corporate action on the part of HDS. The
Board of Directors of HDS has approved the execution, delivery and performance
of this Agreement and the consummation of the Merger and the other transactions
provided for in this Agreement. This Agreement has been duly executed and
delivered by HDS and constitutes the valid and binding agreement of HDS,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency and other similar laws affecting the enforceability of
creditors' rights generally, general equitable principles and the discretion of
courts in granting equitable remedies.
Section 3.3. Absence of Restrictions and Conflicts. Subject to the
stockholder approval contemplated in Section 6.1(a), the execution, delivery and
performance of this Agreement, the consummation of the Merger and the other
transactions contemplated by this Agreement and the fulfillment of and
compliance with the terms and conditions of this Agreement do not and will not,
with the passing of time or the giving of notice or both, violate, constitute a
breach of or default under, result in the loss of any material benefit under the
terms or provisions of, or permit the acceleration of any obligation under, (i)
any term or provision of the charter or bylaws of HDS or Subsidiary, (ii) any
HDS Material Contract, (iii) any judgment, decree or order of any court or
governmental authority or agency to which HDS or Subsidiary is a party or by
which HDS or Subsidiary or any of their respective properties is bound, or (iv)
any statute, law, regulation or rule applicable to HDS or Subsidiary, so as to
have, in the case of subsections (ii) through (iv) above, an HDS Material
Adverse Effect. Except for compliance with the applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), applicable
state securities laws and the filing and recordation of the Certificate of
Merger as required by the DGCL, no consent, approval, order or authorization of,
or registration, declaration or filing with, any governmental agency or public
or regulatory unit, agency, body or authority with respect to HDS or Subsidiary
is required in connection with the execution, delivery or performance of this
Agreement by HDS or the consummation of the transactions contemplated by this
Agreement by HDS, the failure to obtain which would have an HDS Material Adverse
Effect.
Section 3.4. Capitalization. The authorized capital stock of HDS consists
of 10,000,000 shares of common stock, $0.10 par value per share, and 5,000,000
shares of serial preferred stock, of which 742,000 shares of HDS Series B Stock,
1,687,500 shares of HDS Series C Stock, 830,000 shares of HDS Series E Stock and
1,818,181 shares of HDS Series F Stock have been authorized. As of the date of
this Agreement, there were 4,081,990 shares of HDS Common Stock, 742,000 shares
of HDS Series B Stock, 1,312,500 shares of HDS Series C Stock and 1,605,353
shares of HDS Series F stock issued and outstanding. Shares of the HDS Series B,
HDS Series C and HDS Series F Stock are convertible into shares of HDS Common
Stock on a one-for-one basis. Each share of HDS Capital Stock outstanding as of
the date of this Agreement is duly authorized, validly issued, fully paid and
nonassessable and free of pre-emptive rights. There are no subscriptions,
options, convertible securities, calls, puts, rights, warrants or other
agreements,
A-12
92
claims or commitments of any nature whatsoever obligating HDS to purchase,
redeem, issue, transfer, deliver or sell, or cause to be purchased, redeemed,
issued, transferred, delivered or sold, additional shares of the capital stock
or other securities of HDS or obligating HDS to grant, extend or enter into any
such agreement or commitment. HDS does not own an equity interest in any
corporation, partnership or other entity, except that HDS owns beneficially and
of record all the issued and outstanding stock of the Subsidiary. Each share of
capital stock of the Subsidiary outstanding as of the date of this Agreement is
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights. No prior offer, issue, redemption, call, purchase, sale,
transfer or other transaction of any nature with respect to the capital stock or
equity interests of HDS, or any corporation or organization which has been
merged into HDS, has given or may give rise to any valid claim or action by any
person which is enforceable against HDS, the Surviving Corporation or any of
their respective affiliates and, to the knowledge of the HDS Executives (as
hereinafter defined), no fact or circumstance exists which could give rise to
any such right, claim or action on behalf of any person.
Section 3.5. Financial Statements. (a) HDS has made available to Medaphis
the audited balance sheets of HDS as of March 31, 1995 and March 31, 1996, and
the related audited statements of income, changes in stockholders' equity and
cash flows for the respective fiscal years then ended including the notes to
such financial statements, examined by and accompanied by the report of Deloitte
& Touche LLP ("Deloitte & Touche"), independent public accountants (the balance
sheet as of March 31, 1996 is referred to herein as the "1996 Balance Sheet").
All of the foregoing financial statements are collectively referred to as the
"HDS Financial Statements." The HDS Financial Statements (i) have been prepared
from, and are in accordance with, the books and records of HDS and (ii), as
applicable, present fairly the financial position, results of operations,
changes in stockholders' equity and cash flows of HDS as of the dates and for
the periods indicated, in each case in conformity with generally accepted
accounting principles, consistently applied. The HDS Disclosure Letter sets
forth a true and complete list of all loss contingencies (within the meaning of
Statement of Financial Accounting Standards No. 5) of HDS existing as of March
31, 1996 exceeding $50,000 in the case of any single loss contingency or
$100,000 in the case of all loss contingencies.
(b) On the Closing Date, HDS and Subsidiary will not have any obligation or
liability (including but not limited to indebtedness for borrowed money and
capitalized lease obligations) that under generally accepted accounting
principles is required to be recorded on a balance sheet as a long-term
liability.
Section 3.6. Absence of Certain Changes. (a) Since March 31, 1996, there
has not been (i) any material adverse change in the assets, liabilities, results
of operations, financial condition or business of HDS and Subsidiary taken as a
whole, (ii) any material damage, destruction, loss or casualty to property or
assets of HDS, whether or not covered by insurance, which property or assets are
material to the operations or business of HDS and Subsidiary taken as a whole,
(iii) any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) in respect of the capital stock of HDS, any
redemption or other acquisition by HDS of any of the capital stock of HDS or any
split, combination or reclassification of shares of capital stock declared or
made by HDS or (iv) any agreement to do any of the foregoing.
(b) Since March 31, 1996, there have not been (i) any extraordinary losses
suffered, which, in the aggregate, have had an HDS Material Adverse Effect, (ii)
any material assets mortgaged, pledged or made subject to any material lien,
charge or other encumbrance, (iii) any material liability or obligation
(absolute, accrued or contingent) incurred or any material bad debt, contingency
or other reserve increase suffered, except, in each such case, in the ordinary
course of business and consistent with past practice, (iv) any material claims,
liabilities or obligations (absolute, accrued or contingent) paid, discharged or
satisfied, other than the payment, discharge or satisfaction, in the ordinary
course of business and consistent with past practice, of claims, liabilities and
obligations reflected or reserved against in the HDS Financial Statements or
incurred in the ordinary course of business and consistent with past practice,
(v) any material guaranteed checks, notes or accounts receivable written off as
uncollectible, except write-offs in the ordinary course of business and
consistent with past practice, (vi) any write down (under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121") or otherwise) of the value of any
material asset or investment on HDS's books or records, except for depreciation
and amortization taken in the ordinary course of business and consistent with
past practice, (vii) any cancellation of any material debts or waiver of any
material claims or rights of substantial value, or sale, transfer or other
disposition of any material properties or assets (real,
A-13
93
personal or mixed, tangible or intangible) of substantial value, except, in each
such case, in transactions in the ordinary course of business and consistent
with past practice, (viii) any capital expenditure that would cause all capital
expenditures since December 31, 1995, to exceed $500,000, (ix) any change in
accounting practice relating to capitalized research and development, (x) any
material transactions entered into other than in the ordinary course of
business, (xi) any agreements to do any of the foregoing, or (xii) any other
events, developments or conditions of any character that have had or are
reasonably likely to have an HDS Material Adverse Effect other than events
affecting businesses similar to HDS and Subsidiary generally.
Section 3.7. Legal Proceedings. There are no suits, actions, claims,
proceedings or investigations pending, or, to the knowledge of the HDS
Executives, threatened against HDS or Subsidiary (or any of their officers or
directors) before any court, arbitrator or administrative or governmental body,
which, if finally determined adversely, are reasonably likely, individually or
in the aggregate, to have an HDS Material Adverse Effect. All pending suits,
actions, claims, proceedings or investigations of HDS or Subsidiary (or any of
their officers or directors) before any court, arbitrator or administrative or
governmental body are adequately provided for in the 1996 Balance Sheet if and
to the extent such a provision is required by generally accepted accounting
principles consistently applied. Neither HDS nor Subsidiary is subject to any
judgment, decree, injunction, rule or order of any court, and, to the knowledge
of the HDS Executives, neither HDS nor Subsidiary is subject to any governmental
restriction applicable to HDS, which is reasonably likely (i) to have an HDS
Material Adverse Effect or (ii) to cause a material limitation on Medaphis's
ability to operate the business of HDS and Subsidiary taken as a whole after the
Closing.
Section 3.8. Compliance with Law. HDS and Subsidiary each has all material
authorizations, approvals, licenses and orders of and from all governmental and
regulatory officers and bodies necessary to carry on its business as it is
currently being conducted, to own or hold under lease the properties and assets
it owns or holds under lease and to perform all of its obligations under the
agreements to which it is a party, and each has been and is in compliance with
all applicable laws, regulations and administrative orders of any country, state
or municipality or of any subdivision of any thereof to which its business or
its employment of labor or its use or occupancy of properties or any part
thereof are subject, the failure to obtain or the violation of which would have
an HDS Material Adverse Effect.
Section 3.9. Material Contracts. The HDS Disclosure Letter contains a
correct and complete list of the following (other than accounts payable incurred
in the ordinary course of business) (the "HDS Material Contracts"):
(a) all bonds, debentures, notes, loans, mortgages, indentures or
guarantees to which HDS or Subsidiary is a party or by which any one of its
properties or assets (real, personal or mixed, tangible or intangible) is
bound, in any case involving an amount in excess of $10,000 individually;
(b) all leases to which HDS or Subsidiary is a party or by which any
of its properties or assets (real, personal or mixed, tangible or
intangible) is bound involving an annual rental payment in excess of
$75,000 individually;
(c) all credit or loan commitments in excess of $100,000 to HDS or
Subsidiary which are outstanding, together with a brief description of such
commitments and the name of each financial institution granting the same;
(d) all contracts or agreements which limit or restrict in a
substantial manner HDS, Subsidiary or any of the HDS Executives from
engaging in any business in any jurisdiction and all contracts or
agreements that limit or restrict others from competing with HDS or
Subsidiary in any jurisdiction, other than contracts between HDS or
Subsidiary and current or former employees of HDS or Subsidiary;
(e) all contracts or agreements requiring HDS or Subsidiary to
register its capital stock or securities under federal or state securities
law; and
(f) all existing contracts and commitments (other than those described
in subparagraphs (a), (b), (c), (d) or (e) of this Section 3.9, the HDS
Client Contracts and other agreements between HDS or Subsidiary and their
clients that are not HDS Client Contracts, and the HDS Benefit Plans) to
which
A-14
94
HDS or Subsidiary is a party or by which its properties or assets may be
bound involving an annual commitment or annual payment by any party to such
contract or commitment of more than $75,000 individually.
True and complete copies of all HDS Material Contracts, including all
amendments, have been made available to Medaphis. The HDS Material Contracts are
valid and enforceable in accordance with their respective terms with respect to
HDS and, to the knowledge of the HDS Executives, valid and enforceable in
accordance with their respective terms with respect to any other party to an HDS
Material Contract, in each case to the extent material to the business and
operations of HDS and subject to applicable bankruptcy, insolvency and other
similar laws affecting the enforceability of creditors' rights generally,
general equitable principles and the discretion of courts in granting equitable
remedies. Except for events or occurrences, the consequences of which,
individually or in the aggregate, would not have an HDS Material Adverse Effect,
there is not under any of the HDS Material Contracts any existing breach,
default or event of default by HDS or Subsidiary or event that with notice or
lapse of time or both would constitute a breach, default or event of default by
HDS or Subsidiary, nor do the HDS Executives know of, and HDS has not received
notice of, or made a claim with respect to, any breach or default by any other
party to an HDS Material Contract.
Section 3.10. HDS Client Contracts. The HDS Disclosure Letter sets forth a
true and complete list of all agreements, contracts or commitments pursuant to
which HDS or Subsidiary provides goods or services to its clients which (i)
produced annual payments to HDS or Subsidiary in excess of $100,000 in the year
ending March 31, 1996, or (ii) HDS reasonably expects to produce annual payments
to HDS or Subsidiary in excess of $1,000,000 in the year ending March 31, 1997
(the "HDS Client Contracts"). The HDS Disclosure Letter contains an accurate
description of (a) the terms and conditions of each oral HDS Client Contract;
(b) any and all disagreements, complaints, disputes or defaults known to the HDS
Executives arising under or with respect to the HDS Client Contracts which could
reasonably be expected to result in a client's termination of its HDS Client
Contract or claim for damages against HDS or Subsidiary in excess of $300,000;
and (c) all loans or advances made by HDS or Subsidiary to or on behalf of its
clients, which description includes the dates of such loans or advances and the
principal balance outstanding as of the date of the HDS Disclosure Letter under
each such loan or advance. Except for provisions in HDS Client Contracts
granting unilateral termination rights to clients of HDS upon notice to HDS, the
execution, delivery and performance of this Agreement by HDS and the
consummation of the transactions contemplated by this Agreement will not, with
the passing of time or the giving of notice or both, violate, constitute a
default under, result in the loss of any material benefit under the terms or
provisions of, or give rise to a termination right under, any HDS Client
Contract. True and complete copies of all written HDS Client Contracts,
including all amendments, have been made available to Medaphis. The HDS Client
Contracts are valid and enforceable in accordance with their respective terms
with respect to HDS or Subsidiary, and, to the knowledge of the HDS Executives,
are valid and enforceable in accordance with their respective terms with respect
to any other party to an HDS Client Contract, in each case except as would not
have an HDS Material Adverse Effect, and subject to applicable bankruptcy,
insolvency and other similar laws affecting the enforceability of creditors'
rights generally, general equitable principles and the discretion of courts in
granting equitable remedies. Except as would not have an HDS Material Adverse
Effect, there is not under HDS Client Contracts any existing breach, default or
event of default by HDS or Subsidiary, or event that with notice or lapse of
time or both would constitute a breach, default or event of default by HDS or
Subsidiary, nor do the HDS Executives know of, and HDS has not received notice
of, or made a claim with respect to, any breach or default by any other party.
Section 3.11. Tax Returns; Taxes. Each of HDS and Subsidiary has duly
filed all federal, state, local and foreign tax returns required to be filed by
it and has duly paid or made adequate provision for the payment of all taxes
which are due and payable pursuant to such returns or pursuant to any assessment
which is due and payable with respect to taxes in such jurisdictions, whether or
not in connection with such returns. The liability for taxes reflected in the
1996 Balance Sheet is sufficient for the payment of all unpaid taxes, whether or
not disputed, that are accrued or applicable for the period ended March 31, 1996
and for all years and periods ended prior to that date or that are attributable
to differences in the time for recognition of income, deductions and other items
for financial reporting and tax purposes. All deficiencies asserted as a result
of any
A-15
95
examinations by the Internal Revenue Service or any other taxing authority have
been paid and fully settled. There are no pending claims asserted for taxes of
HDS or Subsidiary or outstanding agreements or waivers extending the statutory
period of limitation applicable to any tax return of HDS or Subsidiary for any
period. Each of HDS and Subsidiary has made all estimated income tax deposits
and all other required tax payments or deposits and has complied for all prior
periods in all material respects with the tax withholding provisions of all
applicable federal, state, local, foreign and other laws. HDS has made available
to Medaphis true, complete and correct copies of its federal income tax returns
for the last three taxable years and made available all other tax returns
requested by Medaphis.
Section 3.12. Officers, Directors and Employees. The HDS Disclosure Letter
contains a true and complete list of all of the officers and directors of HDS,
specifying their office and annual rate of compensation, and a true and complete
copy of the form of written employment agreement to which each full-time
employee of HDS or Subsidiary is a party and a list of the employees of HDS or
Subsidiary as of the date of this Agreement to whom HDS or Subsidiary has made
oral commitments involving material terms which are binding on HDS or Subsidiary
and that involve an amount in excess of $35,000.
Section 3.13. Employee Benefit Plans. (a) Definition of Benefit
Plans. For purposes of this Section 3.13, the term "HDS Benefit Plan" means any
plan, program, arrangement, fund, policy, practice or contract which, through
which or under which HDS or any HDS ERISA Affiliate currently provides or, with
respect to any multi-employer plans (as defined in ERISA section 4001(a)(3)) and
pension benefit plans (as defined in ERISA section 3(3)) subject to Code section
412, at any time provided, benefits or compensation to or on behalf of employees
or former employees of HDS or any HDS ERISA Affiliate, whether formal or
informal, whether or not written, including but not limited to the following:
(i) Arrangements -- any bonus, incentive compensation, stock option,
deferred compensation, commission, severance pay, golden parachute or other
compensation plan or rabbi trust;
(ii) ERISA Plans -- any "employee benefit plan" (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), including, but not limited to, any multiemployer plan (as
defined in Section 3(37) and Section 4001(a) (3) of ERISA), defined benefit
plan, profit sharing plan, money purchase pension plan, 401(k) plan,
savings or thrift plan, or any plan, fund, program, arrangement or practice
providing for medical (including post-retirement medical), hospitalization,
accident, sickness, disability, or life insurance benefits; and
(iii) Other Employee Fringe Benefits -- any stock purchase, vacation,
scholarship, sick days, day care, prepaid legal services, dependent care or
other fringe benefits plans, programs, arrangements, contracts or
practices.
(b) HDS ERISA Affiliate. For purposes of this Section 3.13, the term "HDS
ERISA Affiliate" means each trade or business (whether or not incorporated)
which together with HDS is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code.
(c) Identification of Benefits Plans. All of the HDS Benefit Plans are
listed in the HDS Disclosure Letter.
(d) Compliance With All Statutes, Orders and Rules. Each HDS Benefit Plan
maintained by HDS and each HDS ERISA Affiliate is in compliance in all material
respects with the requirements prescribed by and all statutes, orders and
governmental rules and regulations applicable to HDS Benefit Plans. All reports
and disclosures relating to HDS Benefit Plans required to be filed with or
furnished to any governmental entity, participants or beneficiaries prior to the
Closing Date have been or will be filed or furnished in a timely manner and in
accordance with applicable laws except as would not have an HDS Material Adverse
Effect.
(e) MEPPA Liability/Post-Retirement Medical Benefits. Neither HDS nor any
HDS ERISA Affiliate maintains, or has at anytime established or maintained, or
has at any time been obligated to make, or made, contributions to or under any
multiemployer plan (as defined in Section 3(37) and Section 4001(a)(3) of
ERISA). HDS does not maintain, nor has HDS at any time established or
maintained, nor has HDS at any time been obligated to make, or made,
contributions to or under any plan which provides post-retirement
A-16
96
medical or health benefits with respect to employees of HDS. There is no lien
upon any property of HDS or any HDS ERISA Affiliate outstanding pursuant to
Section 412(n) of the Code in favor of any HDS Benefit Plan. No assets of HDS or
any HDS ERISA Affiliate have been provided as security for any HDS Benefit Plan
pursuant to Section 401(a) (29) of the Code.
(f) Documentation. HDS has made available to Medaphis a true and complete
copy of the following documents, if applicable, with respect to each HDS Benefit
Plan identified in the HDS Disclosure Letter: (1) all documents, including any
insurance contracts and trust agreements, setting forth the terms of each HDS
Benefit Plan, or if there are no such documents evidencing an HDS Benefit Plan,
a full description of such HDS Benefit Plan, (2) the ERISA summary plan
description and any other summary of plan provisions provided to participants or
beneficiaries for each such HDS Benefit Plan, (3) the annual reports filed for
the most recent three plan years and most recent financial statements or
periodic accounting of related plan assets with respect to each HDS Benefit
Plan, (4) the most recent favorable determination letter, opinion or ruling from
the Internal Revenue Service ("IRS") for each HDS Benefit Plan, the assets of
which are held in trust, to the effect that such trust is exempt from federal
income tax, and any outstanding request for a determination letter and (5) each
opinion or ruling from the Department of Labor or the Pension Benefit Guaranty
Corporation ("PBGC") with respect to any such HDS Benefit Plan.
(g) Qualified Status. Each HDS Benefit Plan that is funded through a trust
or insurance contract has at all times satisfied in all material respects, by
its terms and in its operation, all applicable requirements for an exemption
from federal income taxation under Section 501(a) of the Code. Except for the
HDS Profit Sharing 401(k) Plan and the HDS Money Purchase Pension Plan (the "HDS
Qualified Plans"), no HDS Benefit Plan meets or was intended to meet the
requirements of Section 401(a) of the Code. Any determination letter issued by
the IRS to the effect that the HDS Qualified Plans qualify under Section 401(a)
of the Code and that the related trusts are exempt from taxation under Section
501(a) of the Code remains in effect and has not been revoked. The HDS Qualified
Plans currently comply in form in all material respects with the requirements
under Section 401(a) of the Code, other than changes required by statutes,
regulations and rulings for which amendments are not yet required. The HDS
Qualified Plans have been administered according to their terms (except for
those terms which are inconsistent with the changes in operations of a HDS
Qualified Plan required by statutes, regulations, and rulings for which changes
in plan terms are not yet required to be made, in which case the HDS Qualified
Plans have been operated in accordance with the provisions of those statutes,
regulations and rulings) and in accordance with the requirements of Section
401(a) of the Code.
The HDS Profit Sharing 401(k) Plan has been tested for compliance with, and
in all material respects has satisfied the requirements of, Section 401(k)(3)
and 401(m)(2) of the Code for each plan year ending prior to the Closing Date.
(h) Legal Actions. To the knowledge of the HDS Executives, there are no
actions, audits, suits or claims which are pending or threatened against any HDS
Benefit Plan, any fiduciary of any of the HDS Benefit Plans with respect to the
HDS Benefit Plans or against the assets of any of the HDS Benefit Plans, except
claims for benefits made in the ordinary course of the operation of such plans.
(i) Funding. HDS and each HDS ERISA Affiliate has made full and timely
payment of all amounts required to be contributed under the terms of each HDS
Benefit Plan and applicable law or required to be paid as expenses under such
HDS Benefit Plan and no excise taxes in an aggregate amount in excess of $50,000
are assessable as a result of any nondeductible or other contributions made or
not made to an HDS Benefit Plan. The assets of all HDS Benefit Plans which are
required under applicable laws to be held in trust are in fact held in trust,
and the assets of each such HDS Benefit Plan equal or exceed the liabilities of
each such plan. The liabilities of each other HDS Benefit Plan are properly and
accurately reported on the financial statements and records of HDS to the extent
required by law or accounting principles except as would not have an HDS
Material Adverse Effect. The assets of each HDS Benefit Plan are reported at
their then current fair market value on the books and records of each HDS
Benefit Plan.
(j) Liabilities. Neither HDS nor any HDS ERISA Affiliate is subject to any
material liability, tax or penalty whatsoever to any person whomsoever as a
result of HDS's or any HDS ERISA Affiliate's engaging in
A-17
97
a prohibited transaction under ERISA or the Code, and the HDS Executives have no
knowledge of any circumstances which reasonably might result in any such
material liability, tax or penalty as a result of a breach of fiduciary duty
under ERISA.
(k) Excess Parachute Payments. No payment required to be made to any
employee associated with HDS as a result of the transactions contemplated hereby
under any contract or otherwise will, if made, constitute an "excess parachute
payment" within the meaning of Section 280G of the Code.
(l) COBRA. HDS and each HDS ERISA Affiliate have complied with the
continuation coverage requirements of Section 4980B of the Code.
(m) No Acceleration of Liability Under Benefit Plans. The consummation of
the transactions contemplated hereby will not accelerate or increase any
liability under any HDS Benefit Plan because of an acceleration or increase of
any of the rights or benefits to which employees of HDS or any HDS ERISA
Affiliate may be entitled thereunder.
(n) Leased Employees. To the knowledge of the HDS Executives, HDS has made
no representations or warranties (whether written or oral, express or implied)
contractually or otherwise to any client or customer of HDS that HDS employees
rendering services to such client or customer are not "leased employees" (within
the meaning of Section 414(n) of the Code) or that such employees would not be
required to participate under any pension benefit plan (within the meaning of
Section 3(2) of ERISA) (a "Pension Benefit Plan") of such client or customer of
HDS relating either to (a) providing benefits to employees of HDS under a
Pension Benefit Plan of HDS or (b) making contributions to or reimbursing such
client or customer for any contributions made to a Pension Benefit Plan of such
client or customer on behalf of employees of HDS.
(o) Defined Benefit Plans/Money Purchase Plans. No HDS Benefit Plan has
suffered any accumulated funding deficiency within the meaning of Section 302 of
ERISA and Section 412 of the Code. Neither HDS nor any HDS ERISA Affiliate has
any outstanding liability under Section 4971 of the Code. No HDS Benefit Plan is
subject to Title IV of ERISA.
Section 3.14. Labor Relations. To the knowledge of the HDS Executives,
each of HDS and Subsidiary is in compliance with all federal and state laws
respecting employment and employment practices, terms and conditions of
employment, wages and hours, and is not engaged in any unfair labor or unlawful
employment practice. Except as would not result in an HDS Material Adverse
Effect, there is no unlawful employment practice discrimination charge involving
HDS or Subsidiary pending before the Equal Employment Opportunity Commission
("EEOC"), EEOC recognized state "referral agency" or any other governmental
agency. There is no unfair labor practice or similar charge or complaint against
HDS or Subsidiary pending before the National Labor Relations Board ("NLRB") or
any comparable Canadian governmental agency. There is no labor strike, slowdown
or stoppage actually pending or, to the knowledge of the HDS Executives,
threatened against or involving or affecting HDS or Subsidiary and no labor
union representation question exists under the National Labor Relations Act or
any comparable Canadian law respecting any employees of HDS or Subsidiary. To
the knowledge of the HDS Executives, no grievance or arbitration proceeding is
pending against HDS or Subsidiary and no written claim therefor exists. There is
no collective bargaining agreement that is binding on HDS or Subsidiary.
Section 3.15. Insurance. HDS has provided to Medaphis a true and complete
list of its current insurance coverages for HDS and Subsidiary, including names
of carriers, amounts of coverage and premiums therefor. Each of HDS and
Subsidiary believes that such corporation has been and is insured with respect
to its properties and the conduct of its business in such amounts and against
such risks as are reasonable in relation to its business and will use its
reasonable efforts to maintain such insurance at least through the Effective
Time. HDS has made available to Medaphis true and complete copies of all
insurance policies covering HDS or Subsidiary, their properties, assets,
employees or operations.
Section 3.16. Title to Properties and Related Matters. (a) Each of HDS and
Subsidiary has good and valid title to or valid leasehold interests in its
properties reflected in the 1996 Balance Sheet or acquired after March 31, 1996
(other than properties sold or otherwise disposed of in the ordinary course of
business), and
A-18
98
all of such properties are held free and clear of all title defects, liens,
encumbrances and restrictions, except, with respect to all such properties, (a)
mortgages and liens securing debt reflected as liabilities on the 1996 Balance
Sheet and (b) (i) liens for current taxes and assessments not in default, (ii)
mechanics', carriers', workmen's, repairmen's, statutory or common law liens
either not delinquent or being contested in good faith, and (iii) liens,
mortgages, encumbrances, covenants, rights-of-way, building or use restrictions,
easements, exceptions, variances, reservations and other matters or limitations
of any kind, if any, which either individually or in the aggregate do not have a
material adverse effect on HDS's or Subsidiary's use of the property affected.
Notwithstanding the preceding sentence, HDS makes no representation or warranty
in this Section 3.16 or otherwise regarding the validity of lessor's title to
any such properties in which HDS or Subsidiary has a leasehold interest as
lessee. Neither HDS nor Subsidiary has granted any security interests or other
liens upon or factored the accounts receivable of HDS or Subsidiary.
(b) The HDS Disclosure Letter sets forth a true and complete list of all
leases and agreements of HDS or Subsidiary granting possession of or rights to
real or personal property which provide for payments in excess of $75,000
annually (the "Scheduled Leases"). All such Scheduled Leases are in full force
and effect and constitute the valid, binding and enforceable obligations of HDS
or Subsidiary, and, to the knowledge of the HDS Executives, are valid, binding
and enforceable in accordance with their respective terms with respect to each
other party to a Scheduled Lease, subject in each case to applicable bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally, general equitable principles and the discretion of courts in granting
equitable remedies and except as would not result in an HDS Material Adverse
Effect. HDS or Subsidiary has physical possession of all real property,
equipment and other assets which are covered by Scheduled Leases. Except as
would not result in an HDS Material Adverse Effect, there are no existing
defaults of HDS or Subsidiary with respect to such Scheduled Leases or, to the
knowledge of the HDS Executives, of any of the other parties to such Scheduled
Leases (or, to the knowledge of the HDS Executives, any events or conditions
which, with notice or lapse of time, or both, would constitute a default).
Section 3.17. Environmental Matters. To the actual knowledge of the HDS
Executives, HDS is in compliance in all material respects with all statutes,
regulations and ordinances relating to the protection of human health and the
environment including, without limitation, the Clean Water Act, 33 U.S.C.
sec. 1251 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
sec. 6901 et seq., the Clean Air Act, 42 U.S.C. sec. 7401 et seq., the Toxic
Substances Control Act, 15 U.S.C. sec. 2601 et seq., the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. sec. 11001 et seq., the regulations
developed pursuant to these statutes and the corresponding state and local
statutes, ordinances and regulations. There has been no release by HDS,
Subsidiary or, to the actual knowledge of the HDS Executives, by any other
person of a hazardous substance as that term is defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
sec. 9601(14), into the environment at any property owned or leased by HDS or
Subsidiary (the "Premises") including, without limitation, any such release in
the soil or groundwater underlying the Premises. To the actual knowledge of the
HDS Executives, there is no asbestos, polychlorinated biphenyls or underground
storage tanks located on the Premises and there have been no releases of
asbestos, polychlorinated biphenyls or materials stored in underground storage
tanks, including, without limitation, petroleum or petroleum-based materials. To
the knowledge of the HDS Executives, neither HDS nor Subsidiary has received
notice of any violation of any environmental statute or regulation by HDS or
Subsidiary nor has it been advised of any claim or liability pursuant to any
environmental statute or regulation brought by any governmental agency or
private party against HDS or Subsidiary.
Section 3.18. Patents, Trademarks, Trade Names. The HDS Disclosure Letter
sets forth a true and complete list of (i) all patents, registered trademarks,
registered trade names (including all federal and state registration pertaining
thereto) and registered copyrights owned by HDS or Subsidiary and unregistered
trademarks and trade names which are material to the business of HDS and
Subsidiary taken as a whole (collectively, the "Proprietary Intellectual
Property") and (ii) all patents, trademarks, trade names, copyrights, technology
and processes used by HDS or Subsidiary in its business which are material to
its business and are used pursuant to a license or other right granted by a
third party (collectively, the "Licensed Intellectual Property", and together
with the Proprietary Intellectual Property referred to as "Intellectual
Property"), other than commercially available "shrink-wrap" software sold
through retail channels. A true
A-19
99
and complete list of all such licenses with respect to Licensed Intellectual
Property is set forth in the HDS Disclosure Letter. To the knowledge of the HDS
Executives, each of the federal and state registrations pertaining to the
Proprietary Intellectual Property is valid and in full force and effect and all
required filings in association with such registrations have been properly made
and all required fees have been paid. Each of HDS and Subsidiary owns, or has
the right to use pursuant to valid and effective agreements, in accordance with
their respective terms (subject to applicable bankruptcy, insolvency and other
similar laws affecting the enforceability of creditors' rights generally,
general equitable principles and the discretion of courts in granting equitable
remedies), all Intellectual Property, and the consummation of the transactions
contemplated by this Agreement will not violate, constitute a breach of or a
default under, or result in the loss of any material benefit under, the terms or
provisions of any such agreement. To the knowledge of the HDS Executives, no
written claims are pending against HDS or Subsidiary by any person with respect
to the use of any Intellectual Property or challenging or questioning the
validity or effectiveness of any license or agreement relating to the same, and
to the knowledge of the HDS Executives the current use by HDS and Subsidiary of
the Intellectual Property does not infringe on the rights of any third party.
The HDS Disclosure Letter sets forth a list of all jurisdictions in which HDS or
Subsidiary is operating under a trade name, and each jurisdiction in which any
such trade name is registered.
Section 3.19. HDS Computer Software. (a) The HDS Disclosure Letter sets
forth (i) a description of all software owned by each of HDS and Subsidiary and
used or licensed to customers in connection with the business of HDS and
Subsidiary (the "HDS Proprietary Software"); and (ii) a list of all software
(other than the HDS Proprietary Software) used in connection with the business
of HDS and Subsidiary (the "HDS Licensed Software" and together with the HDS
Proprietary Software, the "HDS Software"), except that such list does not
include HDS Licensed Software that is commercially available "shrink-wrap"
software sold through retail channels. The HDS Software consists of: (i) source
and object code embodied in magnetic media; and (ii) all development and
procedural tools necessary to maintain the HDS Proprietary Software, including
licenses to use compilers, assemblers, libraries and other such aids. To the
knowledge of the HDS Executives, HDS employs individuals who are familiar with
the business of such corporation and who are qualified to maintain the HDS
Software and to use the computer hardware used by such corporation in its
operations (the "HDS Hardware").
(b) HDS has all right, title and interest in and to all patent, trade
secret and copyright rights in the HDS Proprietary Software. HDS has developed
the HDS Proprietary Software entirely through its own efforts for its own
account. The HDS Proprietary Software is free and clear of all liens, claims and
encumbrances, except for liens, claims and encumbrances involving an aggregate
of not more than $100,000. The use of the HDS Licensed Software and the use and
distribution of the HDS Proprietary Software does not breach any terms of any
contract between HDS and Subsidiary and any third party, except for breaches of
such contracts involving not more than $100,000 in the aggregate. The HDS
Disclosure Letter sets forth a true and complete list of all license agreements
in favor of HDS or Subsidiary relating to the HDS Licensed Software that is
listed in the HDS Disclosure Letter pursuant to Section 3.19(a)(ii) (the "HDS
License Agreements"). To the knowledge of the HDS Executives, HDS has been
granted and has under the HDS License Agreements valid license rights with
respect to the HDS Licensed Software. HDS is in compliance in all material
respects with each of the material terms and conditions of each of the HDS
License Agreements. In the case of any commercially available "shrink-wrap"
software sold through retail channels (such as Lotus 1-2-3), to the knowledge of
the HDS Executives (i) HDS has not made and is not using any unauthorized copies
of any such software programs and (ii) none of the employees, agents or
representatives of any of HDS or Subsidiary have made or are using any such
unauthorized copies.
(c) Except for infringements that involve in the aggregate not more than
$500,000 or that do not have or would not have an HDS Material Adverse Effect,
the HDS Proprietary Software does not and, to the actual knowledge of the HDS
Executives, the HDS Licensed Software does not infringe any United States
patent, copyright, or trade secret or any other intellectual property right of
any third party. HDS has taken commercially reasonable actions to maintain in
confidence the source code for the HDS Proprietary Software. The HDS Disclosure
Letter sets forth a true and complete list of all source code escrow
arrangements under which a third party may have a right to obtain source code
for the HDS Proprietary Software. Source code for
A-20
100
the HDS Proprietary Software has never been furnished to a third party, except
that source code has been deposited with the escrow agent under the source code
escrow agreements identified on the HDS Disclosure Letter.
(d) To the knowledge of the HDS Executives, the HDS Proprietary Software
was: (i) developed by HDS's employees working within the scope of their
employment at the time of such development; (ii) developed by agents,
consultants, contractors or others who have executed appropriate instruments of
assignment in favor of HDS as assignee that have conveyed to HDS ownership of
all of their intellectual property rights in the HDS Proprietary Software; or
(iii) acquired by HDS in connection with acquisitions in which HDS obtained
appropriate representations and warranties from the transferring party relating
to the title to such HDS Proprietary Software. To the knowledge of the HDS
Executives, neither HDS nor Subsidiary has received notice from any third party
claiming any right, title or interest in the HDS Proprietary Software.
(e) There are no agreements or arrangements in effect with respect to the
marketing, distribution, licensing or promotion of the HDS Proprietary Software
by any independent sales person, distributor, sublicensee or other remarketer or
sales organization.
(f) Neither HDS nor Subsidiary has granted rights in the HDS Proprietary
Software or HDS Licensed Software that is listed pursuant to Section 3.19(a)(ii)
to any third party, except for rights granted to customers pursuant to contracts
with customers which grants of rights are disclosed in the HDS Disclosure
Letter.
(g) To the knowledge of the HDS Executives, the HDS Software and the HDS
Hardware are adequate in all material respects, when taken together with the
other assets, resources and personnel of HDS and Subsidiary, to run the business
of HDS and Subsidiary on the date of this Agreement in substantially the same
manner as such business has operated since June 30, 1995. The HDS Disclosure
Letter contains a summary description of any problems experienced by HDS or
Subsidiary in the past twelve months with respect to the HDS Software or HDS
Hardware and the provision of services to HDS clients which have arisen outside
the ordinary course of business and resulted, or reasonably could be expected to
result, in a material disruption of the provision of services by HDS or
Subsidiary to such clients.
Section 3.20. Proxy Statement and Registration Statement. The information
with respect to HDS, its officers, directors and affiliates in the definitive
proxy statement to be furnished to the stockholders of HDS (the "Proxy
Statement") that will form a part of the Registration Statement on Form S-4
relating to the shares of Medaphis Common Stock to be issued in the Merger (the
"Registration Statement") or in the Registration Statement will not, in the case
of the Proxy Statement, on the date the Proxy Statement is first mailed to
stockholders of HDS or on the date of the stockholders' meeting referred to in
Section 5.5, or, in the case of the Registration Statement, at the time it
becomes effective and at the Effective Time, as such Proxy Statement or
Registration Statement is then amended or supplemented, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Section 3.21. Transactions with Affiliates. No holder of five percent or
more of the issued and outstanding shares of HDS Capital Stock, officer or
director of HDS or Subsidiary, or any immediate family member of any such
stockholder, officer or director, or any entity in which any such person owns
any beneficial interest (other than a publicly held corporation whose stock is
traded on a national securities exchange or in the over-the-counter market and
less than 1% of the stock of which is beneficially owned by all such persons),
has any beneficial interest in: (i) any contract, arrangement or understanding
involving aggregate consideration of $100,000 or more with, or relating to, the
business or operations of HDS or Subsidiary; (ii) any loan, arrangement,
understanding, agreement or contract for or relating to indebtedness of HDS or
Subsidiary in the amount of $100,000 or more; or (iii) any property (real,
personal or mixed), tangible or intangible, with a value of $100,000 or more
used or currently intended to be used in the business or operations of HDS or
Subsidiary.
A-21
101
Section 3.22. Brokers, Finders and Investment Bankers. Neither HDS nor any
of its officers, directors or employees has employed any broker, finder or
investment banker or incurred any liability for any investment banking fees,
financial advisory fees, brokerage fees or finders' fees in connection with the
transactions contemplated by this Agreement.
Section 3.23. Disclosure. No representation, warranty or covenant made by
HDS in this Agreement, the HDS Disclosure Letter or the Exhibits attached to
this Agreement contains an untrue statement of a material fact or omits to state
a material fact required to be stated herein or therein or necessary to make the
statements contained herein or therein not misleading.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF MEDAPHIS
With such exceptions as are set forth in a letter (the "Medaphis Disclosure
Letter") delivered by Medaphis to HDS prior to the date of this Agreement,
Medaphis represents and warrants to HDS as follows:
Section 4.1. Organization. Each of Medaphis and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Medaphis and each of its subsidiaries is duly
qualified to transact business, and is in good standing, as a foreign
corporation in each jurisdiction where the character of its activities requires
such qualification, except where the failure to so qualify would not have a
material adverse effect on the assets, liabilities, results of operations,
financial condition or business of Medaphis and its subsidiaries taken as a
whole (such an effect, a "Medaphis Material Adverse Effect"). Medaphis has
delivered to HDS accurate and complete copies of the Articles or Certificate of
Incorporation and Bylaws, as currently in effect, of Medaphis and each of its
subsidiaries, and has made available to HDS the minute books and stock records
of Medaphis and each subsidiary. The Medaphis Disclosure Letter contains a true
and correct list of all of the jurisdictions in which Medaphis or any of its
subsidiaries is qualified to do business as a foreign corporation.
Section 4.2. Authorization. Each of Medaphis and HDSSub has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement and to consummate the Merger and the other
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Medaphis and HDSSub, the performance by each of Medaphis and HDSSub
of its respective obligations under this Agreement and the consummation of the
Merger and the other transactions provided for in this Agreement have been duly
and validly authorized by all necessary corporate action on the part of Medaphis
and HDSSub. The Boards of Directors of Medaphis and HDSSub have approved the
execution, delivery and performance of this Agreement and the consummation of
the Merger and the other transactions provided for in this Agreement. This
Agreement has been duly executed and delivered by each of Medaphis and HDSSub
and constitutes the valid and binding agreement of each of Medaphis and HDSSub,
enforceable against each of Medaphis and HDSSub in accordance with its terms,
subject to applicable bankruptcy, insolvency and other similar laws affecting
the enforceability of creditors' rights generally, general equitable principles
and the discretion of courts in granting equitable remedies.
Section 4.3. Absence of Restrictions and Conflicts. The execution,
delivery and performance of this Agreement, the consummation of the Merger and
the other transactions contemplated by this Agreement, and the fulfillment of
and compliance with the terms and conditions of this Agreement do not and will
not, with the passing of time or the giving of notice or both, violate or
conflict with, constitute a breach of or default under, result in the loss of
any material benefit under, or permit the acceleration of any obligation under
the terms or provisions of, (i) any term or provision of the Articles or
Certificate of Incorporation or Bylaws of Medaphis or any of its subsidiaries,
(ii) any material contract, agreement, bond, note, mortgage or indenture to
which Medaphis or any of its subsidiaries is a party or by which Medaphis, any
of its subsidiaries or any of their respective properties is bound (a "Medaphis
Material Contract"), (iii) any judgment, decree or order of any court or
governmental authority or agency to which Medaphis or any of its subsidiaries is
a party or by which Medaphis, any of its subsidiaries or any of their respective
properties is bound, or (iv) any statute, law,
A-22
102
regulation or rule applicable to Medaphis, or any of its subsidiaries, so as to
have, in the case of subsections (ii) through (iv) above, a Medaphis Material
Adverse Effect. Except for compliance with the applicable requirements of the
HSR Act, the Securities Act, the Exchange Act, applicable state securities laws
and the filing and recordation of the Certificate of Merger as required by the
DGCL, no consent, approval, order or authorization of, or registration,
declaration or filing with, any government agency or public or regulatory unit,
agency, body or authority with respect to Medaphis or any of its subsidiaries is
required in connection with the execution, delivery or performance of this
Agreement by Medaphis or HDSSub or the consummation of the transactions
contemplated by this Agreement by Medaphis or HDSSub , the failure to obtain
which would have a Medaphis Material Adverse Effect.
Section 4.4. Capitalization of Medaphis. The authorized capital stock of
Medaphis consists of 200,600,000 shares of capital stock consisting of
200,000,000 shares of voting common stock, $.01 par value and 600,000 shares of
non-voting common stock, $.01 par value. At May 13, 1996, there were 64,953,205
shares of Medaphis Common Stock issued and outstanding and no shares of
non-voting common stock were issued or outstanding. All shares of Medaphis
Common Stock outstanding as of the date hereof are duly authorized, validly
issued, fully paid, nonassessable and free of pre-emptive rights. The shares of
Medaphis Common Stock to be issued in the Merger will be validly issued, fully
paid, nonassessable and free of pre-emptive rights. The shares of Medaphis
Common Stock issuable upon exercise of the Non-Qualified Options (and, to the
extent Non-Qualified Options were not issued in substitution therefor, the
Options) have been duly authorized and, when issued against payment therefor,
will be validly issued, fully paid for and nonassessable and free of pre-emptive
rights. Except as set forth in this Section 4.4, there are no shares of capital
stock of Medaphis outstanding, and there are no subscriptions, options,
convertible securities, calls, puts, rights, warrants or other agreements,
claims or commitments of any nature whatsoever obligating Medaphis or any of its
subsidiaries to purchase, redeem, issue, transfer, deliver or sell, or cause to
be purchased, redeemed, issued, transferred, delivered or sold, additional
shares of the capital stock or other securities of Medaphis or obligating
Medaphis or any of its subsidiaries to grant, extend or enter into any such
agreement or commitment.
Section 4.5. Capital Stock of Medaphis Subsidiaries. The Medaphis
Disclosure Letter sets forth a true and complete list of all corporations,
partnerships and other entities in which Medaphis owns an equity interest (such
corporations, partnerships and other entities being hereinafter referred to as
the "Medaphis Subsidiaries"), the jurisdiction in which each Medaphis Subsidiary
is incorporated or organized, and all shares of capital stock or other ownership
interests authorized, issued and outstanding of each Medaphis Subsidiary. The
outstanding shares of capital stock or other equity interests of each Medaphis
Subsidiary have been duly authorized and are validly issued, fully paid and
nonassessable. All shares of capital stock or other equity interests of each
Medaphis Subsidiary owned by Medaphis or any of its subsidiaries are set forth
in the Medaphis Disclosure Letter and are owned by Medaphis, either directly or
indirectly, free and clear of all liens, encumbrances, equities or claims.
Section 4.6. Medaphis Commission Reports. Medaphis has made available to
HDS (i) Medaphis's Annual Report on Form 10-K for the year ended December 31,
1995, including all exhibits and items incorporated by reference, (ii)
Medaphis's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
including all exhibits and items incorporated by reference, (iii) the proxy
statement relating to Medaphis's Annual Meeting of Stockholders held on May 1,
1996 and (iv) all Current Reports on Form 8-K filed by Medaphis with the
Commission since March 31, 1996, including all exhibits and items incorporated
by reference (items (i) through (iv) in this sentence being referred to
collectively as the "Medaphis Commission Reports"). As of their respective
dates, the Medaphis Commission Reports did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Since December 31, 1994, Medaphis has
filed all forms, reports and documents with the Commission required to be filed
by it pursuant to the Securities Act and the Exchange Act and the rules and
regulations promulgated under such acts, each of which complied as to form, at
the time such form, document or report was filed, in all material respects with
the applicable requirements of the Securities Act and the Exchange Act and the
applicable rules and regulations promulgated under such acts.
A-23
103
Section 4.7. Financial Statements. Medaphis has delivered to HDS (i) the
audited consolidated balance sheets of Medaphis and its subsidiaries as of
December 31, 1995 and its audited consolidated statements of operations, changes
in stockholders' equity and cash flows for the fiscal years then ended,
including the notes thereto, examined by and accompanied by the report of
Deloitte & Touche, independent public accountants; and (ii) the unaudited
consolidated balance sheet of Medaphis and its subsidiaries as of March 31,
1996, (the "Medaphis Balance Sheet") and its unaudited consolidated statements
of operations, stockholders' equity and cash flows for the three-month period
then ended (all of the financial statements referred to in this Section 4.7 are
collectively referred to as the "Medaphis Financial Statements"). The Medaphis
Financial Statements have been prepared from, and are in accordance with, the
books and records of Medaphis and its consolidated subsidiaries and, as
applicable, present fairly the consolidated financial position, consolidated
results of operations, changes in stockholders' equity and consolidated cash
flows of Medaphis and its consolidated subsidiaries as of the dates and for the
periods indicated, in each case in conformity with generally accepted accounting
principles, consistently applied. The Medaphis Disclosure Letter sets forth a
true and complete list of all loss contingencies (within the meaning of
Statement of Financial Accounting Standards No. 5) of Medaphis existing as of
December 31, 1995, exceeding $250,000 in the case of any single loss contingency
or $1,000,000 in the case of all loss contingencies.
Section 4.8. Absence of Certain Changes. (a) Since December 31, 1995,
there has not been (i) any change in the assets, liabilities, results of
operations, financial condition or business of Medaphis and its subsidiaries
taken as a whole that has resulted in a Medaphis Material Adverse Effect, (ii)
any damage, destruction, loss or casualty to property or assets of Medaphis or
any of its subsidiaries, whether or not covered by insurance, which property or
assets are material to the operations or business of Medaphis and its
subsidiaries taken as a whole, (iii) any declaration, setting aside or payment
of any dividend or distribution (whether in cash, stock or property) in respect
of the capital stock of Medaphis or any redemption or other acquisition by
Medaphis of any of the capital stock of Medaphis or any of its subsidiaries
(except for the acquisition of Medaphis Common Stock in payment of the purchase
price and related taxes upon the exercise of stock options) or any split,
combination or reclassification of shares of capital stock declared or made by
Medaphis, or (iv) any agreement to do any of the foregoing.
(b) Since December 31, 1995, there have not been (i) any extraordinary
losses suffered which, in the aggregate, have had a Medaphis Material Adverse
Effect, (ii) any material assets mortgaged, pledged or made subject to any lien,
charge or other encumbrance, (iii) any material liability or obligation
(absolute, accrued or contingent) incurred or any material bad debt, contingency
or other reserve increase suffered, except, in each such case, in the ordinary
course of business and consistent with past practice, (iv) any material claims,
liabilities or obligations (absolute, accrued or contingent) paid, discharged or
satisfied, other than the payment, discharge or satisfaction, in the ordinary
course of business and consistent with past practice, of claims, liabilities and
obligations reflected or reserved against in the Medaphis Financial Statements
or incurred in the ordinary course of business and consistent with past
practice, (v) any material guaranteed checks, notes or accounts receivable
written off as uncollectible, except write-offs in the ordinary course of
business and consistent with past practice, (vi) any write down (under SFAS No.
121 or otherwise) of the value of any material asset or investment on Medaphis's
books or records, except for depreciation and amortization taken in the ordinary
course of business and consistent with past practice, (vii) any cancellation of
any material debts or waiver of any material claims or rights of substantial
value, or sale, transfer or other disposition of any properties or assets (real,
personal or mixed, tangible or intangible) of substantial value, except, in each
such case, in transactions in the ordinary course of business and consistent
with past practice and which in any event do not exceed $250,000 in the
aggregate, (viii) any single capital expenditure or commitment in excess of
$1,000,000 for additions to property or equipment, or aggregate capital
expenditures and commitments in excess of $30,000,000 (on a consolidated basis)
for additions to property or equipment, (ix) any transactions entered into other
than in the ordinary course of business, (x) any agreements to do any of the
foregoing, or (xi) any other events, developments or conditions of any character
that have had or are reasonably likely to have a Medaphis Material Adverse
Effect other than events affecting businesses similar to Medaphis and its
subsidiaries generally.
A-24
104
Section 4.9. Legal Proceedings. There are no suits, actions, claims,
proceedings or investigations pending, or, to the knowledge of the Medaphis
Executives, threatened against, relating to or involving Medaphis or any of its
subsidiaries (or any of their officers or directors) before any court,
arbitrator or administrative or governmental body, which, if finally determined
adversely, are reasonably likely, individually or in the aggregate, to have a
Medaphis Material Adverse Effect. All pending suits, actions, claims,
proceedings or investigations relating to or involving Medaphis or any of its
subsidiaries (or any of their officers or directors) before any court,
arbitrator or administrative or governmental body are adequately provided for in
the Medaphis Balance Sheet if and to the extent such a provision is required by
generally accepted accounting principles. Neither Medaphis nor any of its
subsidiaries is subject to any judgment, decree, injunction, rule or order of
any court, and, to the knowledge of the Medaphis Executives, neither Medaphis
nor any of its subsidiaries is subject to any governmental restriction
applicable to Medaphis or any such subsidiary, which is reasonably likely (i) to
have a Medaphis Material Adverse Effect or (ii) to cause a material limitation
on Medaphis's and its subsidiaries' ability to operate the business of Medaphis
and its subsidiaries after the Closing.
Section 4.10. Compliance with Law. Each of Medaphis and its subsidiaries
has all material authorizations, approvals, licenses and orders of and from all
governmental and regulatory officers and bodies necessary to carry on its
business as it is currently being conducted, to own or hold under lease the
properties and assets it owns or holds under lease and to perform all of its
obligations under the agreements to which it is a party, and each of Medaphis
and its subsidiaries has been and is in compliance with all applicable laws,
regulations and administrative orders of any country, state, or municipality or
any subdivision of any thereof to which its business or its employment of labor
or its use or occupancy of properties or any part thereof are subject, the
failure to obtain or the violation of which would have a Medaphis Material
Adverse Effect.
Section 4.11. Proxy Statement and Registration Statement. The information
with respect to Medaphis and its subsidiaries and each of their respective
officers, directors and affiliates in the Proxy Statement or in the Registration
Statement, will not, in the case of the Proxy Statement, on the date the Proxy
Statement is first mailed to stockholders of HDS or on the date of the
stockholders' meeting referred to in Section 5.5, or, in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, as such Proxy Statement or Registration Statement is then amended or
supplemented, contain any untrue statement of a material fact, or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Registration Statement and the Proxy Statement will
comply as to form with the applicable provisions of the Securities Act and the
Exchange Act.
Section 4.12. Tax Returns; Taxes. Each of Medaphis and its subsidiaries
has duly filed all federal, state, local and foreign tax returns required to be
filed by it and has duly paid or made adequate provision for the payment of all
taxes which are due and payable pursuant to such returns or pursuant to any
assessment which is due and payable with respect to taxes in such jurisdictions,
whether or not in connection with such returns. The liability for taxes
reflected on the Medaphis Balance Sheet is sufficient for the payment of all
unpaid taxes, whether or not disputed, that are accrued or applicable for the
period ended December 31, 1995 and for all years and periods ended prior to
December 31, 1995 or are attributable to differences in the time for recognition
of income, deductions and other items for financial reporting and tax purposes.
All deficiencies asserted as a result of any examinations by the Internal
Revenue Service or any other taxing authority have been paid and fully settled.
There are no pending claims asserted for taxes of Medaphis or any of its
subsidiaries or outstanding agreements or waivers extending the statutory period
of limitation applicable to any tax return of Medaphis or any of its
subsidiaries for any period. Medaphis and each of its subsidiaries have made all
estimated income tax deposits and all other required tax payments or deposits
and have complied for all prior periods in all material respects with the tax
withholding provisions of all applicable federal, state, local and other laws.
Section 4.13. Billing and Collection Practices. (a) The current practices
and procedures of Medaphis and its subsidiaries with respect to (i) billing on
behalf of clients, (ii) receiving and processing Medicare and Medicaid payments
due to clients, (iii) holding and transfer of such payments and (iv) method of
determining and collecting the fees received by Medaphis and its subsidiaries
for services provided by
A-25
105
providers and physicians participating in the Medicare or Medicaid programs are
not in violation of the restriction on assignment as set forth in 42 U.S.C.
sec. 1395g(c), 42 U.S.C. sec. 1395u(b)(6) and 42 U.S.C. sec. 1396(a)(32), and
the regulations promulgated thereunder, or similar provisions of any state
Medicaid program, except for such violations which in the aggregate would not
have a Medaphis Material Adverse Effect.
(b) Neither Medaphis nor any of its subsidiaries is engaged in any
activity, whether alone or in concert with one of its clients, which would
constitute a violation of any federal laws or the law of any state (including
but not limited to (i) federal antifraud and abuse or similar laws pertaining to
the Medicare, Medicaid, or any other federal health or insurance program; (ii)
state law pertaining to Medicaid or any other state health or insurance program;
(iii) state or federal laws pertaining to billings to insurance companies,
health maintenance organizations, and other managed care plans or to insurance
fraud; and (iv) Federal and state laws relating to collection agencies and the
performance of collection services) prohibiting fraudulent or abusive or
unlawful practices connected in any way with the provision of health care
services, the billing for such services provided to a beneficiary of any state,
federal or private health or insurance program or credit collection services,
except for such violations which in the aggregate would not have a Medaphis
Material Adverse Effect. Without limiting the generality of the foregoing,
neither Medaphis nor any subsidiary has, directly or indirectly, paid, offered
to pay or agreed to pay, or solicited or received, any fee, commission, sum of
money, property or other remuneration to or from any person which the Medaphis
Executives know or have reason to believe to have been illegal under (i) 42
U.S.C. sec. 1320a-7b(b) or (ii) any similar state law.
(c) Medaphis and its subsidiaries are in compliance in all material
respects with the applicable trust accounting statutes, rules and regulations of
the various states and each has sufficient funds deposited in such trust
accounts to cover all trust liabilities to clients of Medaphis and its
subsidiaries.
Section 4.14. Medaphis Employee Benefit Plans. Except as to matters of
which HDS is aware,
(a) Definition of Benefit Plans. For purposes of this Section 4.14,
the term "Medaphis Benefit Plan" means any plan, program, arrangement,
fund, policy, practice or contract which, through which or under which
Medaphis or a Medaphis ERISA Affiliate currently provides, or with respect
to any multi-employer plans (as defined in ERISA Section 4001(a)(3)) and
pension benefit plans (as defined in ERISA Section 3(3)) subject to Code
Section 412, at any time provided, benefits or compensation to or on behalf
of employees or former employees of Medaphis or a Medaphis ERISA Affiliate,
whether formal or informal, whether or not written, including but not
limited to the following:
(1) Arrangements -- any bonus, incentive compensation, stock
option, deferred compensation, commission, severance pay, golden
parachute or other compensation plan or rabbi trust;
(2) ERISA Plans -- any "employee benefit plan" (as defined in
Section 3(3) of ERISA, including, but not limited to, any multi-employer
plan (as defined in Section 3(37) and Section 4001(a)(3) of ERISA),
defined benefit plan, profit sharing plan, money purchase pension plan,
401(k) plan, savings or thrift plan, stock bonus plan, employee stock
ownership plan, or any plan, fund, program, arrangement or practice
providing for medical (including post-retirement medical),
hospitalization, accident, sickness, disability, or life insurance
benefits; and
(3) Other Employee Fringe Benefits -- any stock purchase, vacation,
scholarship, day care, prepaid legal services, dependent care or other
fringe benefit plans, programs, arrangements, contracts or practices.
(b) Medaphis ERISA Affiliate. For purposes of this Section 4.14, the
term "Medaphis ERISA Affiliate" means each trade or business (whether or
not incorporated) which together with Medaphis is treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code.
(c) Identification of Benefit Plans. Except for Medaphis Benefit
Plans which have been terminated and with respect to which neither Medaphis
nor any Medaphis ERISA Affiliate has any financial, administrative or other
liability, obligation or responsibility, Medaphis does not maintain, nor
has at any
A-26
106
time established or maintained, nor has at any time been obligated to make,
or otherwise made, contributions to or under or otherwise participated in
any Medaphis Benefit Plan.
(d) MEPPA Liability/Post-Retirement Medical Benefits. Neither
Medaphis nor any Medaphis ERISA Affiliate maintains, nor has at any time
established or maintained, nor has at any time been obligated to make, or
made, contributions to or under any multi-employer plan. Medaphis does not
maintain, nor has at any time established or maintained, nor has at any
time been obligated to make, or made, contributions to or under (i) any
plan which provides post-retirement medical or health benefits with respect
to employees of Medaphis; (ii) any organization described in Sections
501(c)(9) or 501(c)(20) of the Code; (iii) any defined benefit pension plan
or money purchase pension plan subject to Title IV of ERISA; or (iv) any
plan which provides retirement benefits in excess of the limitations in
Sections 401(a)(17), 401(k), 401(m), 402(g) or 415 of the Code. There is no
lien upon any property of Medaphis or any Medaphis ERISA Affiliate
outstanding pursuant to Section 412(n) of the Code in favor of any Medaphis
Benefit Plan. No assets of Medaphis or any Medaphis ERISA Affiliate have
been provided as security for any Medaphis Benefit Plan pursuant to Section
401(a)(29) of the Code.
(e) Qualified Status. Each Medaphis Benefit Plan that is funded
through a trust or insurance contract has at all times satisfied in all
material respects, by its terms and in its operation, all applicable
requirements for an exemption from federal income taxation under Section
501(a) of the Code. Except for the plans identified as Qualified Plans in
the Medaphis Disclosure Letter (the "Medaphis Qualified Plans"), no
Medaphis Benefit Plan meets or was intended to meet the requirements of
Section 401(a) of the Code. Any determination letter issued by the IRS to
the effect that any of the Medaphis Qualified Plans qualifies under Section
401(a) of the Code and that the related trust is exempt from taxation under
Section 501(a) of the Code remains in effect and has not been revoked. Each
of the Medaphis Qualified Plans currently complies in form in all material
respects with the requirements under Section 401(a) of the Code, other than
changes required by statutes, regulations and rulings for which amendments
are not yet required. Each of the Medaphis Qualified Plans has been
administered according to its terms (except for those terms which are
inconsistent with the changes in operations of a Medaphis Qualified Plan
required by statutes, regulations and rulings for which changes in plan
terms are not yet required to be made, in which case such Medaphis
Qualified Plan has been operated in accordance with the provisions of those
statutes, regulations and rulings) and in accordance with the requirements
of Section 401(a) of the Code. Each of the Medaphis Qualified Plans has
been tested for compliance with, and in all material respects has satisfied
the requirements of, Sections 401(k)(3) and 401(m)(2) of the Code for each
plan year ending prior to the Effective Time.
(f) Legal Actions. There are no actions, audits, suits or claims
known to Medaphis which are pending or, to the knowledge of the Medaphis
Executives, threatened against any Medaphis Benefit Plan, any fiduciary of
any Medaphis Benefit Plans with respect to the Medaphis Benefit Plans or
against the assets of any of the Medaphis Benefit Plans, except claims for
benefits made in the ordinary course of the operation of such plans.
(g) Funding. Medaphis and each Medaphis ERISA Affiliate has made full
and timely payment of all amounts required to be contributed under the
terms of each Medaphis Benefit Plan and applicable law or required to be
paid as expenses under such Medaphis Benefit Plan, and no excise taxes in
an aggregate amount in excess of $50,000 are assessable as a result of any
nondeductible or other contributions made or not made to a Medaphis Benefit
Plan.
(h) Liabilities. Neither Medaphis nor any Medaphis ERISA Affiliate is
subject to any material liability, tax or penalty whatsoever to any person
whomsoever as a result of Medaphis' or any Medaphis ERISA Affiliate's
engaging in a prohibited transaction under ERISA or the Code, and Medaphis
has no knowledge of any circumstances which reasonably might result in any
such material liability, tax or penalty as a result of a breach of
fiduciary duty under ERISA.
Section 4.15. Labor Relations. Each of Medaphis and its subsidiaries is in
compliance in all material respects with all federal and state laws respecting
employment and employment practices, terms and conditions of employment, wages
and hours, and is not engaged in any unfair labor or unlawful employment
A-27
107
practice. Except as would not result in a Medaphis Material Adverse Effect,
there is no unlawful employment practice discrimination charge involving
Medaphis or any of its subsidiaries pending before the EEOC, EEOC recognized
state "referral agency" or any other governmental agency. There is no unfair
labor practice charge or complaint against Medaphis or any of its subsidiaries
pending before the NLRB. There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the knowledge of the Medaphis Executives, threatened
against or involving or affecting Medaphis or any of its subsidiaries and no
NLRB representation question exists respecting any of their respective
employees. To the knowledge of the Medaphis Executives, no grievance or
arbitration proceeding is pending against Medaphis or any of its subsidiaries
and no written claim for such a proceeding exists. There is no collective
bargaining agreement that is binding on Medaphis or any of its subsidiaries.
Section 4.16. Medaphis Computer Software and Hardware. (a) The software
owned by Medaphis and its subsidiaries for license to or use in connection with
the business of Medaphis and its subsidiaries (the "Medaphis Proprietary
Software") consists of: (i) source and object code embodied in magnetic media;
and (ii) all development and procedural tools necessary to maintain the Medaphis
Proprietary Software, including licenses to use compilers, assemblers, libraries
and other aids. To the knowledge of the Medaphis Executives, Medaphis and its
subsidiaries employ individuals who are familiar with the business of Medaphis
and its subsidiaries and who are qualified to maintain the Medaphis Proprietary
Software and the related computer hardware used by Medaphis and its subsidiaries
in their operations (the "Medaphis Hardware").
(b) Medaphis and its subsidiaries have all right, title and interest in and
to all patent, trade secret and copyright rights in the Medaphis Proprietary
Software. Medaphis and its subsidiaries have developed the Medaphis Proprietary
Software entirely through their own efforts for their own accounts and the
Medaphis Proprietary Software is free and clear of all liens, claims and
encumbrances, except for liens, claims and encumbrances involving an aggregate
of not more than $100,000. The use of the software (other than the Medaphis
Proprietary Software) used by Medaphis and its subsidiaries in connection with
the business of Medaphis and its subsidiaries (the "Medaphis Licensed Software"
and together with the Medaphis Proprietary Software, the "Medaphis Software")
and the use and distribution of the Medaphis Proprietary Software does not
breach any terms of any contract between Medaphis or any of its subsidiaries and
any third party, except for breaches of such contracts involving not more than
$100,000 in the aggregate. To the knowledge of the Medaphis Executives, Medaphis
and its subsidiaries has been granted under the license agreements relating to
the Medaphis Licensed Software (the "Medaphis License Agreements") valid and
subsisting license rights with respect to all software comprising the Medaphis
Licensed Software. Medaphis is in compliance in all respects with each of the
material terms and conditions of each of the Medaphis License Agreements. In the
case of any commercially available "shrink-wrap" software programs (such as
Lotus 1-2-3), Medaphis and its subsidiaries have not made and are not using any
unauthorized copies of any such software programs and, to the knowledge of the
Medaphis Executives, none of the employees, agents or representatives of
Medaphis or any of its subsidiaries have made or are using any such unauthorized
copies.
(c) Except for infringements that involve in the aggregate not more than
$500,000 or that do not or would not have a Medaphis Material Adverse Effect,
the Medaphis Proprietary Software and, to the knowledge of the Medaphis
Executives, the Medaphis Licensed Software does not infringe any United States
patent, copyright, or trade secret or any other intellectual property right of
any third party. The source code for the Medaphis Proprietary Software has been
maintained in confidence.
(d) Neither Medaphis nor any of its subsidiaries has granted rights in the
Medaphis Software to any third party.
(e) To the knowledge of the Medaphis Executives, the Medaphis Software and
the Medaphis Hardware are adequate in all material respects with the other
assets of Medaphis to run the business of Medaphis and its subsidiaries in
substantially the same manner as such business has operated since December 31,
1994. The Medaphis Disclosure Letter contains a summary description of any
problems experienced by Medaphis and its subsidiaries in the past twelve months
with respect to the Medaphis Software or Medaphis Hardware and the provision of
services to Medaphis's and its subsidiaries' clients which have arisen outside
the ordinary course
A-28
108
of business and resulted, or reasonably could be expected to result, in any
disruption of the provision of services by Medaphis and its subsidiaries to such
clients.
Section 4.17. Title to Properties and Related Matters. Each of Medaphis
and its subsidiaries has good and valid title to or valid leasehold interest in
its properties reflected in the Medaphis Balance Sheet or acquired after the
date thereof (other than property sold or otherwise disposed of in the ordinary
course of business), and all of such properties are held free and clear of all
title defects, liens, encumbrances and restrictions, except, with respect to all
such properties, (a) mortgages and liens securing debt reflected as liabilities
on the Medaphis Balance Sheet and (b)(i) liens for current taxes and assessments
not in default, (ii) mechanics', carriers', workmen's, materialmen's,
repairmen's, statutory or common law liens either not delinquent or being
contested in good faith, and (iii) liens, mortgages, encumbrances, covenants,
rights of way, building or use restrictions, easements, exceptions, variances,
reservations and other similar matters or limitations of any kind, if any, which
either individually or in the aggregate do not have a material adverse effect on
the use of the property affected by Medaphis or its subsidiaries, as applicable.
Notwithstanding the preceding sentence, Medaphis and its subsidiaries make no
representation or warranty in this Section 4.17 or otherwise regarding the
validity of lessor's title to any such properties in which Medaphis or its
subsidiaries have only a leasehold interest as lessee.
Section 4.18. Environmental Matters. There has been no release of a
hazardous substance, as that term is defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. sec. 9601(14), by
Medaphis or any of its subsidiaries into the environment at any property owned,
leased or used by Medaphis or any of its subsidiaries (the "Medaphis Premises")
including, without limitation, any release in the soil or ground water
underlying such Medaphis Premises, and, to the actual knowledge of the Medaphis
Executives, there has been no such release by any other party at any of the
Medaphis Premises. Neither Medaphis nor any of its subsidiaries has received
notice of any violation of any environmental statute or regulation, nor has any
such corporation been advised of any claim or liability pursuant to any
environmental statute or regulation brought by any domestic or foreign
governmental agency or private party, except such violations, claims and
liabilities which in the aggregate would not have a Medaphis Material Adverse
Effect.
Section 4.19. Brokers, Finders and Investment Bankers. Neither Medaphis
nor any subsidiary of Medaphis, or any of their respective officers, directors
or employees, has employed any broker, finder or investment banker or incurred
any liability for any investment banking fees, financial advisory fees,
brokerage fees or finders' fees in connection with the transactions contemplated
by this Agreement.
Section 4.20. Disclosure. No representation, warranty or covenant made by
Medaphis in this Agreement, the Medaphis Disclosure Letter or the Exhibits
hereto contains any untrue statement of a material fact or omits to state a
material fact required to be stated herein or therein or necessary to make the
statements contained herein or therein not misleading.
ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS
Section 5.1. Conduct of Business by HDS. From the date of this Agreement
to the Effective Time or the termination of this Agreement, HDS will and will
cause Subsidiary to, except as required in connection with the Merger and the
other transactions contemplated by this Agreement and except as otherwise
disclosed in the HDS Disclosure Letter or consented to in writing by Medaphis:
(a) Carry on its businesses in the ordinary course in substantially
the same manner as previously conducted and not engage in any new line of
business or enter into any agreement, transaction or activity or make any
commitment except those in the ordinary course of business and not
otherwise prohibited under this Section 5.1, subject to the provisions of
the proviso to the first sentence of Section 5.8;
(b) Neither change nor amend its Certificate of Incorporation or
Bylaws;
(c) Not issue, sell or grant options, warrants or rights to purchase
or subscribe to, or enter into any arrangement or contract with respect to
the issuance or sale of any of the capital stock of HDS or
A-29
109
Subsidiary or rights or obligations convertible into or exchangeable for
any shares of the capital stock of HDS or Subsidiary and not make any
changes (by split-up, stock dividend, combination, reorganization or
otherwise) in the capital structure of HDS or Subsidiary; except that HDS
shall be permitted to issue shares of HDS Common Stock upon exercise of
Options outstanding on the date of this Agreement that are exercised in
accordance with their terms as the same exist on the date of this
Agreement;
(d) Not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
HDS and not redeem, purchase or otherwise acquire any shares of the capital
stock or other securities of HDS or rights or obligations convertible into
or exchangeable for any shares of the capital stock or other securities of
HDS or obligations convertible into such, or any options, warrants or other
rights to purchase or subscribe to any of the foregoing;
(e) Not acquire or enter into an agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity;
(f) Use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of HDS and Subsidiary, to
keep the officers and employees of HDS and Subsidiary available to Medaphis
and to preserve the relationships of HDS and Subsidiary with customers,
suppliers and others having business relations with HDS or Subsidiary;
(g) Not (i) create, incur or assume any short-term debt for borrowed
money, except in the ordinary course of business under existing lines of
credit, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person, except in the ordinary course of business
and consistent with past practice, (iii) make any loans or advances to any
other person, except in the ordinary course of business and consistent with
past practice, (iv) make any capital contributions to, or investments in,
any person, except in the ordinary course of business and consistent with
past practices with respect to investments, or (v) make any capital
expenditure that would cause all capital expenditures since December 31,
1995, to exceed $500,000;
(h) Not enter into, modify or extend in any manner the terms of any
employment, severance or similar agreements with officers and directors or
grant any increase in the compensation of officers, directors or employees,
whether now or in the future payable, including any increase pursuant to
any option, bonus, stock purchase, pension, profit-sharing, deferred
compensation, retirement or other plan, arrangement, contract or
commitment, other than raises or bonuses granted in the ordinary course of
business or pursuant to written agreements in existence on the date of this
Agreement;
(i) Perform in all material respects all of its obligations under all
HDS Client Contracts (except those being contested in good faith), and not
amend any existing contract of HDS in a way that would result in the loss
to HDS of a material benefit thereunder;
(j) Use its reasonable efforts to maintain in full force and effect
and in the same amounts policies of insurance comparable in amount and
scope of coverage to that now maintained by HDS;
(k) Use its reasonable efforts to continue to collect its accounts
receivable and pay its accounts payable in the ordinary course of business
and consistent with past practices;
(l) Prepare and file all federal, state, local and foreign returns for
taxes and other tax reports, filings and amendments thereto required to be
filed by it, and allow Medaphis, at its request, to review all such
returns, reports, filings and amendments at HDS's offices prior to the
filing thereof, which review shall not interfere with the timely filing of
such returns;
(m) Obtain on or prior to the Closing Date, Noncompetition and
Nonsolicitation Agreements (in the form of Exhibit 5.1(m)(A)) with the
stockholders specified in the HDS Disclosure Letter (the "Specified
Stockholders") and Employment Agreements (in the form of Exhibit 5.1(m)(B))
with the employees of HDS specified in the HDS Disclosure Letter (the
"Specified Employees"); and
(n) Not take any action the effect of which would be to cause the
Merger to be treated as a taxable transaction.
A-30
110
In connection with the continued operation of the business of HDS and
Subsidiary between the date of this Agreement and the Effective Time, HDS shall
confer in good faith on a regular and frequent basis with one or more
representatives of Medaphis designated in writing to report operational matters
of materiality and the general status of ongoing operations. HDS acknowledges
that Medaphis does not and will not waive any rights it may have under this
Agreement as a result of such consultations.
Section 5.2. Conduct of Business by Medaphis. From the date of this
Agreement to the Effective Time, Medaphis will, and will cause each of its
subsidiaries to, except as required in connection with the Merger and the other
transactions contemplated by this Agreement and except as otherwise disclosed in
the Medaphis Disclosure Letter or consented to in writing by HDS:
(a) Carry on its businesses in the ordinary course in substantially
the same manner as previously conducted;
(b) Neither change nor amend its Articles or Certificate of
Incorporation or Bylaws;
(c) Other than pursuant to the exercise of employee stock options
outstanding on the date of this Agreement, not issue, sell or grant
options, warrants or rights to purchase or subscribe to, or enter into any
arrangement or contract with respect to the issuance or sale of any of the
capital stock of Medaphis or any of its subsidiaries or rights or
obligations convertible into or exchangeable for any shares of the capital
stock of Medaphis or any of its subsidiaries and not alter the terms of any
presently outstanding options or make any changes (by split-up,
combination, reorganization or otherwise) in the capital structure of
Medaphis or any of its subsidiaries; provided, however, that Medaphis shall
have the right to issue capital stock or securities convertible into
capital stock in transactions approved by the Board of Directors of
Medaphis;
(d) Not take any action the effect of which would be to cause the
Merger to be treated as a taxable transaction; and
(e) Use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of Medaphis and to preserve
the relationships of Medaphis with customers, suppliers and others having
business relations with Medaphis.
Section 5.3. Inspection and Access to Information. (a) Between the date of
this Agreement and the Effective Time, each party to this Agreement will provide
each other party and its accountants, counsel and other authorized
representatives full access, during reasonable business hours and under
reasonable circumstances, to any and all of its premises, properties, contracts,
commitments, books, records and other information (including tax returns filed
and those in preparation) and will cause their respective officers to furnish to
the other party and its authorized representatives any and all financial,
technical and operating data and other information pertaining to its business,
as each other party shall from time to time reasonably request. HDS further
acknowledges and agrees that, during the period beginning on the date of this
Agreement and ending on June 20, 1996, Medaphis will be continuing its
financial, legal and business due diligence review of HDS and Subsidiary as
provided pursuant to this Section 5.3(a) (the "Medaphis Due Diligence Review").
In the event that any HDS Detrimental Information (as defined in Section 6.2(l))
shall become known to the Medaphis Executives during the Medaphis Due Diligence
Review, Medaphis agrees to provide HDS with a brief written description of such
information within five business days of the date of the obtaining of such
knowledge, but in any event, Medaphis will notify HDS of such information and
the failure of the condition set forth in Section 6.2(l) no later than the close
of business on June 20, 1996.
(b) All non-public information obtained by Medaphis or HDS or any of their
representatives pursuant to this Agreement or in connection with the matters
contemplated by this Agreement concerning the business, operations or affairs of
the other will be kept confidential and will not be used for any purpose other
than the consummation of the transactions contemplated by this Agreement, or be
disclosed to any other person or entity, except for disclosure to its employees,
agents and representatives who have a need to know the same, who have been
advised of the confidential nature of such information and who agree to abide by
the terms of this Section 5.3(b) and except for such disclosure as may be
required by applicable law, court order or
A-31
111
governmental agency request. If this Agreement is terminated, any non-public
information furnished by any party to any other party to this Agreement will be
promptly returned.
Section 5.4. Registration Statement. (a) Medaphis shall prepare and file
with the Commission as soon as is reasonably practicable the Registration
Statement and shall use all reasonable efforts to have the Registration
Statement declared effective by the Commission as promptly as practicable.
Medaphis also shall take any action required to be taken under state blue sky or
securities laws in connection with the issuance of the Medaphis Common Stock
pursuant to the Merger. Medaphis and HDS will furnish each other with all
information concerning themselves, their subsidiaries, directors, officers and
stockholders or shareholders and such other matters as may be necessary or
advisable for the Registration Statement, the Proxy Statement, filings under the
Blue Sky laws, and any other statement or application made by or on behalf of
Medaphis or HDS to any governmental body in connection with the Merger and the
other transactions contemplated by this Agreement.
(b) Medaphis will indemnify and hold harmless each of HDS's directors,
officers and other persons, if any, who control HDS (within the meaning of the
Securities Act) from and against any losses, claims, damages, liabilities or
judgments, joint or several, to which they or any of them may become subject,
insofar as such losses, claims, damages, liabilities, or judgments (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Proxy Statement or
Registration Statement, or in any amendment or supplement thereto, or in any
state application for qualification, permit, exemption or registration, or in
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each such person for any legal or other expenses reasonably
incurred by such person in connection with investigating or defending any such
action or claim; provided, however, that Medaphis shall not be liable, in any
such case, to the extent that any such loss, claim, damage, liability, or
judgment (or action in respect thereof) arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in the Proxy Statement or Registration Statement, or in any such amendment
or supplement thereto, or in any such state application, or in any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to Medaphis by or on behalf of HDS, or any officer, director or
affiliate of HDS, for use therein.
Section 5.5. HDS Stockholder Matters. HDS shall call a meeting of its
stockholders to be held as soon as practicable after the date of this Agreement
for the purpose of voting upon matters relating to this Agreement and the
transactions contemplated by this Agreement. HDS will use its reasonable efforts
to hold its stockholders' meeting as promptly as practicable and will, through
its Board of Directors, recommend (subject to the provisions of the proviso to
the first sentence of Section 5.8) to its stockholders approval of this
Agreement and the transactions contemplated by this Agreement.
Section 5.6. The Nasdaq National Market Additional Shares
Notification. Medaphis will file an additional shares notification with The
Nasdaq National Market to approve for listing, subject to official notice of its
issuance, the shares of Medaphis Common Stock to be issued in connection with
the Merger and upon the exercise of the Non-Qualified Options (and, to the
extent Non-Qualified Options were not issued in substitution therefor, the
Options). Medaphis shall exercise reasonable good faith efforts to cause the
shares of Medaphis Common Stock to be issued in the Merger to be approved for
listing on The Nasdaq National Market, subject to official notice of issuance,
prior to the Effective Time.
Section 5.7. HDS Affiliates. (a) HDS shall deliver to Medaphis a letter
identifying all persons who are, at the time the Merger is submitted to a vote
to the shareholders of HDS, "affiliates" of HDS for purposes of Rule 145 under
the Securities Act. HDS shall cause each person who is identified as an
"affiliate" in such letter to deliver to Medaphis on or prior to the Effective
Time a written statement, in form satisfactory to Medaphis and HDS, that such
person will not offer to sell, transfer or otherwise dispose of any of the
shares of Medaphis Common Stock issued to such person pursuant to the Merger,
except (i) in accordance with the applicable provisions of the Securities Act
and the rules and regulations under the Securities Act and (ii) until such time
as financial results covering at least thirty days of combined operations of
Medaphis and HDS have been published within the meaning of Section 201.01 of the
Commission's Codification of Financial Reporting
A-32
112
Policies; except that each affiliate shall be permitted to make sales to the
extent permitted by applicable accounting rules and regulations promulgated by
the Commission. Medaphis shall be entitled to place legends on any certificates
of Medaphis Common Stock issued to such affiliates to restrict transfer of such
shares as set forth above.
(b) Medaphis shall take such action with respect to affiliates of Medaphis
as is reasonably appropriate under applicable accounting rules and regulations
promulgated by the Commission for the Merger to qualify as a "pooling of
interests" for accounting purposes.
Section 5.8. No Solicitation; Acquisition Proposals. From the date of this
Agreement until the Effective Time or until this Agreement is terminated as
provided in Article 8, HDS will not directly or indirectly (i) solicit or
initiate (including by way of furnishing any information) discussions with or
(ii) enter into negotiations or agreements with, or furnish any information to,
any corporation, partnership, person or other entity or group (other than
Medaphis, an affiliate of Medaphis or their authorized representatives pursuant
to Section 5.3) concerning any proposal for a merger, sale of substantial
assets, sale of shares of stock or securities or other takeover or business
combination transaction (an "Acquisition Transaction") involving HDS; and HDS
will instruct its officers, directors, advisors and other financial and legal
representatives and consultants not to take any action contrary to the foregoing
provisions of this sentence; provided, however, that the actions prohibited by
the foregoing clauses (i) and (ii) shall be subject to any action taken by the
Board of Directors of HDS in the exercise of its good faith judgment as to its
fiduciary duties to the stockholders of HDS, which judgment is based upon the
advice of independent counsel that a failure of the Board of Directors to take
such action would be likely to constitute a breach of its fiduciary duties to
the stockholders of HDS. HDS will notify Medaphis promptly in writing if HDS
becomes aware that any inquiries or proposals are received by, any information
is requested from, or any negotiations or discussions are sought to be initiated
with HDS with respect to an Acquisition Transaction and will immediately after
receipt provide to Medaphis a copy of any letter, proposal or other document in
which any proposal for an Acquisition Transaction is made or expressed. HDS will
immediately cease any existing activities, discussions or negotiations with any
third parties which may have been conducted on or prior to the date hereof with
respect to an Acquisition Transaction and shall direct and use reasonable
efforts to cause its officers, advisors and representatives not to engage in any
such activities, discussions or negotiations.
Section 5.9. Reasonable Efforts; Further Assurances; Cooperation. Subject
to the other provisions of this Agreement, the parties hereto shall each use
their reasonable, good faith efforts to perform their obligations herein and to
take, or cause to be taken or do, or cause to be done, all things necessary,
proper or advisable under applicable law to obtain all regulatory approvals and
satisfy all conditions to the obligations of the parties under this Agreement
and to cause the Merger and the other transactions contemplated by this
Agreement to be effected on or prior to June 30, 1996 in accordance with the
terms of this Agreement and shall cooperate fully with each other and their
respective officers, directors, employees, agents, counsel, accountants and
other designees in connection with any steps required to be taken as a part of
their respective obligations under this Agreement, including without limitation:
(a) Subject to the provisions of Section 5.9(e), HDS and Medaphis
shall promptly make their respective filings and submissions and shall
take, or cause to be taken, all actions and do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations
to obtain any required approval of any other federal, state or local
governmental agency or regulatory body with jurisdiction over the
transactions contemplated by this Agreement.
(b) Subject to the provisions of Section 5.9(e), if any claim, action,
suit, investigation or other proceeding by any governmental body or other
person is commenced which questions the validity or legality of the Merger
or any of the other transactions contemplated by this Agreement or seeks
damages in connection with this Agreement, the parties agree to cooperate
and use all reasonable efforts to defend against such claim, action, suit,
investigation or other proceeding and, if an injunction or other order is
issued in any such action, suit or other proceeding, to use all reasonable
efforts to have such injunction or other order lifted, and to cooperate
reasonably regarding any other impediment to the consummation of the
transactions contemplated by this Agreement.
A-33
113
(c) Each party shall give prompt written notice to the other of (i)
the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of HDS or
Medaphis, as the case may be, contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date of this
Agreement to the Effective Time or that will or may result in the failure
to satisfy any of the conditions specified in Article 6 and (ii) any
failure of HDS or Medaphis, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement.
(d) Without the prior written consent of Medaphis, HDS will not
terminate any employee if such termination would result in the payment of
any amounts pursuant to "change in control" provisions of any employment
agreement or arrangement.
(e) With respect to filings under the HSR Act, Medaphis will
coordinate on behalf of all parties and, except as may be required by law,
shall determine in its sole judgment and discretion the timing of and,
except with respect to matters relating specifically to HDS, the substance
of all communications and filings made by the parties with any governmental
antitrust authority regarding the transactions contemplated by this
Agreement, including without limitation:
(i) the timing of the HSR filings by any party;
(ii) the extent to which it may be necessary to resolve or settle
any concerns on the part of any governmental antitrust authority
regarding the legality under any antitrust law of the Merger by entering
into negotiations, providing information, making proposals, entering
into and performing agreements or submitting to judicial or
administrative orders;
(iii) contesting the entry in a judicial or administrative
proceeding brought under any antitrust law by any governmental antitrust
authority or any other party of any permanent or preliminary injunction
or other order that would make consummation of the Merger unlawful or
would prevent or delay it;
(iv) if such an injunction or other order has been issued in such a
proceeding, taking any and all steps, including, without limitation,
appeal, or the posting of bond, necessary to vacate, modify or suspend
such injunction or order so as to permit the consummation of the Merger
on the schedule contemplated by this Agreement;
(v) responding to and complying with any request for additional
information by any governmental antitrust authority; and
(vi) determining any other appropriate response or initiative to
avoid or eliminate impediments under any antitrust law that may be
asserted by any governmental antitrust authority or any other party to
the consummation of the transactions contemplated by this Agreement.
Section 5.10. Public Announcements. The timing and content of all
announcements regarding any aspect of this Agreement or the Merger to the
financial community, government agencies (except as otherwise provided by
Section 5.9(e)), employees or the general public shall be mutually agreed upon
in advance (unless Medaphis or HDS is advised by counsel that any such
announcement or other disclosure not mutually agreed upon in advance is required
to be made by law or applicable rule of The Nasdaq National Market and then only
after making a reasonable attempt to comply with the provisions of this Section
5.10).
Section 5.11. Financial Statements and Commission Reports. Prior to the
Effective Time, each party to this Agreement shall deliver to the other, as soon
as available but in no event later than 45 days after the end of each fiscal
quarter, a consolidated balance sheet as of the last day of such fiscal period
and the consolidated statements of income, stockholders' equity and cash flows
of such party and its subsidiaries for the fiscal period then ended prepared in
accordance with generally accepted accounting principles with such exceptions as
are noted on such financial statements, and in the case of Medaphis, in
accordance with the requirements of Form 10-Q (or Form 10-K as the case may be)
under the Exchange Act. Prior to the Effective Time, Medaphis shall deliver to
HDS as soon as available a copy of each form, report and other document filed by
A-34
114
Medaphis with the Commission after the date of this Agreement and shall
otherwise keep HDS apprised of any material developments with respect to the
business or financial condition of Medaphis.
Section 5.12. Supplements to Disclosure Letters. From time to time prior
to the Effective Time, HDS and Medaphis will each promptly supplement or amend
the respective disclosure letters which they have delivered pursuant to this
Agreement with respect to any matter arising after the date of this Agreement
which, if existing or occurring at the date of this Agreement, would have been
required to be set forth or described in any such disclosure letter or which is
necessary to correct any information in any such disclosure letter which has
been rendered inaccurate by such matter. No supplement or amendment to any such
disclosure letter shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Sections 6.2(a) or 6.3(a).
Section 5.13. Pooling of Interests Accounting. From and after the date of
this Agreement and until the Effective Time, neither Medaphis nor HDS nor any of
their respective subsidiaries or other affiliates shall knowingly take, or
knowingly fail to take, any action (other than actions expressly contemplated by
this Agreement) that would jeopardize the treatment of Medaphis' acquisition of
HDS as a "pooling of interests" for accounting purposes. Following the Effective
Time, Medaphis shall use its reasonable, best efforts to conduct the business of
Medaphis in a manner that would not jeopardize the characterization of the
Merger as a "pooling of interests" for accounting purposes.
Section 5.14. Accountant's Review Report. HDS agrees to exercise
reasonable efforts to cause Deloitte & Touche to deliver to Medaphis prior to
the filing of the Registration Statement a limited review report covering any
unaudited financial statements of HDS included in the Registration Statement in
form and substance reasonably acceptable to Medaphis (the " Deloitte & Touche
Review Report").
Section 5.15. Special Indemnification by Medaphis. (a) Subsequent to the
Closing, Medaphis shall to the fullest extent permitted under Delaware corporate
law, indemnify and hold harmless each present and former director, officer,
employee and agent of HDS (collectively, the "Special Indemnified Parties")
against all losses, claims, damages, liabilities or judgments, joint or several,
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to any action or omission in their capacity as an officer, director, employee or
agent of HDS before the Closing, whether asserted or claimed prior to, at or
after the Closing Date, for a period of six years after the Closing Date, in
each case to the fullest extent permitted under Delaware corporate law (and
shall pay any expenses in advance of the final disposition of such action or
proceeding to each Special Indemnified Party to the fullest extent permitted
under Delaware corporate law, upon receipt from the Special Indemnified Party to
whom expenses are advanced of an undertaking to repay such advances as required
under Delaware corporate law). In the event of any such claim, action, suit,
proceeding or investigation, Medaphis, at its expense, shall have the right to
defend such claim, action, suit, proceeding or investigation, unless there is,
as determined by counsel to Medaphis, a conflict or reasonable likelihood of a
conflict such that the representation of one or more of the Special Indemnified
Parties would be impermissible under applicable standards of professional
conduct, in which case, or in the case that Medaphis elects not to defend such
claim, action, suit, proceeding or investigation, Medaphis shall pay the
reasonable fees and expenses of counsel selected by the Special Indemnified
Parties, which counsel shall be reasonably satisfactory to Medaphis, promptly
after statements therefor are received, and Medaphis shall cooperate in the
defense of any such matter; provided, however, that, in the event that any claim
for indemnification is asserted or made within such six-year period, all rights
to indemnification in respect of such claim shall continue until the disposition
of such claim.
(b) For a period of six years after the Closing Date, Medaphis agrees that
it will not take any action to amend the Certificate of Incorporation or Bylaws
of the Surviving Corporation to limit the indemnification available to the
Special Indemnified Parties as described by Section 5.15(a).
(c) Medaphis shall maintain, or cause the Surviving Corporation to
maintain, directors' and officers' liability insurance for acts or omissions
occurring through the Closing Date with respect to the Special Indemnified
Parties having terms at least as advantageous to the Special Indemnified Parties
as the directors' and officers' liability insurance policies of HDS currently in
place, for a period of three years after the Closing Date.
A-35
115
(d) In the event Medaphis or any of its respective successors or assigns
(i) consolidates with or merges into any other person or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person or entity, then, and in each such case, proper provision shall be
made so that the successors and assigns of Medaphis shall assume the obligations
set forth in this Section 5.15.
Section 5.16. Employees. (a) HDS 401(k) Plan. Medaphis will maintain the
HDS 401(k) Plan in effect for employees of HDS and each HDS ERISA Affiliate for
a period commencing on the Closing Date and ending September 30, 1997. Medaphis
shall allow employees of HDS and each HDS ERISA Affiliate to participate in the
HDS 401(k) Plan under the terms in effect under the HDS 401(k) Plan as of the
Closing Date except for any changes to such plan that are required by law. At
the end of such period, Medaphis shall cause employees of HDS and each HDS ERISA
Affiliate to be eligible to participate in either the Medaphis 401(k) Plan or
other similar plan providing benefits at a level at least as generous as the
Medaphis 401(k) Plan (the "Replacement Plan"). Medaphis covenants that the
service of each employee of HDS and each HDS ERISA Affiliate prior to the
Closing Date shall be credited as service under the Replacement Plan for all
purposes (including, without limitation, eligibility and vesting) for those
employees of HDS and each HDS ERISA Affiliate who were participants in any
401(k) plan maintained by HDS or an HDS ERISA Affiliate as of the Closing Date.
In addition, to the extent that the Replacement Plan provides for a level of
employer matching and other employer contributions (not including elective
contributions and other employee contributions) which are less than that
provided under the HDS 401(k) Plan prior to the Closing Date, each employee of
HDS and each HDS ERISA Affiliate as of the Closing Date shall be entitled to a
bonus as of the date of their eligibility under the Replacement Plan, such bonus
to be paid on or before December 31, 1997, equal to 75% of the difference
between (A) and (B), where (A) is the employer matching contribution made to the
HDS 401(k) Plan for the employee for the plan year ending September 30, 1997 and
(B) is the employer matching and other employer contributions that would be made
under the Replacement Plan if such employee contributed the same percentage of
his or her compensation to the Replacement Plan during a plan year.
(b) HDS Health Plan. For a period of two years after the Closing Date, in
addition to any other Medaphis group health plan offered to all Medaphis
employees (the "Successor Plans"), Medaphis shall provide all employees of HDS
and each HDS ERISA Affiliate with the opportunity to elect coverage for
themselves and their dependents under the health maintenance organization
sponsored by Blue Cross, the dental program sponsored by Prudential and the
vision care program sponsored by Blue Cross in which HDS participates as of the
Closing Date. Any Successor Plan shall meet the following requirements: (i)
service with HDS and each HDS ERISA Affiliate prior to the Closing Date shall be
credited against all eligibility and waiting period requirements under the
Successor Plans for those employees of HDS and each HDS ERISA Affiliate (and
their eligible dependents) who were eligible for coverage from HDS or an HDS
ERISA Affiliate as of the Closing Date; (ii) the Successor Plans shall not
provide for any pre-existing condition exclusion for those employees of HDS and
each HDS ERISA Affiliate (and their dependents) and all qualified beneficiaries
(as defined in Section 4980B(g)(i) of the Code) entitled to continuation
coverage under COBRA (the "Qualified Beneficiaries") who were entitled to
coverage from HDS or an HDS ERISA Affiliate as of the Closing Date; and (iii)
the deductibles in effect under the Successor Plans for the plan year in which
the Closing Date occurs shall be reduced by any amounts applied toward the
deductibles under the HDS Benefit Plans for the plan year in which the Closing
Date occurs provided such individuals submit evidence to Medaphis sufficient to
demonstrate the amount so applied against any applicable deductibles in effect
under any HDS Benefit Plan.
(c) Other Benefits. For a period of two years after the Closing Date,
Medaphis will provide all employees of HDS and each HDS ERISA Affiliate with
substantially similar benefits, other than those benefits described in Sections
5.16(a) and (b) above, as provided by HDS and each HDS ERISA Affiliate to such
employees as of the Closing Date or will pay such employees the economic
equivalent of such benefits; provided, however, that Medaphis shall not be
required to maintain any insurance benefit programs to the extent that such
programs are unavailable from an insurance carrier or are only available on
commercially unreasonable terms.
A-36
116
Section 5.17. Certain Other Benefits. After the Effective Time, Medaphis
will grant to employees of HDS and Subsidiary certain other benefits in the
manner and to the extent provided in the Medaphis Disclosure Letter.
ARTICLE 6.
CONDITIONS
Section 6.1. Conditions to Each Party's Obligations. The respective
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing of each of the following conditions:
(a) HDS Stockholder Approval. The Merger, this Agreement and the
transactions contemplated by this Agreement shall have been approved at the
meeting of HDS Stockholders duly called and held in accordance with the
DGCL by the holders of not less than eighty-five percent of the outstanding
shares of HDS Series F Stock having the right to vote on such matters and
holders of a majority of the outstanding shares of HDS Capital Stock
(voting together as a class) having the right to vote on such matters.
(b) Injunction. At the Effective Time there shall be no effective
injunction, writ or preliminary restraining order or any order of any
nature issued by a court or governmental agency of competent jurisdiction
to the effect that the Merger may not be consummated as provided in this
Agreement, no proceeding or lawsuit shall have been commenced by any
governmental or regulatory agency for the purpose of obtaining any such
injunction, writ or preliminary restraining order and no written notice
shall have been received from any such agency indicating an intent to
restrain, prevent, materially delay or restructure the transactions
contemplated by this Agreement.
(c) Tax Opinion. HDS and Medaphis shall each have received a written
opinion of King & Spalding concerning certain federal income tax
consequences of the Merger, substantially in the form attached as Exhibit
6.1(c).
(d) Registration Statement. The Registration Statement shall be
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose, or under the proxy rules of the Commission
pursuant to the Exchange Act and with respect to the transactions
contemplated by this Agreement, shall be pending before or threatened by
the Commission. All applicable state securities laws shall have been
complied with in connection with the issuance of Medaphis Common Stock to
be issued pursuant to the Merger, and no stop order suspending the
effectiveness of any qualification or registration of such Medaphis Common
Stock under such state securities laws shall have been issued and pending
or threatened by the authorities of any such state. The prospectus that
comprises part of the Registration Statement shall have been mailed or sent
to HDS Stockholders not less than twenty business days prior to the meeting
described in Section 6.1(a), as the term "business days" is defined for
purposes of Form S-4 under the Securities Act.
(e) Pooling. HDS and Medaphis shall have been advised in writing, as
of the Effective Time, by Deloitte & Touche that, in accordance with
generally accepted accounting principles, the Merger qualifies to be
treated as a "pooling of interests" for accounting purposes.
(f) The Nasdaq National Market Additional Shares Notification. The
Medaphis Common Stock to be issued pursuant to this Agreement shall have
been approved for listing on The Nasdaq National Market, subject only to
official notice of issuance by Medaphis.
(g) HSR Act. The applicable waiting periods shall have expired or
been terminated early under the HSR Act.
Section 6.2. Conditions to Obligations of Medaphis. The obligation of
Medaphis to effect the Merger shall be subject to the fulfillment at or prior to
the Closing of each of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of HDS set forth in Article 3 of this Agreement shall be true
and correct as of the date of this Agreement and as of the Effective Time
as though made on and as of the Effective Time.
A-37
117
(b) Performance of Obligations of HDS. HDS shall have performed in
all material respects all covenants and agreements required to be performed
by it under this Agreement.
(c) Opinion of HDS Counsel. Medaphis shall have received an opinion
of Seyfarth, Shaw, Fairweather & Geraldson, dated the Closing Date,
substantially in the form attached as Exhibit 6.2(c).
(d) Authorization of Merger. All corporate action necessary by HDS to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement shall have
been duly and validly taken.
(e) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filing of the Delaware Certificate of Merger and any other documents
required to be filed after the Effective Time and except where the failure
to have obtained or made any such consent, authorization, order, approval,
filing or registration would not have a material adverse effect on the
business of Medaphis and HDS following the Effective Time.
(f) Certificates. HDS shall have furnished Medaphis with a
certificate of its appropriate officers as to compliance with the
conditions set forth in Sections 6.2(a), (b) and (d).
(g) Accountant's Review Report and Letter. Medaphis shall have
received: (i) the Deloitte & Touche Review Report in accordance with
Section 5.14; and (ii) a letter from Deloitte & Touche dated the effective
date of the Registration Statement under the Securities Act, with respect
to certain financial and statistical information concerning HDS included in
the Registration Statement in form and substance customary in transactions
of the nature of the Merger.
(h) Material Contracts. Medaphis shall have received consents to
assignment of all HDS Material Contracts or written waivers of the
provisions of any HDS Material Contracts requiring the consents of third
parties as set forth in the HDS Disclosure Letter.
(i) Resignation Letters. Each of the directors of HDS shall have
tendered to Medaphis resignation letters in form and substance reasonably
acceptable to Medaphis on or prior to the Closing Date, such resignations
to be effective immediately following the Closing Date.
(j) Dissenters' Rights. Holders of less than 10% of the outstanding
HDS Capital Stock shall have exercised appraisal rights pursuant to the
DGCL.
(k) Options. At least 70% of the holders of Options shall have
executed and delivered to Medaphis an Option Assumption Agreement with
respect to each Option held by such holder on the Closing Date.
(l) Due Diligence. During the course of the Medaphis Due Diligence
Review, Medaphis shall not have discovered any HDS Detrimental Information.
The term "HDS Detrimental Information" means any information concerning the
assets, liabilities, results of operations, financial condition or business
of HDS or Subsidiary, that (i) would have an HDS Material Adverse Effect,
(ii) although it existed on the date of execution of this Agreement, it was
not previously delivered by, or on behalf of, HDS to Medaphis and was not
specifically set forth in or contemplated by the HDS Disclosure Letter as
delivered on the date of this Agreement, (iii) is specific to HDS or
Subsidiary (as opposed to general information concerning the industry or
industries in which HDS or Subsidiary operate or the economy generally) and
(iv) does not relate to prospective agreements of HDS, or any projections
or other similar forward-looking information relating to HDS.
Section 6.3. Conditions to Obligations of HDS. The obligation of HDS to
effect the Merger shall be subject to the fulfillment at or prior to the Closing
of each of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of Medaphis set forth in Article 4 of this Agreement shall be
true and correct as of the date of this Agreement and as of the Effective
Time as though made on and as of the Effective Time.
A-38
118
(b) Performance of Obligations by Medaphis. Medaphis shall have
performed in all material respects all covenants and agreements required to
be performed by it under this Agreement.
(c) Opinion of Medaphis Counsel. HDS shall have received an opinion,
dated the Closing Date, of King & Spalding, counsel to Medaphis,
substantially in the form of Exhibit 6.3(c).
(d) Authorization of Merger. All corporate action necessary by
Medaphis to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement shall have been duly and validly taken.
(e) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filing of the Delaware Certificate of Merger and any other documents
required to be filed after the Effective Time and except where the failure
to have obtained or made any such consent, authorization, order, approval,
filing or registration would not have a material adverse effect on the
business of Medaphis and HDS following the Effective Time.
(f) Certificates. Medaphis shall have furnished HDS with a
certificate of its appropriate officers as to compliance with the
conditions set forth in Sections 6.3(a), (b) and (d).
(g) Accountant's Report. HDS shall have received a letter from
Deloitte & Touche dated the effective date of the Registration Statement
under the Securities Act, with respect to certain financial and statistical
information concerning Medaphis and its subsidiaries included or
incorporated by reference in the Registration Statement, in form and
substance customary in transactions of the nature of the Merger.
(h) Fairness Opinion. The Board of Directors of HDS shall have
received a written opinion of Hambrecht & Quist, dated on or before the
Closing Date, to the effect that the Merger is fair to HDS and its
stockholders from a financial point of view.
ARTICLE 7.
CLOSING
The consummation of the transactions contemplated by this Agreement is
referred to as the "Closing." The "Closing Date" is the date on which the
Closing occurs. The Closing shall occur as soon following the HDS Stockholders'
meeting described in Section 5.5 as is reasonably practicable and in any event
within three business days of the satisfaction or waiver of the other conditions
set forth in Article 6; except that under no circumstance shall the Closing take
place on or after August 15, 1996. The Closing shall take place at the offices
of King & Spalding, 191 Peachtree Street, Atlanta, Georgia, or at such other
place as HDS and Medaphis may agree.
ARTICLE 8.
TERMINATION
Section 8.1. Termination. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after approval by the stockholders
of HDS:
(a) by mutual agreement of the Boards of Directors of HDS and
Medaphis;
(b) by HDS, if any one or more of the conditions set forth in Sections
6.1 and 6.3 are not complied with or performed and such noncompliance or
nonperformance has not been cured or eliminated (or by its nature cannot be
cured or eliminated) by Medaphis on or before August 15, 1996;
(c) by Medaphis, if any one or more of the conditions set forth in
Sections 6.1 and 6.2 are not complied with or performed and such
noncompliance or nonperformance has not been cured or eliminated (or by its
nature cannot be cured or eliminated) by HDS on or before August 15, 1996;
A-39
119
(d) if, after the meeting of the HDS Stockholders contemplated by
Section 5.5 has been held (after giving effect to any adjournments), the
condition set forth in Section 6.1(a) has not been fulfilled, by HDS or
Medaphis; and
(e) by HDS if the Average Closing Price is less than $37.
Section 8.2. Specific Performance and Other Remedies. The parties each
acknowledge that the rights of each party to consummate the transactions
contemplated by this Agreement are special, unique and of extraordinary
character, and that, if any party violates or fails or refuses to perform any
covenant or agreement made by it in this Agreement, the non-breaching party may
be without an adequate remedy at law. The parties each agree, therefore, that if
either party violates or fails or refuses to perform any covenant or agreement
made by such party in this Agreement, the non-breaching party or parties may,
subject to the terms of this Agreement and in addition to any remedies at law
for damages or other relief, institute and prosecute an action in any court of
competent jurisdiction to enforce specific performance of such covenant or
agreement or seek any other equitable relief. If HDS fails to perform any of the
covenants contained in Section 5.1(m) or Section 5.7(a), Medaphis's sole remedy
is to terminate this Agreement pursuant to Section 8.1(c), because the condition
set forth in Section 6.2(b) has not been satisfied.
Section 8.3. Effect of Termination. In the event of termination of this
Agreement pursuant to this Article 8, this Agreement shall forthwith become void
and there shall be no liability on the part of any party or its respective
officers, directors or stockholders, except for obligations under Section
5.3(b), Section 5.10, Section 8.4, Section 9.13 and this Section, all of which
shall survive the termination. Notwithstanding the foregoing, nothing contained
in this Section 8.3 shall relieve any party from liability for any breach of any
covenant or agreement in this Agreement.
Section 8.4. Termination Fee. If (A)(i) Medaphis terminates this Agreement
pursuant to Section 8.1(c) as the result of the failure to satisfy the closing
condition in Section 6.1(a), (ii) HDS terminates this Agreement pursuant to
Section 8.1(b) as a result of the failure to satisfy the closing condition in
Section 6.1(a), (iii) Medaphis terminates this Agreement pursuant to Section
8.1(d), or (iv) HDS terminates this Agreement pursuant to Section 8.1(d); and
(B) on or prior to the date scheduled for the meeting of HDS Stockholders
specified in Section 5.5, any corporation, partnership, limited liability
company, other type of entity, group or person makes a proposal or offer
concerning an Acquisition Transaction involving HDS; and (C) prior to the
expiration of 182 days after the date of a termination of this Agreement of the
type described in (A), HDS engages in negotiations with or enters into a letter
of intent, agreement in principle or definitive agreement with any corporation,
partnership, limited liability company, other type of entity, group or person
(except for Medaphis or its authorized representatives) concerning an
Acquisition Transaction; and (D) such Acquisition Transaction is consummated
during or after such 182-day period, then HDS shall within five business days
after such consummation pay Medaphis a fee of $7,500,000 to reimburse and
compensate Medaphis for its expense, time and effort in connection with the
transactions contemplated by this Agreement.
Except as provided in the second sentence of Section 9.4, in the event of a
payment pursuant to this Section 8.4, such payment shall be in full satisfaction
of all obligations and liabilities of the paying party to the other, arising out
of the termination of this Agreement.
A-40
120
ARTICLE 9.
MISCELLANEOUS PROVISIONS
Section 9.1. Notices. Each notice, communication and delivery under this
Agreement must be made in writing signed by the party making the same, must
specify the Section pursuant to which it is given or being made, and must be
delivered personally or by telecopy transmission (provided that any notice sent
by telecopy transmission must also be sent by registered or certified mail) or
sent by registered or certified mail or by any express mail service (with
postage and other fees prepaid) as follows:
To Medaphis:
Medaphis Corporation
2700 Cumberland Parkway
Suite 300
Atlanta, Georgia 30339
Attn.: William R. Spalding
Telecopy No.: (770) 431-1667
with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attn: Robert W. Miller, Esq.
Telecopy No.: (404) 572-5146
To HDS:
Health Data Sciences Corporation
268 West Hospitality Lane #300
San Bernardino, California 92408
Attn: Ralph A. Korpman, M.D.
Telecopy No.: (909) 885-0124
with a copy to:
Seyfarth, Shaw, Fairweather & Geraldson
2029 Century Park East
Los Angeles, California 90067-3063
Attn: Edward J. Pierce
Telecopy No.: (310) 201-5219
or to such other representative or at such other address of a party as such
party may furnish to the other parties in writing.
Section 9.2. Disclosure Letters and Exhibits. The HDS Disclosure Letter
and the Medaphis Disclosure Letter and all Exhibits are incorporated into this
Agreement and are made a part of this Agreement as if set out in full in this
Agreement.
Section 9.3. Assignment; Successors in Interest. No assignment or transfer
by Medaphis, HDSSub or HDS of their respective rights and obligations under this
Agreement prior to the Closing shall be made except with the prior written
consent of the other parties. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their permitted successors and assigns,
and any reference to a party shall also be a reference to a permitted successor
or assign.
Section 9.4. Representations and Warranties. The representations and
warranties set forth in this Agreement shall not survive the Closing.
Notwithstanding anything to the contrary set forth in this Section 9.4, this
Section shall not limit or restrict HDS's or Medaphis's remedies against the
other or any other person for fraud, willful misconduct, or bad faith. The
covenants and agreements of each of Medaphis,
A-41
121
HDSSub and HDS set forth in this Agreement shall survive the Closing and shall
remain in full force and effect until performed or satisfied by the applicable
party responsible for the same in this Agreement.
Section 9.5. Number; Gender. Whenever this Agreement so requires, the
singular number shall include the plural and the plural shall include the
singular, and the gender of any pronoun shall include the other genders.
Section 9.6. Captions. The titles, captions and table of contents
contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provision of this Agreement. Unless otherwise
specified to the contrary, all references to Articles and Sections are
references to Articles and Sections of this Agreement and all references to
Exhibits are references to Exhibits to this Agreement and the HDS Disclosure
Letter and the Medaphis Disclosure Letter.
Section 9.7. Controlling Law; Integration; Amendment. (a) This Agreement
shall be governed by and construed and enforced in accordance with the internal
laws of the State of Delaware without reference to Delaware's choice of law
rules and the parties agree that any legal proceeding instituted with respect to
this Agreement shall be brought in Delaware and the parties submit to personal
jurisdiction therein and agree that venue properly lies in Delaware. This
Agreement supersedes all negotiations, agreements and understandings among the
parties with respect to the subject matter of this Agreement and constitutes the
entire agreement among the parties.
(b) This Agreement may not be amended, modified or supplemented except by
written agreement of the parties.
Section 9.8. HDS and Medaphis Knowledge. As used in this Agreement, the
terms "the knowledge of the HDS Executives," "known to the HDS Executives" or
words of similar import used in this Agreement with respect to HDS shall mean
the actual knowledge of any HDS Executive, together with the knowledge a
reasonable business person would have obtained after making reasonable inquiry
and after exercising reasonable diligence with respect to the matters at hand.
The "HDS Executives" shall consist of Ralph A. Korpman, M.D., Mr. Peter Gladkin
and Ms. Janice E. Ticich. As used in this Agreement, the terms "the knowledge of
the Medaphis Executives," "known to the Medaphis Executives" or words of similar
import used in this Agreement with respect to Medaphis shall mean the actual
knowledge of any Medaphis Executive, together with the knowledge a reasonable
business person would have obtained after making reasonable inquiry and after
exercising reasonable diligence with respect to the matters at hand. The
"Medaphis Executives" shall consist of Messrs. Randolph G. Brown, Timothy J.
Kilgallon, Michael R. Cote and William R. Spalding.
Section 9.9. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction will, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction will not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by law, the parties waive any provision of law which renders any such
provision prohibited or unenforceable in any respect.
Section 9.10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement or the terms hereof to produce or
account for more than one of such counterparts.
Section 9.11. Enforcement of Certain Rights. Nothing expressed or implied
in this Agreement is intended, or shall be construed, to confer upon or give any
person, firm or corporation other than the parties, and their permitted
successors or assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement, or result in such person, firm or corporation being
deemed a third party beneficiary of this Agreement, other than Section 5.4 and
Section 5.15 which provide for certain benefits to the persons described in such
sections.
A-42
122
Section 9.12. Waiver. At any time prior to the Effective Time, the
parties, by or pursuant to action taken by their respective Boards of Directors,
may, to the extent legally permitted: (i) extend the time for the performance of
any of the obligations or other acts of any other party; (ii) waive any
inaccuracies in the representations or warranties of any other party contained
in this Agreement or in any document or certificate delivered pursuant to this
Agreement; (iii) waive compliance or performance by any other party with any of
the covenants, agreements or obligations of such party contained in this
Agreement; and (iv) waive the satisfaction of any condition that is precedent to
the performance by the party so waiving of any of its obligations under this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. A waiver by one party of the performance of any covenant, agreement,
obligation, condition, representation or warranty shall not be construed as a
waiver of any other covenant, agreement, obligation, condition, representation
or warranty. A waiver by any party of the performance of any act shall not
constitute a waiver of the performance of any other act or an identical act
required to be performed at a later time.
Section 9.13. Fees and Expenses. Medaphis shall pay its own fees, costs
and expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement, including, but not limited to, the fees, costs
and expenses of its financial advisors, accountants and counsel. HDS shall pay
its own fees, costs and expenses incurred in connection with this Agreement and
the transactions contemplated by this Agreement, but such fees, costs and
expenses shall not exceed in the aggregate the sum of the amounts of fees
specified in the HDS Disclosure Letter and the reasonable fees, costs and
expenses of the accountants and counsel for HDS.
A-43
123
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the date first above written.
MEDAPHIS CORPORATION
By: /s/ RANDOLPH G. BROWN
-------------------------------------------
Title: Chairman, CEO and President
--------------------------------------
HDSSUB, INC.
By: /s/ RANDOLPH G. BROWN
-------------------------------------------
Title: Chairman, CEO and President
--------------------------------------
HEALTH DATA SCIENCES CORPORATION
By: /s/ RALPH A. KORPMAN, M.D.
-------------------------------------------
Title: Chairman and Chief Executive Officer
--------------------------------------
A-44
124
ANNEX B
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC.262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this
Chapter;
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of
this Chapter to accept for such stock anything except (i) shares of stock
of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof; (ii) shares of
stock of any other corporation or depository receipts in respect thereof,
which shares of stock or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security or an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders; (iii) cash in
lieu of fractional shares or fractional depositary receipts described in
the foregoing clauses (i) and (ii); or (iv) any combination of the shares
of stock, depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing clauses (i), (ii)
and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a
B-1
125
provision, the procedures of this Section, including those set forth in
subsections (d) and (e), shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
Section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Registrar in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the
B-2
126
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by one or more publications at least one week before the day
of the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publications as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either written 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an
B-3
127
appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
128
ANNEX C
HAMBRECHT & QUISTLLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415)576-3300
May 22, 1996
Confidential
The Board of Directors
Health Data Sciences Corporation
268 West Hospitality Lane
Suite 300
San Bernardino, California 92408
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of common stock (the "Common Stock")
and the outstanding shares of preferred stock (the "Preferred Stock") of Health
Data Sciences Corporation ("HDS" or the "Company") of the consideration to be
received by such shareholders in connection with the proposed merger of HDSSub
Corporation ("HDSSub"), a wholly-owned subsidiary of Medaphis Corporation
("Medaphis"), with and into HDS (the "Proposed Transaction") pursuant to the
Merger Agreement to be dated as of May 23, 1996, among Medaphis, HDSSub, and HDS
(the "Agreement").
We understand that the terms of the Agreement provide, among other things, that
Medaphis will issue .7912 of a share of Medaphis common stock for each of the
outstanding shares of Common Stock and Preferred Stock, as more fully set forth
in the Agreement. We also understand that the Agreement provides that each
unexpired and unexercised option to purchase common stock of HDS outstanding
immediately prior to the Effective Time (as defined in the Agreement) shall be
assumed by Medaphis. For purposes of this opinion, we have assumed that the
Proposed Transaction will qualify as a tax-free reorganization under the United
States Internal Revenue Code for the shareholders of the Company and that the
Proposed Transaction will be accounted for as a pooling of interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of HDS in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion. In
addition, Hambrecht & Quist, together with its affiliates, owns approximately
0.5% of the outstanding HDS Common Stock (on an as-converted basis).
We are familiar with Medaphis and have provided investment banking and other
financial advisory services to Medaphis in the past, and we have received fees
for rendering these services. Specifically, we acted as financial advisor to
Medaphis in 1995 in connection with its acquisition of Healthcare Recoveries,
Inc. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded securities of Medaphis and receives
customary compensation in connection therewith, and also provides research
coverage for Medaphis. In the ordinary course of business, Hambrecht & Quist
actively trades in the equity securities of Medaphis for its own account and for
the accounts of its customers and, accordingly, may at any time hold a
C-1
129
long or short position in such securities. Hambrecht & Quist may in the future
provide additional investment banking or other financial advisory services to
Medaphis.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements
of Medaphis for recent years and interim periods to date and certain other
relevant financial and operating data of Medaphis made available to us from
published sources and from the internal records of Medaphis;
(ii) discussed with certain members of the management of Medaphis the
business, financial condition and prospects of Medaphis;
(iii) reviewed certain financial and operating information, including
certain projections of Medaphis, relating to Medaphis and discussed such
projections with certain members of the management of Medaphis;
(iv) reviewed the consolidated financial statements of HDS for recent
years and interim periods to date and certain other relevant financial and
operating data of HDS made available to us from the internal records of
HDS;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to HDS prepared by the senior
management of HDS;
(vi) discussed the business, financial condition and prospects of HDS
with certain members of its senior management;
(vii) compared certain financial information of HDS and Medaphis with
certain financial information and the recent reported common stock prices
and trading activity of companies engaged in businesses we consider
comparable to that of HDS and Medaphis;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement and certain ancillary agreements; and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Medaphis or HDS considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have not
prepared any independent valuation or appraisal of any of the assets or
liabilities of Medaphis or HDS, nor have we conducted a physical inspection of
the properties and facilities of either company. With respect to the financial
forecasts and projections made available to us and used in our analysis, we have
assumed they reflect the best currently available estimates and judgments of the
expected future financial performance of Medaphis and HDS, respectively. For
purposes of this opinion, we have assumed that neither Medaphis nor HDS is a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Proposed
Transaction and those activities undertaken in the ordinary course of conducting
their respective businesses. Our opinion is necessarily based upon market,
economic, financial and other conditions as they exist and can be evaluated as
of the date of this letter and any change in such conditions would require a
reevaluation of this opinion. We express no opinion as to the price at which
Medaphis common stock will trade subsequent to the Effective Time (as defined in
the Agreement). We were not requested to, and did not, solicit indications of
interest from any other parties in connection with a possible acquisition of, or
business combination with, HDS.
It is understood that his letter is for the information of the Board of
Directors only and may not be used for any purpose without our prior written
consent; provided, however, that this letter may be reproduced in full in the
C-2
130
Prospectus/Proxy Statement to be sent to the stockholders of HDS in connection
with the Proposed Transaction and any filing made by HDS or Medaphis with the
Securities and Exchange Commission with respect to the Proposed Transaction.
This letter does not constitute a recommendation to any stockholder as to how
such stockholder should vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other matters
as we deem relevant, we are of the opinion that as of the date hereof the
consideration to be received by the holders of the Common Stock and the holders
of the Preferred Stock in the Proposed Transaction is fair to such holders from
a financial point of view. We express no opinion, however, as to the adequacy of
any consideration received in the Proposed Transaction by Medaphis or any of its
affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ David G. Golden
----------------------------------
David G. Golden
Managing Director
C-3
131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following summary is qualified in its entirety by reference to the
complete text of the statute, Certificate of Incorporation, Bylaws and agreement
referred to below.
The Registrant's Bylaws provide that each person who was or is made a party
to, is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of
the Registrant (or is or was serving at the request of the Registrant as a
director, officer, employee or agent of another entity), will be indemnified and
held harmless by the Registrant to the fullest extent permitted by the Delaware
General Corporation Law as it currently exists or is later amended.
Under Section 145 of the Delaware General Corporation Law, a corporation
may indemnify a director, officer, employee or agent of the corporation (or
other entity if such person is serving in such capacity at the corporation's
request) against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. In the case of an action brought by or in the right of a corporation,
the corporation may indemnify a director, officer, employee or agent of the
corporation (or other entity if such person is serving in such capacity at the
corporation's request) against expenses (including attorneys' fees) actually and
reasonably incurred by him if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless a court determines that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses as
the court shall deem proper. Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.
The Registrant's Certificate of Incorporation provides that a director of
the Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for any acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
in which the director derived an improper personal benefit.
In addition, the Registrant and Randolph G. Brown are parties to an
agreement pursuant to which the Registrant has agreed to indemnify and hold
harmless Mr. Brown to the fullest extent permitted by the Delaware General
Corporation Law as it presently exists or to such greater extent as such law may
hereafter be amended.
The Registrant maintains directors and officers liability insurance
coverage. Such policies have a deductible of $350,000, and an annual per
occurrence and aggregate cap on coverage of $25 million.
II-1
132
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
2.1 -- Merger agreement dated as of May 23, 1996, by and among Registrant, HDSSub, Inc.
and HDS, Inc. (attached as Annex A to the Proxy Statement/Prospectus forming a part
of the Registration Statement). The Registrant agrees to furnish supplementally a
copy of any omitted schedule to the Commission upon request.
2.2 -- Merger Agreement dated as of March 15, 1996, by and among Registrant, BSGSub, Inc.
and BSG Corporation. (incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4; File No. 333-2506).
2.3 -- Merger Agreement dated as of March 12, 1996, by and among Registrant, Rapid Systems
Solutions, Inc. and RipSub, Inc. (incorporated by reference to Exhibit 2.19 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
2.4 -- Merger Agreement dated as of December 29, 1995, by and among Registrant, CarSub
Inc., and Medical Management Sciences, Inc. (incorporated by reference to Exhibit
2.1 to Registrant's Current Report on Form 8-K filed on January 19, 1996).
2.5 -- Merger Agreement dated as of October 13, 1995 by and among Registrant, NukSub, Inc.
and Consort Technologies, Inc. (incorporated by reference to Exhibit 2.1 to
Registrant's Current Report on Form 8-K filed on December 5, 1995).
2.6 -- Merger Agreement dated as of January 29, 1995 by and among Registrant, BullSub,
Inc., AUTOMATION ATWORK, ATWORK AUSTRALIA, ATWORK CANADA CORP., ATWORK-EUROPE AND
ATWORK, U.K. (incorporated by reference to Exhibit 2.1 to Registrant's Registration
Statement on Form S-4, File No. 33-88910).
4.0 -- Indenture by and between Registrant and Trust Company Bank, as Trustee, dated
December 30, 1992 (incorporated by reference to Exhibit 4 to Registrant's Current
Report on Form 8-K filed on January 11, 1993).
4.1 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
4.2 -- Form of Option Certificate relating to Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-1, File No. 33-42216).
4.3 -- Form of Option Certificate relating to Registrant's Executive Performance Plan
(incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-1,
File No. 33-42216).
4.4 -- Form of Option Certificate relating to Registrant's Stock Option Plan for Employees
of Acquired Companies (incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3, File No. 33-71552).
4.5 -- Form of Option Certificate relating to Registrant's Restricted Stock Plan
(incorporated by reference to Exhibit 4.5 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1995).
4.6 -- Form of Option Certificate relating to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 4.6 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995).
II-2
133
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
4.7 -- Registration Rights Agreement, dated November 15, 1989, among Registrant,
Prudential Venture Partners II and Rhode Island Securities Corporation
(incorporated by reference to Exhibit 4.13 to Registration Statement on Form S-1,
File No. 33-42216).
4.8 -- Amendment No. 1 to Registration Rights Agreement, dated as of December 1, 1989,
among Registrant and the several persons named therein (incorporated by reference
to Exhibit 4.14 to Registration Statement on Form S-1, File No. 33-42216).
4.9 -- Amended and Restated Registration Rights Agreement, effective as of December 1,
1989, among Registrant and the several persons named therein (incorporated by
reference to Exhibit 4.15 to Registration Statement on Form S-1, File No.
33-42216).
4.10 -- Registration Rights Agreement, dated as of March 17, 1995, by and among Registrant,
David Michael Warner and John P. Holton (incorporated by reference to Exhibit 4.10
to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
4.11 -- Form of Common Stock Purchase Warrant issued to Frederica Morf and Ursula Nelson
(incorporated by reference to Exhibit 4.19 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
4.12 -- Form of Warrant Agreement between AdvaCare and certain litigants, entered into in
settlement of litigation, dated June 30, 1994 (incorporated by reference to Exhibit
4.22 to Registrant's Annual Report on Form 10-K for the year ended December 31,
1994).
4.13 -- Form of Amendment to Warrant Agreement between AdvaCare and certain litigants,
entered into in settlement of litigation, dated November 30, 1994 (incorporated by
reference to Exhibit 4.23 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994).
4.14 -- Form of Warrant issued to certain litigants in settlement of litigation
(incorporated by reference to Exhibit 4.24 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
4.15 -- Form of Registration Rights Agreement among Registrant, Bryan Dieter and The
Decision Support Group, Inc. (incorporated by reference to Exhibit 4.26 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
4.16 -- Form of Registration Rights Agreement among Registrant, Humana Inc. and Warburg,
Pincus Capital Company, L.P. (incorporated by reference to Exhibit 4.15 to
Registration Statement on Form S-4, File No. 33-96996).
4.17 -- Form of Registration Rights Agreement among Registrant, Mahmoud R. Ghavi, Barry G.
Wahlig, William L. McCready and Kimberly D. Elkins (incorporated by reference to
Exhibit 4.1 to Registrant's Current Report on Form 8-K filed on December 5, 1995).
4.18 -- Form of Registration Rights Agreement among Registrant, William J. DeZonia, Lori T.
Caudill, Carol T. Shumaker, Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust and Paulanne H. Thacker Retained Annuity Trust (incorporated
by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K filed on
January 19, 1996).
4.19 -- Form of Registration Rights Agreement among Registrant, NFT Ventures, Inc. and NP
Ventures, Ltd. (incorporated by reference to Exhibit 4.17 to the Registrant's
Registration Statement on Form S-4, File No. 333-2506).
4.20 -- Form of Registration Rights Agreement among Registrant, Michael Clark, Andrei
Mitran, and Steven Thiedke (incorporated by reference to Exhibit 4.18 to the
Registrant's Registration Statement on Form S-4, File No. 333-2506.)
*5.1 -- Opinion of King & Spalding.
*8.1 -- Opinion of King & Spalding as to tax matters.
II-3
134
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
10.1 -- Medaphis Corporation Re-engineering, Consolidation and Business Improvement Cash
Incentive Plan, dated February 21, 1996 (incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement on Form S-4, File No. 333-2506).
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Arthur Andersen LLP.
23.4 -- Consent of Price Waterhouse LLP.
*23.5 -- Consent of Hambrecht & Quist LLP.
23.6 -- Consent of King & Spalding (included in Exhibit 5.1).
*24.1 -- Power of attorney of the officers and directors of Registrant signing this
Registration Statement (appears at page II-7).
*99.1 -- Form of Proxy for HDS Common Stock, HDS Series B Preferred Stock and HDS Series C
Preferred Stock.
*99.2 -- Form of Proxy for HDS Series F Preferred Stock.
- ---------------
* Previously filed.
b. Financial Statement Schedules.
None.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any
II-4
135
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlanta, State of Georgia, on May 31, 1996.
MEDAPHIS CORPORATION
By: /s/ RANDOLPH G. BROWN
-----------------------------------
Randolph G. Brown
Chairman, Chief Executive Officer
and President
II-6
137
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated below on May 31, 1996.
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
* Chairman, Chief Executive Officer, President
- --------------------------------------------- and Director
Randolph G. Brown
* Senior Vice President -- Finance and Chief
- --------------------------------------------- Financial Officer
Michael R. Cote
* Vice President, Corporate Controller and Chief
- --------------------------------------------- Accounting Officer (Principal Accounting
James S. Douglass Officer)
* Director
- ---------------------------------------------
Robert C. Bellas, Jr.
* Director
- ---------------------------------------------
David R. Holbrooke, M.D.
* Director
- ---------------------------------------------
David E. McDowell
* Director
- ---------------------------------------------
Steven G. Papermaster
* Director
- ---------------------------------------------
Dennis A. Pryor
*By: /s/ RANDOLPH G. BROWN
----------------------------------------
Randolph G. Brown
Attorney-in-Fact
II-7
138
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
2.1 -- Merger agreement dated as of May 23, 1996, by and among Registrant,
HDSSub, Inc. and Health Data Sciences Corporation (attached as Annex A
to the Proxy Statement/Prospectus forming a part of the Registration
Statement). The Registrant agrees to furnish supplementally a copy of
any omitted schedule to the Commission upon request....................
2.2 -- Merger Agreement dated as of March 15, 1996, by and among Registrant,
BSGSub, Inc. and BSG Corporation. (incorporated by reference to Exhibit
2.1 to the Registrant's Registration Statement on Form S-4; File No.
333-2506)..............................................................
2.3 -- Merger Agreement dated as of March 12, 1996, by and among Registrant,
Rapid Systems Solutions, Inc. and RipSub, Inc. (incorporated by
reference to Exhibit 2.19 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995)..................................
2.4 -- Merger Agreement dated as of December 29, 1995, by and among
Registrant, CarSub Inc., and Medical Management Sciences, Inc.
(incorporated by reference to Exhibit 2.1 to Registrant's Current
Report on Form 8-K filed on January 19, 1996)..........................
2.5 -- Merger Agreement dated as of October 13, 1995 by and among Registrant,
NukSub, Inc. and Consort Technologies, Inc. (incorporated by reference
to Exhibit 2.1 to Registrant's Current Report on Form 8-K filed on
December 5, 1995)......................................................
2.6 -- Merger Agreement dated as of January 29, 1995 by and among Registrant,
BullSub, Inc., AUTOMATION ATWORK, ATWORK AUSTRALIA, ATWORK CANADA
CORP., ATWORK-EUROPE AND ATWORK, U.K. (incorporated by reference to
Exhibit 2.1 to Registrant's Registration Statement on Form S-4, File
No. 33-88910)..........................................................
4.0 -- Indenture by and between Registrant and Trust Company Bank, as Trustee,
dated December 30, 1992 (incorporated by reference to Exhibit 4 to
Registrant's Current Report on Form 8-K filed on January 11, 1993).....
4.1 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 to Registrant's Annual Report on Form 10-K for the year ended
December 31,
1995)..................................................................
4.2 -- Form of Option Certificate relating to Stock Option Plan (incorporated
by reference to Exhibit 4.2 to Registration Statement on Form S-1, File
No. 33-42216)..........................................................
4.3 -- Form of Option Certificate relating to Registrant's Executive
Performance Plan (incorporated by reference to Exhibit 4.3 to
Registration Statement on Form S-1, File No. 33-42216).................
4.4 -- Form of Option Certificate relating to Registrant's Stock Option Plan
for Employees of Acquired Companies (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-3, File No.
33-71552)..............................................................
4.5 -- Form of Option Certificate relating to Registrant's Restricted Stock
Plan (incorporated by reference to Exhibit 4.5 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995)..............
II-8
139
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
4.6 -- Form of Option Certificate relating to Registrant's Non-Employee
Director Stock Option Plan (incorporated by reference to Exhibit 4.6 to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995)..................................................................
4.7 -- Registration Rights Agreement, dated November 15, 1989, among
Registrant, Prudential Venture Partners II and Rhode Island Securities
Corporation (incorporated by reference to Exhibit 4.13 to Registration
Statement on Form S-1, File No. 33-42216)..............................
4.8 -- Amendment No. 1 to Registration Rights Agreement, dated as of December
1, 1989, among Registrant and the several persons named therein
(incorporated by reference to Exhibit 4.14 to Registration Statement on
Form S-1, File No. 33-42216)...........................................
4.9 -- Amended and Restated Registration Rights Agreement, effective as of
December 1, 1989, among Registrant and the several persons named
therein (incorporated by reference to Exhibit 4.15 to Registration
Statement on Form S-1, File No. 33-42216)..............................
4.10 -- Registration Rights Agreement, dated as of March 17, 1995, by and among
Registrant, David Michael Warner and John P. Holton (incorporated by
reference to Exhibit 4.10 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994)..................................
4.11 -- Form of Common Stock Purchase Warrant issued to Frederica Morf and
Ursula Nelson (incorporated by reference to Exhibit 4.19 to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994)..................................................................
4.12 -- Form of Warrant Agreement between AdvaCare and certain litigants,
entered into in settlement of litigation, dated June 30, 1994
(incorporated by reference to Exhibit 4.22 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994)..............
4.13 -- Form of Amendment to Warrant Agreement between AdvaCare and certain
litigants, entered into in settlement of litigation, dated November 30,
1994 (incorporated by reference to Exhibit 4.23 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994)..............
4.14 -- Form of Warrant issued to certain litigants in settlement of litigation
(incorporated by reference to Exhibit 4.24 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994)..............
4.15 -- Form of Registration Rights Agreement among Registrant, Bryan Dieter
and The Decision Support Group, Inc. (incorporated by reference to
Exhibit 4.26 to Registrant's Annual Report on Form 10-K for the year
ended December 31,
1994)..................................................................
4.16 -- Form of Registration Rights Agreement among Registrant, Humana Inc. and
Warburg, Pincus Capital Company, L.P. (incorporated by reference to
Exhibit 4.15 to Registration Statement on Form S-4, File No.
33-96996)..............................................................
4.17 -- Form of Registration Rights Agreement among Registrant, Mahmoud R.
Ghavi, Barry G. Wahlig, William L. McCready and Kimberly D. Elkins
(incorporated by reference to Exhibit 4.1 to Registrant's Current
Report on Form 8-K filed on December 5, 1995)..........................
II-9
140
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
4.18 -- Form of Registration Rights Agreement among Registrant, William J.
DeZonia, Lori T. Caudill, Carol T. Shumaker, Alyson T. Stinson, James
F. Thacker, James F. Thacker Retained Annuity Trust and Paulanne H.
Thacker Retained Annuity Trust (incorporated by reference to Exhibit
4.1 to Registrant's Current Report on Form 8-K filed on January 19,
1996)..................................................................
4.19 -- Form of Registration Rights Agreement among Registrant, NFT Ventures,
Inc. and NP Ventures, Ltd. (incorporated by reference to Exhibit 4.17
to the Registrant's Registration Statement on Form S-4, File No.
333-2506)..............................................................
4.20 -- Form of Registration Rights Agreement among Registrant, Michael Clark,
Andrei Mitran, and Steven Thiedke (incorporated by reference to Exhibit
4.18 to the Registrant's Registration Statement on Form S-4, File No.
333-2506)..............................................................
5.1 -- Opinion of King & Spalding.............................................
8.1 -- Opinion of King & Spalding as to tax matters...........................
10.1 -- Medaphis Corporation Re-engineering, Consolidation and Business
Improvement Cash Incentive Plan, dated February 21, 1996 (incorporated
by reference to Exhibit 10.1 to the Registrant's Registration Statement
on Form S-4, File No. 333-2506)........................................
23.1 -- Consent of Deloitte & Touche LLP.......................................
23.2 -- Consent of Coopers & Lybrand L.L.P. ...................................
23.3 -- Consent of Arthur Andersen LLP. .......................................
23.4 -- Consent of Price Waterhouse LLP. ......................................
23.5 -- Consent of Hambrecht & Quist LLP. .....................................
23.6 -- Consent of King & Spalding (included in Exhibit 5.1)...................
24.1 -- Power of attorney of the officers and directors of Registrant signing
this Registration Statement (appears at page II-7).....................
99.1 -- Form of Proxy for HDS Common Stock, HDS Series B Preferred Stock and
HDS Series C Preferred Stock...........................................
99.2 -- Form of Proxy for HDS Series F Preferred Stock.........................
II-10