AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1998
REGISTRATION NO. 333-55977
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
MEDE AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7374 11-3270245
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
90 MERRICK AVENUE, SUITE 501
EAST MEADOW, NEW YORK 11554
(516) 542-4500
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
-----------------
DAVID M. GOLDWIN, ESQ.
GENERAL COUNSEL
MEDE AMERICA CORPORATION
90 MERRICK AVENUE, SUITE 501
EAST MEADOW, NEW YORK 11554
(516) 542-4500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
COPIES TO:
<TABLE>
<S> <C>
MARK J. TANNENBAUM, ESQ. FREDERICK W. KANNER, ESQ
REBOUL, MACMURRAY, HEWITT, DEWEY BALLANTINE LLP
MAYNARD & KRISTOL 1301 AVENUE OF THE AMERICAS
45 ROCKEFELLER PLAZA NEW YORK, NY 10019
NEW YORK, NY 10111 (212) 259-8000
(212) 841-5700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please 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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 6, 1998
PROSPECTUS
3,600,000 SHARES
[GRAPHIC OMITTED]
MEDE AMERICA CORPORATION
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by MEDE AMERICA Corporation ("MEDE AMERICA" or the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$13.00 and $15.00 per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price. The
Company intends to apply to have the Company's Common Stock approved for
quotation on the Nasdaq National Market under the symbol "MEDE."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMIS-
SION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ....................... $ $ $
- --------------------------------------------------------------------------------
Total(3) ........................ $ $ $
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $950,000, payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 540,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and the Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if delivered and accepted by
them, and subject to their right to reject orders in whole or in part. It is
expected that certificates for such shares of Common Stock will be made
available for delivery at the offices of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001, on or about , 1998.
------------------
SALOMON SMITH BARNEY
WILLIAM BLAIR & COMPANY
VOLPE BROWN WHELAN & COMPANY
, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
MEDE AMERICA is a trademark of the Company. All other trade names,
trademarks or service marks appearing in this Prospectus are the property of
their respective owners and are not the property of the Company.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
MEDE AMERICA is a leading provider of electronic data interchange ("EDI")
products and services to a broad range of providers and payors in the healthcare
industry. The Company offers an integrated suite of EDI solutions that allows
hospitals, pharmacies, physicians, dentists and other healthcare providers and
provider groups to electronically edit, process and transmit claims, eligibility
and enrollment data, track claims submissions throughout the claims payment
process and obtain faster reimbursement for their services. In addition to
offering greater processing speed, the Company's EDI products reduce processing
costs, increase collection rates and result in more accurate data interchange.
The Company maintains over 540 direct connections with insurance companies,
Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other
third party payors, as well as over 500 indirect connections with additional
payors through claims clearinghouses. Currently, the Company processes over
900,000 transactions per day for over 65,000 providers located in all 50 states.
Since its formation in March 1995, the Company has expanded both through
internal growth and the acquisition of five healthcare EDI processing
businesses. As part of its strategy of providing an integrated suite of EDI
solutions to a broad range of healthcare providers, the Company has focused on
acquisitions that provided entry into new markets or expanded the Company's
product suite. The Company has actively pursued the integration of its
acquisitions and, in the process, has either divested, closed or restructured
various operations of the acquired entities in order to eliminate non-core or
redundant operations and achieve cost savings and operating efficiencies.
Innovations over the past decade in computer and telecommunications
technologies have resulted in the development of EDI systems to electronically
process and transmit information among the various participants in the
healthcare industry. These systems were designed to replace the paper-based
recording and transmission of information, enabling greater processing speed,
reduced processing costs and more accurate data interchange. According to Health
Data Directory, in 1997 over 4.1 billion electronic and paper claims were paid
in all sectors of the healthcare services market. From 1993 to 1997, the
proportion of total healthcare claims that were electronically processed
increased from 41% to approximately 60%. During such period the number of claims
processed electronically increased at an average rate of 16% per year. The
Company expects the electronic processing of healthcare claims to continue to
increase as a result of increased reliance on electronic commerce and increased
emphasis on cost containment in the healthcare industry.
The penetration of electronic processing varies significantly among the
different markets within the healthcare industry. According to Health Data
Directory, in 1997 electronic processing accounted for approximately 13% of
total dental claims, 38% of total physician medical claims, 83% of total
hospital medical claims and 86% of total pharmacy claims. In addition to the
remaining opportunity to convert paper-based claims to electronic processing,
the Company believes that there is significant market potential for EDI
processing in the non-claim area, including eligibility verification, remittance
transactions and other data exchange transactions such as claims tracking,
referrals and physician scripting. The Company believes that EDI penetration in
these non-claim transaction categories is low, and as a result, the EDI
transaction growth in these areas will exceed that of the EDI claims processing
market.
The Company believes that it has several competitive strengths which will
enable it to capitalize on the significant growth opportunities in the
healthcare EDI marketplace.
3
<PAGE>
COMPREHENSIVE SUITE OF EDI PRODUCTS AND SERVICES. The Company has followed
a strategy of developing or acquiring EDI products and services that may be
offered to a broad range of healthcare providers. The Company's products
incorporate open architecture designs and what the Company regards as "best of
breed" technology and may be purchased as modular additions to the client's
existing data storage and retrieval system, or as part of a comprehensive EDI
processing system. The Company believes it is well positioned to take advantage
of the expected growth of EDI in areas such as eligibility, managed care
transactions and physician scripting.
BROAD AND DIVERSIFIED CLIENT BASE. The Company's client base is highly
diversified, consisting of approximately 42,000 pharmacies, 8,000 dental
offices, 1,000 hospitals and clinics and 14,000 physicians. The Company's broad
and diversified client base provides it with transaction-based revenues that
tend to be recurring and positions it to capitalize on the rapid consolidation
taking place within the healthcare industry.
DIRECT RELATIONSHIPS WITH PROVIDERS AND PAYORS. The range of MEDE AMERICA's
services and the extent of its connectivity with payors provides the opportunity
to achieve deeper penetration of its provider base, while at the same time
offering more complete solutions to new clients. MEDE AMERICA believes that it
is strongly positioned to offer reliable, one-stop shopping to providers for all
their EDI needs.
FOCUS ON CLIENT SERVICE. The Company has focused on implementing a wide
range of client service and support functions including the use of automated
client service tracking software, expanded client help desk and account
executive support functions and extensive client feedback mechanisms. The
Company believes that its high quality client service enhances the satisfaction
of its clients and generates new revenue opportunities in the form of expanded
transaction volume and sales of new products and services.
LEADING TECHNOLOGY AND PRODUCT PLATFORMS. Over the past two years, MEDE
AMERICA has invested significant capital in new hardware and software systems to
increase its transaction processing capacity. As a result of such technology
investments, MEDE AMERICA believes it is able to provide high quality service to
its clients in the form of high network availability, batch transaction
reliability and high rates of payor claims acceptance. MEDE AMERICA also
believes that its technology platform, which is operating at approximately
one-third of its total capacity, provides the Company with substantial operating
leverage.
EXPERIENCED MANAGEMENT TEAM. Each member of the Company's senior management
team has over 15 years of experience in the information technology and
transaction processing industries and has extensive background in working with
emerging companies in the information processing industry. The Company believes
that the range and depth of its senior management team position it to address
the evolving requirements of its clients and to manage the growth required to
meet its strategic goals.
The Company's mission is to be the leading provider of integrated
healthcare transaction processing technology, networks and databases, enabling
its clients to improve the quality and efficiency of their services. To achieve
this objective, the Company is pursuing a growth strategy comprised of the
following elements: provide a comprehensive suite of EDI solutions; further
penetrate its existing client base through cross-selling of emerging products
and services; develop new EDI solutions to meet the evolving electronic
transaction processing needs of its clients; continue to utilize strategic
alliances with key players in the healthcare industry; and pursue strategic
acquisitions in order to expand the Company's product offerings, enter new
markets and capitalize on the Company's operating leverage.
The Company's executive offices are located at 90 Merrick Avenue, Suite
501, East Meadow, New York 11554, and its telephone number is (516) 542-4500.
4
<PAGE>
THE OFFERING
COMMON STOCK OFFERED BY THE COMPANY............ 3,600,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THE
OFFERING...................................... 11,595,787 shares (1)(2)
USE OF PROCEEDS.............................. To retire all outstanding bank
and subordinated indebtedness
and accrued interest thereon,
and for other general corporate
purposes, including working
capital.
PROPOSED NASDAQ NATIONAL
MARKET SYMBOL................................. MEDE
- ----------
(1) Reflects the proposed Recapitalization (as defined herein).
(2) Excludes (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic
Warrant (as defined herein) and (ii) 482,823 shares of Common Stock issuable
upon the exercise of stock options outstanding as of July 31, 1998 under the
MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted
Stock Purchase Plan (the "Stock Plan"), of which 212,715 are exercisable.
The weighted average exercise price of all outstanding stock options is
$4.84 per share. See "Recent Developments" and "Management -- Employee
Benefit Plans."
RECENT DEVELOPMENTS
On July 17, 1998, the Company entered into a Transaction Processing
Agreement (the "Processing Agreement") with Medic Computer Systems, Inc.
("Medic"), a subsidiary of Misys plc that develops and licenses software for
healthcare providers, principally physicians, medical service organizations
("MSOs") and physician practice management companies ("PPMs"). Under the
Processing Agreement, the Company will undertake certain software development
obligations, and from July 1, 1999 it will become the exclusive processor
(subject to certain exceptions) of medical reimbursement claims for Medic's
subscribers submitted to payors with whom MedE has or establishes connectivity.
Under the Processing Agreement, the Company will be entitled to revenues to be
paid by payors (in respect of which a commission is payable to Medic) as well as
fees to be paid by Medic.
Contemporaneously, to ensure a close working relationship between the
parties, on July 19, 1998 the Company granted to Medic a warrant (the "Medic
Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per
share exercise price equal to the price of the Common Stock to the public in the
Offering or, in the event that an initial public offering is not completed by
March 31, 1999, at an exercise price equal to $8.00 per share. The difference
between the two alternative prices reflects, in the Company's view, the
incremental value of a share of Common Stock resulting from the Offering and the
concurrent Recapitalization. The Medic Warrant vests over a two year period and
may be exercised up to five years after the date of grant. The Medic Warrant
contains customary weighted average antidilution provisions. The Company and
certain of its principal stockholders have agreed that following the completion
of the Offering and until the earlier of the termination of the Processing
Agreement or the disposition by Medic and its affiliates of at least 25% of the
shares of Common Stock issuable under the Medic Warrant, Medic shall have the
right to designate one director to the Company's Board of Directors. As of the
date of this Prospectus, Medic has not named a designee.
On September 17, 1998, the Company entered into a non-binding letter of
intent to acquire all the capital stock of Healthcare Interchange, Inc., a
claims processing and EDI company, for a purchase price of $11.6 million. The
Company expects to finance such acquisition with borrowings under its Credit
Facility.
RISK FACTORS
Prospective purchasers should consider all of the information contained in
this Prospectus before making an investment in shares of Common Stock. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
ACTUAL PRO FORMA(1)
---------------------------------------------------------------- -------------
1995 1996 1997 1998 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(2) .................................... $ 16,246 $ 31,768 $ 35,279 $ 42,290 $43,936
Operating expenses:
Operations .................................... 9,753 19,174 16,817 16,958 17,203
Sales, marketing and client services .......... 3,615 7,064 8,769 10,765 11,063
Research and development ...................... 2,051 2,132 3,278 3,941 3,984
General and administrative .................... 3,119 6,059 5,263 4,865 5,026
Depreciation and amortization ................. 2,995 5,176 5,293 6,743 7,090
Write-down of intangible assets ............... 8,191 (3) 9,965 (4) -- -- --
Acquired in-process research and
development(5) .............................. -- -- 4,354 -- --
Other charges(6) .............................. 2,864 538 2,301 -- --
--------- --------- --------- -------- -------
Total operating expenses ....................... 32,588 50,108 46,075 43,272 44,366
--------- --------- --------- -------- -------
Loss from operations ........................... (16,342) (18,340) (10,796) (982) (430)
Other (income) expense ......................... -- 313 (893) (12) (12)
Interest expense (income), net ................. 189 584 1,504 3,623 (14)
--------- --------- --------- -------- -------
Loss before provision for income taxes ......... (16,531) (19,237) (11,407) (4,593) (404)
Provision for income taxes ..................... 70 93 57 42 42
--------- --------- --------- -------- -------
Net loss ....................................... (16,601) (19,330) (11,464) (4,635) (446)
Preferred stock dividends ...................... (27) (2,400) (2,400) (2,400) --
--------- --------- --------- -------- -------
Net loss applicable to common
stockholders................................... $(16,628) $(21,730) $ (13,864) $ (7,035) $ (446)
========= ========= ========= ======== =======
Basic net loss per common share ................ $ (3.17) $ (4.14) $ (2.56) $ (1.24)(7) $ (0.05)
Weighted average common shares
outstanding - Basic ........................... 5,238 5,245 5,425 5,679 9,279
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------------
PRO FORMA,
ACTUAL AS ADJUSTED(8)
------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital ................................... $ 2,345 $ 6,147
Total assets ...................................... 57,163 60,513
Long-term debt, including current portion ......... 41,324 1,240
Redeemable cumulative preferred stock ............. 31,223 --
Stockholders' equity (deficit) .................... (26,923) 48,500
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
ACTUAL PRO FORMA(1)
----------------------------------------------------------- -------------
1995 1996 1997 1998 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(9) ...................................... $ (13,347) $ (13,164) $ (5,503) $ 5,761 $ 6,660
Adjusted EBITDA(9) ............................. (2,292) (2,052) 2,211 5,761 6,660
Cash flows from operating activities ........... (3,561) (1,653) (4,020) (2,500) --
Cash flows from investing activities ........... (22,074) (4,919) (12,221) (12,104) --
Cash flows from financing activities ........... 33,434 657 15,521 15,635 --
Transactions processed(10)
Pharmacy ...................................... -- 107,032 126,211 188,114 191,663
Medical ....................................... -- 15,687 23,075 31,564 31,564
Dental ........................................ -- 6,021 12,188 14,681 14,681
--------- --------- --------- --------- ---------
Total transactions processed ................ -- 128,740 161,474 234,359 237,908
Transactions per FTE(10)(11) ................... -- 321 415 642 652
Revenue per FTE(11) ............................ $ 48 $ 79 $ 91 $ 116 $ 120
Operating expenses per transaction(10) ......... -- 0.39 0.29 0.18 0.19
</TABLE>
(Footnotes on following page)
6
<PAGE>
(1) Gives effect to (i) the acquisition of Stockton in November 1997, (ii) the
Recapitalization and (iii) the Offering, as if they had occurred on July 1,
1997.
(2) During the periods presented, the Company made a series of acquisitions and
divested certain non-core or unprofitable operations. Revenues attributable
to these divested operations, which are included in the statement of
operations data, were $1,709,000, $3,617,000, $2,252,000 and $241,000 in the
fiscal years ended June 30, 1995, 1996, 1997 and 1998, respectively.
(3) Reflects the write-off of goodwill related to the acquisitions of Medical
Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark").
(4) Reflects the write-down of costs relating to client lists and related
allocable goodwill obtained in the acquisition of General Computer
Corporation, subsequently renamed MEDE AMERICA Corporation of Ohio ("MEDE
OHIO").
(5) Reflects the write-off of acquired in-process research and development costs
upon the consummation of the TCS acquisition.
(6) Reflects (i) expenses of $2,864,000 relating to the spin-off of the Company
by Card Establishment Services, Inc. ("CES") in the fiscal year ended June
30, 1995 and (ii) expenses recorded relating to contingent consideration
paid to former owners of acquired businesses of $538,000 and $2,301,000 in
the fiscal years ended June 30, 1996 and 1997, respectively.
(7) Supplemental net loss per share, giving effect to the Recapitalization,
would be $(0.59) for the fiscal year ended June 30, 1998.
(8) Gives effect to (i) the Recapitalization and (ii) the Offering, as if they
had occurred on June 30, 1998.
(9) EBITDA represents net income (loss) plus provision for income taxes, net
interest expense, other (income) expense and depreciation and amortization.
EBITDA is not a measurement in accordance with generally accepted accounting
principles ("GAAP") and should not be considered an alternative to, or more
meaningful than, earnings (loss) from operations, net earnings (loss) or
cash flow from operations as defined by GAAP or as a measure of the
Company's profitability or liquidity. Not all companies calculate EBITDA in
the same manner and, accordingly, EBITDA shown herein may not be comparable
to EBITDA shown by other companies. The Company has included information
concerning EBITDA herein because management believes EBITDA provides useful
information. Adjusted EBITDA represents EBITDA plus certain other charges as
described below. The following table summarizes EBITDA and adjusted EBITDA
for all periods presented:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
ACTUAL PRO FORMA
--------------------------------------------------------- ----------
1995 1996 1997 1998 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA ....................................... $ (13,347) $ (13,164) $ (5,503) $5,761 $6,660
Contingent consideration paid to former
owners of acquired businesses .............. -- 538 2,301 -- --
Write-down of intangible assets .............. 8,191 9,965 -- -- --
Acquired in-process research and
development ................................ -- -- 4,354 -- --
Expenses related to the CES spin-off ......... 2,864 -- -- -- --
Contract and legal settlement provisions ..... -- 609 1,059 -- --
---------- ---------- -------- ------ ------
Adjusted EBITDA .............................. $ (2,292) $ (2,052) $ 2,211 $5,761 $6,660
========== ========== ======== ====== ======
</TABLE>
- -----------
(10) Transaction volumes are not available for the fiscal year ended June 30,
1995.
(11) Full-time equivalents ("FTE") represents the number of full-time employees
and part-time equivalents of full-time employees as of the end of the
period shown.
7
<PAGE>
QUARTERLY FINANCIAL INFORMATION
The following table summarizes certain quarterly financial information for
all periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
9/30/96 12/31/96 3/31/97
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................ $ 8,179 $ 7,831 $ 8,954
Income (loss) from operations ........... (1,301) (1,108) (5,515)
Net loss ................................ (1,465) (1,324) (5,072)
OTHER DATA:
EBITDA (1) .............................. $ (199) $ (64) $ (4,159)
Contingent consideration paid to former
owners of acquired businesses .......... 330 330 330
Acquired in-process research and
development ............................ -- -- 4,354
Contract and legal settlement provisions -- -- --
-------- -------- ---------
Adjusted EBITDA(1) ...................... $ 131 $ 266 $ 525
======== ======== =========
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
6/30/97 9/30/97 12/31/97 3/31/98 6/30/98
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................ $ 10,315 $ 9,241 $ 9,849 $ 11,099 $ 12,101
Income (loss) from operations ........... (2,872) (894) (289) (23) 224
Net loss ................................ (3,603) (1,561) (1,216) (949) (909)
OTHER DATA:
EBITDA (1) .............................. $ (1,081) $ 704 $ 1,309 $ 1,729 $ 2,019
Contingent consideration paid to former
owners of acquired businesses .......... 1,311 -- -- -- --
Acquired in-process research and
development ............................ -- -- -- -- --
Contract and legal settlement provisions 1,059 -- -- -- --
--------- -------- -------- -------- --------
Adjusted EBITDA(1) ...................... $ 1,289 $ 704 $ 1,309 $ 1,729 $ 2,019
========= ======== ======== ======== ========
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Operating Results."
- -----------
(1) EBITDA represents net income (loss) plus provision for income taxes, net
interest expense, other (income) expense and depreciation and amortization.
EBITDA is not a measurement in accordance with GAAP and should not be
considered an alternative to, or more meaningful than, earnings (loss) from
operations, net earnings (loss) or cash flow from operations as defined by
GAAP or as a measure of the Company's profitability or liquidity. Not all
companies calculate EBITDA in the same manner and, accordingly, EBITDA shown
herein may not be comparable to EBITDA shown by other companies. The Company
has included information concerning EBITDA herein because management
believes EBITDA provides useful information. Adjusted EBITDA represents
EBITDA plus certain other charges as described above.
- -----------
Except as otherwise noted herein, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) assumes no
exercise of the Medic Warrant and (iii) has been adjusted to give effect to a
one-for-4.5823 reverse stock split of all outstanding Common Stock (the "Reverse
Stock Split"). The Company's Preferred Stock, $.01 par value ("Preferred
Stock"), provides for conversion of the aggregate liquidation value of the
Preferred Stock, including accrued but unpaid dividends, into Common Stock at
the initial public offering price per share. However, cash realized by the
Company upon any exercise of the Underwriters' overallotment option would be
applied to the payment of accrued dividends in lieu of having such dividends
convert into Common Stock. Except as otherwise noted herein, each reference in
this Prospectus to Common Stock issuable upon conversion of all of the Preferred
Stock assumes a conversion price of $14.00. Based on an aggregate liquidation
preference of the Preferred Stock of $31,424,375 (including $7,428,775 of
accrued dividends) as of July 31, 1998, 2,244,565 shares of Common Stock would
be so issuable as of such date. In addition, concurrently with the consummation
of the Offering, an additional 66,375 shares of Common Stock will be issued upon
the exercise of certain outstanding Common Stock purchase warrants. The Medic
Warrant to purchase 1,250,000 shares of Common Stock at the price to the public
in the Offering will remain outstanding after the Offering. Such conversion of
the Preferred Stock, and exercise of certain warrants, are referred to herein as
the "Recapitalization." See "Capitalization," "Description of Common Stock,"
"Principal Stockholders" and "Underwriting."
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RISK FACTORS
In addition to other information contained in this Prospectus, prospective
investors should carefully consider the following risk factors before purchasing
the shares of Common Stock offered hereby. This Prospectus contains
forward-looking statements relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various factors
and the matters set forth in this Prospectus generally.
HISTORY OF OPERATING LOSSES; LIMITED OPERATING HISTORY
The Company has experienced substantial net losses, including net losses of
$16.6 million, $19.3 million, $11.5 million and $4.6 million for the fiscal
years ended June 30, 1995, 1996, 1997 and 1998, respectively. The Company had an
accumulated deficit of approximately $52.5 million as of June 30, 1998. In
connection with its acquisitions completed to date, the Company has incurred
significant acquisition-related charges and will record significant amortization
expense related to goodwill and other intangible assets in future periods. There
can be no assurance that the Company will be able to achieve or sustain revenue
growth or profitability on a quarterly or annual basis. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's operating history is limited. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies with limited operating histories, particularly
companies in new and rapidly evolving markets such as EDI and transaction
processing. Such risks include, but are not limited to, an evolving and
unpredictable business model and the difficulties inherent in the management of
growth. To address these risks, the Company must, among other things, maintain
and increase its client base, implement and successfully execute its business
and marketing strategies, continue to develop and upgrade its technology and
transaction-processing systems, provide superior client service, respond to
competitive developments, and attract, retain and motivate qualified personnel.
There can be no assurance that the Company will be successful in addressing such
risks or in achieving profitability, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ACQUISITION STRATEGY; NEED FOR ADDITIONAL CAPITAL
The Company's strategy includes acquisitions of healthcare EDI businesses
that complement or supplement the Company's business. The success of such a
strategy will depend on many factors, including the Company's ability to
identify suitable acquisition candidates, the purchase price and the
availability and terms of financing. Significant competition for acquisition
opportunities exists in the healthcare EDI industry, which may significantly
increase the costs of and decrease the opportunities for acquisitions. Although
the Company is actively pursuing possible acquisitions, there can be no
assurance that any acquisition will be consummated. No assurances can be given
that the Company will be able to operate any acquired businesses profitably or
otherwise successfully implement its expansion strategy. The Company may finance
future acquisitions through borrowings or the issuance of debt or equity
securities. There can be no assurance that future lenders will extend credit on
favorable terms, if at all. Further, any borrowings would increase the Company's
interest expense and any issuance of equity securities could have a dilutive
effect on the holders of Common Stock. The Company will not be able to account
for acquisitions under the "pooling of interests" method for at least two years
following the Offering. Accordingly, such future acquisitions may result in
significant goodwill and a corresponding increase in the amount of amortization
expense and could also result in write-downs of purchased assets, all of which
could adversely affect the Company's operating results in future periods.
INTEGRATION OF ACQUIRED BUSINESSES
The success of the Company's acquisition strategy also depends to a large
degree on the Company's ability to effectively integrate the acquired products
and services, facilities, technologies, personnel and operations into the
Company. The process of integration often requires substantial management atten-
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tion and other corporate resources, and the Company may not be able to
accurately predict the resources that will be needed to integrate acquired
operations. There can be no assurance that the Company will be able to
effectively integrate any or all acquired companies or operations. Any failure
to do so could result in operating inefficiencies, redundancies, management
distraction or technological difficulties (among other possible adverse
consequences), any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES
The market for the Company's products and services is characterized by
rapidly changing technology, evolving industry standards and the frequent
introduction of new and enhanced services. The Company's success will depend
upon its ability to enhance its existing services, to introduce new products and
services on a timely and cost-effective basis to meet evolving client
requirements, to achieve market acceptance for new products or services and to
respond to emerging industry standards and other technological changes. There
can be no assurance that the Company will be able to respond effectively to
technological changes or new industry standards. Moreover, there can be no
assurance that other companies will not develop competitive products or
services, or that any such competitive products or services will not have an
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON CONNECTIONS TO PAYORS
The Company's business is enhanced by the substantial number of payors
(such as insurance companies, Medicare and Medicaid agencies and Blue Cross/Blue
Shield organizations) to which the Company has electronic connections. These
connections may either be made directly or through a clearinghouse or other
intermediary. The Company has attempted to enter into suitable contractual
relationships to ensure long term payor connectivity; however, there can be no
assurance that the Company will be able to maintain its links with all payors
with whom it currently has connections. In addition, there can be no assurance
that the Company will be able to develop new connections (either directly or
through clearinghouses) on satisfactory terms, if at all. Lastly, certain
third-party payors provide EDI systems directly to healthcare providers,
bypassing third-party processors such as the Company. The failure to maintain
its existing connections with payors and clearinghouses or to develop new
connections as circumstances warrant, or an increase in the utilization of
direct links between providers and payors, could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEVELOPMENT OF EDI PROCESSING IN THE HEALTHCARE INDUSTRY
The Company's strategy anticipates that electronic processing of healthcare
transactions, including transactions involving clinical as well as financial
information, will become more widespread and that providers and third-party
payors increasingly will use EDI processing networks for the processing and
transmission of data. Electronic transmission of healthcare transactions is
still developing, and complexities in the nature and types of transactions which
must be processed have hindered, to some degree, the development and acceptance
of EDI processing in this market. There can be no assurance that continued
conversion from paper-based transaction processing to EDI processing in the
healthcare industry will occur or that, to the extent it does occur, healthcare
providers and payors will use independent processors such as the Company.
Furthermore, if EDI processing extensively penetrates the healthcare market or
becomes highly standardized, it is possible that competition among transaction
processors will focus increasingly on pricing. If competition causes the Company
to reduce its pricing in order to retain market share, the Company may suffer a
material adverse change in its business, financial condition and results of
operations.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied significantly in the
past and are likely to vary from quarter to quarter in the future. Quarterly
revenues and operating results may fluctuate as a result of a variety of
factors, including: integration of acquired businesses; seasonal variability of
demand
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for healthcare services generally; the number, timing and significance of
announcements and releases of product enhancements and new products by the
Company and its competitors; the timing and significance of announcements
concerning the Company's present or prospective strategic alliances; the loss of
clients due to consolidation in the healthcare industry; legislation or changes
in government policies or regulations relating to healthcare EDI processing;
delays in product installation requested by clients; the length of the sales
cycle or the timing of sales; client budgeting cycles and changes in client
budgets; marketing and sales promotional activities; software defects and other
quality factors; and general economic conditions.
The Company's operating expense levels, which will increase with the
addition of acquired businesses, are relatively fixed. If revenues are below
expectations, net income is likely to be disproportionately adversely affected.
Further, in some future quarters the Company's revenues or operating results may
be below the expectations of securities analysts and investors. In such event,
the trading price of the Company's Common Stock would likely be materially
adversely affected. See "Summary -- Quarterly Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Operating Results."
PROPOSED HEALTHCARE DATA CONFIDENTIALITY LEGISLATION
Legislation that imposes restrictions on third-party processors' ability to
analyze certain patient data without specific patient consent has been
introduced in the U.S. Congress. Although the Company does not currently access
or analyze individually identifiable patient information, such legislation, if
adopted, could adversely affect the ability of third-party processors to
transmit information such as treatment and clinical data, and could adversely
affect the Company's ability to expand into related areas of the EDI healthcare
market. In addition, the Health Insurance Portability and Accountability Act,
passed in 1997, mandates the establishment of federal standards for the
confidentiality, format and transmission of patient data, as well as
recordkeeping and data security obligations. It is possible that the standards
so developed will necessitate changes to the Company's operations, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The Company faces significant competition from healthcare and
non-healthcare EDI processing companies. The Company also faces potential
competition from other companies, such as vendors of provider information
management systems, which have added or may add their own proprietary EDI
processing systems to existing or future products and services. Competition may
be experienced in the form of pressure to reduce per transaction prices or
eliminate per transaction pricing altogether. If EDI processing becomes the
standard for claims and information processing, a number of larger and better
capitalized entities may elect to enter the industry and further increase
competitive pricing pressures. Many of the Company's existing and potential
competitors are larger and have significantly greater financial, marketing,
technological and other resources than the Company. There can be no assurance
that increased competition will not have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Competition."
RISK OF INTERRUPTION OF DATA PROCESSING
The Company currently processes its data through its facilities in
Twinsburg, Ohio, Mitchel Field, New York, and Atlanta, Georgia. The Twinsburg
and Mitchel Field sites are designed to be redundant. Additionally, the Company
transmits data through a number of different telecommunications networks, using
a variety of different technologies. However, the occurrence of an event that
overcomes the data processing and transmission redundancies then in place could
lead to service interruptions and could have a material adverse effect on the
Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, prior to January 1, 2000, computer systems
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and/or software used by many companies (including the Company) will need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential consequences of the
Year 2000 phenomenon. Although the Company currently offers software products
that are designed or have been modified to comply with the Year 2000
requirements, there can be no assurance that the Company's current software
contains all necessary date code changes. The Company believes that certain
installations of its products and certain products currently used by its clients
in conjunction with third-party vendors' products are not Year 2000 compliant.
Certain of the Company's physician benefit management clients are being migrated
from the Company's PBM system in Ohio to its PBM system acquired from Stockton,
which the Company considers to be Year 2000 compliant. The total revenue from
such clients was $6,245,000 in fiscal 1998. A testing and migration timetable
for all such clients has been developed, with migration activities scheduled for
completion in mid-1999.
While the Company has plans to address the problems related to its own
products within the coming year, there can be no assurance that the costs of
bringing these systems into compliance will not be significantly greater than
expected or that compliance will be achieved in a timely manner. In addition,
there can be no assurance that the Company's current products do not contain
undetected errors or defects associated with Year 2000 date functions that may
result in material costs to the Company. Moreover, even if the Company's
products and services satisfy such requirements, the products and services
provided to the Company's clients by other software vendors, and the systems
used by certain payors, may not be Year 2000 compliant, thereby disrupting the
ability of the Company's clients to use the Company's software or to obtain
reimbursement in a timely manner. An adverse impact on such clients due to the
Year 2000 issue could also have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Year
2000 Compliance."
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends in significant part on the continued
service of its executive officers, its product managers and key sales, marketing
and development personnel. The Company considers its key management personnel to
be Thomas P. Staudt, President and Chief Executive Officer, William M. McManus
and Roger L. Primeau, in charge of the pharmacy/medical and dental operations,
respectively, James T. Stinton, the Company's Chief Information Officer, and
Richard Bankosky, the Company's Chief Financial Officer. No single individual is
considered by the Company to be critical to the Company's success. The Company
does not maintain employment agreements with these officers or other employees
(with limited exceptions) and the failure to retain the services of such persons
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. Federal and state legislatures periodically
consider programs to modify or amend the United States healthcare system at both
the federal and state level. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise
change the environment in which healthcare industry participants operate.
Healthcare industry participants may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including investments in the Company's products and services. In addition, many
healthcare providers are consolidating to create larger healthcare delivery
organizations. This consolidation reduces the number of potential clients for
the Company's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for the Company's
services. Other healthcare information companies, such as billing services and
practice management vendors, which currently utilize the Company's services,
could develop or acquire transaction processing and networking capabilities and
may cease utilizing the Company's services in the future. The impact of these
developments in the healthcare industry is difficult to predict and could have a
material adverse effect on the Company's business, financial condition and
results of operations. To the extent that the current trend toward consolidation
in the industry continues, MEDE AMERICA may find it more difficult to obtain
access to payors, information provid-
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ers and practice management software vendors on whom its ability to deliver
services and enroll new clients now depends. Loss of access to these industry
participants could materially adversely affect the Company's business, financial
condition and results of operations.
DEPENDENCE ON INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT
The Company's ability to compete effectively depends to a significant
extent on its ability to protect its proprietary information. The Company relies
on a combination of statutory and common law copyright, trademark and trade
secret laws, client licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. The Company does
not include in its software any mechanisms to prevent or inhibit unauthorized
use, but generally enters into confidentiality agreements with its consultants,
clients and potential clients and limits access to, and distribution of, its
proprietary information. The Company has not filed any patent applications with
respect to its intellectual property. It is the Company's policy to defend its
intellectual property; however, there can be no assurance that the steps taken
by the Company to protect its proprietary information will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
The Company is also subject to the risk of alleged infringement by it of
intellectual property rights of others. Although the Company is not currently
aware of any pending or threatened infringement claims with respect to the
Company's current or future products, there can be no assurance that third
parties will not assert such claims. Any such claims could require the Company
to enter into license arrangements or could result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. Furthermore,
litigation may be necessary to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company expects that software developers will increasingly be subject
to such claims as the number of products and competitors providing software and
services to the healthcare industry increases and overlaps occur. Any such
claim, with or without merit, could result in costly litigation or might require
the Company to enter into royalty or licensing agreements, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company or at all.
RISK OF PRODUCT DEFECTS
Products such as those offered by the Company may contain errors or
experience failures, especially when initially introduced or when new versions
are released. While the Company conducts extensive testing to address these
errors and failures, there can be no assurance that errors or performance
failures will not occur in products under development or in enhancements to
current products. Any such errors or failures could result in loss of revenues
and clients, delay in market acceptance, diversion of development resources,
damage to the Company's reputation or increased service costs, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. To date, the Company has not experienced
any material product defects.
CONTROL BY EXISTING STOCKHOLDERS
After the Offering, 49.7% of the Common Stock will be owned by investment
funds affiliated with Welsh, Carson, Anderson & Stowe, a private investment firm
("WCAS") and 7.9% will be owned by investment funds affiliated with William
Blair Capital Partners L.L.C. ("WBCP"). See "Principal Shareholders" and
"Description of Capital Stock -- Recapitalization." As a result of this
concentration of ownership, these shareholders may be able to exercise control
over matters requiring shareholder ap-
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proval, including the election of directors and approval of significant
corporate transactions. Such control may have the effect of delaying or
preventing a change in control of the Company. The Company's Board of Directors
currently includes Thomas E. McInerney and Anthony J. de Nicola, designees of
WCAS, and Timothy M. Murray, a designee of WBCP. The funds affiliated with WCAS
may be deemed to be controlled by their respective general partners, the
general partners of each of which include some or all of the following
individuals: Thomas E. McInerney and Anthony J. de Nicola, directors of the
Company, Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H.
Stowe, Andrew M. Paul, Robert A. Minicucci, Paul B. Queally and Laura M.
VanBuren. The funds affiliated with WBCP may be deemed to be controlled by
their respective general partners, the general partners of which include
William Blair & Company L.L.C. and certain of its employees, including Timothy
E. Murray, a director of the Company.
NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price has been determined by negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the market
price of the Common Stock in the future. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
stock market has from time to time experienced extreme price and volume
fluctuations, particularly in the securities of technology companies, which have
often been unrelated to the operating performance of individual companies.
Announcements of technological innovations or new and enhanced commercial
products by the Company or its competitors, market conditions in the industry,
developments or disputes concerning proprietary rights, changes in earnings,
economic and other external factors, political and other developments and
period-to-period fluctuations in financial results of the Company may have a
significant impact on the market price and marketability of the Company's Common
Stock. Fluctuations in the trading price of the Common Stock may also adversely
affect the liquidity of the trading market for the Common Stock.
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, any such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. Furthermore, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "DGCL"), which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which such person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of these provisions could have the effect of delaying or preventing
a change of control of the Company. Certain other provisions of the Amended and
Restated Certificate of Incorporation and the Company's Bylaws could also have
the effect of delaying or preventing changes of control or management of the
Company, which could adversely affect the market price of the Company's Common
Stock. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware
Laws and Certain Charter and Bylaw Provisions; Anti-Takeover Measures."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE
Sales of Common Stock (including Common Stock issued upon the exercise of
outstanding stock options) in the public market after this Offering could
materially adversely affect the market price of the Common Stock. Upon the
completion of this Offering and giving effect to the Recapitalization, the
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Company will have 11,595,787 shares of Common Stock outstanding, assuming no
exercise of stock options and no exercise of the Underwriters' over-allotment
option. Of these outstanding shares of Common Stock, the 3,600,000 shares sold
in this Offering will be freely tradeable, without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), unless purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 7,995,787 shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act and were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be resold in the public market only if registered or pursuant to an
exemption from registration, such as Rule 144 under the Securities Act. All
officers, directors and certain holders of Common Stock beneficially owning, in
the aggregate, approximately shares of Common Stock and options to purchase
shares of Common Stock, have agreed, pursuant to certain lock-up agreements,
that they will not sell, offer to sell, solicit an offer to purchase, contract
to sell, grant any option to sell, pledge, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock owned by them, or that could
be purchased by them through the exercise of options to purchase Common Stock of
the Company, for a period of 180 days after the date of this Prospectus without
the prior written consent of Smith Barney Inc. Upon expiration of the lock-up
agreements, all shares of Common Stock currently outstanding will be immediately
eligible for resale, subject to the requirements of Rule 144. The Company is
unable to predict the effect that sales may have on the then prevailing market
price of the Common Stock. See "Management -- Employee Benefit Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
Prospective investors should be aware that current holders of the Company's
Common Stock and Preferred Stock will benefit from the Offering. Approximately
$25.0 million of the net proceeds of the Offering will be used to prepay all
then outstanding principal and accrued interest on a Senior Subordinated Note
(as herein defined) held by WCAS Capital Partners II, L.P., one of the Company's
principal stockholders. In addition, approximately $18.0 million of the net
proceeds will be used to repay all then outstanding indebtedness and accrued
interest under the Company's current Credit Facility (as herein defined). The
Credit Facility, which is guaranteed by the Company's four principal
stockholders, will be replaced with a new facility, which will not be guaranteed
by a third party. See "Use of Proceeds" and "Certain Transactions."
After the Offering, all existing stockholders will benefit from certain
changes including the creation of a public market for the Company's Common
Stock. Moreover, the current shareholders will realize an immediate increase in
market and tangible book value. Assuming an initial public offering price of
$14.00 per share, the aggregate unrealized gain to current stockholders of the
Company, based on the difference between such public offering price of the
Common Stock and the acquisition cost of their equity, will be $83.4 million.
See "Dilution."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will incur immediate and
substantial dilution in the net tangible book value per share of Common Stock in
the amount of $13.10 per share, at an assumed initial public offering price of
$14.00 per share. To the extent that outstanding options to purchase Common
Stock are exercised, there will be further dilution. See "Dilution."
ABSENCE OF DIVIDENDS
No dividends have been paid on the Common Stock to date and the Company
does not anticipate paying dividends on the Common Stock in the foreseeable
future. Moreover, it is expected that the terms of the Amended Credit Facility
will prohibit the Company from paying dividends on the Common Stock. See
"Dividend Policy."
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RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain statements that are "forward-looking
statements," which include, among other things, the discussions of the Company's
business strategy and expectations concerning developments in the healthcare EDI
industry, the Company's market position, future operations, transaction growth,
margins and profitability, and liquidity and capital resources. Investors in the
Common Stock offered hereby are cautioned that such forward-looking statement
involves risks and uncertainties, and that although the Company believes that
the assumptions on which the forward-looking statements contained herein are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could be
incorrect. The uncertainties in this regard include, but are not limited to,
those identified in the risk factors discussed above. In light of these and
other uncertainties, the inclusion of a forward-looking statement herein should
not be regarded as a representation by the Company that the Company's plans and
objectives will be achieved.
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THE COMPANY
MEDE AMERICA is a leading provider of EDI products and services to a broad
range of providers and payors in the healthcare industry. The Company offers an
integrated suite of EDI solutions that allows hospitals, pharmacies, physicians,
dentists and other healthcare providers and provider groups to electronically
edit, process and transmit claims, eligibility and enrollment data, track claims
submissions throughout the claims payment process and obtain faster
reimbursement for their services. In addition to offering greater processing
speed, the Company's EDI products reduce processing costs, increase collection
rates and result in more accurate data interchange. The Company maintains over
540 direct connections with insurance companies, Medicare and Medicaid agencies,
Blue Cross and Blue Shield systems and other third party payors, as well as over
500 indirect connections with additional payors through claims clearinghouses.
Currently, the Company processes over 900,000 transactions per day for over
65,000 providers located in all 50 states. The Company's mission is to be the
leading provider of integrated healthcare transaction processing technology,
networks and databases, enabling its clients to improve the quality and
efficiency of their services.
The Company was formed in March 1995 through the consolidation and
subsequent spin-off of three subsidiaries of Card Establishment Services, Inc.
("CES"), in connection with the acquisition by First Data Corporation of CES'
credit card processing business. The three subsidiaries, MedE America, Inc.,
Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"), which
comprised the heathcare services business of CES, historically provided EDI
services to hospitals and physicians. After the spin-off, the Company made
several strategic acquisitions to strengthen its core hospital/medical business
and to expand into the pharmaceutical and dental markets. In March 1995, the
Company acquired General Computer Corporation, subsequently renamed MEDE AMERICA
Corporation of Ohio (referred to herein as "MEDE OHIO"), a developer of EDI
systems and services for the pharmaceutical industry, and in June 1995 the
Company acquired Latpon Health Systems, Incorporated ("Latpon"), a developer of
proprietary EDI claims processing software for hospitals and physicians. These
acquisitions were followed by acquisitions of Electronic Claims and Funding,
Inc. ("EC&F"), and Premier Dental Systems, Corp. ("Premier"), in October 1995.
These companies were engaged in the EDI and management software businesses in
the dental market. The Company enhanced its presence in the pharmacy market by
acquiring Time-Share Computer Systems, Inc. ("TCS"), in February 1997 and The
Stockton Group, Inc. ("Stockton") in November 1997.
The Company's executive offices are located at 90 Merrick Avenue, Suite
501, East Meadow, New York 11554, and its telephone number is (516) 542-4500.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, assuming an initial public offering price of $14.00 per share,
are estimated to be $45.9 million ($53.0 million if the Underwriters'
over-allotment option is exercised in full), after deducting the estimated
offering fees and expenses payable by the Company. The Company intends to use
the net proceeds from the Offering as follows: (i) approximately $25.0 million
to prepay all then outstanding principal and accrued interest on its outstanding
10% Senior Subordinated Note due February 14, 2002 (the "Senior Subordinated
Note"); (ii) approximately $18.0 million to repay all then outstanding
indebtedness and accrued interest under its current credit facility (the "Credit
Facility"); and (iii) the balance for general corporate and working capital
purposes. Cash realized by the Company upon any exercise of the Underwriters'
overallotment option would be applied to the payment of accrued dividends in
lieu of having such dividends convert into Common Stock. As of July 31, 1998,
such accrued dividends totaled $7,428,775. See "Certain Transactions." Pending
application to the foregoing uses, such proceeds will be invested in short-term,
investment-grade, interest-bearing obligations.
Outstanding borrowings under the Credit Facility bear interest at a
weighted average rate of 6.93% per annum (as of June 30, 1998) and are
guaranteed by WCAS and WBCP. The Credit Facility matures on October 31, 1999.
The Company has received a letter from the lender under the Credit Facility
committing to provide an amended credit facility (the "Amended Credit Facility")
with total available credit of $15.0 million. This facility would be comprised
of a $7.5 million term loan to be used for acquisitions and a $7.5 million
revolving credit loan to be used for working capital purposes, each with a
maximum term of two years from the earlier of the completion of the Offering or
October 31, 1998. Borrowings under the Amended Credit Facility will not be
guaranteed by any third party, but will be secured by substantially all of the
Company's assets including the stock of the Company's subsidiary. It is
anticipated that the Amended Credit Facility will take effect upon the
consummation of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future.
Moreover, it is expected that the terms of the Amended Credit Facility will
prohibit the Company from paying dividends on the Common Stock. The Company
currently intends to retain any earnings to fund future growth and the operation
of its business. See "Risk Factors -- Absence of Dividends."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 on an actual basis and as adjusted to reflect the Recapitalization and
the issuance and sale by the Company of 3,600,000 shares of Common Stock offered
hereby, assuming an initial public offering price of $14.00 per share, after
deducting the estimated offering fees and expenses payable by the Company, and
the application of the net proceeds thereof as described under "Use of
Proceeds." The following table should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and the "Unaudited Pro
Forma Consolidated Financial Information" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)
Senior Subordinated Note ..................... $ 23,359 $ --
Credit Facility .............................. 16,725 --
Other debt ................................... 1,240 1,240
--------- ---------
Total long-term debt ....................... 41,324 1,240
--------- ---------
Redeemable cumulative preferred stock ......... 31,223 --
--------- ---------
Stockholders' (deficit) equity
Common Stock(2) .............................. 57 116
Additional paid-in capital ................... 25,584 102,670
Accumulated deficit .......................... (52,474) (54,196)
Deferred compensation ........................ (90) (90)
--------- ---------
Total stockholders' (deficit) equity ......... (26,923) 48,500
--------- ---------
Total capitalization ......................... $ 45,624 $ 49,740
========= =========
</TABLE>
- ----------
(1) As adjusted to reflect the Recapitalization and the sale of 3,600,000 shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price of $14.00 per share and the anticipated application of the
estimated net proceeds therefrom.
(2) Excludes (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic
Warrant and (ii) 482,823 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding under the Stock Plan as of July 31,
1998, at a weighted average exercise price of $4.84 per share, of which
212,715 are exercisable. See "Prospectus Summary -- Recent Developments" and
"Management-Employee Benefit Plans." Includes 66,375 shares of Common Stock
issuable upon exercise of the Common Stock purchase warrants as contemplated
by the Recapitalization. See "Description of Capital Stock."
19
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of the Company as of June
30, 1998, after giving effect to the Recapitalization, was approximately $(33.7)
million or $(4.22) per share of Common Stock. Pro forma net deficit in tangible
book value per share is determined by dividing the net tangible deficit in book
value of the Company (pro forma tangible assets less total liabilities) by the
number of shares of Common Stock outstanding. Dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of the Offering. Without taking into
account any changes in such pro forma net tangible book value after June 30,
1998, other than to give effect to (i) the sale of 3,600,000 shares of Common
Stock by the Company in this Offering at an assumed initial public offering
price of $14.00 per share and after deducting the estimated fees and offering
expenses, (ii) the application of the estimated net proceeds therefrom and (iii)
the Recapitalization, the pro forma net tangible book value of the Company as of
June 30, 1998 would have been approximately $10.5 million or $0.90 per share.
This represents an immediate increase in pro forma net tangible book value of
$5.12 per share to existing stockholders and an immediate dilution in pro forma
net tangible book value of $13.10 per share to new investors. The following
table illustrates this dilution on a per share basis.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ...................... $ 14.00
Pro forma net tangible book value per share before this Offering(1). $(4.22)
Increase per share attributable to new investors ................... 5.12
------
Pro forma net tangible book value per share after this Offering ...... 0.90
-------
Dilution per share to new investors(2) ............................... $ 13.10
=======
</TABLE>
- ----------
(1) Pro forma net tangible book value per share of Common Stock is determined by
dividing the Company's pro forma deficit in net tangible book value at June
30, 1998 of $(33.7) million, by the pro forma number of shares of Common
Stock outstanding, in each case after giving effect to the Recapitalization.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share after this Offering from the initial
public offering price per share.
The following table sets forth, on a pro forma basis as of June 30, 1998,
after giving effect to the Recapitalization, the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by existing stockholders (excluding the fair value of
companies contributed in the March 1995 spin-off from CES) and to be paid by new
investors, based on an assumed initial public offering price of $14.00 per share
and before deducting estimated fees and expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 7,981,204 68.9% $28,349,000 36.0% $ 3.55
New investors ................. 3,600,000 31.1 50,400,000 64.0 14.00
--------- ----- ----------- -----
Total ......................... 11,581,204 100.0% $78,749,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock. At June 30, 1998 there were 483,041 shares of Common
Stock issuable upon the exercise of stock options outstanding under the
Company's Stock Plans, of which 212,758 were currently exercisable. Such options
have a weighted average exercise price of $4.84 per share. To the extent such
options are exercised, there will be further dilution to the new investors. See
"Capitalization," "Management -- Employee Benefit Plans" and "Description of
Capital Stock."
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information has
been prepared by the Company's management from the historical Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus. The unaudited pro forma consolidated statement of operations
for the year ended June 30, 1998 includes adjustments that give effect to (i)
the acquisition of Stockton in November 1997, (ii) the Recapitalization and
(iii) the Offering, as if they had occurred as of July 1, 1997. The unaudited
pro forma consolidated balance sheet as of June 30, 1998 gives effect to (i) the
Recapitalization and (ii) the Offering as if they had occurred on such date.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma consolidated financial information should be read in
conjunction with the historical financial statements of the Company and Stockton
and the respective notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial
information included herein. The unaudited pro forma consolidated financial
information is provided for information purposes only and does not purport to be
indicative of the results which would have been obtained had the acquisition of
Stockton, the Recapitalization and the Offering been completed on the dates
indicated or which may be expected to occur in the future.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
---------------------------
COMPANY STOCKTON(1)
------- -----------
<S> <C> <C>
Revenues .................................. $ 42,290 $1,646
Operating expenses:
Operations ............................... 16,958 216
Sales, marketing and client services. 10,765 298
Research and development ................. 3,941 43
General and administrative ............... 4,865 161
Depreciation and amortization ............ 6,743 54
Total operating expenses .................. 43,272 772
--------- ------
Income (loss) from operations ............. (982) 874
Other (income) expense .................... (12) --
Interest expense (income), net ............ 3,623 27
--------- ------
Income (loss) before provision for
income taxes ............................. (4,593) 847
Provision for income taxes ................ 42 --
--------- ------
Net income (loss) ......................... (4,635) 847
Preferred stock dividends ................. (2,400) --
--------- ------
Net income (loss) applicable to
common stockholders ...................... $ (7,035) $ 847
========= ======
Basic net loss per common share ........... $ (1.24)
Weighted average common shares
outstanding - Basic ...................... 5,679 --
<CAPTION>
RECAPITALIZATION
AND ACQUISITIONS OFFERING PRO FORMA,
ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues .................................. $ -- $ 43,936 $ -- $ 43,936
Operating expenses:
Operations ............................... 29 (2) 17,203 -- 17,203
Sales, marketing and client services. -- 11,063 -- 11,063
Research and development ................. -- 3,984 -- 3,984
General and administrative ............... -- 5,026 -- 5,026
Depreciation and amortization ............ 315 (3) 7,090 -- 7,090
(22)(4)
Total operating expenses .................. 322 44,366 -- 44,366
--------- --------- ---------- --------
Income (loss) from operations ............. (322) (430) -- (430)
Other (income) expense .................... -- (12) -- (12)
Interest expense (income), net ............ 252 (5) 3,902 (3,916)(6) (14)
--------- --------- ---------- --------
Income (loss) before provision for
income taxes ............................. (574) (4,320) 3,916 (404)
Provision for income taxes ................ -- 42 -- 42
--------- --------- ---------- --------
Net income (loss) ......................... (574) (4,362) 3,916 (7) (446)
Preferred stock dividends ................. 2,400 (8) -- -- --
--------- --------- ---------- --------
Net income (loss) applicable to
common stockholders ...................... $ 1,826 $ (4,362) $ 3,916 $ (446)
========= ========= ========== ========
Basic net loss per common share ........... $ (0.05)
Weighted average common shares
outstanding - Basic ...................... -- 5,679 3,600 (9) 9,279
</TABLE>
<PAGE>
- ---------
DESCRIPTION OF ACQUISITION
The acquisition of Stockton was accounted for using the purchase method of
accounting and, accordingly, the net assets acquired have been recorded at
estimated fair value on the date of acquisition and the historical statement
of operations data of the Company reflects the results of operations of
Stockton from its date of acquisition. The purchase price and the allocation
of the purchase price to the acquired assets are as follows (in thousands):
<TABLE>
<S> <C>
Cash purchase price ....................... $10,674
=======
Computer equipment ........................ $ 260
Purchased client lists .................... 903
Purchased software and technology ......... 1,230
Goodwill .................................. 8,281
-------
$10,674
=======
</TABLE>
The Company is also contingently liable for additional consideration of up
to $2,600,000 (plus interest at an annual rate of 7.25%) if Stockton's
revenue during the 12-month period ending September 30, 1998 is at least
$5,000,000. Based on revenues recorded through July 31, 1998 by Stockton, the
Company has accrued additional contingent consideration of $1,383,000 as of
June 30, 1998 which was treated as additional purchase price and was,
therefore, included in goodwill (but is not reflected in the chart above).
The purchased client lists are being amortized on a straight-line basis
over five years and the purchased software and technology generally is being
amortized on a straight-line basis over five years. Goodwill is
22
<PAGE>
being amortized on a straight-line basis over 20 years. Computer equipment is
being amortized on a straight-line basis over three years.
(1) Represents the historical results of operations of Stockton from July 1,
1997 through the date of acquisition by the Company in November 1997.
(2) Represents rent expense relating to a new operating lease for the Stockton
facility.
(3) Represents adjustments for amortization expense related to the acquisition
of Stockton as if it had occurred July 1, 1997, as follows (in thousands):
<TABLE>
<S> <C>
Purchased client lists .................... $ 67
Purchased software and technology ......... 92
Goodwill .................................. 156
-----
$ 315
=====
</TABLE>
(4) Represents the elimination of depreciation and amortization expenses
relating to assets of Stockton that were not acquired.
(5) The interest expense adjustment is as follows (in thousands):
<TABLE>
<S> <C>
Elimination of historical interest expense of Stockton .......................... $ (38)
Interest expense on borrowings under the Credit Facility used to fund Stockton
acquisition at a composite interest rate of 6.93% (The effect of a .125%
variance in the interest rate on the pro forma adjustment for the year ended
June 30, 1998 would be $5). .................................................... 290
------
$ 252
======
</TABLE>
(6) The interest expense adjustment relating to the Offering is as follows (in
thousands):
<TABLE>
<S> <C>
Interest expense on Senior Subordinated Note including amortiza-
tion of discount .................................................. $ (2,859)
Interest expense on borrowings under the Credit Facility ........... (1,057)
--------
$ (3,916)
========
</TABLE>
(7) In connection with the repayment of outstanding indebtedness under the
Credit Facility and the Senior Subordinated Note, the Company will record
an extraordinary charge relating to the elimination of deferred financing
costs associated with the Credit Facility and the write-off of the
remaining discount on the Senior Subordinated Note. Such charge would have
approximated $2,025,000 as of July 1, 1997, consisting of $25,000 relating
to the write-off of deferred financing costs associated with the Credit
Facility and $2,000,000 relating to the write-off of the remaining discount
on the Senior Subordinated Note. Such charge has been excluded from the pro
forma statement of operations.
(8) Represents the elimination of the dividends accrued on the Preferred Stock
due to the Recapitalization.
(9) Represents the sale by the Company of 3,600,000 shares of Common Stock in
the Offering.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------
ADJUSTMENTS
RELATING TO THE
ACTUAL RECAPITALIZATION
------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 2,950 $ --
Accounts receivable, less allowance for doubt-
ful accounts ..................................... 7,920 --
Formulary receivables .............................. 2,341 --
Inventory .......................................... 211 --
Prepaid expenses and other current assets .......... 537 --
--------- -----------
Total current assets ............................. 13,959 --
Property and equipment-Net .......................... 4,711 --
Goodwill-Net ........................................ 32,522 --
Other intangible assets-Net ......................... 5,501 --
Other assets ........................................ 470 --
--------- -----------
Total ............................................... $ 57,163 $ --
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ................................... $ 3,630 $ --
Accrued expenses and other current liabilities. 7,715 --
Current portion of long-term debt .................. 269 --
--------- -----------
Total current liabilities ........................ 11,614 --
Long-term debt ...................................... 41,055 --
Other long-term liabilities ......................... 194 --
Redeemable cumulative preferred stock ............... 31,223 (31,223)(1)
Stockholders' equity (deficit): .....................
Common Stock ....................................... 57 22 (1)
1 (2)
Additional paid-in capital ......................... 25,584 31,201 (1)
(1)(2)
Accumulated deficit ................................ (52,474) --
Deferred compensation .............................. (90) --
--------- -----------
Total stockholders' equity (deficit) ............. (26,923) 31,223
--------- -----------
Total ............................................... $ 57,163 $ --
========= ===========
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------------
ADJUSTMENTS
RELATING TO PRO FORMA,
PRO FORMA THE OFFERING AS ADJUSTED
----------- -------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 2,950 $ 3,431 (3) $ 6,381
Accounts receivable, less allowance for doubt-
ful accounts ..................................... 7,920 -- 7,920
Formulary receivables .............................. 2,341 -- 2,341
Inventory .......................................... 211 -- 211
Prepaid expenses and other current assets .......... 537 -- 537
--------- ------------ ---------
Total current assets ............................. 13,959 3,431 17,390
Property and equipment-Net .......................... 4,711 -- 4,711
Goodwill-Net ........................................ 32,522 -- 32,522
Other intangible assets-Net ......................... 5,501 -- 5,501
Other assets ........................................ 470 (81)(4) 389
--------- ------------ ---------
Total ............................................... $ 57,163 $ 3,350 $ 60,513
========= ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ................................... $ 3,630 $ -- $ 3,630
Accrued expenses and other current liabilities. 7,715 (766)(3) 6,949
Current portion of long-term debt .................. 269 395 (4) 664
--------- ------------ ---------
Total current liabilities ........................ 11,614 (371)(3) 11,243
Long-term debt ...................................... 41,055 (41,725)(3) 576
1,246 (4)
Other long-term liabilities ......................... 194 -- 194
Redeemable cumulative preferred stock ............... -- -- --
Stockholders' equity (deficit): .....................
Common Stock ....................................... 80 36 (3) 116
Additional paid-in capital ......................... 56,784 45,886 (3) 102,670
Accumulated deficit ................................ (52,474) (1,722)(4) (54,196)
Deferred compensation .............................. (90) -- (90)
--------- ------------ ---------
Total stockholders' equity (deficit) ............. 4,300 44,200 48,500
--------- ------------ ---------
Total ............................................... $ 57,163 $ 3,350 $ 60,513
========= ============ =========
</TABLE>
- ----------
(1) Represents the conversion of outstanding Preferred Stock and $7,227,000 of
accrued dividends on the Preferred Stock into Common Stock in connection
with the Recapitalization.
(2) Represents the exercise of all Common Stock purchase warrants in connection
with the Recapitalization.
(3) Represents the sale by the Company of 3,600,000 shares of Common Stock at an
assumed public offering price of $14.00 per share and the application of the
net proceeds to the Company as follows:
<TABLE>
<S> <C>
PROCEEDS
Gross proceeds from Offering .............................................. $ 50,400
Underwriting discount and commissions ..................................... (3,528)
Estimated Offering expenses ............................................... (950)
---------
Net proceeds ............................................................. 45,922
---------
USES
Repay Senior Subordinated Note ............................................ (25,000)
Repay borrowings under the Credit Facility ................................ (16,725)
Repay accrued interest on Senior Subordinated Note and borrowings under the
Credit Facility .......................................................... (766)
---------
Total uses ............................................................... (42,491)
---------
Excess proceeds .......................................................... $ 3,431
=========
</TABLE>
(4) Represents a $81,000 decrease in other assets relating to the elimination of
deferred financing costs associated with the Credit Facility and the
write-off of the remaining discount on the Senior Subordinated Note of
$1,641,000, both of which will be recorded as extraordinary items upon the
consummation of the Offering.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data presented below for the years ended June
30, 1996, 1997 and 1998 and the balance sheet data as of June 30, 1997 and 1998
are derived from, and qualified by reference to, the audited consolidated
financial statements of the Company included elsewhere herein. The statement of
operations data for the year ended June 30, 1995 and the balance sheet data as
of June 30, 1995 and 1996 are derived from, and qualified by reference to, the
audited consolidated financial statements of the Company not included herein.
The selected consolidated financial data should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company, the notes thereto and the other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1) ................................................ $ 16,246 $ 31,768 $ 35,279 $ 42,290
Operating expenses:
Operations ................................................ 9,753 19,174 16,817 16,958
Sales, marketing and client services ...................... 3,615 7,064 8,769 10,765
Research and development .................................. 2,051 2,132 3,278 3,941
General and administrative ................................ 3,119 6,059 5,263 4,865
Depreciation and amortization ............................. 2,995 5,176 5,293 6,743
Write-down of intangible assets ........................... 8,191 (2) 9,965 (3) -- --
Acquired in-process research and development (4). ......... -- -- 4,354 --
Other charges (5) ......................................... 2,864 538 2,301 --
--------- --------- --------- --------
Total operating expenses ................................... 32,588 50,108 46,075 43,272
--------- --------- --------- --------
Loss from operations ....................................... (16,342) (18,340) (10,796) (982)
Other (income) expense ..................................... -- 313 (893) (12)
Interest expense, net ...................................... 189 584 1,504 3,623
--------- --------- --------- --------
Loss before provision for income taxes ..................... (16,531) (19,237) (11,407) (4,593)
Provision for income taxes ................................. 70 93 57 42
--------- --------- --------- --------
Net loss ................................................... (16,601) (19,330) (11,464) (4,635)
Preferred stock dividends .................................. (27) (2,400) (2,400) (2,400)
--------- --------- --------- --------
Net loss applicable to common stockholders ................. $(16,628) $(21,730) $ (13,864) $ (7,035)
========= ========= ========= ========
Basic net loss per common share ............................ $ (3.17) $ (4.14) $ (2.56) $ (1.24)(6)
Weighted average common shares outstanding-Basic ........... 5,238 5,245 5,425 5,679
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ................................... $ 504 $ (4,207) $ (2,567) $ 2,345
Total assets ...................................... 59,511 43,031 45,459 57,163
Long-term debt, including current portion ......... 5,805 11,601 25,161 41,324
Redeemable cumulative preferred stock ............. 24,023 26,423 28,823 31,223
Stockholders' equity (deficit) .................... 12,942 (8,472) (20,069) (26,923)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C> <C>
OTHER DATA:
EBITDA (7) ..................................... $ (13,347) $ (13,164) $ (5,503) $ 5,761
Adjusted EBITDA (7) ............................ (2,292) (2,052) 2,211 5,761
Cash flows from operating activities ........... (3,561) (1,653) (4,020) (2,500)
Cash flows from investing activities ........... (22,074) (4,919) (12,221) (12,104)
Cash flows from financing activities ........... 33,434 657 15,521 15,635
Transactions processed(8)
Pharmacy ...................................... -- 107,032 126,211 188,114
Medical ....................................... -- 15,687 23,075 31,564
Dental ........................................ -- 6,021 12,188 14,681
--------- --------- --------- ---------
Total transactions processed ................. -- 128,740 161,474 234,359
Transactions per FTE (8)(9) .................... -- 321 415 642
Revenue per FTE (9) ............................ $ 48 $ 79 $ 91 $ 116
Operating expenses per transaction (8) ......... -- 0.39 0.29 0.18
</TABLE>
(Footnotes on following page)
25
<PAGE>
(1) During the periods presented, the Company made a series of acquisitions and
divested certain non-core or unprofitable operations. Revenues attributable
to these divested operations, which are included in the statement of
operations data, were $1,709,000, $3,617,000, $2,252,000 and $241,000 in the
fiscal years ended June 30, 1995, 1996, 1997 and 1998, respectively.
(2) Reflects the write-off of goodwill related to the acquisitions of MPC and
Wellmark.
(3) Reflects the write-down of costs relating to client lists and related
allocable goodwill obtained in the acquisition of MEDE OHIO.
(4) Reflects the write-off of acquired in-process research and development costs
upon the consummation of the TCS acquisition.
(5) Reflects (i) expenses of $2,864,000 relating to the spin-off of the Company
by CES in the fiscal year ended June 30, 1995 and (ii) expenses recorded
relating to contingent consideration paid to former owners of acquired
businesses of $538,000 and $2,301,000 in the fiscal years ended June 30,
1996 and 1997, respectively.
(6) Supplemental net loss per share, giving effect to the Recapitalization,
would be $(0.59) for the fiscal year ended June 30, 1998.
(7) EBITDA represents net income (loss) plus provision for income taxes, net
interest expense, other (income) expense and depreciation and amortization.
EBITDA is not a measurement in accordance with GAAP and should not be
considered an alternative to, or more meaningful than, earnings (loss) from
operations, net earnings (loss) or cash flow from operations as defined by
GAAP or as a measure of the Company's profitability or liquidity. Not all
companies calculate EBITDA in the same manner and, accordingly, EBITDA shown
herein may not be comparable to EBITDA shown by other companies. The Company
has included information concerning EBITDA herein because management
believes EBITDA provides useful information. Adjusted EBITDA represents
EBITDA plus certain other charges as described below. The following table
summarizes EBITDA and adjusted EBITDA for all periods presented:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA ................................................... $ (13,347) $ (13,164) $ (5,503) $5,761
Contingent consideration paid to former owners of acquired
businesses .............................................. -- 538 2,301 --
Write-down of intangible assets .......................... 8,191 9,965 -- --
Acquired in-process research and development ............. -- -- 4,354 --
Expenses related to the CES spin-off ..................... 2,864 -- -- --
Contract and legal settlement provisions ................. -- 609 1,059 --
---------- ---------- -------- ------
Adjusted EBITDA .......................................... $ (2,292) $ (2,052) $ 2,211 $5,761
========== ========== ======== ======
</TABLE>
- ----------
(8) Transaction volumes are not available for the fiscal year ended June 30,
1995.
(9) Full-time equivalents ("FTE") represents the number of full-time employees
and part-time equivalents of full-time employees as of the end of the period
shown.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements, including the notes thereto, of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements relating
to future events or future financial performance of the Company. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including the risk
factors set forth under "Risk Factors" and the matters set forth in this
Prospectus generally.
OVERVIEW
MEDE AMERICA is a leading provider of EDI products and services to a broad
range of providers and payors in the healthcare industry. The Company's
integrated suite of EDI solutions and services allows hospitals, pharmacies,
physicians, dentists and other healthcare providers and provider groups to
electronically edit, process and transmit claims, eligibility and enrollment
data, track claims submissions throughout the claims payment process and obtain
faster reimbursement for their services. Currently, the Company processes over
900,000 transactions per day for over 65,000 providers located in all 50
states.
The Company was formed in March 1995 through the consolidation and
subsequent spin-off of three subsidiaries of CES, in connection with the
acquisition by First Data Corporation of CES' credit card processing business.
The three subsidiaries, MedE America, Inc., MPC and Wellmark, which comprised
the heathcare services business of CES, historically provided EDI services to
hospitals and physicians. Their combined financial results were reflected in
the fiscal 1995 financial statements on a full year basis.
Since its formation, the Company has expanded both through internal growth
and the acquisition of five healthcare transaction processing businesses. As
part of its strategy of providing an integrated suite of EDI products to a
broad range of healthcare providers, the Company has focused on acquisitions
that provided entry into new markets or expanded the Company's product suite.
All acquisitions have been accounted for under the purchase method of
accounting. The Company has actively pursued the integration of its
acquisitions and, in the process, has either divested, closed or modified
various operations of the acquired entities in order to eliminate non-core or
redundant operations and achieve cost savings and operating efficiencies. These
integration activities impacted the Company's financial results in the fiscal
years ended June 30, 1995, 1996, 1997 and 1998 and are ongoing.
27
<PAGE>
The following table summarizes the Company's acquisitions and divested
products and operations:
<TABLE>
<CAPTION>
PRIMARY PRODUCTS DIVESTED PRODUCTS
DATE OF FOUNDING/ OF FOUNDING/ DATE
<S> <C> <C> <C> <C> <C>
FOUNDING COMPANIES ACQUIRED MARKET ACQUIRED COMPANY ACQUIRED COMPANY DIVESTED
4/94(1) Medical Eligibility Verification, -- --
MedE America, Inc.
Enrollment
5/94(1) Medical Hospital Claims, Data Entry 1/97
MPC
Physician Billing Physician Billing 12/96
Physician Billing 8/97
5/94(1) Medical Hospital Claims, -- --
Wellmark
Physician Billing
COMPANIES ACQUIRED BY
MEDE AMERICA
3/95 Pharmacy Switching, PBM, Practice Management 2/96
MEDE OHIO
Third Party Billing Software
Practice Management 12/97
Software
6/95 Medical Hospital Claims Physician Billing 3/96
Latpon
10/95 Dental Dental Claims, Practice Practice Management 3/97
EC&F/Premier
Management Software Software
2/97 Pharmacy/ PBM, Switching, -- --
TCS
Medical Eligibility Verification
11/97 Pharmacy PBM -- --
Stockton
</TABLE>
(1) Represents date acquired by CES.
In March 1995, the largest stockholder of the Company acquired all of the
outstanding shares of MEDE OHIO (formerly known as General Computer
Corporation) for a cash purchase price of approximately $22,593,000, including
transaction expenses. The largest stockholder subsequently merged MEDE OHIO
into the Company. The purchase price paid by the Company for MEDE OHIO to its
largest stockholder was equal to the purchase price paid by the largest
stockholder. MEDE OHIO develops EDI systems for the pharmacy market and
provides transaction switching/routing services. At the time of its
acquisition, MEDE OHIO had been incurring significant losses for over two years
and was in very poor financial condition. The acquisition was accounted for
under the purchase method and the Company recorded total intangible assets of
$25,814,000, consisting of $892,000 of software (which was completed and not
in-process at the time of the acquisition), $2,527,000 of client lists and
$22,395,000 of goodwill. During fiscal year 1996, the Company wrote-down
$9,965,000 of costs relating to client lists and related allocable goodwill due
to a loss of approximately 25% of the acquired MEDE OHIO client base. The loss
of this significant portion of MEDE OHIO's client base was primarily due to
problems experienced by the Company in the post-merger integration of MEDE
OHIO's operations into the Company's operations. This post-merger integration
process took place during the same general time period in which the Company was
spun-off from CES and a new management team was installed at the Company. The
Company generally is amortizing the software over three years and the remaining
value of client lists is being amortized over five years. The goodwill is being
amortized over 20 years.
In June 1995, the Company acquired substantially all of the assets of
Latpon for a cash purchase price of approximately $2,470,000, plus the
assumption of approximately $963,000 of liabilities (primarily long-term debt).
Latpon, a developer of claims processing software, provided EDI transaction
processing services to hospitals and hospital-based physician groups. Latpon
also provided electronic and man-
28
<PAGE>
ual business office administrative services. The acquisition was accounted for
under the purchase method and the Company recorded total intangible assets of
$2,291,000, consisting of $993,000 of software and client lists and $1,298,000
of goodwill. The Company generally is amortizing the software over five years
and is amortizing the client lists and goodwill over five years and 20 years,
respectively.
In October 1995, the Company acquired two commonly-owned companies, EC&F,
an all payor EDI dental claims processor, and Premier, a dental practice
management software vendor. The acquisitions were funded with an initial cash
payment of $4,050,000, including transaction expenses, and contingent earn-out
payments based on the achievement of certain EBITDA growth targets by the EC&F
business over three one-year periods ending on September 30, 1998. The Company
recorded expenses of $538,000 during fiscal year 1996 relating to the first
such period and an aggregate $2,301,000 during fiscal year 1997 primarily
relating to the second and third such periods. The Company does not believe
that any additional amounts will be payable pursuant to this earn-out
arrangement. The acquisitions of EC&F and Premier were accounted for under the
purchase method and the Company recorded total intangible assets of $4,350,000,
consisting of $764,000 of software, and $3,586,000 of goodwill. The Company
generally is amortizing the software over three years and is amortizing the
goodwill over 20 years. The Company sold Premier in January 1997 for a cash
payment of $388,000. There was no gain or loss on the sale of Premier.
In February 1997, the Company acquired TCS, a provider of pharmacy
switching and PBM transaction processing systems and services for pharmacies
and eligibility verification services for physicians, for a total cash payment
of $11,465,000, including transaction expenses. The acquisition was accounted
for under the purchase method and the Company recorded total intangible assets
of $11,065,000, consisting of $4,354,000 of in-process research and
development, $2,984,000 of software and $3,727,000 of goodwill. As of the date
of the acquisition, the Company wrote off the acquired in-process research and
development which had not reached technological feasibility and had no
alternative future use. The Company generally is amortizing the software over
three years and is amortizing the goodwill over seven years.
The in-process research and development acquired from TCS consisted of
advanced Windows software technology for PC and client server platforms for
healthcare EDI transactions. Products under development included: (1) a plan
member eligibility verification product for workers compensation; (2) a medical
claims processing system to meet the HCFA 1500 EDI industry standard; and (3) a
switching system for internet claims from retail pharmacies. At the time of the
acquisition, the Company estimated that continued development activities for
six months to one year resulting in additional estimated research and
development costs of $460,000 would be required in order to prove feasibility
and bring the project to commercial viability. It was the opinion of management
that such projects had an above average probability of successful completion
and could contribute to revenue, profit and cash flow within 18 to 24 months
from the date of purchase. At this time, all three projects are substantially
complete. However, any or all of these projects could fail to produce an
economic gain. Such failure, if encountered, would not affect the Company's
current product suite and financial results, but would decrease the Company's
opportunities for growth. Estimated costs to complete the acquired in-process
research and development projects as of the date of acquisition were as
follows:
ESTIMATED RESEARCH AND DEVELOPMENT EXPENSE (IN THOUSANDS)
<TABLE>
<CAPTION>
WORKERS COMP. HCFA 1500 PHARMACY TOTAL
--------------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Fiscal 1997 .......... $ 58 $ 70 $ 65 $193
Fiscal 1998 .......... 80 97 90 267
---- ---- ---- ----
Total ............... $138 $167 $155 $460
==== ==== ==== ====
</TABLE>
Prior to the consummation of the acquisition, TCS had incurred development
costs of $67,000, $125,000 and $56,000, respectively, for the workers
compensation eligibility product, HCFA 1500 and the internet pharmacy claims
product, the three in-process research and development projects shown above.
29
<PAGE>
The Company determined the value of the purchased in-process technologies
by estimating the projected net cash flows related to each of the in-process
products. The resulting net cash flows were then discounted back to their net
present values. The net cash flows were based on management's estimates of the
costs necessary to complete the development of the products, the revenues that
would be earned after commercial availability and the estimated operating
expenses associated therewith. The projections were based on the following
principal assumptions:
For the workers compensation eligibility product, the projections assumed
commercial availability in January 1998 and revenue growth from $431,000 in
fiscal 1998 to $1.33 million in fiscal 2002, an annual rate increase of
approximately 25%. For HCFA 1500, the projections assumed commercial
availability in March 1998. It was assumed that revenues from the product would
grow from $1.413 million in fiscal 1998 to $5.5 million in fiscal 2002,
increasing at an annual rate of 50% in the first year of commercial
availability, 35% in the second year and at a rate of 25% per year thereafter.
For the internet pharmacy claims product, the projections assumed commercial
availability in December 1997. It was assumed that revenues from the product
would grow from $41,000 in fiscal 1997 to approximately $3.16 million in fiscal
2002, increasing at an annual rate of approximately 35% in the first year of
commercial availability, 30% in the second year and at a rate of 25% per year
thereafter.
In all three cases, post-development operating expenses, including sales,
advertising and promotion and general and administrative costs, were projected
to grow at the rate of 10% per annum between fiscal 1999 and 2002. No
significant synergies were projected for any of the three in-process products
because the Company had no comparable products in the market or in development
and no penetration in the products' prospective user bases.
The projected net cash flows for the in-process products were discounted to
their present values using a discount rate of 18%. Such discount rate was
composed of two factors: the Company's estimated weighted average cost of
capital (the "WACC") (the rate of return an investment would have to generate in
order to provide the required rate of return to the Company's equity and
long-term debt capital), which was calculated to be approximately 13%, and a 5%
risk factor reflecting the uncertainty of successful completion and market
acceptance of the in-process products. Together, the WACC and risk factor yield
a discount factor of 18%. A 13% discount rate factor was used by the Company to
value fully developed software, as it faces substantially the same risks as the
business as a whole. The 5% risk factor reflected the fact that the in-process
products did not involve complex or innovative technologies, and primarily
reflected the risk of market acceptance once the developed products were
released to customers.
Since the TCS acquisition, all three in-process products have been
completed and two are in the early stages of commercialization. As of June 30,
1998, none of these products had generated significant revenues, and, given the
results of the Company's marketing efforts to date, management currently
believes that the revenues derived from these three products will be lower than
projected.
The market for the workers compensation eligibility product has been less
receptive than had been anticipated and this product did not generate any
revenues in the fiscal year ended June 30, 1998. However, the Company believes
that, over time and with increased marketing effort, this product will achieve
commercial viability.
The HCFA 1500 product experienced roll out delays and is expected to be
commercially introduced in the winter of 1998. The Company believes that, in
time, this product will achieve commercial viability.
The internet pharmacy product is the only one of the three-in-process
products acquired from TCS that had generated revenues by the end of fiscal
1998. However, the revenues produced were approximately 20% of the revenues
projected for it at the time of the acquisition. The commercial introduction of
this product was adversely affected by recent revisions in regulatory standards
which limit the use of the internet to process pharmacy claims. Although the
Company is currently processing transactions with this product for several
pharmacy clients, such regulatory changes, unless modified, could limit the
range of applications for this product and affect its future commercial
profitability.
Although any or all of these projects could fail to generate significant
returns for the Company and such failure could render the TCS acquisition less
valuable to the Company than had been anticipated,
30
<PAGE>
such failure would not affect the Company's current suite of products or, in
management's opinion, have a material impact on the Company's results of
operations or overall financial condition.
In November 1997, the Company acquired Stockton, a provider of PBM
transaction processing systems and related services for the pharmacy market.
Stockton was purchased for an initial cash payment of $10,674,000 including
transaction expenses, and a contingent earnout payment based upon the
achievement of certain revenue growth targets. If such revenue targets are
achieved over the 12-month period ending September 30, 1998, a maximum payment
of $2,600,000 (plus interest at an annual rate of 7.25%) will be made in
December 1998. Based on revenues recorded through July 31, 1998 by Stockton,
the Company has accrued additional contingent consideration of $1,383,000 as of
June 30, 1998 which was treated as additional purchase price and was,
therefore, added to goodwill. The acquisition was accounted for under the
purchase method and the Company recorded total intangible assets of
$10,414,000, consisting of $2,133,000 of software and client lists and
$8,281,000 of goodwill. The Company generally is amortizing the software over
five years and is amortizing the client lists and goodwill over five years and
20 years, respectively.
Revenues
Revenues are derived from the sale of transaction processing products and
services primarily on a fee-for-transaction basis. Transaction fees vary
depending upon transaction type and service provided. The Company currently
receives fees from providers for the majority of its transactions including
claims processing, eligibility verification, claims switching, pharmacy script
processing and tracking and Medicaid enrollment. The Company also receives fees
from payors for the transmission of electronic claims and formulary payments
from pharmaceutical manufacturers relating to the Company's PBM script
processing and management reporting services. These transaction-based revenues
comprise the predominant portion of the Company's total revenues and tend to be
recurring. Other revenue is derived from one-time payments related to
installation and implementation services, software license fees and EDI systems
equipment sales. See "Business -- Suite of EDI Products and Services."
Transaction-based revenues and related formulary services revenues (if
applicable), which constitute the majority of the Company's total revenues, are
recognized at the time the transactions are processed and the services are
provided. Revenues associated with software support and implementation fees,
each constituting less than 3% of the Company's revenues for the fiscal year
ended June 30, 1998, are recognized ratably over the contract period or as the
service is provided. Revenue from licensing of software, which also constitutes
less than 3% of the Company's total revenues for the fiscal year ended June 30,
1998, is recognized upon installation if it is determined that the Company has
no significant remaining obligations and collectibility of the resulting
receivable is probable.
Operating Expenses
Operations Expense. Operations expense consists of data and voice
telecommunications expense, salaries and benefits for operations employees and
other costs associated with transaction processing and services provided to
clients, such as network and telecommunications, maintenance, computer
operations and systems administration, facilities and other additional indirect
expenses. Since 1996, operations expense as a percentage of revenues and
operations expense per transaction have declined as a result of the Company's
integration and restructuring efforts and increased operating leverage.
Restructuring charges recorded in connection with the Company's integration
activities have resulted in variability in the Company's quarterly operating
results.
Sales, Marketing and Client Services Expense. Sales, marketing and client
services expense consists primarily of salaries, benefits, commissions and
related indirect costs and expenditures for marketing programs, trade shows,
advertising, help desk software and related client communications. As the
Company continues to implement its growth strategy, sales, marketing and client
services expenses are expected to continue to increase.
Research and Development Expense. Research and development expense
consists primarily of salaries, benefits and related indirect expenses
associated with the design, research and development of new products and
enhancements to existing current products. The development of new software
products
31
<PAGE>
and enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
has been established, any additional software development costs are capitalized
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting For the Cost of Computer Software To Be Sold, Leased or Otherwise
Marketed." Amortization of purchased software and technology and of capitalized
software development costs is provided on a product-by-product basis at the
greater of the amount computed using (a) the ratio of current revenues for a
product to the total of current and anticipated future revenues or (b) the
straight-line method over the remaining estimated economic life of the product.
Generally, an original estimated economic life of three to five years is
assigned to purchased software and technology and an original estimated
economic life of five years is assigned to capitalized software development
costs. Amortization begins in the period in which the related product is
available for general release to customers. During the fiscal year ended June
30, 1998, the Company capitalized $462,000 of software development costs on a
project for which technological feasibility had been established but was not
yet available for client release. Prior to July 1, 1997, the Company did not
have any software development projects for which significant development costs
were incurred between the establishment of technological feasibility and
general client release of the product. The Company believes that the
development of enhanced and new product offerings are essential to remaining
competitive and it expects that development expenses will increase in the
future.
General and Administrative Expense. General and administrative expense
primarily consists of salaries, benefits and related indirect costs for the
administrative, executive, finance, legal, human resources and internal systems
personnel, as well as accounting and legal fees. As the Company implements its
growth strategy, general and administrative expenses are expected to increase.
Depreciation and Amortization Expense. The Company depreciates the cost of
its tangible capital assets on a straight-line basis over the estimated
economic life of the asset: three to five years for computer equipment, five
years for furniture and fixtures, and 20 to 25 years for buildings and
improvements. Acquisition-related intangible assets, which include the value of
software and client lists, are amortized based on the estimated useful economic
life of the asset at the time of acquisition, and therefore will vary among
acquisitions. The Company recorded amortization expense relating to goodwill
and other intangible assets of $3,541,000 and $4,664,000 during the fiscal
years ended June 30, 1997 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the consolidated statements of operations of the Company expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues ...................................... 100% 100% 100%
Operating Expenses:
Operations ................................... 60 48 40
Sales, marketing and client services ......... 22 25 25
Research and development ..................... 7 9 9
General and administrative ................... 19 15 12
Depreciation and amortization ................ 16 15 16
</TABLE>
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Revenues
Revenues for the fiscal year ended June 30, 1998 were $42.3 million
compared to $35.3 million in fiscal 1997, representing an increase of 20%. The
increase was primarily attributable to incremental revenue from the
acquisitions of TCS and Stockton in February 1997 and November 1997,
respectively, and to the growth of the existing business, partially offset by
the loss of revenues from operations that were divested.
32
<PAGE>
The Company processed 234 million transactions in the fiscal year ended
June 30, 1998, compared to 161 million transactions processed in fiscal 1997,
representing an increase of 45%. The increase resulted from the addition of new
clients, increased transaction volume from existing clients and the
acquisitions of TCS and Stockton. The average price per transaction received by
the Company in fiscal 1998 declined by 13% from 1997, as a result of the
greater proportion of transactions processed under contracts with volume-based
terms and pricing and a larger proportion of lower priced eligibility
verification transactions as a result of the acquisition of TCS.
Operating Expenses
Operations expense was $17.0 million for the fiscal year ended June 30,
1998 compared to $16.8 million in fiscal 1997, representing an increase of 1%.
As a percentage of revenues, operations expense decreased from 48% in fiscal
1997 to 40% in fiscal 1998. The containment of operations expense in fiscal
1998 was a result of ongoing cost reduction programs, systems consolidation for
recent acquisitions and the impact of the divested operations, which results
are included in fiscal 1997 but not in fiscal 1998.
Sales, marketing and client services expense was $10.8 million for the
fiscal year ended June 30, 1998 compared to $8.8 million in fiscal 1997,
representing an increase of 23%. As a percentage of revenues, sales, marketing
and client services expense was 25% for each such fiscal year. The increase in
such expenses was primarily due to the inclusion of TCS and Stockton in the
results of operations for the fiscal year ended June 30, 1998 and, to a lesser
extent, increases in expenses relating to the hiring of new employees for
client support and help desk service, the installation of help desk tracking
software and resources devoted to telesales.
Research and development expense was $3.9 million for the fiscal year
ended June 30, 1998 compared to $3.3 million in fiscal 1997, representing an
increase of 20%. As a percentage of revenues, research and development expense
was 9% for each such fiscal year. The Company capitalized $462,000 of software
development costs in fiscal 1998; however, no software development costs were
capitalized in fiscal 1997. Prior to July 1, 1997, the Company did not have any
software development projects for which significant development costs had been
incurred between the establishment of technological feasibility and general
client release of the product.
General and administrative expense was $4.9 million for the fiscal year
ended June 30, 1998 compared to $5.3 million in fiscal 1997, representing a
decrease of 8%. As a percentage of revenues, general and administrative expense
decreased from 15% in fiscal 1997 to 12% in fiscal 1998. This decrease was
primarily a result of cost controls and the consolidation and integration
activities related to the Company's recent acquisitions.
Depreciation and amortization expense was $6.7 million for the fiscal year
ended June 30, 1998 compared to $5.3 million in fiscal 1997, representing an
increase of 27%. As a percentage of revenues, depreciation and amortization
expense increased from 15% in fiscal 1997 to 16% in fiscal 1998. These
increases reflect the increased amortization expense related to the
acquisitions of TCS in February 1997 and Stockton in November 1997.
There were no acquisition-related expenses for the fiscal year ended June
30, 1998, as compared to $6.7 million of such expenses in fiscal 1997. Included
in the amount for fiscal 1997 was a $4.4 million write-off related to
in-process research and development from the acquisition of TCS (for software
that had not achieved technological feasibility and had no alternative use),
and a contingent earnout charge of $2.3 million recorded by the Company in
connection with the EC&F purchase agreement. In addition, in fiscal 1997, the
Company recorded a gain of $885,000 from a sale of securities. See Note 11 of
"Notes to Consolidated Financial Statements."
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Revenues
Revenues for the fiscal year ended June 30, 1997 were $35.3 million
compared to $31.8 million in fiscal 1996, representing an increase of 11%. The
increase was primarily attributable to revenue from the acquisition of TCS in
February 1997, partially offset by the loss of revenues from operations that
were divested. The increase was also due to the growth of the existing
business.
33
<PAGE>
The Company processed 161 million transactions in the fiscal year ended
June 30, 1997 compared to 129 million transactions processed in fiscal 1996,
representing an increase of 25%. The increase resulted from the addition of new
clients, the growth of business from existing clients and the TCS acquisition.
The average price per transaction in fiscal 1997 declined by 4% from fiscal
1996, primarily as a result of the divested operations having higher claims
pricing.
Operating Expenses
Operations expense was $16.8 million for the fiscal year ended June 30,
1997 compared to $19.2 million in fiscal 1996, representing a decrease of 12%.
As a percentage of revenues, operations expense decreased from 60% in fiscal
1996 to 48% in fiscal 1997. The operations expense improvement was a result of
ongoing cost reduction programs, systems consolidation for recent acquisitions
and the divestitures of non-core or unprofitable operations.
Sales, marketing and client services expense was $8.8 million for the
fiscal year ended June 30, 1997 compared to $7.1 million in fiscal 1996,
representing an increase of 24%. As a percentage of revenues, sales, marketing
and client service expense increased from 22% in fiscal 1996 to 25% in fiscal
1997. These increases reflect the inclusion of the TCS acquisition in the
results for five months and, to a lesser extent, the addition of client support
personnel and the increase in help desk tracking software expenses.
Research and development expense was $3.3 million for the fiscal year
ended June 30, 1997 compared to $2.1 million in fiscal 1996, representing an
increase of 54%. As a percentage of revenues, research and development expense
increased from 7% in fiscal 1996 to 9% in fiscal 1997. These increases were due
to the hiring of new employees and other expenses related to the expansion of
the Company's processing capacity and the implementation of new technology
processing platforms throughout its data processing centers.
General and administrative expense was $5.3 million for the fiscal year
ended June 30, 1997 compared to $6.1 million in fiscal 1996, representing a
decrease of 13%. As a percentage of revenues, general and administrative
expense decreased from 19% in fiscal 1996 to 15% in fiscal 1997. These
decreases were primarily a result of consolidation and integration activities.
Depreciation and amortization expense was $5.3 million for fiscal year
ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an
increase of 2%. As a percentage of revenues, depreciation and amortization
expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997.
Acquisition-related expenses for the fiscal year ended June 30, 1997
included a $4.4 million write-off related to in-process research and
development from the acquisition of TCS (for software that had not achieved
technological feasibility and had no alternative use) and a contingent earnout
charge of $2.3 million recorded by the Company in connection with the EC&F
purchase agreement. In addition, in fiscal 1997, the Company recorded a gain of
$885,000 from a sale of securities. See Note 11 of "Notes to Consolidated
Financial Statements."
During the fiscal year ended June 30, 1996, the Company wrote down
approximately $10.0 million of costs relating to client lists and related
allocable goodwill obtained in the acquisition of MEDE OHIO. Such intangible
assets were written down to the net present value of the estimated future cash
flows to be derived from these clients as of June 30, 1996. The write-down was
required due to a loss of approximately 25% of the acquired MEDE OHIO client
base. In addition, a contingent earnout charge of $538,000 was recorded in
connection with the EC&F purchase agreement during the fiscal year ended June
30, 1996.
34
<PAGE>
QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
9/30/96 12/31/96 3/31/97
----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues ................................... $ 8,179 $ 7,831 $ 8,954
Operating Expenses:
Operations ................................ 4,298 3,683 4,123
Sales, marketing and client services....... 1,925 1,957 2,261
Research and development .................. 783 754 918
General and administrative ................ 1,042 1,171 1,127
Depreciation and amortization ............. 1,102 1,044 1,356
Acquired in-process research and
development ............................. -- -- 4,354
Payment to former owners of
acquired businesses ..................... 330 330 330
-------- -------- --------
Total operating expenses ................... 9,480 8,939 14,469
-------- -------- --------
Income (loss) from operations .............. (1,301) (1,108) (5,515)
Other (income) expense ..................... -- -- (885)
Interest expense, net ...................... 150 202 427
-------- -------- --------
Loss before provision for income taxes. (1,451) (1,310) (5,057)
Provision for income taxes ................. 14 14 15
-------- -------- --------
Net loss ................................... $ (1,465) $ (1,324) $ (5,072)
======== ======== ========
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
6/30/97 9/30/97 12/31/97 3/31/98 6/30/98
------------- ----------- ------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ................................... $10,315 $ 9,241 $ 9,849 $11,099 $12,101
Operating Expenses:
Operations ................................ 4,713 4,285 3,942 4,258 4,473
Sales, marketing and client services....... 2,626 2,385 2,432 2,952 2,996
Research and development .................. 823 806 1,059 1,021 1,055
General and administrative ................ 1,923 1,061 1,107 1,139 1,558
Depreciation and amortization ............. 1,791 1,598 1,598 1,752 1,795
Acquired in-process research and
development ............................. -- -- -- -- --
Payment to former owners of
acquired businesses ..................... 1,311 -- -- -- --
------- -------- -------- ------- -------
Total operating expenses ................... 13,187 10,135 10,138 11,122 11,877
------- -------- -------- ------- -------
Income (loss) from operations .............. (2,872) (894) (289) (23) 224
Other (income) expense ..................... (8) -- -- 13 (25)
Interest expense, net ...................... 725 655 915 900 1,153
--------- -------- -------- ------- -------
Loss before provision for income taxes. (3,589) (1,549) (1,204) (936) (904)
Provision for income taxes ................. 14 12 12 13 5
--------- -------- -------- ------- -------
Net loss ................................... $(3,603) $ (1,561) $ (1,216) $ (949) $ (909)
========= ======== ======== ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has used capital from external sources to
fund its internal growth and operations and to make acquisitions. Such capital
requirements have been provided by (i) the Company's four principal
stockholders, through periodic purchases of the Company's debt and equity
securities and (ii) the Credit Facility. Since June 30, 1995 an investment fund
affiliated with WCAS has purchased a Senior Subordinated Note in the principal
amount of $25.0 million and 370,993 shares of Common Stock from the Company for
an aggregate $25.0 million, which was used in connection with the acquisition
of TCS, to repay borrowings under the Credit Facility and for general working
capital purposes. See "Certain Transactions."
As of June 30, 1998, the Company had outstanding borrowings of $16.7
million under the Credit Facility. Such borrowings bear interest at a weighted
average rate of 6.93% per annum (as of June 30, 1998). The total availability
under the Credit Facility is $20.0 million. See "Certain Transactions." All
indebtedness under the Credit Facility has been, and currently is, guaranteed
by the Company's four principal stockholders. The Company has received a letter
from the lender under the Credit Facility committing to provide an amended
credit facility with total available credit of $15.0 million. This facility
would be comprised of a $7.5 million term loan to be used for acquisitions and
a $7.5 million revolving credit loan to be used for working capital purposes,
each with a maximum term of two years from the earlier of the completion of the
Offering or October 31, 1998. Interest for the term and revolver loans is
computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based
rate. Such borrowing rates are at the option of the Company for any particular
period during which borrowings exist. Covenants under the existing agreement
include: customary covenants and restrictions on additional liabilities and
disposition of assets, achieving year 2000 compliance by August 1999,
maintaining financial records and reporting, a maximum quarterly leverage
ratio, a minimum interest coverage ratio, restrictions on the payment of
dividends, as well as prior approval for acquisitions. Borrowings under the
Amended Credit Facility will not be guaranteed by any third party, but will be
secured by substantially all of the Company's assets, including the stock of
the Company's
35
<PAGE>
subsidiary. The Amended Credit Facility will contain covenants similar to those
under the existing agreement, including restrictions on the payment of
dividends on the Common Stock. See "Dividend Policy." It is anticipated that
the Amended Credit Facility will take effect upon the consummation of the
Offering.
As of June 30, 1998, the Company had cash and cash equivalents of $3.0
million and net working capital of $2.3 million. Net cash used in operations
was $1.7 million, $4.0 million and $2.5 million for the fiscal years ended June
30, 1996, 1997 and 1998, respectively. The $2.5 million net cash used in
operations for the fiscal year ended June 30, 1998 was used primarily for
contingent earnout charges on acquisitions made in prior fiscal years which
resulted in a net decrease in accounts payable and accrued expenses of $1.4
million. In addition, $1.9 million of the net cash used was attributable to an
increase in formulary accounts receivable relating to Stockton (formulary
receivables normally have a 7-12 month collection cycle) and $2.1 million was
attributable to an increase in accounts receivable resulting from an increase
in revenues.
Cash used for investment purposes was $4.9 million, $12.2 million and
$12.1 million for the fiscal years ended June 30, 1996, 1997 and 1998,
respectively. Cash used for investment purposes during the fiscal year ended
June 30, 1998 was primarily used to acquire Stockton for $10.7 million and also
to fund capital expenditures (predominantly computer and network hardware and
software) in the amount of $913,000. The Company expects to spend at least $2.0
million per annum for the foreseeable future for capital investment to support
growth in transaction processing.
Cash provided by financing activities was $657,000, $15.5 million and
$15.6 million for the fiscal years ended June 30, 1996, 1997 and 1998,
respectively. Cash provided by financing activities during the fiscal year
ended June 30, 1998 was primarily provided from borrowings under the Credit
Facility which was partially offset by principal repayments of debt and capital
lease obligations. In the fiscal year ended June 30, 1997, cash was provided by
the issuance of a Senior Subordinated Note in the principal amount of
$25,000,000 and 370,993 shares of Common Stock for aggregate proceeds of $25.0
million, which proceeds were partially offset by the repayment of outstanding
borrowings under the Credit Facility and principal repayments of debt and
capital lease obligations.
Approximately $43.1 million of the proceeds of the Offering will be
applied to the repayment of the Company's outstanding indebtedness under the
Credit Facility and the Senior Subordinated Note. In connection with the
repayment of outstanding indebtedness under the Credit Facility and the Senior
Subordinated Note, the Company will record an extraordinary charge of
approximately $1.6 million relating to the elimination of deferred financing
costs associated with the Credit Facility and the write-off of the remaining
discount on the Senior Subordinated Note. The Company expects to use the
Amended Credit Facility to finance the Company's future acquisitions and
general working capital needs. The Company also expects to finance acquisitions
through the issuance of additional equity and debt securities. The Company
believes that the proceeds of the Offering, together with existing cash
balances and cash generated by operations in the near term, and the borrowings
expected to be made available under the Amended Credit Facility, will be
sufficient to finance the Company's operations for at least 18 months. However,
future acquisitions may require funding beyond the Company's cash resources and
currently anticipated capital or operating requirements could change, with the
result that the Company may be required to raise additional funds through the
public or private sale of additional securities. See "Risk Factors --
Acquisition Strategy; Need for Additional Capital."
YEAR 2000 COMPLIANCE
The Company has reviewed the Year 2000 compliance of its systems and has
adopted a program intended to ensure that it achieves compliance with respect
to all products, services and internal systems in a timely manner. Under such
plan, $1,020,000 has been budgeted through December 1999, of which $225,000 has
been spent through July 31, 1998. Certain of the Company's physician benefit
management clients are being migrated from the Company's PBM system in Ohio to
its PBM system acquired from Stockton, which the Company considers to be Year
2000 compliant. The total revenue from such clients was $6,245,000 in fiscal
1998. A testing and migration timetable for all such clients has been
developed, with migration activities scheduled for completion in mid-1999. The
Company believes that it does not require additional technology to achieve Year
2000 compliance and that it has sufficient resources to
36
<PAGE>
implement its plan. The Company expects that the combined amount of budgeted
expenses for Year 2000 compliance plus the ongoing product development and
development expenditures will increase as a percent of revenue in future
periods. However, there can be no assurance that expenditures required to
achieve compliance with Year 2000 requirements will not exceed those amounts.
See "Risk Factors -- Year 2000 Compliance" and "Business -- Year 2000
Compliance."
IMPACT OF INFLATION
Inflation has not had a material impact on the Company's historical
operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted at this date, include SFAS No. 130, "Reporting
Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." These pronouncements are not
expected to have a material impact on the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement is not
required to be adopted at this date. The Company is currently evaluating the
impact of this statement on its financial statements.
NET OPERATING LOSSES
As of June 30, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $36.4 million. Such loss
carryforwards expire in the fiscal years 2005 through 2013. Because of certain
changes in ownership, as defined in the Internal Revenue Code, which occurred
during 1996 and 1995, certain of these net operating loss carryforwards are
subject to annual limitations. See Note 7 of "Notes to Consolidated Financial
Statements."
37
<PAGE>
BUSINESS
GENERAL
MEDE AMERICA is a leading provider of EDI products and services to a broad
range of providers and payors in the healthcare industry. The Company offers an
integrated suite of EDI solutions that allows hospitals, pharmacies, physicians,
dentists and other healthcare providers and provider groups to electronically
edit, process and transmit claims, eligibility and enrollment data, track claims
submissions throughout the claims payment process and obtain faster
reimbursement for their services. In addition to offering greater processing
speed, the Company's EDI products and services reduce processing costs, increase
collection rates and result in more accurate data interchange. The Company
maintains over 540 direct connections with insurance companies, Medicare and
Medicaid agencies, Blue Cross and Blue Shield systems and other third party
payors, as well as over 500 indirect connections with additional payors through
claims clearinghouses. Currently, the Company processes over 900,000
transactions per day for over 65,000 providers located in all 50 states. The
Company's mission is to be the leading provider of integrated healthcare
transaction processing technology, networks and databases, enabling its clients
to improve the quality and efficiency of their services.
The Company was formed in March 1995 through the consolidation and
subsequent spin-off of three subsidiaries of CES, in connection with the
acquisition by First Data Corporation of CES' credit card processing business.
The three subsidiaries, MedE America, Inc., MPC, and Wellmark, which comprised
the healthcare services business of CES, historically provided EDI services to
hospitals and physicians. Since its formation, the Company has expanded both
through internal growth and the acquisition of five healthcare transaction
processing businesses. As part of its strategy of providing an integrated suite
of EDI products and services to a broad range of healthcare providers, the
Company has focused on acquisitions that provided entry into new markets or
expanded the Company's product suite. The Company has actively pursued the
integration of its acquisitions and, in the process, has either divested, closed
or restructured various operations of the acquired entities in order to
eliminate non-core or redundant operations and achieve cost savings and
operating efficiencies.
INDUSTRY OVERVIEW
Innovations over the past decade in computer and telecommunications
technologies have resulted in the development of EDI systems to electronically
process and transmit information among the various participants in the
healthcare industry. These systems were designed to replace paper-based
recording and transmission of information, enabling greater processing speed,
reduced processing costs and more accurate data interchange. Electronic
processing enables providers to verify patient eligibility or obtain
authorization for services at the time of appointment, registration or at the
time of claim submission. The healthcare EDI processor then interfaces with the
payor to obtain an eligibility or authorization confirmation, which is
transmitted back to the provider. To obtain payment, providers must submit
claims information in formats specified by the respective payors. Healthcare EDI
processors can facilitate this process by utilizing customized software programs
that can perform "edits" to the data supplied by providers and re-format that
data to meet the data specifications of payors. Electronically transmitted
claims are sent either directly from the provider to the payor, or through the
healthcare EDI processor (which in turn transmits the claims to the payor
directly or through one or more intermediaries). The claim is received and
reviewed by the payor and the remittance response is communicated (usually not
electronically) back to the provider. Each of these steps in the healthcare
delivery process gives rise to a current or potential EDI transaction.
According to Health Data Directory, in 1997 over 4.1 billion electronic and
paper claims were paid in all sectors of the healthcare services market, and
over the past five years healthcare claims increased at an average rate of 5.5%
per year. The Company expects the volume of healthcare claims to continue to
grow as the U.S. population ages and life expectancy of the U.S. population
increases. The increase in claims has been accompanied by an increase in the
proportion of claims that are electronically processed. From 1993 to 1997, the
proportion of total healthcare claims that were electronically processed
increased from 41% to approximately 60%. During such period the number of claims
processed
38
<PAGE>
electonically increased at an average rate of 16% per year. The Company expects
the electronic processing of healthcare claims to continue to increase as a
result of increased reliance on electronic commerce and increased emphasis on
cost containment in the healthcare industry.
The penetration of electronic processing varies significantly among the
different markets within the healthcare industry. According to Health Data
Directory, in 1997 electronic processing accounted for approximately 13% of
total dental claims, 38% of total physician medical claims, 83% of total
hospital medical claims and 86% of total pharmacy claims. In addition to the
remaining opportunity to convert paper-based claims to electronic processing,
the Company believes that there is significant market potential for EDI
processing in the non-claim area, including eligibility verification, remittance
transactions and other data exchange transactions such as claims tracking,
referrals and physician scripting. The Company believes that EDI penetration in
these non-claim transaction categories is low, and as a result, the EDI
transaction growth in these areas will exceed that of the EDI claims processing
market.
As compared to claims processing, the electronic processing of non-claim
information transactions in the healthcare industry, such as eligibility
inquiries, enrollment in Medicare and Medicaid programs, referrals, formulary
inquiries to pharmacy benefit managers and prescription delivery, has emerged
only recently and is less pervasive. The Company believes that only a small
percentage of non-claim information transactions are managed electronically. In
addition to opportunities to expand its claims processing business, the Company
believes that there are significant possibilities to expand electronic
processing to non-claim areas in the healthcare market, for the following
reasons:
o As advanced technology continues to penetrate the healthcare industry, an
increasing amount of healthcare data will be managed electronically. For
example, healthcare providers are implementing practice management
software systems to manage the clinical, financial and administrative
aspects of their businesses. Increasingly, these software systems
incorporate EDI processing capabilities.
o Efforts by government and private insurers to contain healthcare costs are
expected to motivate hospitals and physicians to use EDI not only to lower
costs, but also to improve operating efficiencies and increase accuracy.
For example, state Medicaid programs and some private insurance companies
now encourage providers to verify patients' medical benefits eligibility
electronically.
o As the healthcare industry continues to undergo consolidation, the larger
scale of the resulting entities may result in increased EDI use. For
example, various managed care companies have encouraged their provider
networks to utilize EDI for authorizations, enrollment verification,
encounter reports and referrals.
Currently, the EDI market is fragmented and consists of several nationally
prominent EDI claims processors and several hundred regional EDI service
providers who occupy selected niches in specialized markets and geographical
sectors. Over the past several years, many of the regional EDI service providers
have been acquired by national organizations. The Company believes that
competitive conditions in the healthcare information industry will continue to
favor consolidation as larger, more diversified organizations are able to reduce
costs and offer an integrated package of standardized products and services.
COMPETITIVE STRENGTHS
The Company believes that it has several competitive strengths which will
enable it to capitalize on the significant growth opportunities in the
healthcare EDI marketplace.
COMPREHENSIVE SUITE OF EDI PRODUCTS AND SERVICES. The Company has followed
a strategy of developing or acquiring EDI products and services that may be
provided to a broad range of healthcare clients. The Company's products
incorporate open architecture designs and what the Company regards as "best of
breed" technology and may be purchased as modular additions to the client's
existing data storage and retrieval system, or as part of a comprehensive EDI
processing system. They are designed to be compatible with a broad variety of
hospital, medical, pharmacy and dental practice management and
39
<PAGE>
billing systems. In addition, new products can be added to respond to changing
client requirements, and the scalability of the Company's products permits the
client to accommodate increasing transaction volumes without requiring
substantial new investments in software and hardware. Because of these product
characteristics, the Company believes it is well positioned to take advantage of
the expected growth of EDI in areas such as eligibility, managed care
transactions and pharmacy to physician scripting.
BROAD AND DIVERSIFIED CLIENT BASE. The Company markets its products and
services to a broad range of healthcare providers including the medical market,
comprised of hospitals, clinics and physicians, the dental market comprised of
small to medium-sized dental practice groups, and the pharmacy market, which
includes retail pharmacies (independents and chains) as well as PBMs. In
addition, the Company has relationships through practice management system
vendors and other intermediaries. The Company's client base is highly
diversified, consisting of approximately 42,000 pharmacies, 8,000 dental
offices, 1,000 hospitals and clinics and 14,000 physicians. The Company's broad
and diversified client base provides it with transaction-based revenues that
tend to be recurring and positions it to capitalize on the rapid consolidation
taking place within the healthcare industry.
DIRECT RELATIONSHIPS WITH PROVIDERS AND PAYORS. The Company has developed
over 540 direct connections with healthcare payors including Medicare and
Medicaid agencies, Blue Cross and Blue Shield systems and commercial insurance
companies, and the Company is able to access over 500 additional payors through
contractual relationships with multiple claims clearinghouses. Additionally, the
Company has direct client relationships with providers such as hospitals,
clinics, physicians and pharmacies. The range of MEDE AMERICA's services and the
extent of its connectivity with payors provides the opportunity to achieve
deeper penetration of its provider base, while at the same time offering more
complete solutions to new clients. MEDE AMERICA believes that it is strongly
positioned to offer reliable, one-stop shopping to both providers and payors for
all their EDI needs.
FOCUS ON CLIENT SERVICE. The Company has focused on implementing a wide
range of client service and support functions. These support activities include
the use of automated client service tracking software, expanded client help desk
and account executive support functions, and extensive client feedback
mechanisms. This focus has enhanced the Company's awareness of client needs and
improved the Company's ability to respond to those needs. As a result of these
activities, of the clients that contributed to the Company's revenues in the
1997 fiscal year, approximately 90% continued as clients of the Company and
contributed to the Company's revenues in the 1998 fiscal year. The Company
believes that its high quality client service enhances the satisfaction of its
clients and generates new revenue opportunities in the form of expanded
transaction volume and sales of new products and services.
LEADING TECHNOLOGY AND PRODUCT PLATFORMS. The Company recognizes the
critical role of technology and telecommunications platforms to ensure reliable
and high quality service. Over the past two years, MEDE AMERICA has invested
significant capital in new hardware and software systems resulting in an
estimated three-fold increase in transaction processing capacity. The Company
has designed its products on a modular client/server model, using open
architecture and commonly available hardware, with redundant processing
capabilities. The Company's redundancies in its computing capacity and its
dual-site operations enable it to provide uninterrupted processing and data
transmission with little if any downtime. As a result of such technology
investments, MEDE AMERICA believes it is able to provide high quality service to
its clients in the form of high network availability, batch transaction
reliability and high rates of payor claims acceptance. MEDE AMERICA also
believes that its technology platform, which is operating at approximately
one-third of its total capacity, provides it with substantial operating
leverage.
EXPERIENCED MANAGEMENT TEAM. Each member of the Company's senior management
team has over 15 years of experience in the information technology and
transaction processing industries and has extensive background in working with
emerging companies in the information processing industry. The Company believes
that the range and depth of its senior management team position it to address
the evolving requirements of its clients and to manage the growth required to
meet its strategic goals.
40
<PAGE>
GROWTH STRATEGY
The Company's mission is to be the leading provider of integrated
healthcare transaction processing technology, networks and databases, enabling
its clients to improve the quality and efficiency of their services. To achieve
this objective, the Company is pursuing a growth strategy comprised of the
following elements:
o PROVIDE COMPREHENSIVE SUITE OF EDI SOLUTIONS. The Company believes that it
is critical to provide a full range of state of the art EDI solutions to
clients at every stage of the healthcare transaction spectrum. The Company
strives to develop fully modular products with open architecture to allow
for easy installation and integration with existing systems. These
features enhance the ability of the Company to offer one-stop shopping for
a client's EDI needs.
o FURTHER PENETRATE EXISTING CLIENT BASE. The Company believes that the
market for EDI transaction processing among its current clients has
significant potential. As EDI becomes more widespread in the healthcare
industry, the use of emerging EDI products and services such as
eligibility, enrollment, electronic credit card transactions and
electronic statement processing will become increasingly commonplace. The
Company believes that it is well positioned to cross sell such emerging
products and services to its existing client base.
o DEVELOP NEW EDI PRODUCTS AND SERVICES. The Company intends to develop new
EDI solutions to meet the evolving electronic transaction processing needs
of its existing and future healthcare clients. The Company believes that
the use of EDI will expand to encompass an increasing range of services
such as referrals, remittances and workers' compensation transactions. The
Company has a team of 105 research and development and technical support
professionals dedicated to developing, supporting and commercializing new
and enhanced EDI solutions. In addition, the Company intends to undertake
acquisitions in order to expand its suite of product offerings.
o UTILIZE STRATEGIC PARTNERSHIPS TO EXPAND CLIENT BASE. MEDE AMERICA's
strategic alliances with vendors, distributors and dealers of practice
management software have played an important role in building
relationships with small groups of physicians, pharmacists and dentists.
These companies promote MEDE AMERICA's EDI products as a modular addition
to their practice management software. The Company also has strategic
relationships with large hospital groups, Medicaid intermediaries, PBMs
and professional organizations. The Company believes that such strategic
partnerships provide important opportunities for increasing the Company's
revenue base.
o PURSUE STRATEGIC ACQUISITIONS. Currently, the EDI market includes several
hundred regional EDI service providers which occupy selected niches in
specialized markets and geographical areas. The Company intends to
capitalize on the fragmented market for the provision of EDI services by
aggressively pursuing consolidation opportunities in order to increase its
client and revenue base, expand its product suite, enter into new
geographic markets, utilize its operating leverage to increase efficiency
and add new talent and technical capacity in emerging areas of the EDI
processing industry.
SUITE OF EDI PRODUCTS AND SERVICES
MEDE AMERICA's products and services enable its healthcare clients to
process and transmit transactions more efficiently and accurately, reducing
costs and increasing overall processing speed. The Company's EDI products
incorporate open architecture designs and what the Company regards as "best of
breed" technology and may be purchased as modular additions to existing data
storage and retrieval systems or as part of a comprehensive EDI processing
system. They are designed to be compatible with a broad variety of hospital,
medical, pharmacy and dental practice management and billing systems. In
addition, new products can be added to respond to changing client requirements.
The scalability of the Company's products permits its clients to accommodate
increasing transaction volumes without substantial new investments in software
and hardware. The following table illustrates the breadth of the Company's
product and service offerings:
41
<PAGE>
MEDE AMERICA'S SUITE OF EDI PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME OF PRODUCT/SERVICE DESCRIPTION OF
AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS
------------------ ------------------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE CLAIM
PROCESSING
MEDEClaim -- o Downloads claims data from client soft- o Accelerates cash flow through faster
All Markets ware applications and provides claims claim reimbursement.
data entry and correction capability. Ed- o Increaes cash flow through high level of
its, formats and screens transaction data payor acceptance of edited claims.
to meet payor-specific requirements. o Improves accounts receivables manage-
ment.
o Reduces administrative expenses.
- -----------------------------------------------------------------------------------------------------------------------
OTHER CLAIM SERVICES
MEDE Assist -- o Bills, on a batch basis, pharmacy pre- o Improves accounts receivable manage-
Pharmacy scriptions and performs non-electronic ment and accelerates cash flow.
reconciliation and payor accounts re- o Reduces administrative expenses.
ceivable management.
Claims Tracking -- o Tracks and provides a lock box service o Improves accounts receivable manage-
Dental for payor reimbursements. ment and accelerates cash flow.
- -----------------------------------------------------------------------------------------------------------------------
ELIGIBILITY VERIFICATION
MEDE Eligibility -- o Verifies patients' eligibility for specific o Reduces costs by minimizing fraud.
All Markets healthcare benefits for Medicaid and o Ensures patient services are supported
commercial payors. by a designated health benefit plan.
o Reduces administrative expenses.
- -----------------------------------------------------------------------------------------------------------------------
MEDICAID ENROLLMENT
Medicaid o Processes and tracks Medicaid enrollment o Reduces expenses through on-line
Enrollment Manage- applications allowing for the verification application process.
ment System (MEMS) and processing of Medicaid claims. Uti- o Reduces application processing time.
-- Medical lized by hospitals and government agen- o Improves Medicaid claims billing and col-
cies in New York, New Jersey and lection.
California. o Reduces bad debt.
- -----------------------------------------------------------------------------------------------------------------------
TRANSACTION SWITCHING
MEDE Xchange -- o Routes real-time and batch transaction o Reduces costs.
All Markets data from clients to facilitate transaction o Increases network availability and
transmission to payors. reliability.
o Supports a broad array of access methods o Provides extensive payor connectivity.
including dial-up, dial to packet, ISDN and
frame relay.
=======================================================================================================================
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME OF PRODUCT/SERVICE DESCRIPTION OF
AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS
------------------ ------------------------ ---------------
- ------------------------- --------------------------------------------- --------------------------------------------
<S> <C> <C>
REAL-TIME PHARMACY
BENEFIT MANAGEMENT
("PBM")
MEDE Select -- o Adjudicates on-line claims, incorporat- o Accelerates cash flow through faster
All Markets ing patient eligibility and benefit review. claim reimbursement.
o Increases cash flow through high level
of payor acceptance of edited claims.
o Improves accounts receivables management.
o Reduces administrative expenses.
- -----------------------------------------------------------------------------------------------------------------------
PHARMACY PRACTICE
MANAGEMENT
SYSTEMS (PPM)
Solution Plus -- o Facilitates dispensing, inventory and o Expands drug pricing and coverage
Pharmacy pricing of products for hospital, outpa- capabilities.
tient and clinic pharmacies. o Improves cash flow.
o Provides on-line claims adjudication. o Improves efficiency of pharmacy
management and operations.
- -----------------------------------------------------------------------------------------------------------------------
OTHER PRODUCTS AND
SERVICES
Link -- o Connects physicians to pharmacies for the o Reduces costs related to manual genera-
Medical and Pharmacy transmission of prescriptions and related tion and transmission of prescriptions.
information and approvals. o Increases accuracy and transmission speed
of prescriptions.
Formulary o Administers and manages formulary pro- o Reduces drug costs and increases PBM
Management -- grams for PBMs. revenue through manufacturer incentives,
Pharmacy o Promotes the usage by healthcare plans of o Promotes compliance with payor formu-
designated drug products. laries.
Patient Statements -- o Facilitates patient statement billing. o Reduces costs and improves patient
All Markets relations.
Credit/Debit Card and o Assists patients in making co-payments or o Reduces bad debt and enhances patient
Check Guarantee -- paying other out-of-pocket charges. convenience.
All Markets
Additional EDI o Processes data relating to referrals, en- o Reduces practice expense and improves
Transactions -- counters and benefit pre-certifications. efficiency and patient relations.
All Markets
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
CLIENTS
The Company markets its products primarily to hospitals, pharmacies,
physicians, dentists and other healthcare providers and provider groups
(including HMOs, PPOs and healthcare practice management vendors). The Company
processes transactions for providers in all 50 states, with 75% of its
transactions generated by providers in 28 states. The Company believes it is one
of the largest pharmacy transaction routers in the U.S. (based on volume)
serving more than 42,000 pharmacies in various EDI capacities.
43
<PAGE>
MEDE AMERICA has a strong presence in the medical market in New York, New
Jersey, California, Florida, Minnesota, and Ohio, currently providing EDI
services to more than 1,000 hospitals and clinics, and 14,000 physicians. In the
dental market, MEDE AMERICA serves more than 8,000 dental offices. No single
client of the Company accounted for more than 3% of the Company's revenues in
fiscal year 1998.
SALES, MARKETING AND CLIENT SERVICES
The Company markets its products through a national sales and marketing
organization consisting of 91 associates organized according to market, client
type and product category. The Company also has a client services organization
consisting of 61 associates dedicated to help desk and client support functions.
A significant component of compensation for all sales personnel is performance
based, although the Company bases quotas and bonuses on a number of factors in
addition to actual sales, such as client satisfaction and collection of
receivables.
MEDE AMERICA's marketing efforts include direct sales, telesales, strategic
partnerships with healthcare vendors, trade shows, direct marketing,
telemarketing, the Internet, and specific advertising and marketing campaigns
where appropriate. In the medical and pharmacy markets, the Company's current
strategic business alliances include relationships with some of the country's
largest hospitals, hospital networks, hospital information systems vendors,
practice management software vendors, pharmacy chains, healthcare organizations
and payors. The Company also maintains strategic alliances with certain state
Medicaid programs.
MEDE AMERICA's strategic alliances with vendors, distributors and dealers
of practice management software have played an important role in building
relationships with individual and small groups of physicians, pharmacies and
dentists. These companies promote MEDE AMERICA's EDI products as modular
additions to their practice management software. MEDE AMERICA has also won
endorsements from 18 state dental associations, representing nearly half of all
dentists in practice today. The Company's sales channels include targeting
dental practice management companies and payor-driven programs aimed at their
network providers. Recent significant expansion of MEDE AMERICA's direct
connectivity to dental payors has contributed to its ability to generate revenue
from this market while at the same time eliminating its dependence on other
processors and clearinghouses.
RESEARCH AND DEVELOPMENT
As of July 31, 1998, the Company employed 73 people in the areas of product
design, research and development, and 32 people in the areas of quality
assurance and technical support. The Company's product development strategy is
focused on continuous enhancement of its existing products to increase their
functionality and ease of use, and the development of new products for
additional EDI transactions and telecommunications offerings. Particular
attention is devoted to the ongoing integration of developed and acquired
systems and applications into a consolidated suite of EDI product offerings and
supporting services for the markets served by the Company.
In the Company's 1996, 1997 and 1998 fiscal years, research and development
expenditures totaled $2,132,000, $3,278,000 and $3,941,000, respectively,
representing approximately 7%, 9% and 9%, respectively, of the Company's total
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
TECHNOLOGY AND OPERATIONS
MEDE AMERICA recognizes the crucial role of technology and
telecommunications in the EDI marketplace. Since the beginning of fiscal 1996,
the Company has acquired new hardware and software and made data center
improvements costing more than $5.0 million. As a result, the Company is
currently operating at approximately one-third of its operating capacity. The
continuing use of newer emerging technologies and platforms has contributed
significantly to the Company's current operational position. Examples of such
innovations include the use of Internet technologies for data transmissions,
on-line transaction monitoring tools and development of Windows-based front-end
applications for clients.
44
<PAGE>
Advanced Open Architecture
MEDE AMERICA's products and applications offer clients the benefits of an
"open architecture" EDI system. As a result, a client's system can expand or
change without incurring significant incremental capital expenditures for
hardware or software. The open architecture of the Company's systems also
improves reliability and connectivity, and facilitates the cross selling of MEDE
AMERICA's products, in part because of the following characteristics:
o SCALABILITY. The Company's systems are designed to take full advantage of
the client/server environment, UNIX operating systems and Redundant Array
of Inexpensive Disks ("RAID") technology, allowing clients to expand their
processing capacity in order to accommodate the growth of their
businesses.
o MODULARITY. The Company's client/server systems have been developed with
discrete functionality that can be replicated and utilized with additional
hardware. This modularity enables MEDE AMERICA to optimize application and
hardware performance.
o REDUNDANCY. The implementation of a dual site, geographically dispersed
On-Line Transaction Processing ("OLTP") switch (Twinsburg, Ohio and
Mitchel Field, New York) and RAID technology for batch processing
significantly reduces the risk of business interruption. Each site is
designed to be entirely self-supporting.
o OPEN SYSTEMS. Through the use of an open systems architecture MEDE AMERICA
is able to add new functionality to applications without re-designing its
applications or architecture.
o INDUSTRY STANDARDS. Through the adoption and active use of pertinent
standards for healthcare EDI processing, MEDE AMERICA can support client
and payor processing requirements and provide standard interfaces to other
EDI processing organizations.
o EASE OF USE. The Company's products are either Windows-based or GUI-based
and function in UNIX, Novell and Windows NT operating environments,
thereby enhancing ease of use by MEDE AMERICA's clients.
o TELECOMMUNICATIONS OFFERINGS. MEDE AMERICA is an early adopter of emerging
telecommunications systems enabling the Company to migrate to newer
services, such as ISDN, dial to packet, frame relay, virtual private
networks and Internet communications. These new offerings provide the
Company with a competitive advantage through improved service levels or
pricing. To ensure reliable connectivity to its EDI clients, the Company
has established relationships with multiple telecommunications vendors.
COMPETITION
Competition in the market for the Company's products and services is
intense and is expected to increase. The EDI market is characterized by rapidly
changing technology, evolving user needs and frequent introduction of new
products. Many of the Company's competitors and potential competitors have
significantly greater financial, technical, product development, marketing and
other resources and market recognition than the Company. In addition, many of
the Company's competitors also currently have, or may develop or acquire,
substantial installed client bases in the healthcare industry. As a result of
these factors, the Company's competitors may be able to respond more quickly to
new or emerging technologies, changes in client requirements and political,
economic or regulatory changes in the healthcare industry, and may be able to
devote greater resources to the development, promotion and sale of their
products than the Company.
The Company's principal competitors include National Data Corporation,
Envoy Corporation and SSI, Inc. in claims processing and eligibility
verification; QuadraMed Corporation in claims processing; Medifax, Inc. and HDX
Healthcare Data Exchange Corporation in eligibility verification; and Envoy
Corporation in the dental market. MEDE AMERICA also may face potential
competition from other companies not currently involved in healthcare electronic
data transmission, which may enter the market as EDI becomes more established.
The Company believes that existing and potential clients in the
45
<PAGE>
healthcare EDI market evaluate the products and services of competing EDI
providers on the basis of the compatibility of the provider's software, cost,
ease of installation, the range of applications available, the quality of
service and the degree of payor connectivity. See "Risk Factors --
Competition."
GOVERNMENT REGULATION
The healthcare industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of healthcare organizations. During the past several
years, the healthcare industry has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates and certain
capital expenditures. For example, legislation has been proposed that would
mandate standards and impose restrictions on the Company's ability to transmit
healthcare data and recently, Congress has had under consideration proposals to
reform the healthcare system. While some of these proposals, if enacted, could
increase the demand for EDI products and services in the healthcare industry by
emphasizing cost containment, they might change the operating environment for
the Company's clients in ways that cannot be predicted. Healthcare organizations
could react to these proposals by curtailing or deferring investments, including
those for the Company's products and services.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation. State laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is at present principally
the responsibility of the hospital, physician or other healthcare provider,
regulations governing patient confidentiality rights are evolving rapidly. The
Health Insurance Portability and Accountability Act, passed in 1997, mandates
the establishment of national standards for the confidentiality of patient data,
as well as record keeping, data format and data security obligations that will
apply to transaction processors, among others. It is possible that standards so
developed will necessitate changes to the Company's operations. Additional
legislation governing the dissemination of medical record information has been
proposed at both the federal and state levels. This legislation may require
holders of such information to implement security measures that may require
substantial expenditures by the Company. There can be no assurance that changes
to state or federal laws will not materially restrict the ability of healthcare
providers to submit information from patient records using the Company's
products. See "Risk Factors -- Proposed Healthcare Data Confidentiality
Legislation."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, prior to January 1, 2000, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential consequences of the Year 2000 phenomenon.
Through July 31, 1998, the Company has expended approximately $225,000 in
addressing Year 2000 problems. The Company estimates that it will incur
approximately $795,000 in additional costs relating to its Year 2000 compliance
program; however, there can be no assurance that such amount will be sufficient
to cover all costs relating to Year 2000 issues. The Company believes that the
majority of all transactions being processed by it are running on Year 2000
compliant systems. However, the Company believes that some systems with which
its own computers interact (for example, some payor and practice management
systems) are not yet Year 2000 compliant, and that the failure of these systems
to be made Year 2000 compliant in a timely manner may adversely affect some of
the Company's operations. In addition, certain systems operated by MEDE AMERICA
are not yet Year 2000 compliant. The applications running on these systems are
expected to be discontinued, migrated to other systems or corrected before 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance." However, there can be no assurance that the
Company's systems will achieve Year 2000 compliance in a timely manner, if at
all. See "Risk Factors -- Year 2000 Compliance."
EMPLOYEES
As of July 31, 1998, the Company employed 367 people, including 102 in
operations, 91 in sales and marketing, 61 in client services, 73 in research and
development, 30 in finance and administration and
46
<PAGE>
ten in corporate. None of the Company's employees is represented by a union or
other collective bargaining group. The Company believes its relationship with
its employees to be satisfactory.
FACILITIES
The following chart summarizes the Company's facilities and their monthly
transaction capacities:
<TABLE>
<CAPTION>
ESTIMATED
MONTHLY
TRANSACTION OWNED/LEASE
FACILITY PERSONNEL TRANSACTION TYPE CAPACITY EXPIRATION DATE
-------- --------- ---------------- -------- ---------------
<S> <C> <C> <C> <C>
Ohio (Primary Medical and 152 Eligibility 2,000,000 Owned
Pharmacy Data Center) Real-Time Benefit Management 6,000,000
Switching 48,000,000
New York (Secondary Medical 33 Eligibility Enrollment 2,000,000 January 2003
and Pharmacy Data Center) 25,000
Georgia (Dental Data Center) 56 Dental Claims 1,600,000 January 2001
Corporate Headquarters, 115 Real-Time Benefit Management 2,000,000 Various dates between
Sales & Development January 1999 and Feb-
Offices (5 sites) and ruary 2003.
PBM Processing
</TABLE>
INTELLECTUAL PROPERTY
The Company considers its methodologies, computer software and many of its
databases to be proprietary. The Company relies on a combination of trade
secrets, copyright and trademark laws, contractual provisions and technical
measures to protect its rights in various methodologies, systems, products and
databases. The Company has no patents covering its software technology. Due to
the nature of its application software, the Company believes that patent and
trade secret protection are less significant than the Company's ability to
further develop, enhance and modify its current products. However, any
infringement or misappropriation of the Company's proprietary software and
databases could disadvantage the Company in its efforts to retain and attract
new clients in a highly competitive market and could cause the Company to lose
revenues or incur substantial litigation expense. The Company seeks to protect
its proprietary information through nondisclosure agreements with its
consultants, clients and potential clients, and limits access to, and
distribution of, its proprietary information. See "Risk Factors -- Dependence on
Intellectual Property; Risk of Infringement."
Substantial litigation regarding intellectual property rights exists in the
software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
products overlaps. Although the Company believes that its products do not
infringe on the intellectual rights of others, there can be no assurance that
such a claim will not be asserted against the Company in the future, or that a
license or similar agreement will be available on reasonable terms in the event
of an unfavorable ruling on any such claim. See "Risk Factors -- Dependence on
Intellectual Property; Risk of Infringement."
LEGAL PROCEEDINGS
In June 1995, the Company acquired substantially all of the assets of
Latpon for a purchase price of $2,470,000, plus the assumption of approximately
$963,000 of liabilities. On June 6, 1998, Curtis J. Oakley filed a complaint
with the Supreme Court of the State of New York, County of Nassau asserting
multiple causes of action against several persons, including a cause of action
naming the Company as a defendant, based on his alleged ownership of a 22%
interest in Latpon. According to the complaint, Mr. Oakley's claim against the
Company is for $2 million or such other amount as may be equivalent to the
present value of his alleged ownership interest in Latpon's predecessor. The
Company believes that it is fully indemnified by the former owners of Latpon
under the Latpon acquisition agreement against any costs or damages arising from
this claim. By letter dated July 10, 1998, one of the former owners of Latpon
confirmed that he would indemnify the Company in accordance with the terms of
the acquisition agreement.
47
<PAGE>
RECENT DEVELOPMENTS
On July 17, 1998, the Company entered into a Transaction Processing
Agreement (the "Processing Agreement") with Medic Computer Systems, Inc.
("Medic"), a subsidiary of Misys plc that develops and licenses software for
healthcare providers, principally physicians, MSOs and PPMs. Under the
Processing Agreement, the Company will undertake certain software development
obligations, and on July 1, 1999 it will become the exclusive processor (subject
to certain exceptions) of medical reimbursement claims for Medic's subscribers
submitted to payors with whom MedE has or establishes connectivity. Under the
Processing Agreement, the Company will be entitled to revenues to be paid by
payors (in respect of which a commission is payable to Medic) as well as fees to
be paid by Medic. The Processing Agreement sets forth detailed performance
criteria and development and implementation timetables; inability to meet these
criteria may result in financial penalties or give Medic a right to terminate
this agreement. The Processing Agreement is for a fixed term of five years, with
annual renewals thereafter (unless either party elects to terminate).
Contemporaneously, to ensure a close working relationship between the
parties, on July 19, 1998 the Company granted to Medic a warrant (the "Medic
Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per
share exercise price equal to the price of the Common Stock to the public in the
Offering or, in the event that an initial public offering is not completed by
March 31, 1999, at an exercise price equal to $8.00 per share. The difference
between the two alternative prices reflects, in the Company's view, the
incremental value of a share of Common Stock resulting from the Offering and the
concurrent Recapitalization. The Medic Warrant vests over a two year period and
may be exercised up to five years from the date of grant. The Medic Warrant
contains customary weighted average antidilution provisions. The Company and the
principal stockholders associated with WCAS and WBCP have agreed that following
the completion of the Offering and until the earlier of the termination of the
Processing Agreement or the disposition by Medic and its affiliates of at least
25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall
have the right to designate one director to the Company's Board of Directors. As
of the date of this Prospectus, Medic has not named a designee.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas E. McInerney(2) ........... 56 Chairman of the Board of Directors
Thomas P. Staudt ................. 45 President and Chief Executive Officer, Director
Richard P. Bankosky .............. 55 Chief Financial Officer, Treasurer and Secretary
James T. Stinton ................. 48 Chief Information Officer
William M. McManus ............... 43 Senior Vice President and General Manager -- Medical
and Pharmacy
Roger L. Primeau ................. 55 Senior Vice President and General Manager -- Dental
Anthony J. de Nicola(1) .......... 34 Director
Timothy M. Murray(1)(2) .......... 46 Director
</TABLE>
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Set forth below is information about each of the Company's executive
officers and directors.
THOMAS E. MCINERNEY has been Chairman of the Board of Directors of the
Company since March 1995 and a general partner of WCAS, an investment firm which
specializes in the acquisition of companies in the information services and
healthcare industries, since September 1986. Prior to joining WCAS, Mr.
McInerney was President and Chief Executive Officer of Dama Telecommunications
Corporation, a voice and data communications services company which he
co-founded in 1982. Mr. McInerney has also been President of the Brokerage
Services Division and later Group Vice President-Financial Services of ADP, with
responsibility for the ADP divisions that serve the securities, commodities,
bank, thrift and electronic funds transfer industries, and has held positions
with the American Stock Exchange, Citibank and American Airlines. Mr. McInerney
holds a B.A. degree from St. Johns University, and attended New York University
Graduate School of Business Administration. He is a director of Aurora
Electronics, Inc., The BISYS Group, Inc. and several private companies.
THOMAS P. STAUDT has been a director and the President and Chief Executive
Officer of the Company since March 1995. He served as President and Chief
Operating Officer of CES from May 1993, and as a director from August 1994,
until the sale of CES to First Data Corporation and the formation of the
Company in March 1995. At CES, Mr. Staudt was responsible for credit card and
healthcare transaction processing operations. Prior to joining CES, Mr. Staudt
was President and Chief Operating Officer of Harbridge Merchant Services, Inc.,
which he joined in December 1991. Mr. Staudt has also held positions with A.C.
Nielsen, a subsidiary of Dun & Bradstreet Corporation, and Wells Fargo Bank.
Mr. Staudt holds a B.S. degree from the U.S. Naval Academy and an M.B.A. from
San Francisco State University.
RICHARD P. BANKOSKY has been Chief Financial Officer, Treasurer and
Secretary of the Company since May 1996. He served as Chief Financial Officer
and Treasurer for TII Industries, Inc. from April 1995 to February 1996. Prior
to joining TII, he was Chief Financial Officer, Treasurer and Secretary for TSI
International Software Ltd from February 1989 to April 1995. Mr. Bankosky also
served as Chief Financial Officer and Secretary for V Band Systems Inc., was
founder and Chief Operating Officer of NCR Credit Corporation and served as
Director of Corporate Development at NCR Corporation. He holds a B.E.E. degree
in Computers and Electrical Engineering from Rensselaer Polytechnic Institute
and an M.B.A. from Adelphi University.
49
<PAGE>
JAMES T. STINTON has been Chief Information Officer of the Company since
October 1995. He served as Release Manager at Charles Schwab & Company from
April 1992 to September 1995. In that position he was responsible for the
development, coordination, testing and implementation for the Microsoft NT and
UNIX Client Server software. Prior to joining Charles Schwab & Company, he was
POS Systems Architect and Vice President at Wells Fargo Bank from February 1982
to April 1992. Mr. Stinton holds a degree from ONC Business Studies, Coventry
Technical College, Coventry, England, and a graduate certificate from Consumer
Banking Association, Retail Banking Management, McIntire Business School of the
University of Virginia.
WILLIAM M. MCMANUS has been Senior Vice President and General Manager --
Pharmacy and Medical of the Company since May 1997 and Senior Vice President and
General Manager -- Pharmacy since February 1996. From April 1994 through
February 1996 he was head of pharmacy system sales for National Data
Corporation. In that position he had overall responsibility for sales, marketing
and product management programs. Prior to April 1994, Mr. McManus held senior
level positions at OmniSYS, Inc., Healthcare Computer Corporation, PDX, Inc.,
and the computer division of Foxmeyer Corporation. Mr. McManus holds a B.S.
degree in Health and Physical Education from the University of South Carolina
and completed postgraduate courses in education and pharmacy at the University
of South Carolina.
ROGER L. PRIMEAU has been Senior Vice President and General Manager --
Dental of the Company since October 1996. From August 1989 through June 1996 he
was Vice President, Administration and Customer Relations of National
Electronic Information Corporation ("NEIC"). Prior to joining NEIC, Mr. Primeau
worked at Columbia Life Insurance Co. and Aetna Life & Casualty in a variety of
management positions. Mr. Primeau holds a B.S. degree in Biology from Holy
Cross College.
ANTHONY J. DE NICOLA has been a director of the Company since March 1995
and has been a general partner of WCAS since April 1994. Prior to joining WCAS,
Mr. de Nicola was an associate at William Blair & Company, L.L.C., an
investment banking firm with which he had been affiliated since 1990.
Previously, Mr. de Nicola worked in the Mergers and Acquisitions Department of
Goldman Sachs & Co. and held positions at McKinsey & Company and IBM. Mr. de
Nicola holds a B.A. degree from DePauw University and an M.B.A. from Harvard
Business School. He is a director of SEER Technologies, Inc. and several
private companies.
TIMOTHY M. MURRAY has been a director of the Company since March 1995 and
is a principal of William Blair & Company, L.L.C., an investment banking firm
with which he has been associated since 1979. He has also been the managing
partner of William Blair Leveraged Capital Fund since its formation in 1988 and
is a Managing Director of WBCP. Mr. Murray holds a B.A. degree from Duke
University and an M.B.A. from the University of Chicago. He is a director of
Daisytek International Corporation and several private companies.
THE BOARD OF DIRECTORS
COMMITTEES OF THE BOARD OF DIRECTORS
The only standing committees of the Board of Directors of the Company are
the Audit Committee and the Compensation Committee. The Audit Committee reviews
the results and scope of audits and other services provided by the Company's
independent public accountants. Its members are Messrs. de Nicola and Murray. In
May 1998, the Board of Directors constituted a Compensation Committee composed
of Messrs. McInerney and Murray which will be responsible for making
recommendations concerning salaries and incentive compensation for executive
officers of the Company. Prior to May 1998, the Board of Directors had sole
responsibility for establishing executive officer compensation. Thomas E.
Staudt, the Company's President and Chief Executive Officer, participated in the
deliberations of the Board concerning executive compensation.
COMPENSATION OF DIRECTORS
Prior to the Offering, the directors of the Company received no
compensation in respect of their service on the Board of Directors. Following
the Offering, under the "New Stock Plan" (as defined in, and described more
fully under, "-- Employee Benefit Plans"), each director who is not an employee
of
50
<PAGE>
the Company or any parent, subsidiary or affiliate of the Company and is not
(and is not affiliated with) a beneficial owner of 5% or more of the voting
stock of the Company (a "non-employee director") will be paid an annual retainer
of $7,500, plus $1,000 for each Board of Directors or committee meeting
attended, and will receive annually a non-qualified stock option to purchase up
to 1,000 shares of Common Stock at the fair market value of the Common Stock on
the date of grant.
Directors are entitled to reimbursement for out-of-pocket expenses incurred
while attending meetings of the Board of Directors or committee meetings.
DESIGNATED DIRECTOR
The Company and the principal stockholders associated with WCAS and WBCP
have agreed that, following the completion of the Offering and until the earlier
of the termination of the Processing Agreement or the disposition by Medic and
its affiliates of at least 25% of the shares of Common Stock issuable under the
Medic Warrant, Medic shall have the right to designate one director to the
Company's Board of Directors. As of the date of this Prospectus, Medic has not
named a designee.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company to its Chief Executive Officer and each of the
four other most highly paid executive officers of the Company (the "Named
Executive Officers") in the 1998 fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- ---------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#)(2) COMPENSATION($)
- --------------------------------------- ----------- ------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas P. Staudt ...................... 185,833 150,000 -- 229,141 --
President and Chief Executive
Officer
Richard P. Bankosky ................... 136,969 55,000 -- 34,915 --
Chief Financial Officer, Treasurer
and Secretary
William M. McManus .................... 133,269 55,000 -- 39,279 --
Senior Vice President and General
Manager -- Pharmacy and Medical
Roger L. Primeau ...................... 121,050 25,000 27,900 23,567 --
Senior Vice President and General
Manager -- Dental
James T. Stinton ...................... 158,878 50,000 -- 40,371 --
Chief Information Officer ............
</TABLE>
- ----------
(1) Bonuses are granted under a bonus formula annually established by the Board
of Directors, based upon the performance (measured by EBITDA) of the Company
(or certain operating divisions thereof). Unless a specified percentage of
the EBITDA target is achieved, no bonus is paid. EBITDA targets are adjusted
to reflect accounting changes, acquisitions and other significant, one-time
events.
(2) Total number granted through June 30, 1998 (exercised and unexercised).
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding grants of
options to purchase Common Stock in fiscal 1998 to each of the Named Executive
Officers:
51
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
-------------------------------------------------------------- ------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
GRANTED(#) FISCAL YEAR(2) ($/SHARE) DATE 5%($) 10%($)
-------------------- ----------------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Staudt ............ 8,729 10.65% 5.73 3/5/08 31,424 79,696
Richard P. Bankosky ......... 5,455 6.66% 5.73 3/5/08 19,638 49,804
William M. McManus .......... 12,001 14.65% 5.73 (3) 43,204 109,569
Roger L. Primeau ............ 5,455 6.66% 5.73 (4) 19,638 49,804
James T. Stinton ............ 5,455 6.66% 5.73 3/5/08 19,638 49,804
</TABLE>
- ----------
(1) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set forth
in accordance with the rules and regulations adopted by the Securities and
Exchange Commission and do not represent the Company's estimate of stock
price appreciation.
(2) Based upon total grants of options to purchase 81,926 shares in fiscal year
1998.
(3) Of such options, 2,182 expire July 31, 2007, 3,273 expire December 30, 2007
and 6,546 expire March 5, 2008.
(4) Of such options, 2,182 expire July 31, 2007 and 3,273 expire March 5, 2008.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1998(#) JUNE 30, 1998($)
------------------------------- ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Thomas P. Staudt ............ 109,551 97,767 $373,908 $322,136
Richard P. Bankosky ......... 0 23,567 0 72,286
William M. McManus .......... 15,711 23,568 45,688 68,544
Roger L. Primeau ............ 3,622 19,945 11,976 60,310
James T. Stinton ............ 13,529 26,842 45,732 83,486
</TABLE>
SEVERANCE AGREEMENTS
The Company maintains severance agreements with each of its executive
officers providing for salary continuation for a period of six months (twelve
months in the case of Mr. Staudt) if the executive is terminated for any reason
other than malfeasance, misconduct or moral turpitude.
NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY AGREEMENTS
Each executive officer and certain other employees of the Company have
entered into a Non-Competition, Non-Solicitation and Confidentiality Agreement
with the Company, the terms of which are as follows. For a term of 12 months
following the cessation of such employee's employment with the Company, the
employee will neither compete with the Company in the United States nor solicit
any customer or employee of the Company. In addition, the employee will not
disclose any trade secrets (as defined in the agreement) and, for a term of 12
months following the cessation of his or her employment by the Company, will not
disclose any confidential information (as defined in the agreement).
EMPLOYEE BENEFIT PLANS
Under the MEDE AMERICA Corporation and its Subsidiaries Stock Option and
Restricted Stock Purchase Plan (the "Stock Plan"), up to 655,000 shares of
Common Stock are reserved for issuance to the officers and employees of the
Company. These shares may be issued either outright, as restricted stock awards,
or they may be issued pursuant to either "incentive stock options" under Section
422(b) of
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<PAGE>
the Internal Revenue Code of 1986, as amended (the "Code"), or "non-qualified"
stock options. As of July 31, 1998, options to purchase up to an aggregate
482,823 shares of Common Stock were outstanding, of which 212,715 options were
exercisable. The weighted average exercise price for all options granted under
the Stock Plan is $4.84 per share. Following the Offering, the Board of
Directors has provided that no additional grants or awards will be made under
the Stock Plan.
Under the MEDE AMERICA Corporation and its Subsidiaries 1998 Stock Option
and Restricted Stock Purchase Plan (the "New Stock Plan"), a variety of awards,
including incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), "non-qualified" stock
options, restricted stock awards and other stock-based awards, may be granted to
officers, employees, directors, consultants and advisors of the Company and its
subsidiaries. An aggregate 1,500,000 shares of Common Stock are currently
reserved for issuance under the New Stock Plan. The Board of Directors will
initially administer the New Stock Plan, but may delegate such responsibility to
a committee of the Board (the "Plan Administrator").
The terms and conditions of individual awards made to employees and
consultants and, except as described below, non-employee directors, may vary,
subject to the following guidelines: (i) the exercise price of options may not
be less than 85% of the fair market value of the Common Stock on the date of
grant provided, however, that neither (a) the exercise price of incentive stock
options nor (b) the exercise price of non-qualified stock options intended to
qualify as "performance-based compensation" within the meaning of the Code may
be less than 100% of the fair market value of the Common Stock on the date of
grant (or, in the case of incentive stock options granted to a stockholder
owning in excess of 10% of the total combined voting power of all classes of
Company stock, 110% of the fair market value); (ii) the maximum number of shares
of Common Stock which may be the subject of awards granted to any employee under
the New Stock Plan during any calendar year may not exceed 300,000; (iii) the
term of incentive stock options may not exceed ten years from the date of grant;
and (iv) no awards may be granted after June 30, 2008.
Except as described below with respect to non-employee directors, the Plan
Administrator determines, within the guidelines set forth above, the amount of
each award, the conditions and limitations applicable to the exercise of an
option, the exercise price therefor and the form of payment that may be used to
exercise the award, which may include cash, check, shares of Common Stock and
promissory notes.
Each non-employee director automatically receives non-qualified stock
options to purchase up to 1,000 shares of Common Stock upon his or her initial
election to the Board of Directors and upon each anniversary thereof upon which
he or she is still serving as a director. The exercise price for each such
option is the fair market value on the date of grant. Non-employee director
options vest six months after grant and the exercise period may not exceed ten
years, provided that, subject to certain exceptions in the event of death or
disability, no non-employee director options may be exercised more than 90 days
after such director ceases to serve as a director.
The Board of Directors may grant restricted and unrestricted share awards
entitling recipients to acquire shares of Common Stock, subject to the right of
the Company to repurchase all or a part of such shares at their purchase price
from the recipient in the event that conditions specified by the Plan
Administrator are not satisfied prior to the end of the applicable restricted
period. Shares of restricted stock may not be sold, assigned, transferred,
pledged or otherwise encumbered during the applicable restricted period. The
Plan Administrator may, in its sole discretion, grant or sell (at a purchase
price per share equal to at least 85% of the fair market value) shares of Common
Stock free of any restrictions under the New Stock Plan. In the event of a
merger or sale of all or substantially all the assets of the Company, the Board
of Directors may, in its discretion, take any one or more of certain actions
including accelerating all unvested or unrealizable awards, terminating all
unexercised options and requiring the acquiring company to assume all
outstanding awards.
While the Company currently anticipates that most grants under the New
Stock Plan will consist of stock options, the Company may also grant restricted
stock awards, which entitle recipients to acquire shares of Common Stock subject
to certain conditions. Options or other awards that are granted under
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the New Stock Plan but expire unexercised are available for future grants.
Vesting of options under the New Stock Plan would be subject to acceleration at
the discretion of the Board of Directors under certain circumstances.
Under the Company's 1998 Employee Stock Purchase Plan (the "Purchase
Plan"), employees of the Company, including directors of the Company who are
employees, are eligible to participate in semi-annual plan offerings in which
payroll deductions may be used to purchase shares of Common Stock. The purchase
price of such shares is the lower of 85% of the fair market value of the Common
Stock on the day the offering commences and 85% of the fair market value of the
Common Stock on the date the offering terminates. The first offering period
under the Purchase Plan will not commence until the completion of the Offering.
In addition, on July 23, 1998, the Board the Directors determined to grant
options to purchase an aggregate 400,000 shares of Common Stock under the New
Stock Plan to certain employees of the Company (including the Named Executive
Officers) contingent upon consummation of the Offering. Such options, which
include both incentive and non-qualified stock options, will have an exercise
price equal to the price to the public in the Offering and generally will vest
ratably over four years from the date of grant except that the initial
installment of options to be granted to certain executive officers, including
the Named Executive Officers, will vest immediately upon consummation of the
Offering. The grants to be received by each of the Named Executive Officers are
as follows: 160,000 shares for Mr. Staudt, 40,000 shares for each of Messrs.
Bankosky and McManus, 16,000 shares for Mr. Primeau and 30,000 shares for Mr.
Stinton.
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CERTAIN TRANSACTIONS
In June 1995, the Company acquired MEDE OHIO, through a merger between the
Company and the parent of MEDE OHIO ("Parent"). Parent was owned by Welsh,
Carson, Anderson & Stowe V, L.P. ("WCAS V"), which had formed Parent to acquire
MEDE OHIO in an all cash merger that was consummated in March 1995. The
acquisition price of MEDE OHIO, including amounts required to finance the merger
and to provide MEDE OHIO with working capital and pre-merger bridge financing,
was approximately $22.6 million. The exchange ratio in the merger between Parent
and the Company was based on the acquisition cost of MEDE OHIO and an
independent valuation of the Company that was performed in connection with the
spin-off of the Company by CES. In the merger and a related offering to raise
working capital for the Company, the Company issued an aggregate 1,772,351
shares of Common Stock and 171,889 shares of Preferred Stock to investment funds
and individuals affiliated with WCAS, and an aggregate 189,465 shares of Common
Stock and 28,987 shares of Preferred Stock to investment funds affiliated with
WBCP.
In October 1995, WCAS V and Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS
VI"), each advanced the Company $1.75 million as bridge financing for the
Company's acquisition of EC&F and Premier. The loan bore interest at the rate of
10% per annum and matured on December 31, 1995. The Company repaid the loan in
December 1995.
On December 18, 1995, the Company issued to its four principal
stockholders, WCAS V, WCAS VI, William Blair Capital Partners V, L.P. ("Blair
V"), and William Blair Leveraged Capital Fund, Limited Partnership ("Blair
LCF"), warrants to purchase an aggregate 52,532 shares of Common Stock at an
exercise price of $4.58 per share in connection with their agreement to
guarantee the Company's obligations under the Credit Facility.
On January 10, 1997, the Company increased the amount of available
borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS
VI, Blair V and Blair LCF, each agreed to guarantee payment of a portion of the
additional debt to be incurred under the increased credit line. In consideration
for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair
LCF warrants to purchase an aggregate 18,330 shares of Common Stock. The
warrants have a ten-year term and the exercise price thereunder is $5.73 per
share.
On October 31, 1997, the Company increased the amount of available
borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS
VI, Blair V and Blair LCF each agreed to guarantee payment of a portion of the
additional debt to be incurred under the increased credit line. In consideration
for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair
LCF warrants to purchase an aggregate 34,200 shares of Common Stock. The
warrants have a ten year term and the exercise price thereunder is $5.73 per
share.
On February 14, 1997 the Company issued a 10% Senior Subordinated Note due
February 14, 2002 in the principal amount of $25,000,000, plus an aggregate
370,993 shares of Common Stock, to WCAS Capital Partners II, L.P. ("WCAS CP
II"), for an aggregate purchase price of $25,000,000. WCAS CP II is an affiliate
of each of WCAS V and WCAS VI, and Thomas McInerney and Anthony de Nicola, both
directors of the Company, are general partners of the sole WCAS CP II general
partner. The Company intends to use a portion of the proceeds of the Offering to
repay in full the Credit Facility and the 10% Senior Subordinated Note. See "Use
of Proceeds." The Company does not anticipate further borrowing from or seeking
further loan guarantees from any of the entities referred to above.
In connection with the issuance and sale of its 10% Senior Subordinated
Note to WCAS CP II, the Company granted to WCAS CP II certain demand and
"piggyback" registration rights pursuant to a Registration Rights Agreement,
dated as of February 14, 1997 between the Company and WCAS CP II. In addition,
the Company has granted demand and piggyback registration rights to Medic with
respect to the shares of Common Stock issuable upon exercise of the Medic
Warrant.
On July 19, 1998 the Company granted to Medic the Medic Warrant to acquire
1,250,000 shares of the Company's Common Stock a per share exercise price equal
to the price of the Common Stock to the public in the Offering or, in the event
that an initial public offering is not completed by March 31, 1999,
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<PAGE>
at an exercise price equal to $8.00 per share. The difference between the two
alternative prices reflects, in the Company's view, the incremental value of a
share of Common Stock resulting from the Offering and the concurrent
Recapitalization. The Medic Warrant vests over a two year period and may be
exercised up to five years after the date of grant. The Company and the
principal stockholders associated with WCAS and WBCP have agreed that, following
the completion of the Offering and until the earlier of the termination of the
Processing Agreement or the disposition by Medic and its affiliates of at least
25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall
have the right to designate one director to the Company's Board of Directors. As
of the date of this Prospectus, Medic has not named a designee.
The terms of the Preferred Stock have been amended to provide for
conversion of the aggregate liquidation value of the Preferred Stock including
accrued but unpaid dividends into Common Stock at the price per share received
by the Company upon the consummation of its initial public offering; provided
further, however, that cash realized by the Company upon any exercise of the
Underwriters' overallotment option would be applied to the payment of accrued
dividends in lieu of having such dividends convert into Common Stock. In
addition, in connection with the Offering, the holders of the outstanding
warrants (other than the Medic Warrant) agreed to exercise all such warrants by
the net issuance exercise method for an aggregate 66,375 shares of Common Stock.
WCAS V, WCAS VI, Blair V and Blair LCF are the owners of an aggregate 193,100
shares of Preferred Stock, and warrants to purchase 52,532 and 52,530 shares of
Common Stock at exercise prices of $4.58 and $5.73 per share, respectively.
Blair V and Blair LCF, and Timothy Murray, a director of the Company, are
each affiliates of William Blair & Company, L.L.C., an underwriter of the
Offering. See "Underwriting."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1998, and as adjusted to
reflect the sale of Common Stock offered hereby, by (i) each person (or group of
affiliated persons) known by the Company to own beneficially more than five
percent of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers and (iv) all directors and
executive officers of the Company as a group. The numbers of shares set forth
below (i) give effect to the Recapitalization and the Reverse Stock Split, (ii)
assume an Offering price of $14.00 per share of Common Stock and (iii) assume a
sale of 3,600,000 shares of Common Stock in the Offering. Unless otherwise
indicated, the address for each stockholder is c/o the Company, 90 Merrick
Avenue, Suite 501, East Meadow, New York 11554.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
--------------------------------------
PERCENTAGE OWNED(2)
------------------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
------------------------------------ ------ -------- --------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe (3) ......... 5,764,785 72.10% 49.71%
320 Park Avenue, 25th Floor
New York, NY 10019
William Blair & Co., L.L.C. (4) ............. 920,229 11.51% 7.94%
222 West Adams Street
Chicago, Illinois 60606
Mellon Bank, as Trustee (5) ................. 619,056 7.74% 5.34%
767 Fifth Avenue, 26th Floor
New York, NY 10153
Thomas P. Staudt (6) ........................ 166,279 2.05% 1.42%
Richard P. Bankosky ......................... 11,346 - -
James T. Stinton (7) ........................ 13,529 - -
William M. McManus (8) ...................... 16,583 - -
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
---------------------------------------
PERCENTAGE OWNED(2)
------------------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
------------------------------------ ------ -------- --------
<S> <C> <C> <C>
Roger L. Primeau (9) ............................ 10,255 - -
Thomas E. McInerney (10) ........................ 5,632,270 70.44% 48.57%
320 Park Avenue, 25th Floor
New York, NY 10019
Anthony J. de Nicola (11) ....................... 5,608,364 70.14% 48.37%
320 Park Avenue, 25th Floor
New York, NY 10019
Timothy M. Murray (12) .......................... 917,077 11.47% 7.91%
222 West Adams Street
Chicago, Illinois 60606
All current directors and executive officers as a 6,777,705 83.15% 57.68%
group (10 persons) .............................
</TABLE>
- ----------
- Represents beneficial ownership of less than 1% of the Common Stock.
(1) Gives effect to the Recapitalization and the Reverse Stock Split. Unless
otherwise indicated, the entities and individuals identified in this table
have sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws, where
applicable.
(2) The percentages shown are based on 7,995,787 shares of Common Stock
outstanding on July 31, 1998, plus, as to each entity or group listed
unless otherwise noted, the number of shares of Common Stock deemed to be
owned by such holder pursuant to Rule 13d-3 under the Exchange Act as of
such date, assuming exercise of options held by such holder that are
exercisable within 60 days of the date of this Prospectus.
(3) Includes 2,576,751 shares of Common Stock held by WCAS V, 2,592,917 shares
of Common Stock held by WCAS VI, 62,354 shares of Common Stock held by WCAS
Information Partners L.P. ("WCAS Info."), 370,993 shares of Common Stock
held by WCAS CP II, and 161,770 shares of Common Stock held by individual
partners of WCAS. Such partners are also partners of the sole general
partner of each of the foregoing limited partnerships. The respective
general partners of WCAS V, WCAS VI, WCAS Info. and WCAS CP II are WCAS V
Partners, L.P., WCAS VI Partners, L.P., WCAS INFO Partners and WCAS CP II
Partners. The individual partners of each of these partnerships include
some or all of Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson,
Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A. Minicucci,
Anthony J. de Nicola and Laura M. VanBuren. The partners of WCAS who are
also directors of the Company are Thomas E. McInerney (who is also Chairman
of the Board of Directors) and Anthony J. de Nicola. Each of the foregoing
persons may be deemed to be the beneficial owner of the Common Stock owned
by WCAS.
(4) Includes 602,641 shares of Common Stock held by Blair V, 314,436 shares of
Common Stock held by Blair LCF and 3,152 shares of Common Stock held by an
individual affiliated with WBCP. Timothy M. Murray, a partner of WBCP, is
also a director of the Company and may be deemed to be a beneficial owner
of the Company's Common Stock owned by WBCP.
(5) Includes 309,528 shares of Common Stock held by Mellon Bank as Trustee for
the General Motors Salaried Employees Pension Trust and 309,528 shares of
Common Stock held by Mellon Bank as Trustee for the General Motors Hourly
Rate Employees Pension Fund.
(6) Includes options to purchase up to 109,551 shares of Common Stock.
(7) Includes options to purchase up to 13,529 shares of Common Stock.
(8) Includes options to purchase up to 16,583 shares of Common Stock.
(9) Includes options to purchase up to 10,255 shares of Common Stock.
(10) Includes 2,576,751 shares of Common Stock held by WCAS V, 2,592,917 shares
of Common Stock held by WCAS VI, 62,354 shares of Common Stock held by WCAS
Info. and 370,993 shares of Common Stock held by WCAS CP II. Mr. McInerney
disclaims beneficial ownership of such shares.
(11) Includes 2,576,751 shares of Common Stock held by WCAS V, 2,592,917 shares
of Common Stock held by WCAS VI, 62,354 shares of Common Stock held by WCAS
Info. and 370,993 shares of Common Stock held by WCAS CP II. Mr. de Nicola
disclaims beneficial ownership of such shares.
(12) Includes 602,641 shares of Common Stock held by Blair V and 314,436 shares
of Common Stock held by Blair LCF. Mr. Murray disclaims beneficial
ownership of such shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, and 5,000,000 shares of Preferred Stock. Upon completion of this
Offering, and after giving effect to the Recapitalization and the Reverse Stock
Split, there will be 11,595,787 shares of Common Stock (12,135,787 shares if the
Underwriters' over-allotment option is exercised) and no shares of Preferred
Stock outstanding. As of July 31, 1998, before giving effect to the
Recapitalization but after giving effect to the Reverse Stock Split, there were
5,684,847 shares of Common Stock outstanding and 239,956 shares of Preferred
Stock outstanding, held of record by 127 stockholders. In addition, as of July
31, 1998, before giving effect to the Recapitalization but after giving effect
to the Reverse Stock Split, there were outstanding options to purchase 482,823
shares of Common Stock and warrants to purchase 105,062 shares of Common Stock.
Pursuant to the Recapitalization, all such warrants will be exercised (for an
aggregate 66,375 shares), and all shares of Preferred Stock will be converted
into an aggregate 2,244,565 shares of Common Stock (based on the aggregate
liquidation preference of the Preferred Stock as of July 31, 1998, assuming no
exercise of the Underwriters' over-allotment option) prior to the consummation
of the Offering. On July 17, 1998, the Company issued to Medic a warrant to
purchase 1,250,000 shares of the Company's Common Stock. See "Prospectus Summary
- -- Recent Developments."
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the rights
and preferences of the holders of any outstanding Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends as are declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock have the right to a ratable portion of assets remaining after the payment
of all debts and other liabilities, subject to the liquidation preferences of
the holders of any outstanding Preferred Stock. Holders of Common Stock have
neither preemptive rights nor rights to convert their Common Stock into any
other securities and are not subject to future calls or assessments by the
Company. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and the shares offered
hereby upon issuance and sale will be, fully paid and non-assessable. The
rights, preferences and privileges of the holders of Common Stock are subject
to, and may be adversely affected by, the rights of the holders of shares of
Preferred Stock that the Company may designate and issue in the future.
PREFERRED STOCK
Upon the closing of this Offering and assuming no exercise of the
Underwriters' over-allotment option, all of the outstanding shares of the
Preferred Stock together with accrued but unpaid dividends thereon will be
automatically converted at the public offering price into 2,244,565 shares of
Common Stock.
The Board of Directors is authorized, subject to certain limitations
prescribed by Delaware law, without further action by the stockholders, to issue
up to 5,000,000 shares of Preferred Stock, $.01 par value, in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series. The Company believes
that the power to issue Preferred Stock will provide flexibility in connection
with possible corporate transactions. The issuance of Preferred Stock, however,
could adversely affect the voting power of holders of Common Stock and restrict
their rights to receive payments upon liquidation. It could also have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
As of July 31, 1998, there were outstanding warrants to purchase 66,375
shares of Common Stock (on a "net exercise" basis) held by four investors. These
warrants will be exercised in full upon the closing of this Offering.
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<PAGE>
On July 17, 1998 the Company granted to Medic the Medic Warrant to acquire
1,250,000 shares of the Company's Common Stock, at a per share exercise price
equal to the price of the Common Stock to the public in the Offering. The Medic
Warrant vests over a two year period and may be exercised up to five years after
the date of grant.
DELAWARE LAWS AND CERTAIN CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER MEASURES
Upon the consummation of this Offering made hereby, the Company will be
subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
All directors elected to the Company's Board of Directors serve until the
next annual meeting of the stockholders and the election and qualification of
their successors or their earlier death, resignation or removal. The Board of
Directors is authorized to create new directorships and to fill such positions
so created. The Board of Directors (or its remaining members, even though less
than a quorum) is also empowered to fill vacancies on the Board of Directors
occurring for any reason for the remainder of the term of the vacant
directorship.
The Company's Bylaws provide that, for nominations to the Board of
Directors or for other business to be properly brought by a stockholder before
an annual meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 90 days nor more
than 120 days prior to the anniversary of the immediately preceding annual
meeting. The notice by a stockholder must contain, among other things, certain
information about the stockholder delivering the notice and a description of the
proposed business to be brought before the meeting.
Certain of the provisions of the Amended and Restated Certificate of
Incorporation and Bylaws discussed above could make more difficult or discourage
a proxy contest or other change in the management of the Company or the
acquisition or attempted acquisition of control by a holder of a substantial
block of the Company's stock. It is possible that such provisions could make it
more difficult to accomplish, or could deter, transactions which stockholders
may otherwise consider to be in their best interests.
As permitted by the DGCL, the Amended and Restated Certificate of
Incorporation provides that Directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
their fiduciary duties as Directors, except for liability (i) for any breach of
their duty of loyalty to the Company and its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions, as provided in Section 174 or successor provisions
of the DGCL or (iv) for any transaction from which the Director derives an
improper personal benefit.
The Amended and Restated Certificate of Incorporation and Bylaws provide
that the Company shall indemnify its Directors and officers to the fullest
extent permitted by Delaware law (except in some circumstances, with respect to
suits initiated by the Director or officer) and advance expenses to such
Directors or officers to defend any action for which rights of indemnification
are provided. In addition, the Amended and Restated Certificate of Incorporation
and Bylaws also permit the Company to grant such rights to its employees and
agents. The Bylaws also provide that the Company may enter into indemnification
agreements with its Directors and officers and purchase insurance on behalf of
any person whom it is required or permitted to indemnify. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as Directors, officers and employees.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering there has been no market for the Common Stock of the
Company. The Company can make no prediction as to the effect, if any, that sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Common Stock in the public market, or the perception that such sales may occur,
could adversely affect prevailing market prices. See "Risk Factors -- Shares
Eligible for Future Sale."
Upon completion of this Offering, the Company expects to have 11,595,787
shares of Common Stock outstanding (excluding 482,823 shares reserved for
issuance upon the exercise of outstanding stock options and 1,250,000 shares
reserved for issuance upon the exercise of the Medic Warrant) (12,135,787 shares
of Common Stock outstanding if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 3,600,000 shares offered hereby will be
freely tradable without restrictions or further registration under the
Securities Act, except for any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act, which will be
subject to the resale limitations imposed by Rule 144, as described below.
All of the remaining 7,995,787 shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold in
the absence of registration under the Securities Act, or pursuant to exemptions
from such registration including, among others, the exemption provided by Rule
144 under the Securities Act. Of the restricted securities, 591,908 shares are
eligible for sale in the public market immediately after this Offering pursuant
to Rule 144(k) under the Securities Act. A total of 7,370,008 additional
restricted securities will be eligible for sale in the public market in
accordance with Rule 144 or 701 under the Securities Act beginning 90 days after
the date of this Prospectus. Taking into consideration the effect of the lock-up
agreements described below and the provisions of Rules 144 and 144(k),
restricted shares will be eligible for sale in the public market
immediately after this Offering, restricted shares (excluding shares issuable
upon the exercise of outstanding stock options) will be eligible for sale
beginning 90 days after the date of this Prospectus, and the remaining
restricted shares will be eligible for sale upon the expiration of the lock-up
agreements 180 days after the date of this Prospectus, subject to the provisions
of Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately 115,957 shares after this Offering) or
(ii) the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two years
is entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
In addition, the Company has granted demand and piggyback registration
rights to WCAS CP II with respect to 370,993 shares of Common Stock and to Medic
with respect to 1,250,000 shares of Common Stock issuable upon the exercise of
the Medic Warrant. All or part of such shares may be sold in the public market
following the exercise of such rights subject to the lock-up arrangements
described below with respect to WCAS CP II and to vesting and exercise
requirements with respect to the Medic Warrant.
All officers, directors and certain holders of Common Stock beneficially
owning, in the aggregate, shares of Common Stock and options to purchase
shares of Common Stock, have agreed, pursuant to certain lock-up
agreements, that they will not sell, offer to sell, solicit an offer to
purchase, contract to sell, grant any option to sell, pledge, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock owned
by them, or that could be purchased by them through the exercise of options to
purchase Common Stock of the Company, for a period of 180 days after the date of
this
60
<PAGE>
Prospectus without the prior written consent of Smith Barney Inc. Upon
expiration of the lock-up agreements, all shares of Common Stock currently
outstanding will be immediately eligible for resale, subject to the requirements
of Rule 144. The Company is unable to predict the effect that sales may have on
the then prevailing market price of the Common Stock. See "Management --
Employee Benefit Plans" and "Description of Capital Stock."
61
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Smith Barney Inc. ..........................
William Blair & Company, L.L.C. ............
Volpe Brown Whelan & Company, LLC ..........
------------
Total ...................................
============
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., William Blair & Company,
L.L.C. and Volpe Brown Whelan & Company, LLC are acting as representatives (the
"Representatives"), propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
share to other Underwriters or to certain other dealers. After the initial
public offering, the public offering price and such concessions may be changed
by the Underwriters. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 540,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Company and its executive officers and directors and certain other
holders of Common Stock and securities convertible into or exercisable or
exchangeable for Common Stock have agreed that for a period of 180 days after
the date of this Prospectus they will not, without the prior written consent of
Smith Barney Inc., sell, offer to sell, solicit an offer to purchase, contract
to sell, grant any option to sell,
62
<PAGE>
pledge or otherwise dispose of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock except in certain limited
circumstances. See "Shares Eligible for Future Sale."
In connection with this Offering and in accordance with applicable law and
industry practice, the Underwriters may over-allot or effect transactions which
stabilize, maintain or otherwise affect the market price of the Common Stock at
levels above those which might otherwise prevail in the open market, including
by entering stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Smith Barney Inc., as managing underwriter, to
reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock originally sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on the Nasdaq National Market, in the over-the-counter market, or otherwise. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were the history of, and the prospects for, the Company's business and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the past and present results of operations of the
Company and the trend of such results of operations, the prospects for earnings
of the Company, the present state of the Company's development, the general
condition of the securities market at the time of this Offering and the market
prices of similar securities of comparable companies at the time of this
Offering.
William Blair & Company, L.L.C., one of the Representatives of the
Underwriters, is affiliated with Blair V and Blair LCF, two of the Company's
principal stockholders and, by virtue of such affiliation, is, prior to the
Offering, an "affiliate" of the Company within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc.
Accordingly, the Offering is being made in conformity with certain applicable
provisions of Rule 2720. Smith Barney Inc., another Underwriter of the Offering
(the "Independent Underwriter"), will act as a "qualified independent
underwriter," as defined in Rule 2720, in connection with the Offering. The
Independent Underwriter, in its role as qualified independent underwriter, has
performed due diligence investigations and reviewed and participated in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. The Independent Underwriter will not receive any
additional fees for serving as a qualified independent underwriter in connection
with the Offering. The price of shares of Common Stock sold to the public will
be no higher than that recommended by the Independent Underwriter.
Timothy M. Murray, a director of the Company, is a managing director of
WBCP and a principal of William Blair & Company, L.L.C.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Reboul, MacMurray, Hewitt, Maynard & Kristol and for the Underwriters
by Dewey Ballantine LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1997
and 1998 and for each of the three years in the period ended June 30, 1998
included in this Prospectus, and the related financial statement schedule
included elsewhere in this Registration Statement, have been audited by Deloitte
&
63
<PAGE>
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement, and have been so included in
reliance upon such report given upon their authority as experts in accounting
and auditing.
The statement of operations of Stockton for the year ended June 30, 1997
included in this Prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and has been so
included in reliance upon such report given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1,
including amendments thereto (the "Registration Statement"), under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding 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
other document filed as an exhibit to the Registration Statement, each such
statement being deemed to be qualified in its entirety by such reference. The
Registration Statement, including all exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: the New York regional office located at 7 World Trade Center,
Suite 1300, New York, New York 10048, and the Chicago regional office located at
the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of this material may also be obtained from the Commission's
Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, such material may also be accessed electronically
at the Commission's Internet home page: (http:// www.sec.gov).
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants,
and will make available quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MEDE AMERICA CORPORATION:
Independent Auditors' Report ......................................................... F-2
Consolidated Balance Sheets as of June 30, 1997 and 1998 ............................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
1996, 1997 and 1998 ................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements ........................................... F-7
THE STOCKTON GROUP, INC.:
Independent Auditors' Report ......................................................... F-21
Statements of Income for the Year Ended June 30, 1997 and the Three Months Ended
September 30, 1997 (Unaudited) ..................................................... F-22
Notes to Financial Statement ......................................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MEDE America Corporation
We have audited the accompanying consolidated balance sheets of MEDE America
Corporation and subsidiaries (the "Company") as of June 30, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MEDE America Corporation and
subsidiaries as of June 30, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Jericho, New York
August 5, 1998
(September 17, 1998 as to Note 12)
F-2
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
JUNE 30, EQUITY
--------------------------- JUNE 30,
1997 1998 1998
------------ ------------ --------------
(UNAUDITED)
(NOTE 1.O.)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 1,919 $ 2,950
Accounts receivable, less allowance for doubtful accounts of
$1,716, and $997, respectively................................. 6,318 7,920
Formulary receivables ........................................... 405 2,341
Inventory ....................................................... 172 211
Prepaid expenses and other current assets ....................... 486 537
--------- ---------
Total current assets .......................................... 9,300 13,959
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6) .................... 5,517 4,711
GOODWILL -- Net (Notes 1 and 2) .................................. 24,834 32,522
OTHER INTANGIBLE ASSETS -- Net (Notes 1 and 4) ................... 5,357 5,501
OTHER ASSETS ..................................................... 451 470
--------- ---------
TOTAL ............................................................ $ 45,459 $ 57,163
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................ $ 2,134 $ 3,630
Accrued expenses and other current liabilities (Note 5) ......... 9,195 7,715
Current portion of long-term debt (Note 6) ...................... 538 269
--------- ---------
Total current liabilities ..................................... 11,867 11,614
--------- ---------
LONG-TERM DEBT (Note 6) .......................................... 24,623 41,055
--------- ---------
OTHER LONG-TERM LIABILITIES ...................................... 215 194
--------- ---------
REDEEMABLE CUMULATIVE PREFERRED STOCK:
$.01 par value; 250 shares authorized; 240 shares issued and
outstanding (aggregate liquidation value of $23,996 plus ac-
crued dividends) (Note 9) ..................................... 28,823 31,223 $ --
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $.01 par value; 6,329 shares authorized; 5,671
and 5,685 shares issued and outstanding, respectively ......... 57 57 79
Additional paid-in capital ...................................... 27,713 25,584 56,785
Accumulated deficit ............................................. (47,839) (52,474) (52,474)
Deferred compensation (Note 8) .................................. -- (90) (90)
--------- --------- ---------
Total stockholders' (deficit) equity .......................... (20,069) (26,923) $ 4,300
--------- --------- ---------
TOTAL ............................................................ $ 45,459 $ 57,163
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES .................................................. $ 31,768 $ 35,279 $ 42,290
OPERATING EXPENSES:
Operations ............................................... 19,174 16,817 16,958
Sales, marketing and client services ..................... 7,064 8,769 10,765
Research and development (Note 1) ........................ 2,132 3,278 3,941
General and administrative ............................... 6,059 5,263 4,865
Depreciation and amortization ............................ 5,176 5,293 6,743
Contingent consideration paid to former owners of
acquired businesses (Note 2) ........................... 538 2,301 --
Write-down of intangible assets (Note 1) ................. 9,965 -- --
Acquired in-process research and development (Note 2)..... -- 4,354 --
--------- --------- --------
Total operating expenses ................................. 50,108 46,075 43,272
--------- --------- --------
LOSS FROM OPERATIONS ...................................... (18,340) (10,796) (982)
OTHER (INCOME) EXPENSE (Note 11) .......................... 313 (893) (12)
INTEREST EXPENSE, Net ..................................... 584 1,504 3,623
--------- --------- --------
LOSS BEFORE PROVISION FOR INCOME
TAXES .................................................... (19,237) (11,407) (4,593)
PROVISION FOR INCOME TAXES (Note 7) ....................... 93 57 42
--------- --------- --------
NET LOSS .................................................. (19,330) (11,464) (4,635)
PREFERRED STOCK DIVIDENDS ................................. (2,400) (2,400) (2,400)
--------- --------- --------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ............................................. $ (21,730) $ (13,864) $ (7,035)
========= ========= ========
BASIC NET LOSS PER COMMON SHARE ........................... $ (4.14) $ (2.56) $ (1.24)
========= ========= ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- BASIC ..................................... 5,245 5,425 5,679
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY (DEFICIT)
-------- -------- ------------ ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 .......................... 5,237 $ 52 $ 29,935 $ (17,045) $ -- $ 12,942
Net loss ...................................... -- -- -- (19,330) -- (19,330)
Preferred stock dividends ..................... -- -- (2,400) -- -- (2,400)
Issuance of warrants .......................... -- -- 121 -- -- 121
Exercise of stock options ..................... 43 1 194 -- -- 195
----- ---- -------- --------- ------ ---------
BALANCE, JUNE 30, 1996 ......................... 5,280 53 27,850 (36,375) -- (8,472)
Net loss ...................................... -- -- -- (11,464) -- (11,464)
Preferred stock dividends ..................... -- -- (2,400) -- -- (2,400)
Issuance of common stock ...................... 371 4 2,121 -- -- 2,125
Issuance of warrants .......................... -- -- 52 -- -- 52
Exercise of stock options ..................... 20 -- 90 -- -- 90
----- ---- -------- --------- ------ ---------
BALANCE, JUNE 30, 1997 ......................... 5,671 57 27,713 (47,839) -- (20,069)
Net loss ...................................... -- -- -- (4,635) -- (4,635)
Preferred stock dividends ..................... -- -- (2,400) -- -- (2,400)
Issuance of warrants .......................... -- -- 98 -- -- 98
Exercise of stock options ..................... 14 -- 65 -- -- 65
Issuance of stock options (Note 8) ............ -- -- 108 -- (108) --
Amortization of deferred compensation ......... -- -- -- -- 18 18
----- ---- -------- --------- ------ ---------
BALANCE, JUNE 30, 1998 ......................... 5,685 $ 57 $ 25,584 $ (52,474) $ (90) $ (26,923)
===== ==== ======== ========= ====== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1996 1997 1998
------------- ---------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (19,330) $ (11,464) $ (4,635)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .......................................... 5,176 5,418 7,102
Provision for doubtful accounts ........................................ 406 316 464
Write-down of intangible assets ........................................ 9,965 -- --
Acquired in-process research and development ........................... -- 4,354 --
(Gain) loss on sale of assets .......................................... 313 (8) 13
Non-cash compensation expense .......................................... -- -- 18
Changes in operating assets and liabilities net of effects of businesses
acquired:
Accounts receivable ................................................... 977 (861) (2,065)
Formularly receivables ................................................ (74) (331) (1,936)
Inventory ............................................................. 262 (45) (40)
Prepaid expenses and other current assets ............................. (179) 175 (51)
Other assets .......................................................... 243 13 19
Accounts payable and accrued expenses and other current liabilities ... 997 (629) (1,368)
Other long-term liabilities ........................................... (409) (958) (21)
--------- ----------- ---------
Net cash used in operating activities ............................... (1,653) (4,020) (2,500)
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired ............................. (3,648) (11,450) (10,674)
Purchases of property and equipment ..................................... (1,271) (1,477) (913)
Additions to goodwill and other intangible assets ....................... -- (143) (699)
Proceeds from sale of property and equipment ............................ -- 461 182
Proceeds from sale of net assets of Premier ............................. -- 388 --
--------- ----------- ---------
Net cash used in investing activities ............................... (4,919) (12,221) (12,104)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to stockholders ..................................................... (4,484) -- --
Issuance of Senior Subordinated Note .................................... -- 22,875 --
Issuance of common stock ................................................ -- 2,125 --
Net proceeds (repayments) under Credit Facility ......................... 8,250 (8,250) 16,725
Principal repayments of debt ............................................ (2,852) (801) (588)
Principal repayments of capital lease obligations ....................... (452) (518) (567)
Exercise of stock options ............................................... 195 90 65
--------- ----------- ---------
Net cash provided by financing activities ........................... 657 15,521 15,635
--------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (5,915) (720) 1,031
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................. 8,554 2,639 1,919
--------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................... $ 2,639 $ 1,919 $ 2,950
========= =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest ............................................................... $ 394 $ 1,541 $ 3,018
========= =========== =========
Income taxes ........................................................... $ 69 $ 111 $ 102
========= =========== =========
Non-cash investing and financing activities:
Assets acquired under capital leases or by incurring debt .............. $ 205 $ 129 $ 278
========= =========== =========
Issuance of warrants ................................................... $ 121 $ 52 $ 98
========= =========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business - MEDE America Corporation and subsidiaries (the
"Company") is a leading provider of electronic data interchange ("EDI")
products and services to a broad range of providers and payors in the
healthcare industry. The Company's integrated suite of EDI products and
services permits hospitals, pharmacies, physicians, dentists, and other
healthcare providers and provider groups to electronically edit, process
and transmit claims, eligibility and enrollment data, track claims
submissions through the claims payment process and obtain faster
reimbursement for their services.
The accompanying consolidated financial statements include the accounts of
MEDE America Corporation and its wholly-owned subsidiaries: MEDE America,
Inc. ("MEDE"), Medical Processing Center, Inc. ("MPC"), Wellmark
Incorporated ("Wellmark"), Electronic Claims and Funding, Inc. ("EC&F"),
Premier Dental Systems Corp. ("Premier"), and MEDE America Corporation of
Ohio, Inc. ("MEDE OHIO") (formerly General Computer Corporation). MPC,
Wellmark, and MEDE formerly constituted the healthcare information services
business unit of Card Establishment Services ("CES"). On March 9, 1995, CES
was acquired by First Data Corporation. Prior to this transaction, the
former owners of CES spun off the healthcare information services business
unit as a new company with MEDE America Corporation formed to serve as the
holding company (the "Spin-off"). Because there was no change in ownership
as a result of this Spin-off, the accompanying consolidated financial
statements accounted for MEDE, MPC, and Wellmark on an historical cost
basis. Effective July 1, 1997, MEDE, MPC, Wellmark and EC&F were merged
into MEDE America Corporation.
The Company has instituted certain cost reduction programs. These programs,
when coupled with the Company's revolving credit facility, should enable
the Company to satisfy its short-term cash flow and working capital
requirements for the foreseeable future. Additionally, the Company has
received support from certain of its stockholders in the past and believes
that continued support would be available if necessary to meet cash flow
and working capital requirements. However, such stockholders are under no
legal obligation to provide such support and, if the IPO (as herein
defined) is consummated as proposed, such stockholders may elect not to do
so. (see Note 12).
b. Principles of Consolidation -- All significant intercompany transactions and
balances are eliminated in consolidation.
c. Revenue Recognition -- Transaction and related formularly services revenues
(if applicable) are recognized at the time the transactions are processed
and the services are rendered. Other service revenues (including
post-contract customer support) and other revenues (including revenues
relating to insignificant obligations at the time sales are recorded) are
recognized ratably over applicable contractual periods or as service is
provided. Revenue from the licensing of software is recognized only after
it is determined that the Company has no significant remaining obligations
and that collectibility of the resulting receivable is probable. Revenue
from hardware sales is recognized when the hardware is shipped.
d. Cash and Cash Equivalents -- The Company considers all highly liquid
instruments with original maturity dates of three months or less to be
components of cash and cash equivalents.
e. Accounts Receivable -- Accounts receivable are due primarily from companies
in the healthcare industry. Credit is extended based on an evaluation of
the customer's financial condition, and generally collateral is not
required.
f. Formularly Receivables -- Formularly receivables represent amounts due for
pharmacy related services provided to Practice Benefit Management ("PBM")
clients. Services include prescription processing from EDI transactions and
collecting and distributing pharmaceutical company fees for
F-7
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
sponsored programs to the PBM client. The Company submits processed
transactions qualifying for formulary incentive fees to various
intermediaries who have PBM program services contracts with pharmaceutical
manufacturers on a quarterly basis, in arrears. The intermediaries
consolidate formulary transactions from various processors and, in turn,
submit such transactions to the pharmaceutical manufacturers for payment.
The additional processing and reconciliation time of the consolidators and
pharmaceutical companies results in a collection cycle for the Company of
7-12 months.
g. Inventory -- Inventory is stated at the lower of cost (first-in, first-out)
or market.
h. Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation and amortization, and is depreciated using the
straight-line method over the estimated useful lives of the related assets.
i. Goodwill -- Goodwill represents the excess of cost over the fair value of
net assets acquired and is amortized on a straight-line basis over 7 to 20
years. Accumulated amortization amounted to $3,284,000 and $5,297,000 as of
June 30, 1997 and 1998, respectively.
j. Other Intangible Assets -- Other intangible assets include purchased client
lists, purchased software and technology, and capitalized software
development costs. Purchased client lists are amortized on a straight-line
basis over three to five years. Amortization of purchased software and
technology and of capitalized software development costs is provided on a
product-by-product basis at the greater of the amount computed using (a)
the ratio of current revenues for a product to the total of current and
anticipated future revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, an original
estimated economic life of three to five years is assigned to purchased
software and technology and an original estimated economic life of five
years is assigned to capitalized software development costs. Amortization
begins in the period in which the related product is available for general
release to customers.
k. Software Development Costs -- The development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological
feasibility is established, any additional costs are capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting For the Cost of Computer Software To Be Sold, Leased or
Otherwise Marketed." During the year ended June 30, 1998, the Company
capitalized $462,000 of software development costs on a project for which
technological feasibility had been established but was not yet available
for customer release. Prior to July 1, 1997, the Company did not have any
software development projects for which significant development costs were
incurred between the establishment of technological feasibility and general
customer release of the product.
l. Impairment of Long-Lived Assets -- In accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company continually evaluates whether events
and circumstances have occurred that indicate the remaining estimated
useful life of goodwill and/or other intangible assets may warrant revision
or that all or a portion of the remaining balance may not be recoverable.
As a result of this evaluation process, during the fiscal year ended June
30, 1996, the Company wrote-down approximately $9,965,000 of costs relating
to client lists and related allocable goodwill obtained in the acquisition
of MEDE OHIO. Such intangible assets were written down to the net present
value of the estimated future cash flows to be derived from these clients
as of June 30, 1996. The write-down was required due to a loss of
approximately 25% of the acquired MEDE OHIO client base.
F-8
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
m. Income Taxes -- The Company accounts for income taxes under SFAS No. 109,
"Accounting For Income Taxes," which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been included in the Company's financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial accounting and
tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
n. 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.
o. Pro Forma Stockholders' Equity -- Pro forma stockholders' equity as of June
30, 1998 reflects the conversion of 239,956 shares of preferred stock plus
$7,227,000 of accrued preferred stock dividends at the assumed initial
public offering ("IPO") price of $14.00 per share. See Note 12.
p. Reclassifications -- Certain amounts in prior years' financial statements
have been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
a. EC&F and Premier -- In October 1995, the Company acquired all of the
outstanding shares of EC&F and Premier, which companies had common
ownership, for a cash purchase price of approximately $4,050,000, including
transaction expenses. The transaction was financed through loans obtained
from the Company's majority stockholder. Such loans were subsequently
repaid with borrowings under the Company's Credit Facility (as herein
defined). In addition, the Company is contingently liable for additional
consideration if certain earnings levels are attained relating to EC&F
during the three-year period following the consummation of the transaction.
At June 30, 1996, the Company accrued $538,000 in connection with the
contingent liability relating to earnings levels attained during the first
year. At June 30, 1997, the Company accrued a settlement totaling
$2,216,000 relating to the contingent liability for the second and third
years. Such accruals of contingent considerations were recorded as
compensation expense as these contingent payments were made to former
shareholders of EC&F and Premier who were required by the stock purchase
agreement to remain in the Company's employ during the period in which the
contingent consideration was to be earned. Purchased software and
technology was valued at $764,000 and generally is being amortized over
three years. EC&F and Premier are developers of electronic systems which
provide EDI services to the dental industry. In March 1997, the Company
sold the operating net assets of Premier for $540,000, including the
buyer's assumption of $152,000 of Premier liabilities. There was no gain or
loss on the sale of such net assets.
b. TCS -- In February 1997, the Company purchased certain assets of Time-Share
Computer Systems, Inc. ("TCS") for $11,465,000, including transaction
expenses. Purchased in-process research and development, which had not
reached technological feasibility and had no alternative future use
amounted to $4,354,000 and was charged to operations at the acquisition
date. Purchased software and technology was valued at $2,984,000 and
generally is being amortized over three years. TCS provides data processing
and information management services to healthcare providers and pharmacies
through integrated electronic data interchange systems. The acquisition was
financed by a portion of the proceeds from the Senior Subordinated Note and
Share Purchase Agreement (as hereinafter defined) (Note 6).
c. Stockton -- In November 1997, the Company purchased certain assets and
assumed certain liabilities of The Stockton Group, Inc. ("Stockton") for a
cash purchase price of $10,674,000, including transaction expenses. In
addition, the Company is contingently liable for additional consideration
of
F-9
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
up to $2,600,000 (plus interest at an annual rate of 7.25%) if Stockton's
revenue during the 12-month period ended September 30, 1998 is at least
$5,000,000. Based on revenues recorded through July 31, 1998 by Stockton,
the Company has accrued additional contingent consideration of $1,383,000
as of June 30, 1998, which was treated as additional purchase price and
was, therefore, added to goodwill. Purchased software and technology and
client lists were valued at $1,230,000 and $903,000, respectively, and
generally are being amortized over five years. Stockton is engaged in the
business of providing EDI and transaction processing services to the
healthcare industry. The transaction was financed through borrowings under
the Company's Credit Facility.
These acquisitions were recorded using the purchase method of accounting and,
accordingly, the results of operations of these acquired companies are included
in the consolidated results of operations of the Company since the dates of
their respective acquisitions. The purchase price of each acquisition has been
allocated to the respective net assets acquired based upon their fair values.
Goodwill, which represents the excess of cost over the estimated fair value of
the net assets acquired, for these transactions were as follows: EC&F and
Premier -- $3,586,000; TCS -- $3,727,000 and Stockton -- $8,281,000. Goodwill
is being amortized over 20 years except for the goodwill recorded in connection
with the acquisition of TCS which is being amortized over seven years.
The following unaudited pro forma information for the year ended June 30, 1997
and 1998 includes the operations of the Company, inclusive of the operations of
both TCS and Stockton as if the acquisitions had occurred at July 1, 1996. This
pro forma information gives effect to the amortization expense associated with
goodwill and other intangible assets acquired, adjustments related to the fair
market value of the assets and liabilities acquired, interest expense relating
to financing the acquisitions, and related income tax effects.
<TABLE>
<CAPTION>
1997 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues .................................... $ 41,824 $ 43,936
========= ========
Loss from operations ........................ $ (11,253) $ (430)
========= ========
Net loss .................................... $ (13,604) $ (4,320)
========= ========
Net loss applicable to common stock ......... $ (16,004) $ (6,720)
========= ========
Basic net loss per share .................... $ (2.95) $ (1.18)
========= ========
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
USEFUL LIVES
(IN YEARS) 1997 1998
------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ................................................... $ 210 $ 104
Building and improvements .............................. 20-25 2,190 2,193
Furniture and fixtures ................................. 5 1,150 1,240
Computer equipment ..................................... 3-5 5,696 6,747
------ -------
9,246 10,284
Less accumulated depreciation and amortization ......... 3,729 5,573
------ -------
Property and equipment -- net .......................... $5,517 $ 4,711
====== =======
</TABLE>
F-10
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
4. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Purchased client lists .................... $2,989 $3,893
Less, accumulated amortization ............ 1,518 2,220
------ ------
1,471 1,673
------ ------
Purchased software and technology ......... 6,859 8,288
Less, accumulated amortization ............ 2,973 4,922
------ ------
3,886 3,366
------ ------
Software development costs ................ -- 462
------ ------
Other intangible assets -- net ............ $5,357 $5,501
====== ======
</TABLE>
Subsequent to the issuance of the June 30, 1997 financial statements, the
Company's management determined that a lower discount rate should have been
utilized to value purchased software and technology acquired in the TCS
acquisition. As a result, the Company reclassified $343,000 from goodwill to
purchased software and technology.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and related employee benefits ......... $1,010 $1,609
Rebate liability .................................... 488 291
Pharmacy claims liability ........................... 576 604
Accrued professional fees ........................... 795 364
Deferred revenue .................................... 749 614
Accrued reorganization costs (a) .................... 1,005 --
Due to former owners of acquired business ........... 2,216 1,945
Accrued litigation settlement ....................... 860 --
Accrued interest .................................... 5 864
Other ............................................... 1,491 1,424
------ ------
Total ............................................... $9,195 $7,715
====== ======
</TABLE>
- ----------
(a) As a result of the Spin-off (Note 1), the Company recorded a charge
amounting to $2,864,000 during the year ended June 30, 1995. Such charge
represented amounts to be paid to former stockholders of MedE (who
remained as executives of MedE) pursuant to contractual agreements which
require such payments to be made upon a change in control. The net present
value of remaining payments totaled $1,005,000 as of June 30, 1997, which
was included in accrued reorganization costs.
F-11
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Senior subordinated note less unamortized discount of $2,000,000 and $1,641,000
at June 30, 1997 and 1998, respectively (a) ...................................... $23,000 $23,359
Credit Facility (b) ............................................................... -- 16,725
Obligations under capital leases (c) .............................................. 769 436
Loan payable relating to an acquisition, collateralized by $224,000 of certifi-
cates of deposits at June 30, 1998 due in quarterly payments ranging from
$15,000 to $25,000 through February 2002, interest at 6.7 percent................. 342 271
Note payable, in connection with the sale of certain assets due in monthly
installments of $6,000 through January 2000, interest at 6.8 percent.............. 180 114
Notes payable to former shareholders of EC&F, repaid in 1998 ...................... 95 --
Note payable, collateralized by land and building of MEDE OHIO, due in
monthly installments of $19,000 through July 2000, interest at 12.5 percent....... 592 419
Note payable to bank, repaid in 1998 .............................................. 173 --
Other ............................................................................. 10 --
------- -------
25,161 41,324
Less current portion .............................................................. 538 269
------- -------
Total ............................................................................. $24,623 $41,055
======= =======
</TABLE>
(a) On February 14, 1997, the Company entered into an agreement with an
affiliate of certain shareholders of the Company under which the Company
issued a $25,000,000 senior subordinated note (the "Senior Subordinated
Note") and 370,993 shares of its common stock valued at $2,125,000
(representing the estimated fair value of the common stock) for total
consideration of $25,000,000 (the "Senior Subordinated Note and Share
Purchase Agreement"). The $2,125,000 relating to the shares of common
stock was recorded as a discount on the Senior Subordinated Note and is
being amortized over the term of the Senior Subordinated Note. The Senior
Subordinated Note bears interest at the rate of 10% per annum, payable
quarterly. One half of the principal sum is due on February 14, 2001, and
the second half is due on February 14, 2002. The terms of the Senior
Subordinated Note and Share Purchase Agreement place restrictions on the
consolidation, merger, or sale of the Company, indebtedness, and the
payment of any cash dividends.
(b) The revolving line of credit from a bank (the "Credit Facility") , as
currently amended on October 30, 1997, provides for maximum borrowings of
$20,000,000 and expires on October 31, 1999. Borrowings under the
agreement bear interest at either the bank's base rate, as defined, plus
.25% or an offshore rate, as defined, plus 1.25%. The weighted average
interest rate on outstanding borrowings at June 30, 1998 was 6.93%. The
Company is required to pay a commitment fee of .375% per annum on the
unused portion of the Credit Facility. All borrowings under the agreement
are guaranteed by certain stockholders of the Company. In consideration
for the granting of such guarantees, the stockholders were issued warrants
to purchase 52,530 shares (valued at $121,000), 18,330 shares (valued at
$52,000) and 34,200 shares (valued at $98,000) of the Company's common
stock during the years ended June 30, 1996, 1997 and 1998, respectively.
All warrants issued were valued using the Black-Scholes Option Pricing
Model. The aggregate fair value of these warrants is recorded in other
assets as deferred financing costs and is being amortized over the life of
the agreement. The terms of the agreement, among other matters, require
the Company to maintain certain leverage and interest coverage ratios and
place restrictions on additional investments, indebtedness and the payment
of any cash dividends.
F-12
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
(c) The Company leases certain computer and office equipment under capital
lease arrangements expiring through July 2000. The gross value of the
equipment held under capital leases was $2,110,000 and $2,406,000 as of
June 30, 1997 and 1998, respectively, and the related accumulated
amortization was $1,524,000 and $2,211,000, respectively.
Maturities of long-term debt as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DISCOUNT
YEAR ENDING JUNE 30, GROSS ON NOTE NET
- ---------------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1999 ................. $ 664 $ 395 $ 269
2000 ................. 17,164 437 16,727
2001 ................. 12,594 483 12,111
2002 ................. 12,543 326 12,217
------- ------ -------
Total ................ $42,965 $1,641 $41,324
======= ====== =======
</TABLE>
Based upon the borrowing rates currently available to the Company for loans
with similar terms, the fair value of the Company's debt approximates the
carrying amounts.
7. INCOME TAXES
The provision for income taxes for the fiscal years ended June 30, 1996, 1997
and 1998 consists entirely of current state income taxes.
The provision for income taxes varies from the amount computed by applying the
statutory U.S. Federal income tax rate to the loss before provision for income
taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Federal statutory rate ................... $ (6,541) $ (3,878) $ (1,562)
Increases (reductions) due to:
Nondeductible expenses ....................... 3,674 293 238
State taxes .................................. 93 57 42
Net operating losses not producing current tax
benefits ................................... 2,867 3,585 1,324
-------- -------- --------
Total ........................................ $ 93 $ 57 $ 42
======== ======== ========
</TABLE>
The net deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable ................................ $ 685 $ 399
Property and equipment ............................. (61) 176
Goodwill ........................................... 3,540 3,678
Other intangible assets ............................ 366 459
Accrued expenses and other current liabilities ..... 1,264 617
Net operating loss carryforwards ................... 12,656 14,552
--------- ---------
18,450 19,881
Less valuation allowance ........................... (18,450) (19,881)
--------- ---------
Total .............................................. $ -- $ --
========= =========
</TABLE>
F-13
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
The valuation allowance increased during the years ended June 30, 1997 and 1998
primarily as a result of additional net operating loss carryforwards and net
deductible temporary differences, for which realization was not considered to
be more likely than not. In the event that the tax benefits relating to the
valuation allowance are subsequently realized, approximately $5,600,000 of
benefits would reduce goodwill.
As of June 30, 1998, the Company had Federal net operating loss carryforwards
of approximately $36,380,000. Such loss carryforwards expire in the fiscal
years 2005 through 2013. Because of the changes in ownership, as defined in the
Internal Revenue Code, which occurred during 1995 and 1996, certain net
operating loss carryforwards are subject to annual limitations.
8. STOCKHOLDERS' EQUITY
a. Stock Option and Restricted Stock Purchase Plan -- In March 1995, the
Company established a stock option and restricted stock purchase plan (the
"Stock Plan"). The Stock Plan permits the granting of any or all of the
following types of awards: incentive stock options ("ISOs"); nonqualified
stock options ("NQSO"); or restricted stock. The Stock Plan authorizes the
issuance of 655,000 shares of common stock. ISOs may not be granted at a
price less than the fair market value of the Company's common stock on the
date of grant (or 110 percent of the fair market value in the case of
persons holding ten percent or more of the voting stock of the Company) and
expire not more than ten years from the date of grant (five years in the
case of ISOs granted to persons holding ten percent or more of the voting
stock of the Company). The vesting period relating to the ISOs is
determined by the Option Committee of the Board of Directors at the date of
grant. The exercise price, expiration date, and vesting period relating to
NQSOs are determined by the Option Committee of the Board of Directors at
the date of grant.
The table below summarizes the activity of the Stock Plan for the years
ended June 30, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE
SHARES RANGE PRICE
------------ --------------- -----------
<S> <C> <C> <C>
Balance, July 1, 1995 .......... 480,316 $ 4.58 $ 4.58
Options granted .............. 117,950 $ 4.58 $ 4.58
Options exercised ............ (42,556) $ 4.58 $ 4.58
Canceled/lapsed .............. (91,217) $ 4.58 $ 4.58
------- ------------ -------
Balance, June 30, 1996 ......... 464,493 $ 4.58 $ 4.58
Options granted .............. 51,059 $ 4.58-$5.73 $ 5.17
Options exercised ............ (19,642) $ 4.58 $ 4.58
Canceled/lapsed .............. (65,684) $ 4.58 $ 4.58
------- ------------ -------
Balance, June 30, 1997 ......... 430,226 $ 4.58-$5.73 $ 4.64
Options granted .............. 81,926 $ 5.73 $ 5.73
Options exercised ............ (14,054) $ 4.58-$5.73 $ 4.62
Canceled/lapsed .............. (15,057) $ 4.58-$5.73 $ 4.62
------- ------------ -------
Balance, June 30, 1998 ......... 483,041 $ 4.58-$5.73 $ 4.84
======= ============ =======
</TABLE>
F-14
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
During March 1998, the Company granted 47,565 options at an exercise price
of $5.73 per share. The Company later determined that the value of the
Company's stock at the date of grant was $8.00. As a result, the Company
recorded a deferred compensation charge of $108,000 relating to the
granting of these options, of which $18,000 was amortized during the year
ended June 30, 1998.
Significant option groups outstanding at June 30, 1998 and related weighted
average price and life information were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ------------- -------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.58 375,804 7.4 $ 4.58 202,069 $ 4.58
$ 5.73 107,237 9.6 $ 5.73 10,689 $ 5.73
------- -------
483,041 7.9 $ 4.84 212,758 $ 4.64
======= =======
</TABLE>
The Company applies APB opinion No. 25 and related interpretations in
accounting for its Option Plan. Accordingly, no compensation cost has been
recognized. If compensation cost for the Company's stock options had been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share for the years
ended June 30, 1996, 1997 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported ......................... $ (19,330) $ (11,464) $ (4,635)
Net loss -- pro forma ........................... (19,345) (11,518) (4,705)
Basic net loss per share -- as reported ......... (4.14) (2.56) (1.24)
Basic net loss per share -- pro forma ........... (4.15) (2.57) (1.25)
</TABLE>
The weighted average fair value of the options granted for the years ended
June 30, 1996, 1997, and 1998 is estimated at $1.56, $1.83, and $1.92 on
the date of grant (using the minimum value option pricing model) with the
following weighted average assumptions for the years ended June 30, 1996,
1997, and 1998, respectively: a risk-free interest rate of 5.93%, 6.39%,
and 5.86%; an expected option life of seven years and no expected
volatility or dividend yield. As required by SFAS No. 123, the impact of
outstanding nonvested stock options granted prior to July 1, 1995 has been
excluded from the pro forma calculation; accordingly, the 1996, 1997 and
1998 pro forma adjustments are not indicative of future period pro forma
adjustments when the calculation will apply to all applicable stock
options.
b. Net income (loss) per share -- In 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Basic income per share is determined by using the
weighted average number of shares of common stock outstanding during each
period. Diluted income per share further assumes the issuance of common
shares for all dilutive outstanding stock options and warrants as
calculated using the treasury stock method. Diluted earnings per share is
not shown for any of the periods presented because the effect of including
outstanding options and warrants would be antidilutive. The calculation for
the years ended June 30, 1996, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
1996 1997
---------------------------------- ----------------------------------
PER-SHARE PER-SHARE
LOSS SHARES AMOUNT LOSS SHARES AMOUNT
------------- -------- ----------- ------------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net loss ......................... $ (19,330) $ (11,464)
Less: Preferred dividends ........ (2,400) (2,400)
--------- ---------
Basic net loss per share ......... $ (21,730) 5,245 $(4.14) $ (13,864) 5,425 $(2.56)
========= ===== ====== ========= ===== ======
<CAPTION>
1998
--------------------------------
PER SHARE
LOSS SHARES AMOUNT
------------ -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss ......................... $ (4,635)
Less: Preferred dividends ........ (2,400)
--------
Basic net loss per share ......... (7,035) 5,679 $(1.24)
======== ===== ======
</TABLE>
F-15
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
9. REDEEMABLE CUMULATIVE PREFERRED STOCK
As of June 30, 1997 and 1998, the Company had outstanding 239,956 shares of
preferred stock. The preferred stock is subject to mandatory redemption in two
equal installments on May 31, 2001 and 2002; however, the Company may redeem
the preferred stock in whole at any time or in part from time to time at its
option. The Company would also be required to redeem the preferred stock should
it consummate a public offering of its common stock pursuant to which the
Company receives aggregate net proceeds of at least $15,000,000. (See Note 12).
The redemption price, as well as liquidation value, of the preferred stock is
$100 per share plus any accrued but unpaid dividends. Dividends on this
preferred stock, which are cumulative, are payable, if declared, at $10 per
share per annum. No dividends have been declared or paid. At June 30, 1998,
cumulative undeclared and unpaid dividends on this preferred stock totaled
$7,227,000.
10. COMMITMENTS AND CONTINGENCIES
a. Leases -- The Company leases certain offices and equipment under operating
leases. The minimum noncancelable lease payments are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -----------------------------------------------
<S> <C>
1999 ................................. $1,405
2000 ................................. 1,351
2001 ................................. 919
2002 ................................. 654
Thereafter ........................... 348
------
Total minimum lease payments ......... $4,677
======
</TABLE>
Rent expense for the years ended June 30, 1996, 1997 and 1998 was $853,000,
$1,309,000, and $1,307,000, respectively.
b. Litigation -- The Company is engaged in various litigation in the ordinary
course of business. Management, based upon the advice of legal counsel, is
of the opinion that the amounts which may be awarded or assessed in
connection with these matters, if any, will not have a material effect on
the consolidated financial position or results of operations.
c. Employment Contracts -- The Company has employment contracts with certain of
its employees with annual enumeration ranging from $95,000 to $110,000.
Future minimum payments under these contracts are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -----------------------
<S> <C>
1999 ................ $206
2000 ................ 79
----
$285
====
</TABLE>
d. Defined Contribution Plans -- The Company maintained four defined
contribution plans (the "Plans") for all eligible employees, as defined by
the Plans until April 1, 1996. On April 1, 1996, the Company combined the
Plans into one defined contribution plan (the "New Plan"). The Company
previously made matching contributions at various percentages to three of
the Plans in accordance with the respective Plan documents and currently
makes matching contributions to the New Plan in an amount equal to fifty
percent of the employee salary deductions to a maximum of four percent of
the employees salary in accordance with the New Plan document. The Company
incurred $197,000, $227,000, and $194,000 for employer contributions to the
Plans/New Plan for the years ended June 30, 1996, 1997 and 1998,
respectively.
F-16
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
e. Service Agreements -- The Company has entered into service agreements with
telecommunications providers which require the Company to utilize certain
minimum monthly amounts of the services of such providers. These agreements
expire through November 2001. The Company was in compliance with the terms
of these agreements as of June 30, 1998. The minimum monthly amounts under
these agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ------------------------
<S> <C>
1999 ................. $ 1,795
2000 ................. 1,497
2001 ................. 1,429
2002 ................. 543
-------
Total ................ $ 5,264
=======
</TABLE>
11. OTHER INCOME
In February 1997, the Company exercised 26,712 options to purchase common
shares of First Data Corporation and subsequently sold the common shares
resulting in a pre-tax gain of $885,000. Such options were issued to former
employees of the Company prior to the Spin-off but reverted to the Company upon
the termination of these employees.
12. SUBSEQUENT EVENTS
a. Proposed Public Offering -- In 1998, the Company determined to work towards
an IPO of the Company's common stock on a firm commitment basis. The
proposed IPO contemplates that a total of 3,600,000 shares of common stock
will be offered at a price between $13.00 and $15.00 per share. The net
proceeds of the IPO will be used to retire all outstanding balances under
its Senior Subordinated Note and its Credit Facility plus any related
accrued interest (Note 6) and for other general corporate purposes
including working capital.
b. Reverse Stock Split and Increase in Authorized Common Stock and Preferred
Stock -- In anticipation of the proposed IPO, on July 27, 1998 the Company
amended and restated its certificate of incorporation in order to, among
other things, effect a reverse stock split of all issued and outstanding
common shares at the rate of 1 for 4.5823, which decreased the number of
issued and outstanding shares as of June 30, 1998 from approximately
26,050,000 to approximately 5,685,000. This stock split has been
retroactively reflected in the accompanying financial statements for all
periods presented. The Company also increased the number of shares of
authorized common stock to 30,000,000 and the number of shares of
authorized preferred stock to 5,000,000.
c. Recapitalization -- In conjunction with the proposed IPO and as provided for
in the Company's July 27, 1998 amendment and restatement of its certificate
of incorporation, the Company contemplates a recapitalization of its
capital stock (the "Recapitalization"). The Recapitalization involves the
conversion of all outstanding preferred stock into common stock (based upon
liquidation value as defined in Note 9) and the exercise of all outstanding
warrants (Note 6). However, cash realized by the Company upon any exercise
of the underwriters' overallotment option would be applied to the payment
of accrued dividends in lieu of having such dividends convert into common
stock. The preferred stock conversion will be effected based upon the IPO
price per share. Assuming an IPO price of $14.00 per share and no exercise
of the underwriters' overallotment, the preferred stock will be converted
into approximately 2,230,000 shares of common stock. The warrants will be
converted, in a cashless exercise, into approximately 66,000 shares of
common stock.
F-17
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
d. Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has
approved the 1998 Employee Stock Purchase Plan (the "Purchase Plan").
Employees of the Company, including directors of the Company who are
employees, are eligible to participate in quarterly plan offerings in which
payroll deductions may be used to purchase shares of common stock. The
purchase price of such shares is the lower of 85 percent of the fair market
value of the common stock on the day the offering commences and 85 percent
of the fair market value of the common stock on the date the offering
terminates. The first offering period under the Purchase Plan will not
commence until the completion of the IPO.
e. New Stock Option and Restricted Stock Purchase Plan -- In anticipation of
the proposed IPO, the Board has approved the 1998 Stock Option and
Restricted Stock Purchase Plan (the "New Stock Plan"). The New Stock Plan
permits the granting of any or all of the following types of awards:
incentive stock options; nonqualified stock options; restricted stock; or
other stock-based awards, to officers, employees, directors, consultants
and advisors of the Company. To date, no options have been granted under
the New Stock Plan, however, the Board determined to grant options to
purchase an aggregate 400,000 shares of common stock pursuant to the New
Stock Plan to certain employees of the Company (including certain executive
officers) contingent upon consummation of the IPO. Such options, which
include both incentive and non-qualified stock options, will have an
exercise price equal to the price to the public in the IPO and generally
will vest ratably over four years from the date of grant except that the
initial installment of options to be granted to certain executive officers
will vest immediately upon consummation of the IPO.
f. Revolving Line of Credit -- During July 1998, the Company received a letter
from the lender under the Credit Facility committing to provide an amended
credit facility with total available credit of $15.0 million. This facility
would be comprised of a $7.5 million term loan to be used for acquisitions
and a $7.5 million revolving credit loan to be used for working capital
purposes, each with a maximum term of two years from the earlier of the
completion of the IPO or October 31, 1998. Interest for the term and
revolver loans is computed at .25% above the bank's base rate, or 1.25%
above a Eurodollar based rate. Such borrowing rates are at the option of
the Company for any particular period during which borrowings exist.
g. Transaction Processing Agreement -- On July 17, 1998, the Company entered
into a transaction processing agreement (the "Processing Agreement") with
Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that
develops and licenses software for healthcare providers, principally
physicians, MSOs and PPMs. Under the Processing Agreement, the Company will
undertake certain software development obligations, and on July 1, 1999 it
will become the exclusive processor (subject to certain exceptions) of
medical reimbursement claims for Medic's subscribers submitted to payors
with whom MedE has or establishes connectivity. Under the Processing
Agreement, the Company will be entitled to revenues to be paid by payors
(in respect of which a commission is payable to Medic) as well as fees to
be paid by Medic. The Processing Agreement sets forth detailed performance
criteria and development and implementation timetables. Inability to meet
these criteria may result in financial penalties or give Medic a right to
terminate this agreement. The Processing Agreement is for a fixed term of
five years, with annual renewals thereafter (unless either party elects to
terminate).
Contemporaneously, to ensure a close working relationship between the
parties, on July 17, 1998 the Company granted to Medic a warrant (the
"Medic Warrant") to acquire 1,250,000 shares of the Company's common stock,
at a per share exercise price equal to the price of the common stock to the
public in the IPO or, in the event that the IPO is not completed by March
31, 1999 at an exercise price equal to $8 per share. The Medic Warrant
vests over a two year period and may be exercised up to five years after
issuance. The Medic Warrant contains customary weighted average
antidilution provisions. The Company and certain principal stockholders
have agreed that following the completion of the IPO and until the earlier
of the termination of the Processing Agreement or
F-18
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
the disposition by Medic and its affiliates of at least 25% of the shares
of common stock issuable under the Medic Warrant, Medic shall have the
right to designate one director to the Company's Board of Directors. Medic
has not yet named a designee.
h. Acquisition -- On September 17, 1998, the Company entered into a non-binding
letter of intent to acquire all the capital stock of Healthcare
Interchange, Inc., a claims processing and EDI company, for a purchase
price of $11.6 million. The Company expects to finance such acquisition
with borrowings under its Credit Facility.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
The Stockton Group, Inc.:
We have audited the accompanying statement of income of The Stockton Group,
Inc. (the "Company") for the year ended June 30, 1997. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of income is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of income. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement of income presentation.
We believe that our audit of the statement of income provides a reasonable
basis for our opinion.
In our opinion, such statement of income presents fairly, in all material
respects, the results of operations of the Company for the year ended June 30,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 7, 1997
F-20
<PAGE>
THE STOCKTON GROUP, INC.
STATEMENTS OF INCOME
YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1997
--------------- -------------------
(UNAUDITED)
<S> <C> <C>
REVENUES ....................................... $ 3,801,953 $1,056,748
OPERATING EXPENSES:
Operations .................................... (563,295) (137,495)
Sales, marketing, and client services ......... (899,366) (203,133)
Research and development ...................... (103,153) (24,405)
General and administrative .................... (159,517) (72,425)
Non-cash stock compensation (Note 4) .......... (1,280,000) --
Depreciation and amortization ................. (109,336) (37,411)
------------ ----------
Total operating expenses .................... (3,114,667) (474,869)
------------ ----------
INCOME FROM OPERATIONS ......................... 687,286 581,879
INTEREST EXPENSE ............................... (111,260) (22,574)
OTHER INCOME ................................... 11,229 8,020
------------ ----------
NET INCOME (Note 1) ............................ $ 587,255 $ 567,325
============ ==========
</TABLE>
See notes to financial statement.
F-21
<PAGE>
THE STOCKTON GROUP, INC.
NOTES TO FINANCIAL STATEMENT
YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 (UNAUDITED)
(INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business -- The Stockton Group, Inc. (the "Company"), was
incorporated as an S Corporation in the State of South Carolina in July 1993.
The Company provides computer-based prescription drug claims processing to
Pharmaceutical Benefit Managers ("PBMs"), Health Maintenance Organizations
("HMOs"), Preferred Provider Organizations ("PPOs"), insurance companies,
Third-Party Administrators ("TPAs"), self-insured employers, and Taft-Hartley
Funds. The Company's services range from claims processing to full-service
program management, including eligibility verification, drug coverages and
exclusions, concurrent utilization review, drug pricing verification, supply
limitations and other applicable plan design requirements. The Company supports
a network of over 40,000 pharmacies nationwide.
In addition to claims processing fees, the Company receives rebate revenue from
drug manufacturers for prescription drug transactions that are processed
through the Company's system.
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.
Major Customers -- For the year ended June 30, 1997, three customers accounted
for approximately 15%, 12% and 10%, respectively, of total revenues.
Revenue Recognition -- Revenue from prescription drug claims processing
services and rebates from drug manufacturers are recognized when the services
are delivered.
Property and Equipment -- Property and equipment is depreciated using the
double-declining balance method over the estimated useful lives of the related
assets. Assets under capital leases are depreciated using the straight-line
method over the lease term.
Income Taxes -- The Company has elected to be taxed as an S Corporation, and as
such its income is included in the current taxable income of its stockholder.
Accordingly, no provision has been made in the accompanying financial
statements for federal or state income taxes.
Unaudited Interim Financial Statement -- In the opinion of management, the
unaudited statement of income for the three months ended September 30, 1997 is
presented on a basis consistent with the audited statement of income and
reflects all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results thereof. The results of
operations for the three months ended September 30, 1997 is not necessarily
indicative of the results to be expected for the entire year.
2. NOTE PAYABLE TO STOCKHOLDER
The Company had a note payable to stockholder with an outstanding principal
balance of $359,621 at June 30, 1997. The note bore interest at a rate of prime
plus .25% (8.75% at June 30, 1997).
3. LEASE COMMITMENTS
The Company leased certain equipment under operating leases expiring at various
dates through April 2000. Rent expense for the year ended June 30, 1997 was
approximately $12,000.
F-22
<PAGE>
THE STOCKTON GROUP, INC.
NOTES TO FINANCIAL STATEMENT - (CONTINUED )
In addition, the Company leased its office facility and certain computer and
office equipment under capital lease arrangements with interest rates ranging
from 14.5% to 25%, expiring through July 2011. The lease arrangement for the
office facility was with a corporation in which the Company's sole stockholder
holds an ownership interest.
4. STOCK-BASED COMPENSATION ARRANGEMENTS
During 1994, the Company granted a key employee the right to acquire common
stock equivalent to a 25% equity ownership in the Company at no cost. The
shares have not yet been issued. At the date of the grant, the Company recorded
compensation cost equal to the fair market value of shares to be awarded to the
executive.
During 1997, the Company entered into an employment agreement with another new
key executive. Among other things, the agreement granted the executive the
right to acquire a 10% equity ownership in the Company at a nominal cost
($1.00) or, if the Company is sold within one year, to receive 10% of the sales
proceeds as defined. Accordingly, the Company has recorded compensation cost in
1997, equal to the estimated cash settlement to be paid to the executive based
upon the anticipated proceeds from the sale of the Company. (See Note 5).
5. SUBSEQUENT EVENT
In November 1997, the Company sold certain computer equipment, intangible
assets and the operations of the Company to MEDE America Corporation. All other
assets and liabilities remained with the Company. The purchase price was
$10,400,000 in cash. In addition, the purchase agreement requires additional
consideration of up to $2,600,000 (plus interest at an annual rate of 7.25%) to
be paid if Stockton's revenue during the 12-month period ended September 30,
1998 is at least $5,000,000.
******
F-23
<PAGE>
<TABLE>
<S> <C>
=============================================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS NOT CONTAINED
HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN 3,600,000 SHARES
AUTHORIZED BY THE COMPANY, ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS [GRAPHIC OMITTED]
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, MEDE AMERICA
ANY SECURITIES OTHER THAN THE SHARES OF CORPORATION
COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS Common Stock
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 9
Use Of Proceeds ............................... 18
Dividend Policy ............................... 18
Capitalization ................................ 19
Dilution ...................................... 20
Unaudited Pro Forma Consolidated Financial
Information ................................ 21 -------------
Selected Consolidated Financial Data .......... 25
Management's Discussion And Analysis Of Fi- PROSPECTUS
nancial Condition And Results Of Operations. 27
Business ...................................... 37 -------------
Management .................................... 48
Certain Transactions .......................... 54
Principal Stockholders ........................ 55
Description Of Capital Stock .................. 57
Shares Eligible For Future Sale ............... 59
Underwriting .................................. 61
Legal Matters ................................. 62
Experts ....................................... 62
Additional Information ........................ 63 SALOMON SMITH BARNEY
Index To Financial Statements ................. F-1 WILLIAM BLAIR & COMPANY
VOLPE BROWN WHELAN & COMPANY
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE
OF THIS PROSPECTUS) ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OCTOBER , 1998
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=============================================================================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee and the National Association of Securities Dealers, Inc.
("NASD") Filing Fee, the amounts listed below are estimates:
<TABLE>
<S> <C>
SEC Registration Fee ......................... $ 18,320
NASD Filing Fee .............................. 6,710
Nasdaq Listing Fees .......................... *
Legal Fees and Expenses ...................... *
Blue Sky Fees and Expenses ................... 10,000
Accounting Fees and Expenses ................. *
Printing and Engraving ....................... *
Transfer Agent and Register Fees and Expenses. *
Miscellaneous ................................ *
--------
Total ........................................ $950,000
========
</TABLE>
- ----------
* To be filed by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") and By-laws provide that the Company shall indemnify to
the fullest extent authorized by the Delaware General Corporation Law ("DGCL"),
each person who is involved in any litigation or other proceeding because such
person is or was a director or officer of the Company or is or was serving as an
officer or director of another entity at the request of the Company, against all
expense, loss or liability reasonably incurred or suffered in connection
therewith. The Restated Certificate and By-laws provide that the right to
indemnification includes the right to be paid expenses incurred in defending any
proceeding in advance of its final disposition; provided, however, that such
advance payment will only be made upon delivery to the Company of an
undertaking, by or on behalf of the director or officer, to repay all amounts so
advanced if it is ultimately determined that such director is not entitled to
indemnification. If the Company does not pay a proper claim for indemnification
in full within 60 days after a written claim for such indemnification is
received by the Company, the Restated Certificate and Restated Bylaws authorize
the claimant to bring an action against the Company and prescribe what
constitutes a defense to such action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that such person is or was a director or officer of the corporation, and, with
respect to any criminal action or proceeding, if he or she had no reason to
believe his or her conduct was unlawful. In a derivative action, (i.e., one
brought by or on behalf of the corporation), indemnification may be made only
for expenses, actually and reasonably incurred by any director or officer in
connection with the defense or settlement of such an action or suit, if such
person acted in good faith and in a manner that he reasonably believed to be in,
or not opposed to, the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
II-1
<PAGE>
Pursuant to Section 102(b)(7) of the DGCL, the Restated Certificate
eliminates the liability of a director to the corporation or its stockholders
for monetary damages for such breach of fiduciary duty as a director, except for
liabilities arising (i) from any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) from acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL, or (iv) from any transaction from which the
director derived an improper personal benefit.
The Company expects to obtain primary and excess insurance policies
insuring the directors and officers of the Company against certain liabilities
that they may incur in their capacity as directors and officers. Under such
policies, the insurers, on behalf of the Company, may also pay amounts for which
the Company has granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement and
persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Corporation has sold the following securities that were not registered under the
Securities Act (with the exception of the number of shares of Common Stock
subject to the Medic Warrant, the following share numbers do not give effect to
the Reverse Stock Split):
(a) Issuances of Capital Stock
On June 27, 1995, in connection with the acquisition by the Registrant of
MEDE Ohio and a related offering, the Registrant issued an aggregate 239,956
shares of Preferred Stock and 13,999,538 shares of Common Stock to the
stockholders of the parent company of MEDE Ohio and stockholders of the
Registrant.
On December 18, 1995, in connection with their agreement to guarantee the
Registrant's obligations under a credit agreement between the Registrant and
Bank of America Illinois (the "Credit Facility"), the Registrant issued to WCAS
V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 240,720
shares of Common Stock at an exercise price of $1.00 per share.
On July 18, 1996, the Company issued 500 shares of Common Stock to Sharon
Hallberg, an employee of the Company, as a performance bonus.
On January 10, 1997, in connection with their agreement to guarantee
additional obligations of the Registrant under and amendment to the Credit
Facility, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants
to purchase an aggregate 84,000 shares, of Common Stock at an exercise price of
$1.25 per share.
On February 14, 1997, the Company issued to WCAS CP II, for a purchase
price of $25 million, (i) a 10% Senior Subordinated Note due February 14, 2002
in the aggregate principal amount of $25,000,000 and (ii) 1,700,000 shares of
Common Stock.
On September 9, 1997, the Company issued 500 shares of Common Stock to Ed
Feltner, an employee of the Company, as a performance bonus.
On October 31, 1997, in connection with their agreement to guarantee
additional obligations of the Registrant under the amended Credit Agreement, the
Company issued to WCAS VI and Blair V warrants to purchase an aggregate 156,720
shares, of Common Stock at an exercise price of $1.25 per share.
On July 17, 1998, the Company granted to Medic the Medic Warrant to acquire
1,250,000 shares of the Company's Common Stock, at a per share exercise price
equal to the price of the Common Stock to the public in the Offering or, in the
event that an initial public offering is not completed by March 31, 1999, at an
exercise price equal to $8.00 per share. The difference between the two
alternative prices
II-2
<PAGE>
reflects, in the Company's view, the incremental value of a share of Common
Stock resulting from the Offering and the concurrent Recapitalization. The
Medic Warrant vests over a two year period and may be exercised up to five
years after the date of grant.
(b) Certain Grants and Exercises of Stock Options
The MEDE America Corporation and its Subsidiaries Stock Option and
Restricted Stock Purchase Plan was adopted by the Registrant's Board of
Directors on March 22, 1995. As of July 31, 1998, options to purchase up to an
aggregate 3,351,000 shares of Common Stock, had been granted to employees of the
Registrant and its subsidiaries thereunder, of which options to purchase up to
an aggregate 2,212,600 shares of Common Stock, at a weighted average exercise
price of $1.09 per share, were outstanding as of such date. The Company has
issued an aggregate 349,400 shares of Common Stock upon the exercise of such
options.
The securities issued in the foregoing transactions in paragraphs (a) and
(b) above were offered and sold in reliance upon exemptions from Securities Act
registration set forth in Section 4(2) of the Securities Act, or any regulations
promulgated thereunder, relating to sales by an issuer not involving a public
offering. No underwriters were involved in the foregoing sales of securities.
The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
1.1 + -- Form of Underwriting Agreement.
2.1 + -- Asset Purchase Agreement among MEDE AMERICA Corporation, General
Computer Corporation, Time-Share Computer Systems, et al, dated
as of February 3, 1997.
2.2 + -- Asset Purchase Agreement among MEDE AMERICA Corporation, General
Computer Corporation, The Stockton Group, et al, dated as of
October 20, 1997.
3.1 + -- Certificate of Incorporation of the Registrant as amended.
3.2 + -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.3 + -- Amended Bylaws of the Registrant.
3.4 + -- Agreement and Plan of Merger, dated as of May 17, 1995, between
MEDE AMERICA Corporation and GENCC Holdings Corporation.
4.1 + -- Specimen certificate for shares of Common Stock.
4.2 + -- Note and Share Purchase Agreement between MEDE AMERICA
Corporation and WCAS Capital Partners II, L.P., dated as of
February 14, 1997.
4.3 + -- Warrant Agreement dated as of October 31, 1997 among MEDE AMERICA
Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh,
Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital
Fund Limited Partnership and William Blair Capital Partners V,
L.P., and Warrants issued thereunder.
4.4 + -- Warrant Agreement dated as of January 10, 1997 among MEDE AMERICA
Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh,
Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital
Fund Limited Partnership and William Blair Capital Partners V,
L.P., and Warrants issued thereunder.
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.5 + -- Warrant Agreement dated as of December 18, 1995 among MEDE
AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P.,
Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged
Capital Fund Limited Partnership and William Blair Capital
Partners V, L.P., and Warrants issued thereunder.
4.6 + -- Registration Rights Agreement, dated as of February 14, 1997
between MEDE AMERICA Corporation and WCAS Capital Partners II,
L.P.
4.7 + -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA
Corporation to Medic Computer Systems, Inc.
4.8 + -- Registration Rights Agreement, dated as of July 17, 1998 between
MEDE AMERICA Corporation and Medic Computer Systems, Inc.
4.9 + -- Stockholders Agreement, dated as of July 17, 1998 among Medic
Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P.,
Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital
Partners V, L.P., WCAS Capital Partners II, L.P., and William
Blair Leveraged Capital Fund Limited Partnership.
4.10+ -- Investment Agreement, dated as of July 17, 1998 between MEDE
AMERICA Corporation and Medic Computer Systems, Inc.
5.1 * -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with
respect to the legality of securities being registered.
10.1 + -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and
Restricted Stock Purchase Plan as amended.
10.2 + -- Credit Agreement between MEDE AMERICA Corporation and Bank of
America Illinois dated as of December 18, 1995 as amended, with
accompanying guarantees.
10.3 + -- Form of Indemnification Agreement between MEDE AMERICA
Corporation and Directors thereof.
10.4 + -- Agreement of Lease dated as of October 15, 1991 between HMCC
Associates and MedE America, Inc.
10.5 + -- Lease Agreement dated as of July 10, 1995 as amended January 3,
1997 between T&J Enter- prises, LLC and Electronic Claims &
Funding, Inc.
10.6 + -- Commitment Letter dated July 15, 1998 from Bank of America
National Trust & Savings Association to MEDE AMERICA Corporation,
regarding amendment to Credit Facility.
10.7 + -- Form of Non-Competition, Non-Solicitation and Confidentiality
Agreement between MEDE AMERICA Corporation and Employees.
10.8 + -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option
and Restricted Stock Purchase Plan.
10.9** -- Transaction Processing Agreement, dated as of July 17, 1998
between MEDE AMERICA Cor- poration and Medic Computer Systems,
Inc.
10.10+ -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan.
21.1 + -- Subsidiaries of the Company.
23.1 -- Consent of Deloitte & Touche LLP, independent accountants.
23.2 -- Consent of Deloitte & Touche LLP, independent accountants.
23.3* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
24.1 + -- Power of Attorney.
27.1 + -- Financial Data Schedule.
- ----------
* To be filed by amendment.
** Confidential treatment requested.
+ Previously filed.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(a) 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 provisions described under "Item
14-Indemnification of Directors and Officers" above, or otherwise, the
Registrant has been advised that in
II-4
<PAGE>
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
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.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
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.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, on October 6, 1998.
MEDE AMERICA CORPORATION
By: THOMAS P. STAUDT
------------------------------
Thomas P. Staudt
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
THOMAS P. STAUDT President and Chief Executive October 6, 1998
- ------------------------- Officer (Principal executive officer);
Thomas P. Staudt Director
THOMAS P. STAUDT* Chief Financial Officer (Principal October 6, 1998
- ------------------------- financial and accounting officer)
Richard P. Bankosky
THOMAS P. STAUDT* Director October 6, 1998
- -------------------------
Thomas E. McInerney
THOMAS P. STAUDT* Director October 6, 1998
- -------------------------
Anthony J. de Nicola
THOMAS P. STAUDT* Director October 6, 1998
- -------------------------
Timothy M. Murray
</TABLE>
- ----------
* as attorney-in-fact
II-6
<PAGE>
SCHEDULE II
MEDE AMERICA CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ------------ -------------------------- ----------------- -----------
ADDITIONS
--------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COST AND ACCOUNTS- DEDUCTIONS END OF
DESCRIPTIONS OF PERIOD EXPENSES DESCRIBE -DESCRIBE PERIOD
------------ --------- -------- -------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996 -
Allowance for bad debts ......... $1,386 $406 $-- $ 392 (1) $1,400
====== ==== === ======== ======
Year ended June 30, 1997 -
Allowance for bad debts ......... $1,400 $316 $-- $ -- (1) $1,716
====== ==== === ======== ======
Year ended June 30, 1998 -
Allowance for bad debts ......... $1,716 $464 $-- $ 1,183 (1) $ 997
====== ==== === ======== ======
</TABLE>
- ----------
(1) Amounts written off.
S-1
<PAGE>
EXHIBIT INDEX
1.1 + -- Form of Underwriting Agreement.
2.1 + -- Asset Purchase Agreement among MEDE AMERICA Corporation, General
Computer Corporation, Time-Share Computer Systems, et al, dated
as of February 3, 1997.
2.2 + -- Asset Purchase Agreement among MEDE AMERICA Corporation, General
Computer Corporation, The Stockton Group, et al, dated as of
October 20, 1997.
3.1 + -- Certificate of Incorporation of the Registrant as amended.
3.2 + -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.3 + -- Amended Bylaws of the Registrant.
3.4 + -- Agreement and Plan of Merger, dated as of May 17, 1995, between
MEDE AMERICA Corporation and GENCC Holdings Corporation.
4.1 + -- Specimen certificate for shares of Common Stock.
4.2 + -- Note and Share Purchase Agreement between MEDE AMERICA
Corporation and WCAS Capital Partners II, L.P., dated as of
February 14, 1997.
4.3 + -- Warrant Agreement dated as of October 31, 1997 among MEDE AMERICA
Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh,
Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital
Fund Limited Partnership and William Blair Capital Partners V,
L.P., and Warrants issued thereunder.
4.4 + -- Warrant Agreement dated as of January 10, 1997 among MEDE AMERICA
Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh,
Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital
Fund Limited Partnership and William Blair Capital Partners V,
L.P., and Warrants issued thereunder.
4.5 + -- Warrant Agreement dated as of December 18, 1995 among MEDE
AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P.,
Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged
Capital Fund Limited Partnership and William Blair Capital
Partners V, L.P., and Warrants issued thereunder.
4.6 + -- Registration Rights Agreement, dated as of February 14, 1997
between MEDE AMERICA Corporation and WCAS Capital Partners II,
L.P.
4.7 + -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA
Corporation to Medic Computer Systems, Inc.
4.8 + -- Registration Rights Agreement, dated as of July 17, 1998 between
MEDE AMERICA Corporation and Medic Computer Systems, Inc.
4.9 + -- Stockholders Agreement, dated as of July 17, 1998 among Medic
Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P.,
Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital
Partners V, L.P., WCAS Capital Partners II, L.P., and William
Blair Leveraged Capital Fund Limited Partnership.
4.10+ -- Investment Agreement, dated as of July 17, 1998 between MEDE
AMERICA Corporation and Medic Computer Systems, Inc.
5.1 * -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with
respect to the legality of securities being registered.
10.1 + -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and
Restricted Stock Purchase Plan as amended.
10.2 + -- Credit Agreement between MEDE AMERICA Corporation and Bank of
America Illinois dated as of December 18, 1995 as amended, with
accompanying guarantees.
10.3 + -- Form of Indemnification Agreement between MEDE AMERICA
Corporation and Directors thereof.
10.4 + -- Agreement of Lease dated as of October 15, 1991 between HMCC
Associates and MedE America, Inc.
10.5 + -- Lease Agreement dated as of July 10, 1995 as amended January 3,
1997 between T&J Enter- prises, LLC and Electronic Claims &
Funding, Inc.
10.6 + -- Commitment Letter dated July 15, 1998 from Bank of America
National Trust & Savings Association to MEDE AMERICA Corporation,
regarding amendment to Credit Facility.
10.7 + -- Form of Non-Competition, Non-Solicitation and Confidentiality
Agreement between MEDE AMERICA Corporation and Employees.
10.8 + -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option
and Restricted Stock Purchase Plan.
10.9** -- Transaction Processing Agreement, dated as of July 17, 1998
between MEDE AMERICA Cor- poration and Medic Computer Systems,
Inc.
10.10+ -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan.
21.1 + -- Subsidiaries of the Company.
23.1 -- Consent of Deloitte & Touche LLP, independent accountants.
23.2 -- Consent of Deloitte & Touche LLP, independent accountants.
23.3* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
24.1 + -- Power of Attorney.
27.1 + -- Financial Data Schedule.
- ----------
* To be filed by amendment.
** Confidential treatment requested.
+ Previously filed.
EXHIBIT 10.9
TRANSACTION PROCESSING AND DEVELOPMENT AGREEMENT
AGREEMENT (the "Agreement"), dated as of July 21, 1998, by and between MedE
America Corporation, a Delaware corporation ("MedE"), and Medic Computer
Systems, Inc., a North Carolina corporation ("Medic").
WHEREAS, Medic provides electronic data interchange ("EDI") services to
certain hospitals, physicians and other health care service providers; and
WHEREAS, Medic wishes to engage MedE to provide transaction or claims
processing services via EDI for transmitting claims to insurance carriers;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants herein contained, and other good and valuable consideration, the
parties hereto hereby agree as follows:
Section 1. Definitions.
"Medic/MedE System" shall mean the system currently used by MedE to
process transactions with Payors and other entities providing claims coverage
via EDI on behalf of its customers as such system shall be customized and
otherwise altered and modified in accordance with the terms of this Agreement
for use by MedE, Medic and the Payors in connection with the MedE Services under
this Agreement, and used on communications and data server hardware (existing or
newly acquired), together with separate data storage systems, that are
server-integrated into MedE's network, all as further defined in Schedule 1
(Medic/MedE System).
"Medic Subscribers" shall mean any individuals or group "providers" or
other organizations that have licensed Medic software products for submission of
claims or other transactions to Payors. The term "Medic Subscribers" shall not
include any third party claims clearinghouses.
***** This material has been omitted pursuant to a request for confidential
treatment and filed separately with the Securities and Exchange Commission.
<PAGE>
"Payor" shall mean any insurance company or other organization
providing health care coverage, including Blue Cross/Blue Shield, Medicare,
Medicaid, HMOs and commercial health insurance companies.
Section 2. MedE Services; Transaction Information. (a) Subject to and
in accordance with the terms and conditions of this Agreement, MedE will provide
claims and transaction processing services (the "MedE Services") to Medic in
accordance with Schedule 2(a) (Medic/MedE Transaction Processing Relationship
Guidelines).
(b) Medic and MedE shall transmit claims, remittance, transaction and
other information to each other in the standard data format (the "Data Format")
set forth on Schedule 2(b) (Standard Data Format). MedE shall be responsible for
configuring the Medic/MedE System, including the electronic link with Medic's
system, to the Data Format and updating the Medic/MedE System to accommodate any
changes in such Data Format that the parties may mutually agree upon. Medic
shall be responsible for configuring its own system to the Data Format.
(c) MedE shall have no responsibility to verify, check or otherwise
inspect any claims, transaction or other information transmitted by Medic,
except as may be necessary to keep an accounting of the number of records, the
number of claims and transactions and the total dollar amount of the claims and
transactions transmitted for processing.
(d) Medic shall use all reasonable efforts to ensure that any data
submitted to MedE shall be correct and complete, and in the Data Format (as set
forth in Schedule 2(b)). MedE shall notify Medic promptly of any claims or
transactions that are rejected by any Payor or if MedE discovers or learns of
any errors in any claims, transaction or other data transmitted by Medic. If any
data supplied by Medic is in error because it is not correct or complete or in
the proper format, Medic shall have sole authority to make any corrections of
such errors and, upon making any such corrections, shall retransmit such
corrected data to MedE unless, upon Medic's written request, Medic engages MedE
to correct any such data, such as in the case of formatting errors, for a
reasonable service charge as MedE may propose and the parties may agree upon.
Section 3. Payor Arrangements. (a) MedE shall add and integrate Payors
to the MedE Services by (i) using its best efforts to enter into agreements with
each of the Payors listed on Schedule 3(a) (Payor Schedule) for the submission
of claims and other transactions via EDI (each such agreement, a "Payor
Agreement") and (ii) upon entering into any such Payor Agreement, establishing
electronic links, in accordance with Section 4, with each such Payor. MedE shall
furnish to Medic copies of its standard form(s) of "payor agreement," including
any revised versions thereof.
2
<PAGE>
(b) MedE shall have primary responsibility for negotiating such Payor
Agreements. MedE shall use its best efforts to negotiate with each Payor the
most favorable terms possible, including as to the amount of revenues per claim
or transaction (the "Revenue Rates") to be paid by such Payor, subject to
Schedule 3(b) (Revenue Rates) in respect of any Revenue Rates in the amounts
described therein. MedE shall consult with Medic regarding any terms proposed to
be included in such Payor Agreements which differ from any of MedE's standard
form(s) of "payor agreement" as previously furnished to Medic. Medic shall use
its best efforts to cooperate with MedE in establishing agreements with Payors.
(c) MedE shall use its best efforts to cause each Payor with whom MedE
enters into a Payor Agreement to enter into a Recognition and Nondisturbance
Agreement substantially in the form of Exhibit A. MedE shall not enter into any
Payor Agreement with any Payor which refuses to enter into such Recognition and
Nondisturbance Agreement simultaneously with such Payor Agreement without
Medic's prior written consent (which consent shall not be unreasonably
withheld).
Section 4. Development Milestones. MedE shall perform its obligations
under Section 3(a) in accordance with the development milestones (each, a
"Development Milestone") set forth in Schedule 4 (Development Milestones). If,
upon reaching the date on which any Development Milestone is scheduled to be
met, the aggregate transaction volumes represented by any Payors that have been
added to date is ***** then Medic shall have the right to terminate the
Agreement without further obligation to MedE, provided, however, that in order
to avoid termination, MedE may propose, for Medic's approval (which approval
shall not be unreasonably withheld), a plan of action for prompt cure of its
failure to achieve such Development Milestones within a commercially reasonable
period of time, provided, further, that Medic may condition its acceptance of
such plan of action and waiver of its right to terminate upon payment of a
reasonable estimate of what is likely to be the shortfall at July 1, 1999 into
escrow, to be released (x) to Medic in the event of any failure to meet the July
1, 1999 Processing Milestone or, if earlier, upon the termination by Medic as a
result of any Termination Event set forth in clauses (i), (ii), (iii), (v),
(vii) or (ix) of Section 18(a) or (y) to MedE if the July 1, 1999 Processing
Milestone is met or, if earlier, upon any termination by MedE due solely to any
Termination Event set forth in clauses (iv), (vi) or (viii) of Section 18(a).
For the purposes of this Section 4, the "aggregate transaction volumes" of any
Payors shall be calculated by reference to the transaction volumes set forth in
Schedule 3(a) with respect to each of the Payors.
3
<PAGE>
Section 5. Medic/MedE System; Development. (a) MedE will, in a
professional and diligent manner, develop, operate, maintain and support the
Medic/MedE System (including but not limited to any and all electronic links to
Medic or any of the Payors) in accordance with the development specifications
set forth in Schedule 5(a) (Development Specifications). Without limiting the
foregoing, MedE shall be responsible for any and all development, maintenance
and support of any electronic links to Medic and each Payor to ensure that any
and all transactions processed via EDI over any such electronic links are, and
shall continue to be, processed in a timely, accurate and error free manner.
Medic shall provide all reasonably necessary cooperation to enable MedE to
perform its duties hereunder.
(b) Any electronic links established with any Payor shall be
established in accordance with the procedures set forth in Schedule 5(b) (Payor
Implementation Guide).
(c) Medic and MedE acknowledge that the Medic/MedE System, including
any electronic links to Medic and to each Payor, shall be tested by Medic and
MedE in accordance with Section 6 to the satisfaction of both MedE and Medic.
(d) MedE shall ensure that the Medic/MedE System shall conform with the
performance and scalability criteria set forth in Schedule 5(d) (Medic/MedE
System Performance and Scalabilty Criteria) throughout the Term.
(e) Medic and MedE acknowledge that MedE shall have no responsibility
for, and shall be provided no access to, any of Medic's systems or the systems
of any Medic Subscriber.
(f) Medic may request in writing from time to time (the "Medic
Request") that MedE provide a service not heretofore provided or proposed to be
provided by MedE to Medic of establishing an electronic link to a Payor not
covered by Schedule 3(a) with whom Medic may want to have a link to process
commercial claims (each an "Additional Service"). ***** Any such Additional
Service to be provided by MedE pursuant to this Section 5(f) shall be deemed to
be a part of the
4
<PAGE>
"MedE Services" and shall be developed, commercially implemented, tested and
provided by MedE in accordance with and subject to the terms of this
Agreement*****
Section 6. Testing. Upon completing any stage of development of the
Medic/MedE System, establishing any electronic link to Medic or any Payor or
commencing live operation of the Medic/MedE System or upon the reasonable
request of MedE or Medic at any time, MedE and Medic shall run, as and when
appropriate, such in-house tests, live tests or client tests set forth in
Schedule 5(b) or such other tests as either Medic or MedE may deem reasonably
necessary or appropriate to determine if the Medic/MedE System operates without
any material incorrect functioning, material incorrect results or other material
errors (each, an "Error"). If upon running such tests Medic or MedE determines
that the Medic/MedE System contains Errors, MedE shall, as soon as commercially
reasonable (but in any event within five (5) business days), correct any and all
such Errors. Medic and MedE shall conduct further tests on any corrected
Medic/MedE System. Medic shall, as soon as commercially reasonable (but in any
event within five (5) business days), correct any Errors caused by Medic or
within Medic's control.
Section 7. Processing Milestones. (a) MedE shall perform the MedE
Services in accordance with each of the claims and transaction processing
milestones (each, a "Processing Milestone") set forth on Schedule 7(a)
(Processing Milestones).
(b) If MedE exceeds any Processing Milestone, Medic shall pay MedE
***** .
(c) If MedE fails to meet any Processing Milestone, as a result of its
failure (i) to enter into agreements with or connect to Payors or (ii) to
perform MedE Services to standard, MedE will pay such damages to Medic as
provided in Schedule 7(c) (Damages Relating to Processing Milestones).
Section 8. Payments. (a) Each party shall pay the other party, in
5
<PAGE>
accordance with Section 8(b), any and all amounts owing to such other party as
set forth in Schedule 8(a) (Payment Schedule).
(b) Within twenty (20) days after the end of each month during the Term
(each such month, a "Commission Period"), MedE shall
(i) provide Medic with (A) a statement of accounting (each, a
"Statement of Accounting") of all transactions and claims processed through
the MedE Services for Medic Subscribers during, and through the end of,
such Commission Period just completed and (B) an invoice (each, an
"Invoice") of any and all transactions processed by the MedE Services
during, and through the end of, such Commission Period in respect of which
Medic owes MedE any transaction fees in accordance with Schedule 8(a) or as
otherwise agreed in writing by the parties; and
(ii) pay to Medic, by wire transfer to an account or accounts
designated by Medic from time to time, the amount equal to (A) Medic's
commissions owing or payable by any Payors, in accordance with the relevant
Revenue Rates, for any and all transactions and claims required to be set
forth in the Statement of Accounting for Medic Subscribers, less (B) any
amounts retained by MedE as payment for any undisputed and unpaid
transaction fees for which an Invoice has been submitted to Medic pursuant
to Section 8(b)(i)(B); provided that, notwithstanding the foregoing, if
MedE manages the cash flow from Payors such that significant revenues are
received from any Payors prior to such twentieth day following the end of
each Commission Period, MedE shall make reasonable arrangements to pay to
Medic such commissions owing to Medic in a timely manner.
Section 9. Medic/MedE System; Use and Maintenance. (a) MedE shall
grant, and hereby grants, to Medic a nonexclusive, non-transferable (except as
provided in Section 28), worldwide, perpetual (subject to the terms hereof),
irrevocable, royalty-free, fully paid-up right and license to use (i) the
software comprising the Medic/MedE System and (ii) upon any Termination Event
(other than any termination due solely to any Termination Event set forth in
Sections 18(a)(iv) and 18(a)(vi)), the source code of the Medic/MedE System and
any other Escrowed Materials relating to the Medic/MedE System, solely for the
purpose of enabling Medic to provide claims and transaction processing services
directly to the Medic Subscribers (in the case of any source code, such use
shall include the creation of derivative works thereof to be used solely for the
aforementioned purpose). In certain circumstances, as provided in Section
18(b)(i),
6
<PAGE>
Medic shall pay an additional one-time fee upon delivery of such Escrowed
Materials
(b) MedE shall make any upgrade, update, correction or other
modification to the Medic/MedE System that becomes necessary or appropriate due
to (i) any changes in applicable laws, rules or regulations, (ii) any changes in
a Payor's system or interface, (iii) any change in the preferred data
communications medium used by MedE or any Payor or (iv) any corrections of any
Errors, provided that in the case of clause (iv), MedE shall use its best
efforts to correct any Errors which impact the ability to accurately process
claims as promptly as possible (but in any event within two (2) business days)
after becoming aware of such Error. Prior to undertaking any such upgrade,
update, correction or other modification, MedE shall consult with Medic. If
Medic wishes to modify the preferred data communications medium used by it, or
wishes for MedE to otherwise modify the Medic/MedE System, Medic shall so inform
MedE. If such modification does not require that MedE implement any unique or
proprietary operating methods, and can be effected without unreasonable cost,
MedE shall use its best efforts to accommodate such requests. MedE shall respond
to any other requests for modifications by providing in good faith an estimate
of the time and cost involved in such modifications (which costs, if the
modifications are undertaken, shall be borne as MedE and Medic shall in good
faith agree).
(c) Except for (and only to the extent of) the limited license to use
the software comprising the Medic/MedE system set forth in Section 9(a) above,
Medic acknowledges and agrees that MedE owns and retains all right, title and
interest of any sort whatsoever in and to the Medic/MedE System and all elements
thereof (excluding, however, the "Medic Data" (as defined herein)), including
the software and hardware used in the system. Medic further confirms its
understanding that the Medic/MedE System and all specifications, manuals, other
documentation and materials (other than the Medic Data), and all improvements,
corrections and modifications related thereto to the extent developed by MedE
(or its developers), are and shall remain the sole substantial proprietary
interests and valuable trade secrets of MedE.
(d) MedE shall be solely responsible for any and all internal and
external costs, expenses and disbursements incurred in connection with
development, operation, support and maintenance of the Medic/MedE System.
Without limiting the foregoing, MedE shall be responsible for any and all
license fees, royalties and other payments to third parties for development
platforms or software used in connection with or incorporated in the Medic/MedE
System.
(e) Medic shall pay to MedE a service fee in the amount of *****
7
<PAGE>
provided that, without limiting Medic's rights under Section 9(a), upon any
termination of this Agreement prior to September 30, 2000 (except a termination
due solely to a Termination Event set forth in Section 18(a)(iv)), there shall
be no further obligation on the part of Medic to pay any subsequent installment.
(f) During the Term, Medic shall not attempt to obtain the source code
to the Medic/MedE System except as expressly permitted under Section 9(a)
hereof, including without limitation by means of decompilation, disassembly or
other means, and shall make no copies of the software other than archival or
back-up copies or as otherwise specifically authorized.
(g) Medic may export any part of the software comprising the Medic/MedE
System, directly or indirectly, to any country outside the United States or
Canada so long as Medic complies with all applicable laws (including the
International Traffic in Arms Regulations (ITAR 22 CFR 1-130) of the U.S.
State Department, Office of the Defense Trade Controls as and to the extent
applicable).
Section 10. Medic Subscriber Database. (a) All right, title and
interest in and to any and all information relating to Medic Subscribers
(including any claims, transactions and other information submitted by Medic for
processing by the MedE Services and any claims remittances and other information
provided by any Payors upon adjudication of any claims and transactions)
(collectively, the "Medic Data") are and shall be owned exclusively by Medic.
MedE shall not have the right to use, license, rent, sell or otherwise make
available any such information for any purpose (other than to the relevant Payor
or otherwise for the benefit of Medic as specifically provided in this
Agreement).
(b) MedE shall develop and maintain a database of the Medic Data (to be
built on an Informix database platform or such other platform as the parties may
mutually agree) (the "Medic Database") that shall at all times be segregated and
secure from any database or information of any other vendors and customers of
MedE. MedE will give Medic direct electronic remote access as may be reasonably
necessary or desired to conduct searches, queries and generate reports of the
Medic Data between the hours of 7 A.M. and 9 P.M. (EST) for database queries and
reporting. If Medic requires access outside these hours, MedE and Medic will
cooperate in good faith to work out a mutually agreeable solution to provide
Medic with additional access. Further, at the end of each quarter during the
Term, MedE shall provide Medic with a complete copy, in its entirety, of the
Medic Database. From time to time, upon Medic's request, MedE will provide
documentation of the schema details in a format indicating both table structures
and
8
<PAGE>
relationships, including updates as and when changes to the schema are made.
(c) MedE shall provide, at MedE's cost, for ten (10) concurrent users
licenses of the Medic Database as is currently permitted by the Informix
licenses between Informix and MedE. Should Medic need to increase the number of
concurrent users, MedE will acquire any additional Informix licenses as needed
to accommodate the additional number of concurrent users specified by Medic,
provided, however, that MedE shall only be responsible to pay any costs thereof
up to $15,000 in the aggregate (i.e., for the ten concurrent user licenses
provided above plus any additional concurrent user licenses) and if such costs
exceed $15,000, Medic and MedE shall negotiate in good faith to determine which
party shall bear any additional costs in excess of $15,000. Medic and MedE shall
work together to negotiate appropriate license fee rates with Informix.
Section 11. Resources; Project Manager. (a) MedE will commit adequate
resources (including technically competent personnel) to ensure timely and
satisfactory performance of its obligations hereunder. MedE (and its development
personnel) shall deal exclusively (except for those minor development efforts
currently underway pursuant to existing contractual obligations of MedE) with
Medic with respect to ******* for the longer of (a) ******* years or (b) ******
following the expiration of such ******* year period.
(b) MedE will designate one member of its personnel to serve as the
project manager for the performance of the MedE Services and MedE's other
obligations hereunder (the "Project Manager"). Such Project Manager will serve
as the primary contact person at MedE for Medic. MedE shall in good faith take
into account any comments raised by Medic in the event that Medic is
dissatisfied with such Project Manager's performance.
(c) Medic will designate one member of its personnel to serve as the
project manager to be the primary contact for MedE in relation to the
performance of the MedE Services (the "Medic Project Manager").
Section 12. Responsibilities of Medic. (a) Medic represents and agrees
that it will not use the Medic/MedE System as a conduit to provide services to
any third party clearinghouse or company engaged in a business substantially
similar to that of MedE absent the express prior written consent of MedE.
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(b) Medic represents and agrees that it will use the Medic/MedE System
in accordance with the reasonable conditions, rules, and regulations which are
established or specified by MedE in writing from time to time for all of MedE's
customers and as are set forth in any manuals, materials, documents, or
instructions furnished by MedE in advance of their effectiveness to its
customers (including Medic), provided that Medic shall not be required to comply
with any conditions, rules or regulations that conflict with any provisions of
this Agreement or materially adversely affect the ability of Medic to use the
Medic/MedE System as contemplated herein.
Section 13. Training; Customer Service. (a) MedE shall provide training
to Medic personnel in the use of the Medic/MedE System and the Medic Database
(including operation of any electronic access, as well as use of any search,
query and reporting functions). The duration and nature of this training shall
be pursuant to terms to be mutually agreed upon.
(b) MedE and Medic acknowledge that MedE shall not provide customer
service directly to any Medic Subscriber (including any customer of any Medic
Subscriber). MedE shall provide first-line support (e.g., telephone, on-site and
other support) to the Payors and second-line support to Medic, who shall be
responsible for providing first-line support to Medic Subscribers (including
their customers). In order to insure that Medic will be able to provide customer
service to Medic Subscribers and their customers, MedE will provide the support
services set forth on Schedule 13(b) (Customer Service).
Section 14. Disaster Recovery. Within forty-five (45) days prior to the
date that MedE commences processing transactions hereunder, MedE shall
establish, purchase or lease, and thereafter maintain at its own expense and to
the satisfaction of Medic, a fully redundant system which may be in the form of
MedE's main non-Medic server and system, coupled with a geographically-remote
secondary fully redundant system, as well as daily off-site back-up of the Medic
Database (the "Disaster Recovery System") to be made available to Medic in event
of a natural disaster, hardware failure, data communications problem or other
unplanned interruption of, or inaccessibility to, the Medic/MedE System, such
that MedE will be able to process 100% of Medic's then current EDI transaction
volume within twenty-four (24) hours of such disaster or problem. MedE shall be
responsible for, subject to Medic's approval, the development, testing and
implementation of a viable contingency plan for accessing and using the Disaster
Recovery System in the event of a disaster.
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Section 15. Representations and Warranties. (a) Each of MedE and Medic
represents and warrants to the other party that it has full legal right and
authority to enter into this Agreement and perform its respective obligations
contained herein, and that no agreement or understanding with any other person
or entity exists or will exist which would interfere with such party's
respective obligations hereunder.
(b) Further, MedE hereby represents and warrants and covenants to Medic
that:
(i) the Medic/MedE System (which includes any communications
and data servers and other hardware installed and any software portions
used by MedE and any software portions delivered by MedE for use by Medic
or any of the Payors) is, and will be, capable of performing in all
material respects the functions for which the Medic/MedE System is
intended as contemplated herein;
(ii) the Medic/MedE System has been screened for, and does not
contain any virus, back door, drop lock or similar or other programming
code or instruction that is intentionally constructed to (x) damage,
interfere or otherwise adversely affect the operations of the Medic/MedE
System or any systems of Medic, any of the Payors or any of the Medic
Subscribers or (y) permit unauthorized electronic, remote or other access
by any person or entity through modem or other means or medium, in each
case without the consent or intent of the party utilizing any portion of
such Medic/MedE System;
(iii) except for such third party software or other rights
disclosed by MedE on Schedule 15(b)(iii) (Third Party Software and Other
Rights), (x) MedE owns or will own the entire Medic/MedE System,
including any modification, upgrade, enhancement and customization
thereof or thereto, (y) no license or other right to use any third party
software or other intellectual property is or will be required to
develop, operate, maintain or support the Medic/MedE System, and (z) the
delivery, installation and use of the Medic/MedE System as a whole does
not and will not infringe or otherwise conflict with the rights of any
other person or entity;
(iv) the Medic/MedE System, together with the rest of MedE's
network system, or any part thereof that contains or calls on a calendar
function, including but not limited to any function that is indexed to a
computer processing unit clock, provides specific dates or calculates
spans of dates, is and will be able to
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record, store, process and provide true and accurate dates and
calculations for dates and spans of dates including and following January
1, 2000; and
(v) assuming the assignment or sublicense of the third party
software listed on Schedule 15(b)(iii) in accordance with Section
18(b)(i) and when used in connection with any telecommunications and data
lines used by MedE to make any physical links with Medic and the Payors
(which are being retained by MedE), the software portions of the
Medic/MedE System and the other Escrowed Materials, together with the
data and communications servers included in the Medic/MedE System,
comprise all of the software and hardware necessary to operate the MedE
Services, including without limitation on a standalone basis, in the
manner contemplated by this Agreement.
(c) THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
WARRANTIES, AND MEDIC HEREBY WAIVES ALL OTHER WARRANTIES, EXPRESSED, IMPLIED, OR
STATUTORY, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, RELATING TO MEDIC/MEDE SYSTEM AND THE PROVISION OF THE MEDE
SERVICES.
Section 16. Escrow. Within sixty (60) days after the date hereof, Medic
and MedE, together with an escrow agent located in the United States to be
selected by Medic, shall negotiate in good faith to agree upon an escrow
agreement (the "Escrow Agreement") containing commercially reasonable terms and
conditions that are standard in the industry. Such Escrow Agreement shall
provide for deposit of the materials relating to the Medic/MedE System that are
described on Schedule 16 (Escrowed Materials) and ------ shall provide for the
release of such Escrowed Materials upon the occurrence of a Termination Event in
accordance with Section 18, other than a Termination Event solely declared by
MedE pursuant to clause (iv) or (vi) of Section 18(a).
Section 17. Term. The term (the "Term") of this Agreement shall
commence upon the date hereof and, unless terminated sooner pursuant to Section
18, shall continue in effect until June 30, 2003 (the "Initial Term"), provided
that the Term shall continue for additional one-year periods (each, a "Renewal
Period") unless either party notifies the other party in writing at least twelve
(12) months prior to the expiration of the Initial Term or any Renewal Period,
as applicable, of such party's desire to terminate the Agreement.
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Section 18. Termination. (a) This Agreement may be terminated upon
written notice upon the occurrence of any of the following (each, a "Termination
Event"):
(i) upon mutual agreement of Medic and MedE;
(ii) by MedE, upon not less than six (6) months prior written
notice, if for reasons beyond MedE's control, the project fails to meet the
Processing Milestones and MedE processes in any year less than ***** of the
total transaction volume that would have been processed had the timetable
been met;
(iii) by Medic, upon any failure by MedE (through no fault of
Medic) to meet any Processing Milestone by ***** or more of the transaction
volumes corresponding to such Processing Milestone;
(iv) by MedE, upon a material breach of any representation,
warranty, covenant or agreement by Medic (other than as provided by Section
18(a)(viii)), which breach is not cured within thirty (30) days after
receipt of notice of such breach, provided that for the purposes of this
Agreement, a "material breach" shall include, but shall not be limited to,
(x) Medic fails or refuses to pay any amount due hereunder to MedE, except
any amount which is being disputed in good faith by Medic, (y) Medic fails
to substantially perform any obligation contained herein which, by its
terms, is required to be performed by a certain deadline or within a
certain time period (notwithstanding Medic's best efforts to do so) or (z)
a series of breaches each of which individually may have been cured or are
not material, but in the aggregate, constitute a material breach or
indicate a pattern of breaches;
(v) by Medic, upon a material breach of any representation,
warranty, covenant or agreement by the other party which is not cured
within thirty (30) days after receipt of notice of such breach, provided
that for the purposes of this Agreement, a "material breach" shall have
occurred if, without limitation, (w) MedE fails or refuses to pay any
amount due hereunder to Medic, except any amount which is being disputed in
good faith by MedE, (x) the Medic/MedE System or any material component
thereof continues to exhibit Errors, or the Medic Database continues to be
unable to be accessed or searched, in either case causing disruptions in or
repeated periods of downtime of the MedE Services or customer service of
Medic or Medic Subscribers (notwithstanding MedE's remedial or maintenance
efforts) during any 45-day period (which shall include the 30-day notice
period), (y) MedE fails to substantially perform any
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obligation contained herein which, by its terms, is required to be
performed by a certain deadline or within a certain time period
(notwithstanding MedE's best efforts to do so) or (z) a series of breaches
each of which individually may have been cured or are not material, but in
the aggregate, constitute a material breach or indicate a pattern of
breaches;
(vi) by MedE, if Medic becomes insolvent, makes a general
assignment for the benefit of creditors, suffers or permits the appointment
of a receiver for its business or assets, becomes subject to any proceeding
under any bankruptcy or insolvency law, whether domestic or foreign, or has
wound up or liquidated, voluntarily or otherwise;
(vii) by Medic, if MedE becomes insolvent, makes a general
assignment for the benefit of creditors, suffers or permits the appointment
of a receiver for its business or assets, becomes subject to any proceeding
under any bankruptcy or insolvency law, whether domestic or foreign, or has
wound up or liquidated, voluntarily or otherwise;
(viii) by MedE, if Medic materially breaches its obligations
contained in Section 20, unless Medic cures such breach within thirty (30)
days after receipt of notice thereof; or
(ix) by Medic, upon any "change of control" of MedE, which
shall be defined to have occurred if a non-financial buyer acquires,
directly or indirectly, beneficial ownership of 35% or more of the then
outstanding voting shares or share equivalents of MedE, provided that
Medic's termination right in this Section 18(a)(ix) may be exercised upon
and at any time within eight (8) months after the occurrence of such change
of control of MedE during which such non-financial buyer continues to be a
shareholder, provided, further, that prior to the occurrence of such
"change of control" event, MedE and Medic may agree upon a notice period of
such termination.
(b) Upon any termination or expiration of the Agreement (subject to
Section 18(d) below):
(i) MedE shall deliver (or allow to be delivered out of
escrow), and Medic shall receive, (x) the software portions of the
Medic/MedE System, together with good and merchantable title to, and the
manufacturers' warranties on and any support arrangements relating to, the
data and communications servers,
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and any and all Escrowed Materials (whether out of escrow or otherwise), in
each case, free and clear of any liens, security interests and other
encumbrances, provided that such software portions thereof shall be subject
to the limited license granted under Section 9(a) hereof, and (y)
assignment or sublicense of any and all third party software components
used as part of or in connection with the development, operation,
maintenance and support of the Medic/MedE System, so long as (i) the owner
of such software shall have consented to such assignment or sublicense and
(ii) Medic agrees to assume and perform any ongoing obligations in respect
of any such assigned or sublicensed third party software. If, and only to
the extent that, the Medic/MedE System relies on any third party software
to be so assigned or sublicensed, and either (i) the owner of such software
does not consent to such assignment or sublicense or (ii) Medic does not
agree to assume the ongoing obligations with respect to such software as
aforesaid, then MedE makes no representations of any nature whatsoever
relating to the Medic/MedE System and Medic accepts the Medic/MedE System
"AS-IS, WHERE-IS" in respect of those portions of such Medic/MedE System
that depend upon the use of such third party software. The delivery of the
Medic/MedE System and other Escrowed Materials to Medic in accordance with
this Section 18(b)(i) shall be at no additional cost to Medic, except that
if any such termination or expiration is due to (A) either (x) the
nonrenewal or nonextension of the Initial Term or, if applicable, any
Renewal Period or (y) a Termination Event as set forth in Section
18(a)(ix), Medic shall pay to MedE a one-time payment of ***** to be paid
upon satisfactory delivery of the items to be delivered by MedE in
accordance with this Section 18(b)(i), or (B) a Termination Event pursuant
to Section 18(a)(viii), Medic shall be required to purchase the items to be
delivered by MedE in accordance with this Section 18(b)(i) for a one-time
payment of ***** to be paid upon satisfactory delivery of such items.
(ii) MedE shall provide Medic with (x) reasonable support,
training and assistance that is mutually agreed upon in effecting a smooth
transition and assisting Medic personnel in the use of the Medic/MedE
System, for a period not to exceed six (6) months, consisting of certain
periods of support, training and assistance for free and thereafter at
rates to be agreed and (y) cooperation in conversions to new providers for
a period of six months on terms that are reasonable. - -
(iii) Any residual transactions that remain to be processed by
MedE upon the termination of this Agreement will be processed upon terms
that will be mutually agreed to, but that shall not be less favorable than
those that were
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in effect immediately prior to the termination of this Agreement.
(iv) MedE shall provide reasonable assistance at no additional
cost to Medic in connection with effecting a smooth transition to Medic or
a new provider.
(c) Notwithstanding anything to the contrary contained herein, Sections
8(b), 9(a), 9(c), 10(a), 15, 16, 18(b), 18(c), 18(d), 19, 21, 23, 24, 25, 31, 32
and 33 shall survive any expiration or termination of this Agreement.
(d) Notwithstanding anything to the contrary set forth herein, in the
event of a termination solely due to a Termination Event set forth in clause
(iv) or (vi) of Section 18(a), (1) Medic shall have no entitlement to possess or
use the Medic/MedE System for any purpose whatsoever, (2) Medic shall promptly
return to MedE and/or delete all elements of the Medic/MedE System in its
possession or control, and (3) Medic shall not be entitled to any of the
benefits set forth in Section 18(b) hereof.
Section 19. Indemnification. (a) MedE shall indemnify, defend and hold
harmless, and shall pay and reimburse, Medic, Medic Subscribers and its and
their respective employees, officers, directors, representatives, customers and
agents for any and all suits, proceedings, claims, actions, judgments,
settlements, losses, damages, liabilities, debts, costs and expenses (including
attorneys' fees and disbursements) resulting from or arising out of (i) any
alleged or actual infringement of or other conflict of the Medic/MedE System
with any third party's intellectual property, proprietary or other rights, (ii)
any breach of any representation and warranty contained in Section 15(b)(iii),
or (iii) any breach of any other representation or warranty or any covenant or
other obligation of MedE hereunder, provided, however, that MedE's
indemnification obligation hereunder shall continue during the Term and
thereafter (x) in the case of the foregoing Section 19(a)(iii), for one
additional year following any expiration or termination of the Term and (y) in
the case of the foregoing Section 19(a)(i) or Section 19(a)(ii), for five
additional years following any expiration or termination of the Term.
(b) Except as provided in Section 19(a), Medic shall indemnify, defend
and hold harmless, and shall pay and reimburse, MedE and its respective
employees, officers, directors, representatives, customers and agents for any
and all suits, proceedings, claims, actions, judgments, settlements, losses,
damages, liabilities, debts, costs and expenses (including attorneys' fees and
disbursements) resulting from or arising out of (i) any claim by any Medic
Subscriber relating to Medic's performance of its obligations to any Medic
Subscriber or (ii) any breach of any representation, warranty,
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covenant or other obligation of Medic hereunder.
Section 20. Exclusivity. (a) Scope of Exclusivity. During the Term,
subject to Section 20(b) and 20(c), MedE will be the exclusive EDI processor for
Medic in respect of claims and transactions that can be processed by the MedE
Services, including, without limitation, in respect of any Payors which have
been added and integrated into the MedE Services (i.e., a Payor with which MedE
has established a Payor Agreement and EDI link) and to which Medic shall submit
any and all claims and transactions of Medic Subscribers covered by such Payor
for processing by the MedE Services.
(b) Medic and MedE Obligations. ***** With respect to competitiveness
as to price and other terms (i) MedE shall have the opportunity to match bona
fide, written independent third-party offers received by Medic, provided that
Medic shall have the right ro give such transaction processing business to such
relevant independent third party if MedE fails to match the terms of such
independent third party's offer (including as to price, service standards and
other terms); and (ii) MedE shall give Medic the benefit of any terms (including
as to price, service standards and other terms) which MedE has agreed with any
other similarly situated customer or third party which are more favorable than
the terms agreed with Medic.
(c) Certain Exceptions to Exclusvity. Notwithstanding anything to the
contrary contained herein, the parties acknowledge that Medic shall not be bound
by, or be deemed to have breached, any obligations of exclusivity or otherwise
hereunder if: *****
Section 21. Limitation of Liability. (a) In no event shall either party
be liable for indirect, special, or consequential damages (including loss of
profits or damage to business reputation), even if such party has been advised
of the possibility of such damages, except as specifically provided in Section 4
and 7(c).
(b) During the Initial Term, such penalties and damages payable
pursuant to Sections 4 and 7(c) shall not exceed ***** in the aggregate. No such
limit on the amount of damages and penalties payable during any Renewal Period
shall apply unless mutually agreed upon by the parties.
(c) Notwithstanding anything to the contrary contained herein, each
party's total cumulative liability to the other party under this Agreement shall
be limited to ***** and each party releases the other party from any and all
obligations, liability, claims or demands in excess of such limitation.
Section 22. Compliance with Laws. Each of Medic and MedE agrees that,
with respect to its respective performance hereunder, it shall comply with any
and all applicable laws and regulations (including without limitation any
confidentiality requirements established by the Health Care Financing
Administration and any state health care authorities).
Section 23. Confidentiality. (a) Each party shall, and shall cause
their respective affiliates and any of its and their respective officers,
consultants, principals, agents, employees and directors to, use all reasonable
efforts to (a) protect the other party's confidential information and (b) not
disclose, nor permit unauthorized access to, the other party's confidential
information, without the prior written consent of such other party.
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(b) In the event that either party (the "Disclosing Party") is required
under applicable law to disclose any confidential information of the other party
(the Non-Disclosing Party"), including in connection with any filings to be made
with the Securities Exchange Commission pursuant to the U.S. Securities Act of
1933, as amended, or the U.S. Securities Exchange Act of 1934 as amended, such
Disclosing Party shall give the Non-Disclosing Party prompt written notice of
such requirement so that the Non- Disclosing Party may seek an appropriate
confidential treatment or protective order of such confidential information or
portions thereof. If in the absence of a protective order the Disclosing Party
is compelled to disclose such confidential information, such Disclosing Party
may disclose such portion of such confidential information that in the opinion
of the Disclosing Party's counsel such Disclosing Party is compelled to
disclose, without liability under this Agreement, provided, however, that such
Disclosing Party shall give such Non-Disclosing Party written notice of the
confidential information to be disclosed as far in advance of its disclosure as
is practicable and shall use reasonable efforts to obtain assurances that
confidential treatment, if available, will be accorded to such confidential
information.
(c) The parties acknowledge that the term "confidential information" as
used herein will include the terms of this Agreement (including any Schedules
hereto) and the Medic/MedE System, the Medic Data and Medic Database, and all
specifications, manuals, other documentation and materials, and all
improvements, corrections and modifications related thereto.
(d) The obligations of each party hereto under this Section 23 shall
not apply to any information that: (i) was known to such party prior to the
disclosure by the other party; (ii) is or becomes generally available to the
public (other than by a breach of this Agreement); or (iii) otherwise becomes
available on a non-confidential basis by a third party who is not under an
obligation of confidence to either party hereto. Section 24. Maintenance of
Records; Audit. (a) Each of Medic and MedE agrees that it shall maintain a copy
of this Agreement and any books, documents, records and other data of such party
as may be required to be maintained by applicable law, for such periods as such
laws may require.
(b) During the Term and for three (3) years thereafter, MedE shall
maintain on its premises all usual and proper records and books of account and
all usual and proper entries to substantiate the number of claims and
transactions processed in connection with the MedE Services. In order to verify
statements issued by MedE and MedE's compliance with the terms of this
Agreement, Medic may audit, or cause an audit to be made of, MedE's books and
records. Any audit
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shall be conducted during regular business hours at MedE's facilities upon five
(5) days' prior written notice. Any audit shall be conducted by Medic or an
independent certified public accountant selected by Medic (other than on a
contingent fee basis), provided that, if Medic elects to use an independent
certified public accountant, such accountant shall be reasonably acceptable to
MedE. MedE agrees to provide Medic or its designated auditors, as the case may
be, access to all relevant records and facilities of MedE, and Medic agrees to
take such actions as are reasonable to minimize any disruption to MedE's
business. Prompt adjustment shall be made to compensate for any errors or
omissions disclosed by such audit. Any such audit shall be paid for by Medic
unless material discrepancies are disclosed. "Material" shall mean at least 10%
(in Medic's favor) of the amount that was reported. If material discrepancies
are disclosed, MedE agrees to pay Medic for the reasonable costs associated with
the audit. In no event shall audits be made more frequently than semi-annually
unless the immediately preceding audit disclosed a material discrepancy.
Section 25. Non-Solicitation. (a) During the Term and for a period of
one (1) year following the expiration or termination of the Term, neither MedE
nor any of its affiliates, nor any of its or their employees, officers or
directors, will, directly or indirectly, solicit or endeavor to entice away from
Medic or any of its affiliates or otherwise intentionally interfere with Medic's
relationship with, any person or entity who or which (i) is at the time employed
by or otherwise engaged to perform services (other than clerical or routine
administrative services) for Medic or any of its affiliates or (ii) is, or has
been within the two-year period ending on the date of such expiration or
termination, a Medic Subscriber or other customer or client of Medic or any of
its affiliates.
(b) During the Term and for a period of one (1) year following the
expiration or termination of the Term, neither Medic nor any of its affiliates,
nor any of its or their employees, officers or directors, will, directly or
indirectly, solicit or endeavor to entice away from MedE or any of its
affiliates or otherwise intentionally interfere with Medic's relationship with,
any person or entity who or which (i) is at the time employed by or otherwise
engaged to perform services (other than clerical or routine administrative
services) for MedE or any of its affiliates or (ii) is, or has been within the
two-year period ending on the date of such expiration or termination, a customer
or client of MedE or any of its affiliates.
Section 26. Force Majeure. Neither Medic nor MedE shall be held liable
for failure to fulfill its respective obligations hereunder if such failure is
caused by strikes, acts of God, flood, extreme weather, fire, or other natural
calamity, or similar causes beyond the control of such party (each a "Force
Majeure Event"). Notwithstanding the
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foregoing, a Force Majeure Event will not excuse MedE from performance of its
obligations hereunder if and to the extent a Disaster Recovery System (as
provided in Section 14) would have mitigated any such failure on the part of
MedE to perform such obligations. During the pendency of a Force Majeure Event,
each of the parties shall take all reasonable steps to furnish the services
required hereunder by other means, and, in any event, shall, upon termination of
such Force Majeure Event, forthwith resume obligations under this Agreement.
Section 27. Relationship of Parties. Nothing contained in this
Agreement shall be construed as creating a joint venture, partnership or
employment arrangement between the parties hereto, nor shall either party have
the right, power or authority to create any obligation or duty, expressed or
implied, on behalf of the other party hereto.
Section 28. Assignment. Notwithstanding anything to the contrary
contained in this Agreement, each party hereto may assign, or provide the
benefit of, this Agreement or any rights hereunder to any parent, subsidiary,
affiliate or successor in interest (including a successor in interest to
substantially all the assets of such party). Notwithstanding anything to the
contrary contained in this Agreement, Medic may subcontract or sublicense any
rights granted to it under this Agreement to any third party person or entity
for use for the benefit of Medic or any of its affiliates (such as in an
outsourcing arrangement), except any third party person or entity who is a
direct competitor of MedE unless MedE gives its prior written consent (which
consent shall not be unreasonably withheld), provided, however, that all
obligations for performance under this Agreement shall remain with Medic
following such subcontract or sublicense. Except as provided in the foregoing,
this Agreement may not be assigned by either party without the other party's
prior written consent, which consent shall not be unreasonably withheld, and any
attempted assignment without such consent shall be null and void.
Section 29. No Waiver. No failure on the part of either party to
exercise and no delay in exercising any right or remedy hereunder shall operate
as a waiver thereof or modify the terms of this Agreement. The exercise of any
one remedy shall not be deemed to waive or preclude the exercise of any other
remedy.
Section 30. Entire Agreement, Amendments. This Agreement, including all
the Schedules hereto, constitutes the entire agreement, understanding, and
representations, express or implied, between MedE and Medic regarding the
subject matter hereof and supersedes all prior communications between the
parties including all oral or written proposals. No representation, warranty,
promise, inducement, or statement of intention has been made by either party
which is not embodied in this Agreement, and
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neither MedE, on the one hand, nor Medic, on the other hand, shall be bound by,
or be liable for, any alleged representation, warranty, promise, inducement, or
statement of intention not embodied herein. Any amendments to this Agreement
must be in writing signed by both parties hereto.
Section 31. Severability. In the event that any provision hereof is
found to be invalid or unenforceable pursuant to judicial decree or decision,
the remainder of this Agreement shall remain valid and enforceable according to
its terms. It is expressly understood and agreed that each provision of this
Agreement that provides for a disclaimer of warranties, limitation on liability,
or exclusion of damages is intended by the parties to be severable and
independent of any other provision and to be enforced as such.
Section 32. Applicable Law; Dispute Resolution. (a) This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to conflicts of law principles.
(b) (i) Any dispute, controversy or claim arising out of, relating to,
or in connection with, this Agreement or any breach, termination or validity
thereof shall be finally settled by arbitration. The arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association in effect at the time of the arbitration, except as they
may be modified herein or by mutual agreement of the parties. The seat of the
arbitration shall be New York, and it shall be conducted in the English
language.
(ii) The arbitration shall be conducted by three arbitrators. The party
initiating arbitration ("the Claimant") shall appoint its arbitrator in its
request for arbitration (the "Request"). The other party ("the Respondent")
shall appoint its arbitrator within thirty (30) days of receipt of the Request
and shall notify the Claimant of such appointment in writing. If the Respondent
fails to appoint an arbitrator within such 30-day period, the arbitrator named
in the Request shall decide the controversy or claim as a sole arbitrator.
Otherwise, the two arbitrators appointed by the parties shall appoint a third
arbitrator within thirty (30) days after the Respondent has notified Claimant of
the appointment of the Respondent's arbitrator. When the arbitrators appointed
by the Claimant and Respondent have appointed a third arbitrator and the third
arbitrator has accepted the appointment, the two arbitrators shall promptly
notify the parties of the appointment of the third arbitrator. If the two
arbitrators appointed by the parties fail or are unable so to appoint a third
arbitrator or so to notify the parties, then the appointment of the third
arbitrator shall be made by President of the American Arbitration Association
21
<PAGE>
which shall promptly notify the parties of the appointment of the third
arbitrator. The third arbitrator shall act as Chairman of the panel.
(iii) The arbitral award shall be in writing and shall be final and
binding on the parties. The award may include an award of costs, including
reasonable attorneys' fees and disbursements. Judgment upon the award may be
entered by any court having jurisdiction thereof or having jurisdiction over the
parties or their assets. This Section 32 shall in no way affect the right of
either party hereto to seek interim relief in any court of competent
jurisdiction, and a request for such interim relief shall not be deemed
incompatible with, or a waiver of, the agreement to arbitrate contained herein.
Section 33. Notices. Notices required to be given pursuant to this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered personally, transmitted by confirmed fax, or sent by a nationally
recognized overnight courier service, or by registered or certified mail,
postage prepaid, as follows:
If to MedE, send to:
MedE America Corporation
90 Merrick Avenue, Suite 501
East Meadow, NY 11554
Attn: David Goldwin, Esq.
Phone (516) 542-4500 ext. 108
Fax: (516) 542-4508
If to Medic, send to:
Medic Computer Systems, Inc.
8601 Six Forks Road, Suite 300
Raleigh, North Carolina 27615
Tel: (919) 847-8102
Fax: (919) 847-7110
Attention:
with a copy to:
Misys plc
Burleigh House
Chapel Oak
22
<PAGE>
Salford Priors 23
Evesham, England WORCS
WR11 5SH
Tel: 011 44 138 687-1373
Fax: 011 44 138-687-1045
Attention: Ross K. Graham
or to such other address as either party shall have designated by notice to the
other.
Section 34. Execution in Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
23
<PAGE>
IN WITNESS WHEREOF, MedE and Medic have duly executed and delivered this
Agreement as of the date first above written.
MEDIC COMPUTER SYSTEMS, INC.
By:
-------------------------------
Name:
Title:
MEDE AMERICA CORPORATION
By:
-------------------------------
Name:
Title:
24
<PAGE>
EXHIBIT A
RECOGNITION AND NONDISTURBANCE AGREEMENT
RECOGNITION AND NONDISTURBANCE AGREEMENT (the "Agreement"), dated as of
__________by and among MedE Corporation, a Delaware corporation ("MedE"), Medic
Computer Systems, Inc., a North Carolina corporation ("Medic") and [PAYOR], a
____________corporation ("Payor").
BACKGROUND
WHEREAS, MedE and Payor are parties to the [Payor Agreement], dated as
of [____], (the "Payor Agreement");
WHEREAS, MedE and Medic are parties to the Transaction Processing and
Development Agreement, dated as of [July _, 1998] (the "Transaction Agreement"),
whereby MedE has agreed to process, via electronic data interchange ("EDI"),
claims or other transactions of Medic's subscribers and customers (such
services, the "MedE Services"); and
WHEREAS, the parties hereto desire to assure Medic of its ability to
continue submitting claims to Payor, upon the terms and conditions substantially
similar to the Payor Agreement, irrespective of termination of the MedE Services
or Medic's arrangement with MedE;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
Section 1. Recognition and Nondisturbance.
(a) Medic shall immediately notify Payor in writing upon the occurrence
of any Termination Event (as defined below).
(b) Upon occurrence of any Termination Event:
(i) The Payor Agreement will continue as a direct agreement
between the Payor and Medic upon the terms and conditions of the Payor
Agreement, but only with respect to the claims and transactions of Medic
subscribers and customers being processed with such Payor, and with such
changes as Payor and Medic may thereafter mutually agree in writing are
appropriate under the circumstances.
<PAGE>
(ii) Medic will perform all of the obligations of MedE under
the Payor Agreement from and after the date of such Termination Event, but
Medic shall have no liability to the Payor for acts or omissions of MedE
on, prior to or after the date of such Termination Event;
(iii) the Payor acknowledges that Payor shall have to
cooperate with Medic to establish an EDI electronic link between Medic's
systems and the Payor's system as promptly as commercially practicable in
accordance with and as contemplated by the terms of the Payor Agreement;
and
(iv) Payor will (i) not disturb the rights granted to Medic to
process claims and transactions of Medic subscribers and customers via an
EDI link with the Payor, (ii) grant to Medic rights and benefits
substantially similar to those granted to MedE under its Payor Agreement,
including the rate of commissions paid by Payor in connection with
processing claims and transactions via EDI and (iii) perform Payor's
obligations under the Payor Agreement from and after the date of such
Termination Event.
(c) The provisions of this Agreement shall be effective and
self-operative as of the date of such Termination Event without execution of any
further instrument on the part of MedE, Payor or Medic.
(d) Upon the reasonable written request of either Payor or Medic,
Payor, Medic and MedE shall execute and deliver promptly to the requesting party
such other documents or instruments (in recordable form, if so requested)
reasonably necessary to effectuate or evidence the intent of the parties
hereunder.
(e) For purposes of this Agreement, "Termination Event" shall mean the
occurrence of any of the following events:
(1) MedE becomes insolvent, makes a general assignment for the
benefit of creditors, suffers or permits the appointment of a receiver for
its business or assets, becomes subject to any proceeding under any
bankruptcy or insolvency law, whether domestic or foreign, or has wound up
or liquidated, voluntary or otherwise; or
(2) the receipt by Medic of any portion of the Medic/MedE
System (as the same is defined and referred to in the Transaction
Processing Agreement) to be received by it, including any of the items
deposited by MedE into escrow in accordance with the Transaction Agreement,
whether such termination is due to notice of termination by Medic or MedE
or otherwise.
2
<PAGE>
Section 2. Consent of Payor. Payor consents to, and shall give Medic
the benefit of, Medic's assumption and performance of terms and obligations
substantially similar to the duties of MedE under the Payor Agreement.
Section 3. Assignment. Notwithstanding anything to the contrary
contained in this Agreement , each party hereto may assign this Agreement or any
rights hereunder to any parent, subsidiary, affiliate or successor in interest
(including a successor in interest to substantially all the assets of such
party). Notwithstanding anything to the contrary contained in this Agreement,
Medic may subcontract or sublicense any rights granted to it under any Agreement
to any third party person or entity for use for the benefit of Medic (such as in
an outsourcing arrangement), provided, however, that all obligations for
performance under this Agreement shall remain with Medic following such
assignment. Except as provided in the foregoing, this Agreement may not be
assigned by either party without the other party's prior written consent, which
consent shall not be unreasonably withheld, and any attempted assignment without
such consent shall be null and void.
Section 4. No Waiver. No failure on the part of either party to
exercise and no delay in exercising any right or remedy hereunder shall operate
as a waiver thereof or modify the terms of this Agreement. The exercise of any
one remedy shall not be deemed to waive or preclude the exercise of any other
remedy.
Section 5. Entire Agreement, Amendments. This Agreement, together with
the Payor Agreement, constitutes the entire agreement, understanding, and
representations, express or implied, among the Payor, MedE and Medic regarding
the subject matter hereof and supersedes all prior communications between the
parties including all oral or written proposals. No representation, warranty,
promise, inducement, or statement of intention has been made by either party
which is not embodied in this Agreement, and neither MedE, on the one hand, nor
Medic, on the other hand, shall be bound by, or be liable for, any alleged
representation, warranty, promise, inducement, or statement of intention not
embodied herein. Any amendments to this Agreement must be in writing signed by
both parties hereto.
Section 6. Severability. In the event that any provision hereof is
found to be invalid or unenforceable pursuant to judicial decree or decision,
the remainder of this Agreement shall remain valid and enforceable according to
its terms. It is expressly understood and agreed that each provision of this
Agreement that provides for a disclaimer of warranties, limitation on liability,
or exclusion of damages is intended by the parties to be severable and
independent of any other provision and to be enforced as such.
3
<PAGE>
Section 7. Applicable Law; Dispute Resolution. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without regard to conflicts of law principles.
Section 8. Notices. Notices required to be given pursuant to this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered personally, transmitted by confirmed fax, or sent by a nationally
recognized overnight courier service, or by registered or certified mail,
postage prepaid, as follows:
If to Payor, send to:
If to MedE, send to:
MedE America Corporation
90 Merrick Avenue, Suite 501
East Meadow, NY 11554
Attn: David Goldwin, Esq.
Phone (516) 542-4500 ext. 108
Fax: (516) 542-4508
If to Medic, send to:
Medic Computer Systems, Inc.
8601 Six Forks Road, Suite 300
Raleigh, North Carolina 27615
Tel: (919) 847-8102
Fax: (919) 847-7110
Attention:
with a copy to:
Misys plc
Burleigh House
Salford Priors
Evesham, England WORCS
WR11 5SH
Tel: 011 44 138 687-1373
Fax: 011 44 138-687-1045
Attention: Ross K. Graham
4
<PAGE>
or to such other address as either party shall have designated by notice to the
other.
Section 9. Execution in Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, each of MedE, Medic and the Payor have duly executed and
delivered this Agreement as of the date first above written.
[PAYOR]
By:
-----------------------------
Name:
Title:
MEDIC COMPUTER SYSTEMS, INC.
By:
------------------------------
Name:
Title:
MEDE AMERICA CORPORATION
By:
-----------------------------
Name:
Title:
6
<PAGE>
Transaction Processing Agreement
List of Schedules
-----------------
<TABLE>
<S> <C>
Schedule 1 Medic/MedE System
Schedule 2(a) Medic/MedE Transaction Processing Relationship
Guidelines
Schedule 2(b) Standard Data Format
Schedule 3(a) Payor Schedule
Schedule 3(b) Revenue Rates
Schedule 4 Development Milestones
Schedule 5(a) Development Specifications
Schedule 5(b) Payor Implementation Guide
Schedule 5(d) Medic/MedE System Performance and Scalability Criteria
Schedule 7(a) Processing Milestones
Schedule 7(c) Damages Relating to Processing Milestones
Schedule 8(a) Payment Schedule
Schedule 13(b) Customer Service
Schedule 15(b)(iii) Third Party Software and Other Rights
Schedule 16 Escrowed Materials
</TABLE>
<PAGE>
Schedule 1
Medic/MedE System
The "Medic/MedE System" shall include, but not be limited to, (a) any and all
electronic links established to Medic and to any Payors, including any software
provided and licensed thereto, (b) hardware including but not limited to
servers, equipment for receiving and transmitting data communications and any
other hardware used by MedE to provide the MedE Services, (c) any and all
documentation, third party software or other rights (whether incorporated as a
component or used in connection with development of the Medic/MedE System), and
(d) upon the occurrence of any Termination Event (other than a Termination Event
declared by MedE under clauses (iv) or (vi) of Section 18(a)), the source code
and other Escrowed Materials (as defined in Section 16).
2
<PAGE>
Schedule 2(a)
Medic/MedE Transaction Processing Relationship Guidelines
- -- Medic will make multiple transmissions throughout the day
- -- MedE will be able to receive claims 24 hours-a-day, 7 days-a-week, 365
days-a-year, except for scheduled maintenance and down times.
- -- The cutoff for claims transmission will be *****
- -- MedE will provide dial backup of claims transmission.
- -- MedE will provide daily control totals for incoming and outgoing claim
transmission
- -- MedE will forward to Medic any status or other messages from any Payor
with respect to any claims or transactions of any Medic Subscriber.
- -- Medic shall be responsible for implementing an enrollment process to
enroll any Medic Subscribers with the Payors.
- -- MedE will assign to each claim or transaction a tracking number.
- -- MedE shall have the right to change the passwords used by Medic to
access the Medic/MedE System every 90 days; provided, however, that
MedE shall inform Medic in advance of any such password changes.
- -- MedE will provide Medic with five (5) business days' prior written
notice of all scheduled down time for maintenance and system upgrade,
provided, however, that in the case of an emergency, MedE shall provide
Medic with such notice as soon as is reasonably possible.
3
<PAGE>
Schedule 2(b)
Standard Data Format
--------------------
The "Data Format" for communications for transactions between Medic and MedE
will be Medic National Standard Format (NSF) for claims and Medic NSF
remittance.
4
<PAGE>
Schedule 3(a)
Payor Schedule
--------------
June 1998 list of commercial and governmental Payors as provided to MedE on or
prior to the date hereof.
5
<PAGE>
Schedule 3(b)
Revenue Rates
-------------
*****
6
<PAGE>
Schedule 4
Development Milestones
----------------------
- *****
- MedE shall provide Medic with development services to support the
development and implementation of ***** . MedE and Medic shall mutually
agree further on the schedule for such remittance development and
implementation.
7
<PAGE>
Schedule 5(a)
Development Specifications
--------------------------
- -- The Medic/MedE System shall have the capability to transmit
transactions and claims processed by Medic via EDI to Payors, obtain a
result set for each such transaction and/or claim, act on the result
set and transmit the result set via EDI to Medic.
- -- MedE will furnish a weekly status report to the Medic Project Manager,
which report shall include the status of all active projects with
respect to each Payor and each MedE developer. These reports will also
include "Actual Project Status versus Goals," "Time Spent versus
Allocated," and potential problem areas in the development of the
Medic/MedE System.
- -- Development cycle for establishing an electronic link with any Payor
shall start with receipt of specifications, contact person information
and signed Payor Agreement with such Payor.
- -- Development does not include claim referral and eligibility.
- -- On a monthly basis MedE will furnish to the Medic Project Manager a
status report in respect of each MedE developer and any Payor then
being linked, as well as forward looking plans for the next 90 days,
claims and transaction volumes versus established goals, and projected
claims and transaction volumes for the next 90 days.
- -- Medic will supply test claims to MedE within an appropriate time frame
after signing any Payor Agreement as the parties may mutually agree
upon.
8
<PAGE>
Schedule 5(b)
Payor Implementation Guide
--------------------------
See attached "Payer Implementation Guide"
Commercial Claims
- -- Each electronic link to a Payor shall be considered completed and
tested only if it has tested in accordance with one of the following:
*****
Government Claims
- -- Each electronic link to a Payor shall be considered completed and
tested only if it has either been: *****
9
<PAGE>
Payor Implementation Guide
- - INITIAL PAYOR CONTACT
1. Obtain Contact Name and Numbers for EDI Testing, Production,
Billing, and Provider Support
2. Order Claim, Communication, Report and Remittance Specifications
3. Obtain all Vendor and Provider Enrollment Forms with Instructions
4. Negotiate and agree upon a Payor Agreement
5. Agree upon procedures to establish link
- - DEVELOPMENT
1. Fill out and submit Vendor Enrollment
2. Review specifications
3. Create Electronic Format and Map
4. Write initial Payor specific edits
5. Obtain or create test claims
- - IN-HOUSE TESTING
1. Obtain test data
2. Run test data through Payor specific edits on MedE Claim
3. Run test data through electronic format and map
4. Validate output file
10
<PAGE>
- - PAYOR TESTING
1. Set up communication (obtain modem number, submitter ID and login)
2. Transmit test claims to Payor (notify Payor of transaction)
3. Contact Payor for test results
4. Make corrections if errors are found
5. Send out a second test for claim validation (more detailed)
6. Contact Payor for test results from second file
7. Set up router for Electronic Reports (if available)
- - LIVE CLIENT TEST
1. Obtain sample of live claims for client
2. Follow up on Provider Enrollment (must be completed before first
live file is sent)
3. Set up Live Communication
4. Process and transmit claims to Payor
5. Pick up Electronic Reports
6. Route reports to Providers' directory for pick up with their next
submission
7. Review reports on a daily basis, making changes when needed until
the accept rate is ***** or above
11
<PAGE>
- - REMITTANCE (IF REQUESTED)
1. Work with Provider and Payor to set up Electronic Remittance
Advice
2. Follow up with details of the contract
3. Create Map to read input file then export the file based on the
Providers' needs
4. If applicable, test with Payor and Provider
5. Pick up Electronic Remittance from Payor
6. Run through conversion map
7. Route to Provider
12
<PAGE>
Payor Implementation Time Line
- ------------------------------
*****
13
<PAGE>
Remittance Implementation Guide
Implementation is per Payor
- - Initial Provider Contact (2-3 Days)
1. Obtain Contact Name and Numbers for EDI Testing, Production
Provider Support
2. Develop Report and Remittance Specifications with Provider
- - Initial Payor Contact
(this is done in cooperation with the claim processing development)
1. Obtain Contact Name and Numbers for EDI Testing, Production
Provider Support
2. Obtain Report and Remittance Specifications from Payor
3. Negotiate and agree upon a Payor Agreement
4. Agree upon procedures to establish link
- - Development *****
14
<PAGE>
- - In-house Testing *****
1. Obtain test remittance
2. Validate test data format
3. Run test data through maps
4. Validate output file
5. Make changes as necessary
- - Testing *****
(This time frame can vary depending on the medium used to obtain and
deliver the remittance, i e. tape, electronic, etc., and the remittance
cycle of the Payor)
1. Set up communication with Payor
(this will be in place for all but new Payors)
2. Set up communication with Provider
(this will be in place for most providers who submit claims)
3. Receive test remittance from Payor
4. Transmit remittance (in Provider format) to Provider
5. Contact Provider for test results
6. Make corrections per Provider requests
- - Automate Process *****
1. Write scripts to automate communication and processing
2. Activate automated process after testing phase is complete
15
<PAGE>
Remittance Implementation Guide
- - Initial Provider Contact - *****
- - Negotiate and agree upon a Payor Agreement
- - Agree upon procedures to establish link
- - Initial Payor Contact - ******
- - Development - *****
- - In-house Testing - *****
- - Live Testing - ongoing
- - Automate Process - *****
Total development time is *****.
16
<PAGE>
Schedule 5(d)
Medic/MedE System Performance and Scalability Criteria
------------------------------------------------------
The Medic/MedE System shall meet the following standards of performance and
scalability:
(1) Claims submitted by Medic for processing by the MedE Services must be
(i) processed within ***** of transmission of such claims, or (ii) if
such claims are not processed within ***** of transmission, such claims
must be processed *****
(2) The MedE system contains no limitations in Field Lengths, Counters,
etc. that will negatively impact the ability to efficiently handle
Medic's current and future volumes (including, without limitation,
***** .
(3) Medic intends to exercise its right to query the Medic Database for
analysis and reporting purposes on a regular basis. MedE warrants that
the production environment will provide adequate response times to the
reasonably necessary or desirable number of on-line queries without
negatively impacting the transaction processing system in violation of
(1) above. In the event that the transaction processing system does not
complete its tasks within the allotted times set forth in (1) above,
MedE agrees to enhance the environment to bring the transaction
processing times into compliance.
(4) Bandwidth provided by MedE to Medic must be sufficient to ensure that
the communication links between Medic and MedE are not a constraining
factor in the times required to process claims and other EDI
transactions.
17
<PAGE>
Schedule 7(a)
Processing Milestones
---------------------
Milestone Dates Processing Milestone
- --------------- --------------------
*****
18
<PAGE>
Schedule 7(c)
Damages Relating to Processing Milestones
-----------------------------------------
Damages for failure to meet any Processing Milestone shall be the amount equal
to ***** .
19
<PAGE>
Schedule 8(a)
Commission Payment Schedule
---------------------------
MedE Payment Obligation
- -----------------------
Medic and MedE agree to pay to Medic *****
Medic Payment Obligation
- ------------------------
Medic shall pay to MedE *****
20
<PAGE>
Schedule 13(b)
Customer Service
----------------
- - MedE will provide second-level telephone support to Medic between the
hours of 7:00 a.m. to 6:00 p.m., Eastern standard time, and will
provide an average call response time of no greater than 2 hours from
their Help Desk.
- - MedE will provide a dedicated person for Medic's questions and
inquiries
21
<PAGE>
Schedule 15(b)(iii)
Third Party Software
--------------------
The following is a list of third party software used in or in connection with
the Medic/MedE System:
Solaris Operating system
Informix database license and software
Mercator Data Mapping software
Procomm Communications software
NT Back Office
22
<PAGE>
Schedule 16
Escrowed Materials
------------------
- - Appropriate product related information for all electronic links to
Payors will be placed into escrow with an escrow agent designated by
Medic within 30 days of closing. This will include but not be limited
to:
- Data Communications Source Code and Specifications
- Business Logic
- Data Element Mapping
- End User Documentation
- Technical Specifications and Documentation
- - A backup copy of all MedE executable programs required to run the
Medic/MedE System and operate the MedE Services successfully.
- - All documentation required to effectively install, prepare, execute,
and maintain the Medic/MedE System and operate the MedE Services.
- - Escrowed Materials will be updated every 30 days until and including
July 1, 1999. After July 1, 1999, Escrowed Materials will be updated
every 60 days.
23
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
MEDE America Corporation
East Meadow, New York
We consent to the use in Amendment No. 4 to Registration Statement No. 333-55977
of MEDE America Corporation on Form S-1 of our report dated August 5, 1998
(September 17, 1998 as to Note 12) relating to the consolidated financial
statements of MEDE America Corporation as of June 30, 1997 and 1998 and for each
of the three years in the period ended June 30, 1998 appearing in the
Prospectus, which is a part of this Registration Statement, and to the reference
to us under the heading "Experts" in such Prospectus.
Our audits of the consolidated financial statements of MEDE America Corporation
referred to in our aforementioned report also included the financial statement
schedule of MEDE America Corporation listed in Part II at Item 16(b). This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Jericho, New York
October 6, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
MEDE America Corporation
East Meadow, New York
We consent to the use in Amendment No. 4 to Registration Statement No.
333-55977 of MEDE America Corporation on Form S-1 of our report dated October
7, 1997 relating to the statement of income of The Stockton Group, Inc. for the
year ended June 30, 1997, appearing in the Prospectus, which is a part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 6, 1998
