AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1998
REGISTRATION NO. 333-55977
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 5
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 DECEMBER 23, 1998
PROSPECTUS
4,166,667 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
$11.00 and $13.00 per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price. The
Company's Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "MEDE."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 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 SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION 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 $1,700,000, payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 625,000 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 Salomon Smith Barney Inc., 333 West
34th Street, New York, New York 10001, on or about , 1999.
------------------
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>
[DIAGRAM OF MEDE AMERICA CORPORATION'S
TECHNOLOGY, PRODUCTS AND SERVICES]
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. As of November 30, 1998, the Company
processed 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 six 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 provide entry into new markets or expand 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 1998 over 4.4 billion electronic and paper claims will be
paid in all sectors of the healthcare services market. From 1994 to 1998
(estimated), the proportion of total healthcare claims that were electronically
processed increased from 47% to approximately 62%. During such period the number
of claims processed electronically increased at an average rate of 14% 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. Health Data Directory
estimates that in 1998 electronic processing will account for approximately 16%
of total dental claims, 40% of total physician medical claims, 84% of total
hospital medical claims and 88% 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, 1,100 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. Through its various
processing platforms, MEDE AMERICA can provide Internet access to its clients
for the transmission and receipt of EDI transactions. 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; provide multiple communications
technologies for healthcare providers, including direct lines, common carrier
dial-ups, commercial data networks and the Internet; 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.. 4,166,667 shares
COMMON STOCK TO BE OUTSTANDING AFTER THE
OFFERING............................ 12,596,374 shares (1)(2)
USE OF PROCEEDS.................. To retire all outstanding subordinated
indebtedness and accrued interest
thereon, and a portion of outstanding
bank indebtedness.
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), (ii) 84,050 shares of Common Stock
issuable pursuant to the 1998 Guaranty Warrants (as defined herein) and
(iii) 482,823 shares of Common Stock issuable upon the exercise of stock
options outstanding as of November 30, 1998 under the MEDE AMERICA
Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase
Plan (the "Stock Plan"), of which 228,917 were exercisable at such date.
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 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 offered 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 October 30, 1998, the Company acquired all the outstanding shares of
capital stock of Healthcare Interchange, Inc. ("HII"), a St. Louis, Missouri
based provider of EDI transaction processing services to hospitals and physician
groups in Missouri, Kansas and Illinois. Prior to the acquisition, HII was a
subsidiary of RightCHOICE Managed Care, Inc. ("RightCHOICE") and General
American Life Insurance Company ("General American"). The Company acquired HII
for a total cash payment of approximately $11.7 million, including transaction
expenses.
5
<PAGE>
The HII acquisition was financed pursuant to an amendment to the Company's
Credit Agreement, dated as of December 18, 1995, as amended (the "Credit
Facility") increasing the facility to $36,000,000. To induce investment funds
affiliated with Welsh, Carson, Anderson & Stowe, a private investment firm
("WCAS"), and William Blair Capital Partners L.L.C. ("WBCP") to guarantee this
increases, on October 7, 1998 the Company granted to such funds warrants
(the"1998 Guaranty Warrants") to purchase an aggregate 84,050 shares of the
Company's Common Stock, at a per share exercise price determined in the same
manner as the Medic Warrant. The 1998 Warrants are immediately exercisable and
may be exercised up to five years after the date of grant.
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."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
ACTUAL
-----------------------------------------------------------------
1995 1996 1997(3) 1998(3)
---------------- ---------------- ------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(4) .............................. $ 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 5,460 7,143
Write-down of intangible assets ......... 8,191 (5) 9,965 (6) -- --
Acquired in-process research and
development(7) ........................ -- -- 1,556 --
Other charges(8) ........................ 2,864 538 2,301 --
--------- --------- --------- --------
Total operating expenses ................. 32,588 50,108 43,444 43,672
--------- --------- --------- --------
Income (loss) from operations ............ (16,342) (18,340) (8,165) (1,382)
Other (income) expense ................... -- 313 (893) (12)
Interest expense (income), net ........... 189 584 1,504 3,623
--------- --------- --------- --------
Loss before provision for income
taxes ................................... (16,531) (19,237) (8,776) (4,993)
Provision for income taxes ............... 70 93 57 42
--------- --------- --------- --------
Net loss ................................. (16,601) (19,330) (8,833) (5,035)
Preferred stock dividends ................ (27) (2,400) (2,400) (2,400)
--------- --------- --------- --------
Net loss applicable to common
stockholders ............................ $(16,628) $(21,730) $ (11,233) $ (7,435)
========= ========= ========= ========
Basic and diluted net loss per com-
mon share ............................... $ (3.17) $ (4.14) $ (2.07) $ (1.31)(9)
Weighted average common shares
outstanding - Basic and diluted ......... 5,238 5,245 5,425 5,679
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
-------------- -------------------------------------------
PRO FORMA(1) ACTUAL PRO FORMA(2)
-------------- ----------------------------- -------------
1998(3) 1997(3) 1998 1998
-------------- ----------- ----------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(4) .............................. $ 48,880 $ 9,241 $ 12,006 $13,318
Operating expenses:
Operations .............................. 18,882 4,285 4,793 5,272
Sales, marketing and client services 12,376 2,385 2,930 3,208
Research and development ................ 3,984 806 1,106 1,106
General and administrative .............. 6,027 1,061 1,263 1,511
Depreciation and amortization ........... 8,645 1,698 1,894 2,177
Write-down of intangible assets ......... -- -- -- --
Acquired in-process research and
development(7) ........................ -- -- -- --
Other charges(8) ........................ -- -- -- --
-------- -------- -------- -------
Total operating expenses ................. 49,914 10,235 11,986 13,274
-------- -------- -------- -------
Income (loss) from operations ............ (1,034) (994) 20 44
Other (income) expense ................... (12) -- -- --
Interest expense (income), net ........... 639 655 1,089 214
-------- -------- -------- -------
Loss before provision for income
taxes ................................... (1,661) (1,649) (1,069) (170)
Provision for income taxes ............... 42 12 16 16
-------- -------- -------- -------
Net loss ................................. (1,703) (1,661) (1,085) (186)
Preferred stock dividends ................ -- (600) (600) --
-------- -------- -------- -------
Net loss applicable to common
stockholders ............................ $ (1,703) $ (2,261) $ (1,685) $ (186)
======== ======== ======== =======
Basic and diluted net loss per com-
mon share ............................... $ (0.14) $ (0.40) $ (0.30)(9) $ (0.02)
Weighted average common shares
outstanding - Basic and diluted ......... 12,308 5,674 5,685 12,314
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------
PRO FORMA,
ACTUAL AS ADJUSTED(10)
------------ ----------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital ................................... $ 2,232 $ 3,295
Total assets ...................................... 64,726 76,392
Long-term debt, including current portion ......... 42,627 11,715
Redeemable cumulative preferred stock ............. 31,823 --
Stockholders' equity (deficit) .................... (23,750) 51,328
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
ACTUAL
----------------------------------------------------
1995 1996 1997(3) 1998(3)
------------- ------------- ----------- ------------
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C> <C>
OTHER DATA:
EBITDA(11) ............................... $ (13,347) $ (13,164) $ (2,705) $ 5,761
Adjusted EBITDA(11) ...................... (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(12)
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(12)(13) ............. -- 321 415 642
Revenue per FTE(13) ...................... $ 48 $ 79 $ 91 $ 116
Operating expenses per transac-
tion(12) ................................ -- 0.39 0.27 0.19
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30, 1998
------------------- ------------------------------------
PRO FORMA(1) ACTUAL PRO FORMA(2)
------------------- ---------------------- -------------
1998(3) 1997 1998 1998
-------------- ----------- ---------- -------------
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C> <C>
OTHER DATA:
EBITDA(11) ............................... $ 7,611 $ 704 $ 1,914 $ 2,221
Adjusted EBITDA(11) ...................... 7,611 704 1,914 2,221
Cash flows from operating activities -- (1,616) 447 --
Cash flows from investing activities. -- (519) (869) --
Cash flows from financing activities. -- 2,781 1,023 --
Transactions processed(12)
Pharmacy ................................ 191,663 38,513 53,608 53,608
Medical ................................. 46,821 7,762 8,348 12,601
Dental .................................. 14,681 3,546 4,135 4,135
---------- --------- ------- --------
Total transactions processed .......... 253,165 49,821 66,091 70,344
Transactions per FTE(12)(13) ............. 633 137 174 170
Revenue per FTE(13) ...................... $ 122 $ 25 $ 32 $ 32
Operating expenses per transac-
tion(12) ................................ 0.20 0.21 0.18 0.19
</TABLE>
(Footnotes on following page)
7
<PAGE>
(1) Gives effect to (i) the acquisition of Stockton in November 1997, (ii) the
acquisition of HII in October 1998, (iii) the Recapitalization and (iv) the
Offering, as if they had occurred on July 1, 1997.
(2) Gives effect to (i) the acquisition of HII in October 1998, (ii) the
Recapitalization and (iii) the Offering, as if they had occurred on July 1,
1997.
(3) As restated, to adjust the write-off of acquired in-process research and
development and the amortization of goodwill resulting from the acquisition
of Time-Share Computer Systems, Inc.("TCS"). See Note 13 to Notes to
Consolidated Financial Statements.
(4) 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, $241,000 and
$190,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and
the three months ended September 30, 1997, respectively.
(5) Reflects the write-off of goodwill related to the acquisitions of Medical
Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark").
(6) 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").
(7) Reflects the write-off of acquired in-process research and development
costs upon the consummation of the TCS acquisition.
(8) 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.
(9) Supplemental net loss per share, giving effect to the Recapitalization,
would be $(0.62) and $(0.13) for the fiscal year ended June 30, 1998 and
the three months ended September 30, 1998, respectively.
(10) Gives effect to (i) the acquisition of HII in October 1998, (ii) the
Recapitalization and (iii) the Offering, as if they had occurred on
September 30, 1998.
(11) 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
---------------------------------------------------
1995 1996 1997 1998
-------------- -------------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA ...................................... $ (13,347) $ (13,164) $ (2,705) $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 ............................... -- -- 1,556 --
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
========== ========== ======== ======
<CAPTION>
YEAR ENDED THREE MONTHS
JUNE 30, ENDED SEPTEMBER 30,
----------- ------------------------------
PRO FORMA ACTUAL PRO FORMA
----------- ------------------- ----------
1998 1997 1998 1998
----------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA ...................................... $7,611 $ 704 $ 1,914 $ 2,221
Contingent consideration paid to former
owners of acquired businesses ............. -- -- -- --
Write-down of intangible assets ............. -- -- -- --
Acquired in-process research and
development ............................... -- -- -- --
Expenses related to the CES spin-off ........ -- -- -- --
Contract and legal settlement provisions -- -- -- --
------ ----- ------- -------
Adjusted EBITDA ............................. $7,611 $ 704 $ 1,914 $ 2,221
====== ===== ======= =======
</TABLE>
(12) Transaction volumes are not available for the fiscal year ended June 30,
1995.
(13) 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.
8
<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(1) 6/30/97(1)
----------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues .................... $ 8,179 $ 7,831 $ 8,954 $ 10,315
Income (loss) from oper-
ations ..................... (1,301) (1,108) (2,784) (2,972)
Net loss .................... (1,465) (1,324) (2,341) (3,703)
OTHER DATA:
EBITDA(2) ................... $ (199) $ (64) $ (1,361) $ (1,081)
Contingent consideration
paid to former
owners of acquired
businesses ................. 330 330 330 1,311
Acquired in-process re-
search and
development ................ -- -- 1,556 --
Contract and legal settle-
ment provisions ............ -- -- -- 1,059
-------- -------- --------- ---------
Adjusted EBITDA(1) .......... $ 131 $ 266 $ 525 $ 1,289
======== ======== ========= =========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
9/30/97(1) 12/31/97(1) 3/31/98(1) 6/30/98(1) 9/30/98
------------ ------------- ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues .................... $ 9,241 $ 9,849 $ 11,099 $ 12,101 $ 12,006
Income (loss) from oper-
ations ..................... (994) (389) (123) 124 20
Net loss .................... (1,661) (1,316) (1,049) (1,009) (1,085)
OTHER DATA:
EBITDA(2) ................... $ 704 $ 1,309 $ 1,729 $ 2,019 $ 1,914
Contingent consideration
paid to former
owners of acquired
businesses ................. -- -- -- -- --
Acquired in-process re-
search and
development ................ -- -- -- -- --
Contract and legal settle-
ment provisions ............ -- -- -- -- --
-------- -------- -------- -------- --------
Adjusted EBITDA(1) .......... $ 704 $ 1,309 $ 1,729 $ 2,019 $ 1,914
======== ======== ======== ======== ========
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Operating Results."
- -----------
(1) As restated, to adjust the write-off of acquired in-process research and
development and the amortization of goodwill resulting from the TCS
acquisition. See Note 13 to Notes to Consolidated Financial Statements.
(2) 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 or the 1998 Guaranty Warrants 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 on the
Preferred Stock and the remainder of such accrued dividends would 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 $12.00. Based on an aggregate liquidation
preference of the Preferred Stock of $32,219,847 (including $8,224,247 of
accrued dividends) as of November 30, 1998, 2,684,933 shares of Common Stock
would be so issuable as of such date. In addition, concurrently with the
consummation of the Offering, an additional 59,926 shares of Common Stock will
be issued upon the exercise of certain outstanding Common Stock purchase
warrants. The Medic Warrant and the 1998 Guaranty Warrants, all having an
exercise price equal to the price to the public in the Offering, will remain
outstanding after the Offering. Such conversion of the Preferred Stock, and
exercise of warrants to purchase 59,926 shares of Common Stock (on a "net
exercise" basis), are referred to herein as the "Recapitalization." See
"Capitalization," "Description of Common Stock," "Principal Stockholders" and
"Underwriting."
9
<PAGE>
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, $8.8 million, $5.0 million and $1.1 million for
the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months
ended September 30, 1998, respectively. The Company had an accumulated deficit
of approximately $51.3 million as of September 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. The Company believes its new credit facility, which is expected to
be in place after the Offering, will provide a line of credit sufficient for the
Company's foreseeable working capital needs, but any significant acquisition
that is to be financed with indebtedness would require additional borrowings.
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.
10
<PAGE>
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
attention 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.
11
<PAGE>
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 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.
12
<PAGE>
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 (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, the Company has identified certain products and services which it
believes are not Year 2000 compliant. While the Company has plans to address
such problems, there can be no assurance that the costs of bringing these
systems into compliance will not be significantly greater than expected, that
compliance will be achieved in a timely manner, or that providers and payors
will bring their systems into Year 2000 compliance in a timely manner. The
failure to achieve Year 2000 compliance in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Year 2000 Compliance."
In October 1998 the Company acquired HII. HII's EDI products and services
fall into three categories: physician claims processing, hospital claims
processing and claims data transmission (extraction and transmission of claim
data to a third party data analyst). Based on its review at the time of the
acquisition, the Company determined that none of these products is Year 2000
compliant.
Prior to the HII acquisition, certain employees and officers of HII made
express and implied representations to a number of HII's clients as to the time
at which HII's systems would be Year 2000 compliant. The Company does not expect
to be able to meet the deadlines set forth in such representations. While the
Company does not believe that a material number of these clients will terminate
their relationships with HII and the Company based on the Company's inability to
meet such deadlines, there can be no assurance that such clients will not
attempt to do so or that such terminations would not have a material adverse
effect on the Company's business, financial condition and results of operations.
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,
Linda K. Ryan 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 P. 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 ser-
13
<PAGE>
vices, 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 providers 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, 48.2% of the Common Stock will be owned by investment
funds affiliated with WCAS and 7.7% will be owned by investment funds affiliated
with WBCP. See "Principal Shareholders" and "Description of Capital Stock --
Recapitalization." As a result of this concentration of owner-
14
<PAGE>
ship, these shareholders may be able to exercise control over matters requiring
shareholder approval, 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
15
<PAGE>
Company will have 12,596,374 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 4,166,667 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 8,429,707 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 Salomon 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 $19.8 million of the net
proceeds will be used to repay all but $13.0 million of the outstanding
indebtedness and accrued interest under the Company's current Credit Facility.
If the Underwriters' overallotment option is exercised, the cash realized by the
Company therefrom will be applied to the payment of accrued dividends on the
Preferred Stock (which amounted to $8,224,247 as of November 30, 1998) and the
remainder of such accrued dividends would convert into Common Stock. 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
$12.00 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 $72.4 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 $11.09 per share, at an assumed initial public offering price of
$12.00 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. The Credit Facility prohibits the payment of dividends on the Common
Stock. 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."
16
<PAGE>
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.
17
<PAGE>
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.
As of November 30, 1998, the Company processed 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. Healthcare Interchange, Inc.
("HII"), a provider of transaction processing services to hospitals and
physician groups, was acquired in October 1998.
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.
18
<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 $12.00 per share,
are estimated to be $44.8 million ($51.8 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") and (ii) approximately $19.8 million to repay all but $13.0 million of
the outstanding indebtedness and accrued interest under the Credit Facility.
Cash realized by the Company upon any exercise of the Underwriters'
overallotment option would be applied to the payment of accrued dividends on the
Preferred Stock and the remainder of such accrued dividends would convert into
Common Stock. As of November 30, 1998, such accrued dividends totaled
$8,224,247. 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 6.41% per annum (as of November 30, 1998) and are
guaranteed by WCAS and WBCP. The Credit Facility matures on October 31, 1999.
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 (the "Amended Credit Facility"). 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 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. The Company is currently
negotiating with the lender to increase such total available credit to $20.0
million. 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. The
Credit Facility prohibits the payment of dividends on the Common Stock.
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."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 on an actual basis and pro forma, as adjusted to reflect (i)
the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the
issuance and sale by the Company of 4,166,667 shares of Common Stock offered
hereby, assuming an initial public offering price of $12.00 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 SEPTEMBER 30, 1998
-----------------------------
PRO FORMA,
ACTUAL AS ADJUSTED(1)
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)
Senior Subordinated Note ..................... $ 23,455 $ --
Credit Facility .............................. 17,950 --
Other debt ................................... 1,222 11,715
--------- ---------
Total long-term debt ....................... 42,627 11,715
--------- ---------
Redeemable cumulative preferred stock ......... 31,823 --
--------- ---------
Stockholders' (deficit) equity
Common Stock(2) .............................. 57 127
Additional paid-in capital ................... 27,521 104,074
Accumulated deficit .......................... (51,328) (52,873)
--------- ---------
Total stockholders' (deficit) equity ......... (23,750) 51,328
--------- ---------
Total capitalization ......................... $ 50,700 $ 63,043
========= =========
</TABLE>
- ----------
(1) As adjusted to reflect (i) the acquisition of HII in October 1998, (ii) the
Recapitalization and (iii) the sale of 4,166,667 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $12.00 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, (ii) 84,050 shares of Common Stock issuable pursuant to the
1998 Guaranty Warrants and (iii) 482,823 shares of Common Stock reserved
for issuance upon exercise of stock options outstanding under the Stock
Plan as of November 30, 1998, at a weighted average exercise price of $4.84
per share, of which 228,917 were exercisable at such date. See "Prospectus
Summary -- Recent Developments" and "Management-Employee Benefit Plans."
Includes 59,926 shares of Common Stock issuable upon exercise of Common
Stock purchase warrants as contemplated by the Recapitalization. See
"Description of Capital Stock."
20
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of the Company as of
September 30, 1998, after giving effect to the Recapitalization, was
approximately $(31.8) million or $(3.79) 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 September 30, 1998, other than to give effect to (i)
the sale of 4,166,667 shares of Common Stock by the Company in this Offering at
an assumed initial public offering price of $12.00 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 September 30, 1998 would have been
approximately $11.5 million or $0.91 per share. This represents an immediate
increase in pro forma net tangible book value of $4.70 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$11.09 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 ...................... $ 12.00
Pro forma net tangible book value per share before this Offering(1). $(3.79)
Increase per share attributable to new investors ................... 4.70
------
Pro forma net tangible book value per share after this Offering ...... 0.91
-------
Dilution per share to new investors(2) ............................... $ 11.09
=======
</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
September 30, 1998 of $(31.8) 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 September 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 $12.00 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 ......... 8,396,299 66.8% $28,349,000 36.2% $ 3.38
New investors ................. 4,166,667 33.2 50,000,004 63.8 12.00
--------- ----- ----------- -----
Total ......................... 12,562,966 100.0% $78,349,004 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock. At September 30, 1998 there were 482,823 shares of Common
Stock issuable upon the exercise of stock options outstanding under the
Company's Stock Plans, of which 221,890 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."
21
<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 statements of operations
for the year ended June 30, 1998 and the three months ended September 30, 1998
include adjustments that give effect to (i) the acquisition of Stockton in
November 1997, (ii) the acquisition of HII in October 1998, (iii) the
Recapitalization and (iv) the Offering, as if they had occurred as of July 1,
1997. The unaudited pro forma consolidated balance sheet as of September 30,
1998 gives effect to (i) the acquisition of HII in October 1998, (ii) the
Recapitalization and (iii) 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, Stockton
and HII 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 acquisitions of
Stockton and HII, the Recapitalization and the Offering been completed on the
dates indicated or which may be expected to occur in the future.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS
------------------------------------- RELATING TO THE
COMPANY(1) STOCKTON(2) HII(3) ACQUISITIONS
------------ ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Revenues ............................. $ 42,290 $1,646 $4,944 $ --
Operating expenses:
Operations .......................... 16,958 216 1,679 29 (4)
Sales, marketing and client ser-
vices .............................. 10,765 298 1,313 --
Research and development ............ 3,941 43 -- --
General and administrative .......... 4,865 161 1,001 --
Depreciation and amortization........ 7,143 54 200 1,270 (5)
(22)(6)
--------
Total operating expenses ............. 43,672 772 4,193 1,277
--------- ------ ------ --------
Income (loss) from operations ........ (1,382) 874 751 (1,277)
Other (income) expense ............... (12) -- -- --
Interest expense (income), net ....... 3,623 27 190 791 (7)
--------- ------ ------ --------
Income (loss) before provision for
income taxes ........................ (4,993) 847 561 (2,068)
Provision for income taxes ........... 42 -- -- --
--------- ------ ------ --------
Net income (loss) .................... (5,035) 847 561 (2,068)
Preferred stock dividends ............ (2,400) -- (94) 94 (10)
--------- ------ ------ --------
Net income (loss) applicable to
common stockholders ................. $ (7,435) $ 847 $ 467 $ (1,974)
========= ====== ====== ========
Basic and diluted net loss per
common share ........................ $ (1.31)
Weighted average common shares
outstanding - Basic and diluted 5,679 --
<CAPTION>
ADJUSTMENTS
RELATING TO THE OFFERING PRO FORMA,
RECAPITALIZATION PRO FORMA ADJUSTMENTS AS ADJUSTED
------------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues ............................. $ -- $ 48,880 $ -- $ 48,880
Operating expenses:
Operations .......................... -- 18,882 -- 18,882
Sales, marketing and client ser-
vices .............................. -- 12,376 -- 12,376
Research and development ............ -- 3,984 -- 3,984
General and administrative .......... -- 6,027 -- 6,027
Depreciation and amortization........ -- 8,645 -- 8,645
--
----------
Total operating expenses ............. -- 49,914 -- 49,914
---------- --------- ---------- ---------
Income (loss) from operations ........ -- (1,034) -- (1,034)
Other (income) expense ............... -- (12) -- (12)
Interest expense (income), net ....... -- 4,631 (3,992)(8) 639
---------- --------- ---------- ---------
Income (loss) before provision for
income taxes ........................ -- (5,653) 3,992 (1,661)
Provision for income taxes ........... -- 42 -- 42
---------- --------- ---------- ---------
Net income (loss) .................... -- (5,695) 3,992 (9) (1,703)
Preferred stock dividends ............ 2,400 (11) -- -- --
---------- --------- ---------- ---------
Net income (loss) applicable to
common stockholders ................. $ 2,400 $ (5,695) $ 3,992 $ (1,703)
========== ========= ========== =========
Basic and diluted net loss per
common share ........................ $ (0.14)
Weighted average common shares
outstanding - Basic and diluted 2,462 (12) 8,141 4,167 (13) 12,308
</TABLE>
<PAGE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS
----------------------- RELATING TO THE
COMPANY HII(14) HII ACQUISITION
------------- --------- -----------------
<S> <C> <C> <C>
Revenues ............................. $ 12,006 $1,312 $ --
Operating expenses:
Operations .......................... 4,793 479 --
Sales, marketing and client ser-
vices .............................. 2,930 278 --
Research and development ............ 1,106 -- --
General and administrative .......... 1,263 248 --
Depreciation and amortization........ 1,894 44 239 (5)
--------- ------ ------
Total operating expenses ............. 11,986 1,049 239
--------- ------ ------
Income (loss) from operations ........ 20 263 (239)
Other (income) expense ............... -- -- --
Interest expense (income), net ....... 1,089 64 120
--------- ------ ------
Income (loss) before provision for
income taxes ........................ (1,069) 199 (359)
Provision for income taxes ........... 16 -- --
--------- ------ ------
Net income (loss) .................... (1,085) 199 (359)
Preferred stock dividends ............ (600) (23) 23 (10)
--------- ------ ------
Net income (loss) applicable to
common stockholders ................. $ (1,685) $ 176 $ (336)
========= ====== ======
Basic and diluted net loss per
common share ........................ $ (0.30)
Weighted average common shares
outstanding - Basic and diluted. 5,685 --
<CAPTION>
ADJUSTMENTS
RELATING TO THE OFFERING PRO FORMA,
RECAPITALIZATION PRO FORMA ADJUSTMENTS AS ADJUSTED
------------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues ............................. $ -- $ 13,318 $ -- $ 13,318
Operating expenses:
Operations .......................... -- 5,272 -- 5,272
Sales, marketing and client ser-
vices .............................. -- 3,208 -- 3,208
Research and development ............ -- 1,106 -- 1,106
General and administrative .......... -- 1,511 -- 1,511
Depreciation and amortization........ -- 2,177 -- 2,177
---------- --------- ---------- --------
Total operating expenses ............. -- 13,274 -- 13,274
---------- --------- ---------- --------
Income (loss) from operations ........ -- 44 -- 44
Other (income) expense ............... -- -- -- --
Interest expense (income), net ....... -- 1,273 (1,059)(8) 214
---------- --------- ---------- --------
Income (loss) before provision for
income taxes ........................ -- (1,229) 1,059 (170)
Provision for income taxes ........... -- 16 -- 16
---------- --------- ---------- --------
Net income (loss) .................... -- (1,245) 1,059 (9) (186)
Preferred stock dividends ............ 600 (11) -- -- --
---------- --------- ---------- --------
Net income (loss) applicable to
common stockholders ................. $ 600 $ (1,245) $ 1,059 $ (186)
========== ========= ========== ========
Basic and diluted net loss per
common share ........................ $ (0.02)
Weighted average common shares
outstanding - Basic and diluted. 2,462 (12) 8,147 4,167 (13) 12,314
</TABLE>
23
<PAGE>
DESCRIPTION OF ACQUISITIONS
STOCKTON
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 September 30, 1998
by Stockton, the Company has accrued additional contingent consideration of
$2,022,000 as of September 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
being amortized on a straight-line basis over 20 years. Computer equipment
is being amortized on a straight-line basis over three years.
HII
The acquisition of HII will be accounted for using the purchase method
of accounting and, accordingly, the net assets acquired will be recorded at
estimated fair value on the date of acquisition. The allocation of purchase
price is preliminary and subject to change upon review by management of
additional evidence relating to the fair value of assets acquired and
liabilities assumed at the closing date. Adjustments to the purchase price
allocation, if any, would likely relate to amounts assigned to intangible
assets. The purchase price and the allocation of the purchase price to the
acquired net assets are as follows (in thousands):
<TABLE>
<S> <C>
Cash purchase price .............................................. $11,600
Acquisition related costs ........................................ 118
-------
Total estimated purchase price ................................. $11,718
=======
Historical adjusted net book value at September 30, 1998 ......... $ 856
Write-off of inventory ........................................... (13)
Goodwill ......................................................... 8,250
Purchased client lists ........................................... 2,713
Estimated liability for severence payments ....................... (88)
-------
Net assets acquired ............................................ $11,718
=======
</TABLE>
The purchased client lists will be amortized on a straight-line basis
over five years and goodwill will be amortized on a straight-line basis
over 20 years.
24
<PAGE>
- ----------
(1) As restated, to adjust the write-off of acquired in-process research and
development and the amortization of goodwill resulting from the TCS
acquisition. See Note 13 to Notes to Consolidated Financial Statements.
(2) Represents the historical results of operations of Stockton from July 1,
1997 through the date of acquisition by the Company in November 1997.
(3) Represents the historical continuing operations of HII for the 12 months
ended June 30, 1998.
(4) Represents rent expense relating to a new operating lease for the Stockton
facility.
(5) Represents adjustments for amortization expense related to the acquisitions
of Stockton and HII as if they had occurred July 1, 1997, as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
---------------------------- -------------------
STOCKTON HII TOTAL HII
---------- ------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased client lists .................... $ 67 $543 $ 610 $136
Purchased software and technology ......... 92 -- 92 --
Goodwill .................................. 156 412 568 103
----- ---- ------ ----
$ 315 $955 $1,270 $239
===== ==== ====== ====
</TABLE>
(6) Represents the elimination of depreciation and amortization expenses
relating to assets of Stockton that were not acquired.
(7) The interest expense adjustment relating to the Stockton and HII
acquisitions is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
--------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of historical interest expense of Stockton ..................... $ (38) $ --
Elimination of historical interest expense of HII .......................... (190) (64)
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 --
Interest expense on borrowings under the Credit Facility used to fund HII
acquisition at a composite interest rate of 6.22% (The effect of a .125%
variance in the interest rate on the pro forma adjustment for the year ended
June 30, 1998 and the three months ended September 30, 1998
would be $15 and $4, respectively)......................................... 729 184
------ -----
$ 791 $ 120
====== =====
</TABLE>
(8) The interest expense adjustment relating to the Offering is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
--------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Interest expense on Senior Subordinated Note including amortization of
discount ............................................................ $ (2,859) $ (721)
Interest expense on borrowings under the Credit Facility ............. (1,133) (338)
-------- --------
$ (3,992) $ (1,059)
======== ========
</TABLE>
(9) In connection with the repayment of the Senior Subordinated Note, the
Company will record an extraordinary charge relating to 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. Such charge has been
excluded from the pro forma statements of operations.
(10) Represents the elimination of the dividends accrued on HII's preferred
stock.
(11) Represents the elimination of the dividends accrued on the Preferred Stock
due to the Recapitalization.
(12) Represents the conversion of the Preferred Stock and accrued dividends
thereon into Common Stock due to the Recapitalization.
(13) Represents the sale by the Company of 4,166,667 shares of Common Stock in
the Offering.
(14) Represents the historical continuing operations of HII for the three months
ended September 30, 1998.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
--------------------------------------------
ACTUAL
------------------------ ADJUSTMENTS
RELATING TO THE
COMPANY HII(1) HII ACQUISITION
------------ ----------- -------------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents ................ $ 3,551 $ 38 $ --
Accounts receivable, less allowance for
doubtful accounts ....................... 8,579 661 --
Formulary receivables .................... 3,283 -- --
Inventory ................................ 250 13 (13)(2)
Prepaid expenses and other current as-
sets .................................... 668 260 (169)(3)
---------- --------- ----------
Total current assets .................... 16,331 972 (182)
Property and equipment-Net ................ 4,885 577 --
Goodwill-Net .............................. 34,735 -- 8,250 (4)
Other intangible assets-Net ............... 5,143 -- 2,713 (5)
Other assets .............................. 3,632 202 (11)(3)
---------- --------- ----------
Total ..................................... $ 64,726 $ 1,751 $ 10,770
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ......................... $ 3,096 $ 1,140 $ (1,131)(3)
Accrued expenses and other current li-
abilities ............................... 10,741 706 88 (7)
Current portion of long-term debt ........ 262 2,325 (2,325)(3)
---------- --------- ----------
Total current liabilities ............... 14,099 4,171 (3,368)
Long-term debt ............................ 42,365 -- 11,718 (10)
--
Other long-term liabilities ............... 189 -- --
Redeemable cumulative preferred stock...... 31,823 -- --
Stockholders' equity (deficit):
Preferred Stock .......................... -- 63 (63)(12)
Common Stock ............................. 57 90 (90)(12)
Additional paid-in capital ............... 27,521 2,993 (2,993)(12)
Accumulated deficit ...................... (51,328) (5,566) 5,566 (12)
---------- --------- ----------
Total stockholders' equity (deficit) . (23,750) (2,420) 2,420
---------- --------- ----------
Total ..................................... $ 64,726 $ 1,751 $ 10,770
========== ========= ==========
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATING TO THE RELATING TO PRO FORMA,
RECAPITALIZATION PRO FORMA THE OFFERING AS ADJUSTED
-------------------- ----------- -------------------- ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents ................ $ -- $ 3,589 $ -- $ 3,589
Accounts receivable, less allowance for
doubtful accounts ....................... -- 9,240 -- 9,240
Formulary receivables .................... -- 3,283 -- 3,283
Inventory ................................ -- 250 -- 250
Prepaid expenses and other current as-
sets .................................... -- 759 -- 759
------------ --------- ------------ ---------
Total current assets .................... -- 17,121 -- 17,121
Property and equipment-Net ................ -- 5,462 -- 5,462
Goodwill-Net .............................. -- 42,985 -- 42,985
Other intangible assets-Net ............... -- 7,856 -- 7,856
Other assets .............................. -- 3,823 (855)(6) 2,968
------------ --------- ------------ ---------
Total ..................................... $ -- $ 77,247 $ (855) $ 76,392
============ ========= ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ......................... $ -- $ 3,105 $ (280)(6) $ 2,825
Accrued expenses and other current li-
abilities ............................... -- 11,535 (625)(8) 10,335
(575)(6)
Current portion of long-term debt ........ -- 262 404 (9) 666
------------ --------- ------------ ---------
Total current liabilities ............... -- 14,902 (1,076) 13,826
Long-term debt ............................ -- 54,083 (44,175) (8) 11,049
1,141 (9)
Other long-term liabilities ............... -- 189 -- 189
Redeemable cumulative preferred stock...... (31,823)(11) -- -- --
Stockholders' equity (deficit):
Preferred Stock .......................... -- -- -- --
Common Stock ............................. 27 (11) 85 42 (8) 127
1 (13)
Additional paid-in capital ............... 31,796 (11) 59,316 44,758 (8) 104,074
(1)(13)
Accumulated deficit ...................... -- (51,328) (1,558)(10) (52,874)
------------ --------- ------------ ---------
Total stockholders' equity (deficit) . 31,823 8,073 43,255 51,328
------------ --------- ------------ ---------
Total ..................................... $ -- $ 77,247 $ (855) $ 76,392
============ ========= ============ =========
</TABLE>
26
<PAGE>
- ----------
(1) Represents the historical balance sheet of HII as of September 30, 1998.
(2) Represents the write-off of inventory.
(3) The following adjustments to HII's historical balance sheet reflect those
assets and liabilities excluded from the entity being acquired prior to
consummation of the acquisition (in thousands).
<TABLE>
<S> <C>
Net assets of discontinued operations retained .......... $ 169
Other assets retained ................................... 11
Current portion of long-term debt retained .............. (2,325)
Accounts payable retained(*) ............................ (1,131)
--------
$ (3,276)
========
</TABLE>
* The closing agreement requires working capital to be at least one dollar at
closing.
(4) Represents goodwill resulting from the HII acquisition.
(5) Represents the amount allocated to purchased client lists, which is the
estimated fair value of the asset acquired.
(6) Represents the payment of accounts payable and accrued Offering expenses
and the reclassification of these costs to additional paid-in capital.
(7) Represents an accrual for severence payments.
(8) Represents the sale by the Company of 4,166,667 shares of Common Stock at
an assumed public offering price of $12.00 per share and the application of
the net proceeds to the Company as follows (in thousands):
<TABLE>
<S> <C>
PROCEEDS
Gross proceeds from Offering ............................... $ 50,000
Underwriting discount and commissions ...................... (3,500)
Estimated Offering expenses ................................ (1,700)
---------
Net proceeds .............................................. $ 44,800
=========
USES
Repay Senior Subordinated Note ............................. $ (25,000)
Repay borrowings under the Credit Facility ................. (19,175)
Repay accrued interest on Senior Subordinated Note ......... (625)
---------
Total uses ................................................ $ (44,800)
=========
</TABLE>
(9) Represents the write-off of the remaining discount on the Senior
Subordinated Note of $1,545,000 which will be recorded as an extraordinary
item upon the consummation of the Offering.
(10) Represents borrowings under the Credit Facility used to finance the HII
acquisition.
(11) Represents the conversion of outstanding Preferred Stock and $7,827,000 of
accrued dividends on the Preferred Stock into Common Stock in connection
with the Recapitalization.
(12) Represents the elimination of HII's historical stockholders' deficit.
(13) Represents the exercise of all Common Stock purchase warrants in connection
with the Recapitalization.
27
<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 statement of operations data for the three months ended September 30, 1997
and 1998 and the balance sheet data as of September 30, 1997 and 1998 are
derived from, and qualified by reference to, the unaudited consolidated
financial statements of the Company. In the opinion of management, the unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. The results for the interim period are not necessarily indicative of
the results for the full fiscal year. 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(1) 1998(1)
---------------- ---------------- ------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(2) ......................................... $ 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 5,460 7,143
Write-down of intangible assets .................... 8,191 (3) 9,965 (4) -- --
Acquired in-process research and development
(5) ............................................... -- -- 1,556 --
Other charges (6) .................................. 2,864 538 2,301 --
--------- --------- --------- --------
Total operating expenses ............................ 32,588 50,108 43,444 43,672
--------- --------- --------- --------
Loss from operations ................................ (16,342) (18,340) (8,165) (1,382)
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) (8,776) (4,993)
Provision for income taxes .......................... 70 93 57 42
--------- --------- --------- --------
Net loss ............................................ (16,601) (19,330) (8,833) (5,035)
Preferred stock dividends ........................... (27) (2,400) (2,400) (2,400)
--------- --------- --------- --------
Net loss applicable to common stockholders .......... $(16,628) $(21,730) $ (11,233) $ (7,435)
========= ========= ========= ========
Basic and diluted net loss per common share ......... $ (3.17) $ (4.14) $ (2.07) $ (1.31)(7)
Weighted average common shares outstanding-
Basic and diluted .................................. 5,238 5,245 5,425 5,679
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1997(1) 1998
----------- -----------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(2) ......................................... $ 9,241 $ 12,006
Operating expenses:
Operations ......................................... 4,285 4,793
Sales, marketing and client services ............... 2,385 2,930
Research and development ........................... 806 1,106
General and administrative ......................... 1,061 1,263
Depreciation and amortization ...................... 1,698 1,894
Write-down of intangible assets .................... -- --
Acquired in-process research and development
(5) ............................................... -- --
Other charges (6) .................................. -- --
-------- --------
Total operating expenses ............................ 10,235 11,986
-------- --------
Loss from operations ................................ (994) 20
Other (income) expense .............................. -- --
Interest expense, net ............................... 655 1,089
-------- --------
Loss before provision for income taxes .............. (1,649) (1,069)
Provision for income taxes .......................... 12 16
-------- --------
Net loss ............................................ (1,661) (1,085)
Preferred stock dividends ........................... (600) (600)
-------- --------
Net loss applicable to common stockholders .......... $ (2,261) $ (1,685)
======== ========
Basic and diluted net loss per common share ......... $ (0.40) $ (0.30)(7)
Weighted average common shares outstanding-
Basic and diluted .................................. 5,674 5,685
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF SEPTEMBER 30,
-------------------------------------------------- -------------------------
1995 1996 1997(1) 1998(1) 1997(1) 1998
--------- ------------- ------------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ................................... $ 504 $ (4,207) $ (2,567) $ 2,345 (378) $ 2,232
Total assets ...................................... 59,511 43,031 48,090 59,394 48,041 64,726
Long-term debt, including current portion ......... 5,805 11,601 25,161 41,324 27,995 42,627
Redeemable cumulative preferred stock ............. 24,023 26,423 28,823 31,223 29,423 31,823
Stockholders' equity (deficit) .................... 12,942 (8,472) (17,438) (24,692) (19,666) (23,750)
</TABLE>
(Footnotes on following page)
28
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
----------------------------------------------------- ----------------------
1995 1996 1997(1) 1998(1) 1997(1) 1998
------------- ------------- ------------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (8) ................................. $ (13,347) $ (13,164) $ (2,705) $ 5,761 $ 704 $ 1,914
Adjusted EBITDA (8) ........................ (2,292) (2,052) 2,211 5,761 $ 704 $ 1,914
Cash flows from operating activities ....... (3,561) (1,653) (4,020) (2,500) (1,616) 447
Cash flows from investing activities ....... (22,074) (4,919) (12,221) (12,104) (519) (869)
Cash flows from financing activities ....... 33,434 657 15,521 15,635 2,781 1,023
Transactions processed (9)
Pharmacy .................................. -- 107,032 126,211 188,114 38,513 53,608
Medical ................................... -- 15,687 23,075 31,564 7,762 8,348
Dental .................................... -- 6,021 12,188 14,681 3,546 4,135
--------- --------- --------- --------- -------- -------
Total transactions processed ............. -- 128,740 161,474 234,359 49,821 66,091
Transactions per FTE (9)(10) ............... -- 321 415 642 137 174
Revenue per FTE (10) ....................... $ 48 $ 79 $ 91 $ 116 $ 25 $ 32
Operating expenses per transaction (9) ..... -- 0.39 0.27 0.19 0.21 0.18
</TABLE>
- ----------
(1) As restated, to adjust the write-off of acquired in-process research and
development and the amortization of goodwill resulting from the TCS
acquisition. See Note 13 to Notes to Consolidated Financial Statements.
(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, $241,000 and
$190,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and
the three months ended September 30, 1997, respectively.
(3) Reflects the write-off of goodwill related to the acquisitions of MPC and
Wellmark.
(4) Reflects the write-down of costs relating to client lists and related
allocable goodwill obtained in the acquisition of 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 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 $(0.62) and $(0.13) for the fiscal year ended June 30, 1998 and
the three months ended September 30, 1998, respectively.
(8) 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>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1997 1998
-------------- -------------- ------------ --------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EBITDA .............................................. $ (13,347) $ (13,164) $ (2,705) $5,761 $ 704 $ 1,914
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 ........ -- -- 1,556 -- -- --
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 $ 704 $ 1,914
========== ========== ======== ====== ===== =======
</TABLE>
(9) Transaction volumes are not available for the fiscal year ended June 30,
1995.
(10) 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.
29
<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 six 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
provide entry into new markets or expand 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.
30
<PAGE>
The following table summarizes the Company's acquisitions and divested
products and operations:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRIMARY PRODUCTS DIVESTED PRODUCTS
DATE OF FOUNDING/ OF FOUNDING/ DATE
FOUNDING COMPANIES ACQUIRED MARKET ACQUIRED COMPANY ACQUIRED COMPANY DIVESTED
MEDE AMERICA, Inc. 4/94(1) Medical Eligibility Verification, -- --
Enrollment
MPC 5/94(1) Medical Hospital Claims, Data Entry 1/97
Physician Billing Physician Billing 12/96
Physician Billing 8/97
Wellmark 5/94(1) Medical Hospital Claims, -- --
Physician Billing
COMPANIES ACQUIRED BY
MEDE AMERICA
MEDE OHIO 3/95 Pharmacy Switching, PBM, Practice Management 2/96
Third Party Billing Software
Practice Management 12/97
Software
Latpon 6/95 Medical Hospital Claims Physician Billing 3/96
EC&F/Premier 10/95 Dental Dental Claims, Practice Practice Management 3/97
Management Software Software
TCS 2/97 Pharmacy/ PBM, Switching, -- --
Medical Eligibility Verification
Stockton 11/97 Pharmacy PBM -- --
HII 10/98 Medical Hospital Claims -- --
Physician Claims
</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
process-
31
<PAGE>
ing services to hospitals and hospital-based physician groups. Latpon also
provided electronic and manual 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 $1,556,000 of in-process research and development,
$2,984,000 of software and $6,525,000 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.
32
<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 amount of the write-off of in-process research and
development costs was then limited to the portion allocable to pre-acquisition
development costs incurred by TCS versus post-acquisition costs incurred by the
Company. 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 $1.3 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 $1.4 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 $3.2 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 September
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 as of September 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 Spring of 1999. 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 22% 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. The Company is
currently processing transactions with this product for a small number of
pharmacy clients.
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,
33
<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. Based on
revenues recorded through September 30, 1998 by Stockton, the Company has
accrued additional contingent consideration of $2,022,000 as of September 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.
In October 1998, the Company acquired HII, a provider of EDI transaction
processing services to hospitals and physician groups in Missouri, Kansas and
Illinois. Prior to the purchase of HII, Intercare and Telemedical, two unrelated
healthcare services divisions, were divested from HII in separate transactions.
HII was purchased for a total cash payment of approximately $11,718,000,
including transaction expenses. The acquisition was accounted for under the
purchase method and the Company recorded total intangible assets of $10,963,000,
consisting of $2,713,000 of client lists and $8,250,000 of goodwill. The Company
is amortizing the client lists over five years and goodwill over 20 years.
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.
34
<PAGE>
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 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 and the
three months ended September 30, 1998, the Company capitalized $462,000 and
$238,000, respectively, of software development costs for projects for which
technological feasibility has been established but were 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 $3,708,000 and $5,064,000 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>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------ ------------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues ............................... 100% 100% 100% 100% 100%
Operating Expenses:
Operations ............................ 60 48 40 46 40
Sales, marketing and client services. 22 25 25 26 24
Research and development .............. 7 9 9 9 9
General and administrative ............ 19 15 12 11 11
Depreciation and amortization ......... 16 15 17 18 16
</TABLE>
35
<PAGE>
Subsequent to the issuance of the Company's consolidated financial
statements for the fiscal year ended June 30, 1998, the Company's management
determined that it was necessary to revise the valuation of the write-off of
in-process research and development incurred in connection with the TCS
acquisition in February 1997. As a result, the Company's financial statements
for the fiscal years ended June 30, 1997 and 1998 and the three months ended
September 30, 1997 have been restated from the amounts previously reported in
order to reflect the effects of the adjustment to the write-off of in-process
research development. See Note 13 to Notes to Consolidated Financial Statements.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues
Revenues for the three months ended September 30, 1998 were $12.0 million
compared to $9.2 million in the corresponding period of fiscal 1998,
representing an increase of 30%. The increase was primarily attributable to
growth of the existing business and to incremental revenue from the acquisition
of Stockton in November 1997, partially offset by the loss of revenues from
operations that were divested.
The Company processed 66 million transactions in the three months ended
September 30, 1998, compared to 50 million transactions processed in the
corresponding period of fiscal 1998, representing an increase of 33%. The
increase resulted from the addition of new clients, increased transaction volume
from existing clients and to a lesser extent the acquisition of Stockton. The
average price per transaction received by the Company declined by 8% between
such periods, as a result of a relatively higher proportion of lower priced
Pharmacy division switching transactions compared to the other divisions' higher
priced transactions, and a greater portion of transactions that were processed
under contracts with volume-based pricing terms.
Operating Expenses
Operations expense was $4.8 million for the three months ended September
30, 1998, compared to $4.3 million in the corresponding period of fiscal 1998,
representing an increase of 12%. As a percentage of revenues, operations expense
decreased from 46% for the first three months of fiscal 1998 to 40% in the
corresponding period of fiscal 1999. The increase in operations expense was
primarily due to the acquisition of Stockton in November of 1997, the results of
which were included in the current quarter but not in the prior year's quarter,
and to a lesser extent the higher volume of transactions processed. The decrease
in operations expense as a percentage of revenues was primarily due to
operations leverage from systems consolidation for recent acquisitions, the
effects of ongoing cost reduction programs, and the impact of the divested
operations, which results were included in the 1998 period but not the 1999
period.
Sales, marketing and client services expense was $2.9 million for the three
months ended September 30, 1998, compared to $2.4 million in the corresponding
period of fiscal 1998, representing an increase of 23%. As a percentage of
revenues, sales, marketing and client services expense decreased from 26% for
the first three months of fiscal 1998 to 24% in the corresponding period of
fiscal 1999. The increase in sales, marketing and client services expense was
primarily due to the inclusion of the Stockton acquisition, the hiring of new
employees in sales and marketing to support expansion of the Company's business
into new markets, as well as client support and help desk services to serve an
expanded customer base.
Research and development expense was $1.1 million for the three months
ended September 30, 1998, compared to $806,000 in the corresponding period of
fiscal 1998, representing an increase of 37%. As a percentage of revenues,
research and development expense was 9% for each such period. The increase in
research and development costs in the period was primarily due to development of
new and enhanced EDI transaction products and services, development associated
with major customer contracts currently expected to roll out in calendar 1999
and the establishment of additional direct payor connections. In addition, Year
2000 compliance expenditures amounted to $132,000 for the three months ended
September 30, 1998; there were no such expenditures in the corresponding period
of fiscal 1998. The Company capitalized $238,000 of software development costs
in the first three months of fiscal 1999, compared to $93,000 in the
corresponding period of fiscal 1998.
36
<PAGE>
General and administrative expense was $1.3 million for the three months
ended September 30, 1998, compared to $1.1 million in the corresponding period
of fiscal 1998, representing an increase of 19%. As a percentage of revenues,
general and administrative expense was 11% for each such period.
Depreciation and amortization expense was $1.9 million for the three months
ended September 30, 1998, compared to $1.7 million in the corresponding period
of fiscal 1998, representing an increase of 12%. As a percentage of revenues,
depreciation and amortization expense decreased from 18% for the first three
months of fiscal 1998 to 16% in the corresponding period of fiscal 1999.
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.
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.
37
<PAGE>
Depreciation and amortization expense was $7.1 million for the fiscal year
ended June 30, 1998 compared to $5.5 million in fiscal 1997, representing an
increase of 31%. As a percentage of revenues, depreciation and amortization
expense increased from 15% in fiscal 1997 to 17% 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 $3.9 million of such expenses in fiscal 1997. Included
in the amount for fiscal 1997 was a $1.6 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 12 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.
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 $5.5 million for fiscal year
ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an
increase of 5%. As a percentage of revenues, depreciation and amortization
expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997.
38
<PAGE>
Acquisition-related expenses for the fiscal year ended June 30, 1997
included a $1.6 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 12 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.
39
<PAGE>
QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
9/30/96 12/31/96 3/31/97 6/30/97
----------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues ................................. $ 8,179 $ 7,831 $ 8,954 $10,315
Operating Expenses:
Operations .............................. 4,298 3,683 4,123 4,713
Sales, marketing and client services .... 1,925 1,957 2,261 2,626
Research and development ................ 783 754 918 823
General and administrative .............. 1,042 1,171 1,127 1,923
Depreciation and amortization ........... 1,102 1,044 1,423 1,891
Acquired in-process research and
development ............................ -- -- 1,556 --
Payment to former owners of
acquired businesses .................... 330 330 330 1,311
-------- -------- -------- -------
Total operating expenses ................. 9,480 8,939 11,738 13,287
-------- -------- -------- -------
Income (loss) from operations ............ (1,301) (1,108) (2,784) (2,972)
Other (income) expense ................... -- -- (885) (8)
Interest expense, net .................... 150 202 427 725
-------- -------- -------- ---------
Loss before provision for income taxes ... (1,451) (1,310) (2,326) (3,689)
Provision for income taxes ............... 14 14 15 14
-------- -------- -------- ---------
Net loss ................................. $ (1,465) $ (1,324) $ (2,341) $(3,703)
======== ======== ======== =========
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98
----------- ------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ 9,241 $ 9,849 $ 11,099 $ 12,101 $ 12,006
Operating Expenses:
Operations .............................. 4,285 3,942 4,258 4,473 4,793
Sales, marketing and client services .... 2,385 2,432 2,952 2,996 2,930
Research and development ................ 806 1,059 1,021 1,055 1,106
General and administrative .............. 1,061 1,107 1,139 1,558 1,263
Depreciation and amortization ........... 1,698 1,698 1,852 1,895 1,894
Acquired in-process research and
development ............................ -- -- -- -- --
Payment to former owners of
acquired businesses .................... -- -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses ................. 10,235 10,238 11,222 11,977 11,986
-------- -------- -------- -------- --------
Income (loss) from operations ............ (994) (389) (123) 124 20
Other (income) expense ................... -- -- 13 (25) --
Interest expense, net .................... 655 915 900 1,153 1,089
-------- -------- -------- -------- --------
Loss before provision for income taxes ... (1,649) (1,304) (1,036) (1,004) (1,069)
Provision for income taxes ............... 12 12 13 5 16
-------- -------- -------- -------- --------
Net loss ................................. $ (1,661) $ (1,316) $ (1,049) $ (1,009) $ (1,085)
======== ======== ======== ======== ========
</TABLE>
The quarterly operating results for the three months ended March 31, 1997,
June 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998 have been
restated in order to adjust the write-off of acquired in-process research and
development and the amortization of the goodwill resulting from the TCS
acquisition. See Note 13 to Notes to Consolidated Financial Statements.
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 September 30, 1998, the Company had outstanding borrowings of $18.0
million under the Credit Facility. Such borrowings bear interest at a weighted
average rate of 7.0% per annum (as of September 30, 1998). The Company was not
in compliance with the leverage and interest coverage covenants as of September
30, 1998. The bank has granted a waiver relating to the noncompliance with these
covenants and has amended these covenants on a prospective basis such that the
Company anticipates it will be in compliance with such covenants at least
through September 30, 1999. The total availability under the Credit Facility was
20.0 million. In October 1998, the total availability under the Credit Facility
was increased to $36.0 million, and the Company drew down an additional $11.7
million to pay the purchase price of the HII acquisition. All indebtedness under
the Credit Facility has been, and currently is, guaranteed by the Company's four
principal stockholders. See "Certain Transactions."
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
40
<PAGE>
loan to be used for working capital purposes, each with a maximum term of two
years from October 31, 1998. Interest for the term and revolver loans would be
computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based
rate. Such borrowing rates would be at the option of the Company for any
particular period during which borrowings exist. The Company is currently
negotiating with the lender to increase such total available credit to $20.0
million. 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 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 September 30, 1998, the Company had cash and cash equivalents of $3.6
million and net working capital of $2.2 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. Net cash provided by operating activities was
$447,000 for the three months ended September 30, 1998. 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. The $447,000 net cash provided by operating activities for the three
months ended September 30, 1998 resulted primarily from the $1.1 million of
income from operations (after adding back non-cash charges) resulting from
increased revenues and operating margins. The net cash provided from operations
also reflected increased investments in formulary receivables ($729,000),
accounts receivables ($942,000) and other assets ($625,000), which were
partially offset by an increase in accounts payable and accrued expenses
($1,853,000).
Cash used for investment purposes was $4.9 million, $12.2 million, $12.1
million and $869,000 for the fiscal years ended June 30, 1996, 1997 and 1998 and
the three months ended September 30, 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. Cash used for investment purposes for the three months ended September
30, 1998 was used to fund capital expenditures of $466,000 and additions to
intangible assets of $403,000. The Company expects to pay $1.7 million of
additional contingent consideration relating to the Stockton acquisition by the
end of the March 31, 1999 quarter and 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, $15.6
million and $1.0 million for the fiscal years ended June 30, 1996, 1997 and 1998
and the three months ended September 30, 1998, respectively. Cash provided by
financing activities during the fiscal year ended June 30, 1998 and the three
months ended September 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 $25.0 million of the net proceeds of the Offering will be
used to prepay all then outstanding principal and accrued interest on the Senior
Subordinated Note and approximately $19.8 million of the net proceeds will be
used to repay all but $13.0 million of the outstanding indebtedness and accrued
interest under the Company's current Credit Facility. In connection with the
repayment of
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<PAGE>
the Senior Subordinated Note, the Company will record an extraordinary charge of
approximately $1.4 million relating to 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 completed its assessment of whether it will have to modify
or replace portions of its software and its products, services and internal
systems so that they will function properly with respect to dates in the year
2000 and thereafter. In addition to its general Year 2000 compliance review, the
Company has specifically identified several areas which are not Year 2000
compliant as of November 30, 1998: (i) the Company's PBM system in Ohio, (ii)
the UNIX operating platform software used in connection with the Company's
pharmacy practice management system, and (iii) the UNIX operating platform
software utilized in its pharmacy transaction switching. With the exception of
the Ohio PBM system, the Company believes its internally developed software and
systems are Year 2000 compliant.
The Company has developed a remediation program to correct the Year 2000
problems it has identified. PBM clients who utilize the Company's PBM system in
Ohio are being migrated to the PBM system acquired by the Company from Stockton,
which the Company considers to be Year 2000 compliant. A testing and migration
timetable for all such clients has been developed, with migration activities
scheduled for completion in mid-1999. For retail pharmacy practice management
clients, the Company's remediation program consists of providing software
upgrades, with discounted hardware packages to enable such clients to utilize
Year 2000 compliant systems. The Company is currently contacting retail pharmacy
customers and expects that the implementation of such program will extend
throughout calendar 1999. A version of the UNIX operating platform software used
in pharmacy transaction switching, which the manufacturer represents to be Year
2000 compliant, was released in December 1998. Testing of that operating
platform software on the Company's hardware, with the Company's pharmacy
transaction switching software, is scheduled for January and February of 1999.
In October 1998 the Company acquired HII. HII's EDI products and services
fall into three categories: physician claims processing (small and large-group),
hospital claims processing and claims data transmission (extraction and
transmission of claim data to a third party data analyst). Based on its review
at the time of the acquisition, the Company determined that none of these
products is Year 2000 compliant. The Company intends to modify HII's common
carrier and internet-based claims processing system for small physician groups
to make it Year 2000 compliant. The Company also intends to modify HII's payor
data transmission products to make such products Year 2000 compliant. These
modifications are scheduled to be completed by spring 1999. The Company intends
to migrate HII's claims processing for hospitals and large physician groups to
the Company's MedE Claim product; this migration is scheduled to start in spring
1999 and be completed by mid-1999. The Company can, if necessary, process claims
for hospitals and large physician groups through its common carrier and
internet-based claims processing system.
Some or all of the Company's revenues from each of the three areas in which
Year 2000 problems have been identified, as well as those of HII's clients, are
subject to the risk of Year 2000 noncompliance. The total revenue from the
Company's PBM services clients was $6,245,000 in fiscal 1998. The total revenue
from Pharmacy retail system sales was $511,000 in fiscal 1998. The total revenue
derived from Pharmacy switching was $8,004,000 in fiscal 1998. The total claims
and related revenue derived from HII was $4,950,000 for the twelve months ended
June 30, 1998.
Excluding anticipated expenditures associated with ordinary product
development, the Company has budgeted approximately $1,210,000 through December
1999 for Year 2000 compliance costs, of which approximately $350,000 had been
expended through November 30, 1998. The Company believes that this amount will
be sufficient to execute its plan and cover contingency plan costs. The Company
believes that it has sufficient resources to implement its plan. However, there
can be no assurance that expenditures required to achieve compliance with Year
2000 requirements will not exceed the budgeted amounts.
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<PAGE>
The Company's client base consists of over 65,000 health-care providers and
over 1,000 payors. While the Company has not attempted to assess the readiness
of each of these entities, the Company has begun to work with major customers
and suppliers to insure that Year 2000 compliance issues will not interrupt in
the normal activities supported by these relationships. The Company's
Medicare/Medicaid Payors are subject to a Year 2000 compliance program
undertaken by the Health Care Financing Administration. Under the HCFA plan, all
mission critical systems have been identified, and an Independent Verification
and Validation consultant has been retained to perform inspections and testing
of all public payors. This plan includes both random and announced system and
site testing.
The Company believes that the most likely worst case Year 2000 scenario
would include the following: (i) one or more parts of the Company's software and
operating systems will operate incorrectly; (ii) one or more of the Company's
payors would be unable to receive transactions; and (iii) one or more of the
Company's providers/clients would not have completed internal Year 2000
conversions. The Company has completed the assessment of its critical hardward
and software and believes that the assessment has revealed all significant Year
2000 problems, that such problems will be capable of remediation, and that the
Company's software and hardware will perform substantially as planned when Year
2000 processing begins.
As contingency planning, the Company has three available options should
certain functions not operate properly on January 1, 2000. The Company has
developed its internal systems in such a manner as to allow such systems to
accept non-Year 2000 compliant data, and convert such data based on defaults and
algorithms developed in conjunction with the providers to Year 2000 compatible
formats. This methodology is applicable for claims, eligibility and enrollment
transactions. Second, for payors, in the event a payor is unable to accept EDI
claims, the Company currently has the capability, internally and, if necessary
with support from an outside vendor, to print paper claims forms from the
supplied provider data, and to send those claims in paper form to non-Year 2000
compliant payors. In addition, for medical claims, a bulletin board system
acquired in the HII transaction could be utilized by clients, with minimal
programming set up, as a means of transmitting claims to the Company via the
internet.
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", SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". 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."
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<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. As of November 30, 1998, the Company processed 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 six 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.
Health Data Directory estimates that in 1998 over 4.4 billion electronic
and paper claims will be paid in all sectors of the healthcare services market,
and over the past five years healthcare claims increased at an average rate of
6.25% 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 1994 to 1998
(estimated), the proportion of total healthcare claims that were electronically
processed increased from 47% to approximately 62%. During such period the number
of
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<PAGE>
claims processed electonically increased at an average rate of 14% 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. Health Data Directory
estimates that in 1998 electronic processing will account for approximately 16%
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. These products also provide to the client the capability and
the required security to transmit or receive EDI transactions across the
Internet. They are designed to be compatible with a broad variety of hospital,
medical, pharmacy and dental practice manage-
45
<PAGE>
ment and 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. As of November 30, 1998, the Company's highly
diversified client base consisted of approximately 42,000 pharmacies, 8,000
dental offices, 1,100 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.
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<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:
47
<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 Increases 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 through
reconciliation and payor accounts re- faster claim reimbursement.
ceivable management. o Reduces administrative expenses.
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>
48
<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 through faster claim
o Provides on-line claims adjudication. reimbursement.
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) and processes
transactions for providers in all 50 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. MEDE AMERICA has a strong
presence in the medical market in New York, New
49
<PAGE>
Jersey, California, Florida, Minnesota, and Ohio, currently providing EDI
services to more than 1,100 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 99 associates organized according to market, client
type and product category. The Company also has a client services organization
consisting of 67 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 November 30, 1998, the Company employed 76 people in the areas of
product design, research and development, and 40 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.
50
<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
51
<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. 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. In addition, certain of the Company's internally developed software
and software on which its systems operate 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 November 30, 1998, the Company employed 406 people, including 110 in
operations, 99 in sales and marketing, 67 in client services, 86 in research and
development, 34 in finance and administration and 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:
52
<PAGE>
<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
Claims 3,000,000
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
St. Louis (HII Facility) 23 Claims N/A1 May 2005
</TABLE>
- ----------
1 All claims of this facility are outsourced to a third party mainframe
processor.
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. On August 25, 1998, the Company filed a motion to
dismiss this claim. That motion is currently pending.
53
<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.
On October 30, 1998, the Company acquired all the outstanding shares of
stock of HII, a St. Louis, Missouri based provider of EDI transaction processing
services to hospitals and physician groups in the midwest. Prior to such
acquisition, HII was a subsidiary of RightCHOICE and General American. The
Company acquired HII for a total cash payment of approximately $11.7 million,
including transaction expenses. Immediately prior to the acquisition, HII's
"Intercare" and "Telemedical" businesses were divested in separate transactions.
The HII acquisition was financed by an amendment to the Credit Facility
increasing the facility to $36,000,000. To induce investment funds affiliated
with WCAS, and WBCP to guarantee this increase, on October 7, 1998 the Company
granted to such funds the 1998 Guaranty Warrants to purchase an aggregate 84,050
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 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 1998 Guaranty Warrants are
immediately exercisable and may be exercised up to five years from the date of
grant.
54
<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 ................. 46 President and Chief Executive Officer, Director
Richard P. Bankosky .............. 56 Chief Financial Officer, Treasurer and Secretary
James T. Stinton ................. 48 Chief Information Officer
William M. McManus ............... 43 Senior Vice President and General Manager -- Pharmacy
Linda K. Ryan .................... 51 Senior Vice President and General Manager -- Medical
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.
55
<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 of the Company since February 1996. From February 1996 through July
1998 he was Senior Vice President and General Manager -- Pharmacy and Medical,
and 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.
LINDA K. RYAN has been Senior Vice President and General Manager -- Medical
of the Company since July 1998. In April 1995 she joined the Company as Vice
President of Marketing and Product Management. From June 1990 through April 1995
she served as the Director of the Single Payor Demonstration Program at the New
York State Department of Health. The program was responsible for introducing
healthcare EDI in New York State. Ms. Ryan has also served as Director of New
York's Community Health Management Information System and held several key
positions in New York State's Medicaid program and as a health care researcher
at Johns Hopkins and Albany Medical College. Ms. Ryan holds a Bachelor's Degree
from the University at Stony Brook in New York and a Master of Arts degree from
the College of William and Mary in Virginia.
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
56
<PAGE>
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 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($)
- --------------------------------------- ----------- ------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas P. Staudt ...................... 185,833 150,000 -- 229,141 --
President and Chief Executive
Officer
Richard P. Bankosky ................... 136,969 55,000 -- 34,915 --
Chief Financial Officer, Treasurer
and Secretary
William M. McManus .................... 133,269 55,000 -- 39,279 --
Senior Vice President and General
Manager -- Pharmacy and Medical
Roger L. Primeau ...................... 121,050 25,000 27,900 23,567 --
Senior Vice President and General
Manager -- Dental
James T. Stinton ...................... 158,878 50,000 -- 40,371 --
Chief Information Officer ............
</TABLE>
57
<PAGE>
- ----------
(1) Bonuses are granted under a bonus formula annually established by the Board
of Directors, based upon the performance (measured by EBITDA) of the
Company (or certain operating divisions thereof). Unless a specified
percentage of the EBITDA target is achieved, no bonus is paid. EBITDA
targets are adjusted to reflect accounting changes, acquisitions and other
significant, one-time events.
(2) Total number granted through June 30, 1998 (exercised and unexercised).
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding grants of
options to purchase Common Stock in fiscal 1998 to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
-------------------------------------------------------------- ------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
GRANTED(#) FISCAL YEAR(2) ($/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
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<PAGE>
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 the Internal Revenue Code of 1986, as amended (the "Code"), or
"non-qualified" stock options. As of November 30, 1998, options to purchase up
to an aggregate 482,823 shares of Common Stock were outstanding, of which
228,917 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
59
<PAGE>
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 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.
On July 23, 1998, the Board of 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.
On November 15, 1998, the Board of Directors determined to grant options
(such grant to be effective as of the date of the Offering) to purchase an
aggregate 50,500 shares of Common Stock under the New Stock Plan to certain
employees of the Company, most of whom were formerly employed by HII. Such
options will be incentive 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.
60
<PAGE>
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 17, 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,
61
<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 and the 1998 Guaranty Warrants) agreed to
exercise all such warrants by the net issuance exercise method for an aggregate
59,926 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.
On October 7, 1998, in connection with their agreement to extend their
guaranty of the Company's obligations under the Credit Facility to cover an
additional $16 million of indebtedness, the Company issued to WCAS V and Blair V
warrants to purchase an aggregate 84,050 shares of Common Stock at a per share
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 warrants are immediately
exercisable and may be exercised up to five years from the date of grant.
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 November 30, 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 $12.00 per share of Common Stock and (iii) assume a
sale of 4,166,667 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.
62
<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>
Welsh, Carson, Anderson & Stowe (3) ............. 6,141,252 72.28% 48.50%
320 Park Avenue, 25th Floor
New York, NY 10019
William Blair & Co., L.L.C. (4) ................. 989,126 11.71% 7.84%
222 West Adams Street
Chicago, Illinois 60606
Southlake & Co., as Nominee ..................... 646,612 7.67% 5.13%
c/o State Street Bank & Trust Co.
222 Franklin Street -- Concourse
Boston, MA 02110 ...............................
Thomas P. Staudt (5) ............................ 168,768 1.98% 1.33%
Richard P. Bankosky (6) ......................... 11,782 - -
James T. Stinton (7) ............................ 20,512 - -
William M. McManus (8) .......................... 20,948 - -
Linda K. Ryan (9) ............................... 1,918 - -
Roger L. Primeau (10) ........................... 7,680 - -
Thomas E. McInerney (11) ........................ 6,000,945 70.62% 47.39%
320 Park Avenue, 25th Floor
New York, NY 10019
Anthony J. de Nicola (12) ....................... 5,975,632 70.33% 47.19%
320 Park Avenue, 25th Floor
New York, NY 10019
Timothy M. Murray (13) .......................... 985,788 11.67% 7.82%
222 West Adams Street
Chicago, Illinois 60606
All current directors and executive officers as a 7,224,004 83.25% 56.24%
group (9 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 8,429,707 shares of Common Stock
outstanding on November 30, 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 2,725,706 shares of Common Stock held by WCAS V, 2,740,006 shares
of Common Stock held by WCAS VI, 66,024 shares of Common Stock held by WCAS
Information Partners L.P. ("WCAS Info."), 370,993 shares of Common Stock
held by WCAS CP II, 171,283 shares of Common Stock held by individual
partners of WCAS, and warrants to purchase up to 67,240 shares of Common
Stock held by WCAS V. 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 636,491 shares of Common Stock held by Blair V, 332,487 shares of
Common Stock held by Blair LCF, 3,338 shares of Common Stock held by an
individual affiliated with WBCP, and warrants to purchase up to 16,810
shares of Common
63
<PAGE>
Stock held by Blair V. 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 options to purchase up to 109,987 shares of Common Stock.
(6) Includes options to purchase up to 436 shares of Common Stock.
(7) Includes options to purchase up to 20,512 shares of Common Stock.
(8) Includes options to purchase up to 20,948 shares of Common Stock.
(9) Includes options to purchase up to 1,613 shares of Common Stock.
(10) Includes options to purchase up to 10,255 shares of Common Stock.
(11) Includes 2,725,706 shares of Common Stock held by WCAS V, 2,740,006 shares
of Common Stock held by WCAS VI, 66,024 shares of Common Stock held by WCAS
Info., 370,993 shares of Common Stock held by WCAS CP II, and warrants to
purchase up to 67,240 shares of Common Stock held by WCAS V. Mr. McInerney
disclaims beneficial ownership of such shares.
(12) Includes 2,725,706 shares of Common Stock held by WCAS V, 2,740,006 shares
of Common Stock held by WCAS VI, 66,024 shares of Common Stock held by WCAS
Info., 370,993 shares of Common Stock held by WCAS CP II, and warrants to
purchase up to 67,240 shares of Common Stock held by WCAS V. Mr. de Nicola
disclaims beneficial ownership of such shares.
(13) Includes 636,491 shares of Common Stock held by Blair V, 332,487 shares of
Common Stock held by Blair LCF, and warrants to purchase up to 16,810
shares of Common Stock held by Blair V. 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 12,596,374 shares of Common Stock (13,221,374 shares if the
Underwriters' over-allotment option is exercised) and no shares of Preferred
Stock outstanding. As of November 30, 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 126 stockholders. In addition, as of
November 30, 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 (on
a "net exercise" basis) (for an aggregate 59,926 shares), and all shares of
Preferred Stock will be converted into an aggregate 2,684,933 shares of Common
Stock (based on the aggregate liquidation preference of the Preferred Stock as
of November 30, 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. On October 7, 1998 the Company issued to WCAS V and Blair V warrants to
purchase an aggregate 84,050 shares of 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 2,684,933 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 November 30, 1998, four investors owned warrants to purchase 59,926
shares of Common Stock (on a "net exercise" basis), which will be exercised in
full upon the closing of this Offering. See "Certain Transactions."
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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.
On October 7, 1998, in connection with their agreement to extend their
guaranty of the Company's obligations under the Credit Facility to cover an
additional $16 million of indebtedness, the Company issued to WCAS V and Blair V
warrants to purchase an aggregate 84,050 shares of Common Stock at a per share
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 warrants are immediately
exercisable and may be exercised up to five years from 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
66
<PAGE>
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.
67
<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 12,596,374
shares of Common Stock outstanding (excluding 482,823 shares reserved for
issuance upon the exercise of outstanding stock options, 1,250,000 shares
reserved for issuance upon the exercise of the Medic Warrant and 84,050 shares
reserved for issuance upon the exercise of the 1998 Guaranty Warrants)
(13,221,374 shares of Common Stock outstanding if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 4,166,667
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 8,429,707 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, 625,484 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 7,804,223 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 125,964 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
68
<PAGE>
Prospectus without the prior written consent of Salomon 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."
69
<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>
Salomon 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 Salomon 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 625,000
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
Salomon Smith Barney Inc., sell, offer to sell, solicit an offer to purchase,
contract to sell, grant any option to sell, 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."
70
<PAGE>
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 Salomon 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. Salomon 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
& 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.
71
<PAGE>
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.
The consolidated financial statements of Healthcare Interchange, Inc. and
subsidiary as of June 30, 1998 and for the nine-month period ended June 30,
1998, included herein and elsewhere in the registration statement have been
audited and reported upon by KMPG Peat Marwick LLP, independent certified public
accountants. Such financial statements have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
appearing herein, and upon the authority of said firm 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.
72
<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 and September 30, 1998
(Unaudited) ........................................................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1996, 1997 and 1998
and the Three Months Ended September 30, 1997 (Unaudited) and 1998 (Unaudited) ........ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
1996, 1997 and 1998 and the Three Months Ended September 30, 1998 (Unaudited) ......... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1997 and 1998
and the Three Months Ended September 30, 1997 (Unaudited) and 1998 (Unaudited) ........ 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
HEALTHCARE INTERCHANGE, INC.:
Independent Auditors' Report ............................................................ F-25
Consolidated Balance Sheets as of June 30, 1998 and September 30, 1998 (Unaudited) ...... F-26
Consolidated Statements of Operations for the Nine Month Period Ended June 30, 1998 and
the Three Month Period Ended September 30, 1998 (Unaudited) ........................... F-27
Consolidated Statements of Stockholders' Equity (Deficit) for the Nine Month Period Ended
June 30, 1998 and the Three Month Period Ended September 30, 1998 (Unaudited) ......... F-28
Consolidated Statements of Cash Flows for the Nine Month Period Ended June 30, 1998 and
the Three Month Period Ended September 30, 1998 (Unaudited) ........................... F-29
Notes to Consolidated Financial Statements .............................................. F-30
</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.
As discussed in Note 13, the accompanying 1997 and 1998 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Jericho, New York
August 5, 1998
(October 7, 1998 as to Note 6.b., October 30, 1998 as to Note 14 and December
11, 1998 as to Note 13)
F-2
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
AND SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------- --------------
1997 1998 1998 1998
------------ ------------ --------------- --------------
(AS RESTATED, (UNAUDITED) (UNAUDITED)
SEE NOTE 13) (NOTE 1.P.)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 1,919 $ 2,950 $ 3,551
Accounts receivable, less allowance for doubtful accounts of
$1,716, $997 and $983, respectively.............................. 6,318 7,920 8,579
Formulary receivables ............................................. 405 2,341 3,283
Inventory ......................................................... 172 211 250
Prepaid expenses and other current assets ......................... 486 537 668
--------- --------- ---------
Total current assets ............................................ 9,300 13,959 16,331
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6) ...................... 5,517 4,711 4,885
GOODWILL -- Net (Notes 1 and 2) .................................... 27,465 34,753 34,735
OTHER INTANGIBLE ASSETS -- Net (Notes 1 and 4) ..................... 5,357 5,501 5,143
OTHER ASSETS (Note 11) ............................................. 451 470 3,632
--------- --------- ---------
TOTAL .............................................................. $ 48,090 $ 59,394 $ 64,726
========= ========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 2,134 $ 3,630 $ 3,096
Accrued expenses and other current liabilities (Note 5) ........... 9,195 7,715 10,741
Current portion of long-term debt (Note 6) ........................ 538 269 262
--------- --------- ---------
Total current liabilities ....................................... 11,867 11,614 14,099
--------- --------- ---------
LONG-TERM DEBT (Note 6) ............................................ 24,623 41,055 42,365
--------- --------- ---------
OTHER LONG-TERM LIABILITIES ........................................ 215 194 189
--------- --------- ---------
REDEEMABLE CUMULATIVE PREFERRED STOCK:
$.01 par value; 250 shares authorized; 240 shares issued and
outstanding (aggregate liquidation value of $23,996 plus accrued dividends)
(Note 9)........................................................... 28,823 31,223 31,823 $ --
--------- --------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $.01 par value; 6,329 shares authorized; 5,671,
5,685 and 5,685 shares issued and outstanding, respectively. 57 57 57 84
Additional paid-in capital ........................................ 27,713 25,584 27,521 59,317
Accumulated deficit ............................................... (45,208) (50,243) (51,328) (51,328)
Deferred compensation (Note 8) .................................... -- (90) -- --
--------- --------- --------- ---------
Total stockholders' (deficit) equity ............................ (17,438) (24,692) (23,750) $ 8,073
--------- --------- ========= ---------
TOTAL .............................................................. $ 48,090 $ 59,394 $ 64,726
========= ========= =========
</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
AND THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------- ---------------------------
1996 1997 1998 1997 1998
------------ ------------- ------------ -------------- ------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 13) SEE NOTE 13)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES .................................................. $ 31,768 $ 35,279 $ 42,290 $ 9,241 $ 12,006
OPERATING EXPENSES:
Operations ............................................... 19,174 16,817 16,958 4,285 4,793
Sales, marketing and client services ..................... 7,064 8,769 10,765 2,385 2,930
Research and development (Note 1) ........................ 2,132 3,278 3,941 806 1,106
General and administrative ............................... 6,059 5,263 4,865 1,061 1,263
Depreciation and amortization ............................ 5,176 5,460 7,143 1,698 1,894
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)..... -- 1,556 -- -- --
--------- --------- -------- -------- --------
Total operating expenses ................................. 50,108 43,444 43,672 10,235 11,986
--------- --------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS ............................. (18,340) (8,165) (1,382) (994) 20
OTHER (INCOME) EXPENSE (Note 12) .......................... 313 (893) (12) -- --
INTEREST EXPENSE, Net ..................................... 584 1,504 3,623 655 1,089
--------- --------- -------- -------- --------
LOSS BEFORE PROVISION FOR INCOME
TAXES .................................................... (19,237) (8,776) (4,993) (1,649) (1,069)
PROVISION FOR INCOME TAXES (Note 7) ....................... 93 57 42 12 16
--------- --------- -------- -------- --------
NET LOSS .................................................. (19,330) (8,833) (5,035) (1,661) (1,085)
PREFERRED STOCK DIVIDENDS ................................. (2,400) (2,400) (2,400) (600) (600)
--------- --------- -------- -------- --------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ............................................. $ (21,730) $ (11,233) $ (7,435) $ (2,261) $ (1,685)
========= ========= ======== ======== ========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE .................................................... $ (4.14) $ (2.07) $ (1.31) $ (0.40) $ (0.30)
========= ========= ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- BASIC AND DILUTED ......................... 5,245 5,425 5,679 5,674 5,685
========= ========= ======== ======== ========
</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
AND THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(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 (as restated, see Note 13) ........... -- -- -- (8,833) -- (8,833)
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 (as restated, see
Note 13) ...................................... 5,671 57 27,713 (45,208) -- (17,438)
Net loss (as restated, see Note 13) ........... -- -- -- (5,035) -- (5,035)
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 (as restated, see
Note 13) ...................................... 5,685 57 25,584 (50,243) (90) (24,692)
Net loss (unaudited) .......................... -- -- -- (1,085) -- (1,085)
Preferred stock dividends (unaudited) ......... -- -- (600) -- -- (600)
Issuance of warrants (unaudited) (Note 11)..... -- -- 2,537 -- -- 2,537
Amortization of deferred compensation
(unaudited) (Note 8) ........................ -- -- -- -- 90 90
----- ---- -------- --------- ------ ---------
BALANCE, SEPTEMBER 30, 1998
(UNAUDITED) ................................... 5,685 $ 57 $ 27,521 $ (51,328) $ -- $ (23,750)
===== ==== ======== ========= ====== =========
</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 AND THREE MONTHS ENDED
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1996 1997 1998
------------- --------------- ------------
(AS RESTATED,
SEE NOTE 13)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (19,330) $ (8,833) $ (5,035)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization .............................................. 5,176 5,585 7,502
Provision for doubtful accounts ............................................ 406 316 464
Write-down of intangible assets ............................................ 9,965 -- --
Acquired in-process research and development ............................... -- 1,556 --
(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 provided by (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 PERIOD ............................... 8,554 2,639 1,919
--------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 2,639 $ 1,919 $ 2,950
========= ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period 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
========= ========== =========
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
-------------- --------------
(AS RESTATED,
SEE NOTE 13)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $(1,661) $(1,085)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization .............................................. 1,784 1,990
Provision for doubtful accounts ............................................ 57 70
Write-down of intangible assets ............................................ -- --
Acquired in-process research and development ............................... -- --
(Gain) loss on sale of assets .............................................. -- --
Non-cash compensation expense .............................................. -- 90
Changes in operating assets and liabilities net of effects of businesses
acquired:
Accounts receivable ....................................................... (464) (729)
Formularly receivables .................................................... (9) (942)
Inventory ................................................................. (21) (39)
Prepaid expenses and other current assets ................................. 13 (131)
Other assets .............................................................. (60) (625)
Accounts payable and accrued expenses and other current liabilities ....... (1,254) 1,853
Other long-term liabilities ............................................... (1) (5)
---------- ----------
Net cash provided by (used in) operating activities ...................... (1,616) 447
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired ................................. -- --
Purchases of property and equipment ......................................... (212) (466)
Additions to goodwill and other intangible assets ........................... (307) (403)
Proceeds from sale of property and equipment ................................ -- --
Proceeds from sale of net assets of Premier ................................. -- --
--------- ---------
Net cash used in investing activities .................................... (519) (869)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to stockholders ......................................................... -- --
Issuance of Senior Subordinated Note ........................................ -- --
Issuance of common stock .................................................... -- --
Net proceeds (repayments) under Credit Facility ............................. 3,025 1,225
Principal repayments of debt ................................................ (172) (83)
Principal repayments of capital lease obligations ........................... (105) (119)
Exercise of stock options ................................................... 33 --
--------- ---------
Net cash provided by financing activities ................................ 2,781 1,023
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 646 601
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 1,919 2,950
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 2,565 $ 3,551
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ................................................................... $ 641 $ 1,075
========= =========
Income taxes ............................................................... $ 10 $ 7
========= =========
Non-cash investing and financing activities:
Assets acquired under capital leases or by incurring debt .................. -- $ 184
========= =========
Issuance of warrants ....................................................... -- $ 2,537
========= =========
</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
AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
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. The Company
anticipates that these programs, when coupled with the Company's revolving
credit facility, will enable the Company to satisfy its short-term cash flow
and working capital requirements at least through fiscal 1999. 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 8).
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-7
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
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 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 $3,451,000 and $5,864,000 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. Unaudited Interim Financial Statements -- In the opinion of management, the
unaudited consolidated financial statements for the three months ended
September 30, 1997 and 1998 are presented on a basis consistent with the
audited consolidated financial statements and reflect all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results thereof. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
p. Pro Forma Stockholders' Equity -- Pro forma stockholders' equity as of
September 30, 1998 reflects the conversion of 239,956 shares of preferred
stock plus $7,827,000 of accrued preferred stock dividends at the assumed
initial public offering ("IPO") price of $12.00 per share. See Note 8.
q. 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 $1,556,000 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 inte-
F-9
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
grated 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
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 September 30, 1998 by
Stockton, the Company has accrued additional contingent consideration of
$2,022,000 as of September 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 -- $6,525,000 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 ......................... $ (8,855) $ (430)
========= ========
Net loss ..................................... $ (11,206) $ (4,320)
========= ========
Net loss applicable to common stock .......... $ (13,606) $ (6,720)
========= ========
Basic and diluted net loss per share ......... $ (2.51) $ (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
<TABLE>
<CAPTION>
Other intangible assets consist of the following:
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 7, 1998, provides for maximum borrowings of
$36,000,000 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 October 31, 1998 was 6.41%. 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. In addition, the
stockholders were issued warrants to purchase 84,050 shares on October 7,
1998 in consideration for the granting of the most recent guaranty. 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
F-12
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
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.
The Company was not in compliance with the leverage and interest coverage
covenants as of September 30, 1998. The bank has granted a waiver relating to
the noncompliance with these covenants and has amended these covenants on a
prospective basis such that the Company anticipates it will be in compliance
with such covenants at least through September 30, 1999.
(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.
<TABLE>
<CAPTION>
Maturities of long-term debt as of June 30, 1998 are as follows:
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) $ (2,984) $ (1,698)
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 2,691 1,460
-------- -------- --------
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 ............................................... 2,488 2,786
Other intangible assets ................................ 366 459
Accrued expenses and other current liabilities ......... 1,264 617
Net operating loss carryforwards ....................... 12,656 14,552
--------- ---------
17,398 18,989
Less valuation allowance ............................... (17,398) (18,989)
--------- ---------
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>
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.
Effective August 31, 1998, the Company accelerated the vesting of these
options and, therefore, amortized the remaining balance.
F-14
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
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) $ (8,833) $ (5,035)
Net loss -- pro forma ............................. (19,345) (8,887) (5,105)
Basic and diluted net loss per share -- as reported (4.14) (2.07) (1.31)
Basic and diluted net loss per share -- pro forma. (4.15) (2.08) (1.32)
</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. Basic and diluted earnings per share are the
same for all 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 and the three months ended
September 30, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
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) $ (8,833)
Less: Preferred dividends ........ (2,400) (2,400)
--------- ---------
Basic and diluted net loss per
share .......................... $ (21,730) 5,245 $(4.14) $ (11,233) 5,425 $(2.07)
========= ===== ====== ========= ===== ======
<CAPTION>
YEAR ENDED JUNE 30,
1998
--------------------------------
PER-SHARE
LOSS SHARES AMOUNT
------------ -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss ......................... $ (5,035)
Less: Preferred dividends ........ (2,400)
--------
Basic and diluted net loss per
share .......................... $ (7,435) 5,679 $(1.31)
======== ===== ======
</TABLE>
F-15
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1997 1998
------------------------------------- ------------------------------------
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 ............................... $ (1,661) $ (1,085)
Less: Preferred dividends .............. (600) (600)
-------- --------
Basic and diluted net loss per share.... $ (2,261) 5,674 $(0.40) $ (1,685) 5,685 $(0.30)
======== ===== ====== ======== ===== ======
</TABLE>
c. 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 4,166,667 shares of common stock
will be offered at a price between $11.00 and $13.00 per share. The net
proceeds of the IPO will be used to retire its Senior Subordinated Note and
a portion of borrowings outstanding under its Credit Facility plus any
related accrued interest.
d. 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.
e. 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. However, cash realized by the Company upon any
exercise of the underwriters' overallotment option would be applied to the
payment of accrued dividends on the preferred stock and the remainder of
such accrued dividends would convert into common stock. The preferred stock
conversion will be effected based upon the IPO price per share. Assuming an
IPO price of $12.00 per share and no exercise of the underwriters'
overallotment, the preferred stock will be converted into approximately
2,652,000 shares of common stock. The warrants will be converted, in a
cashless exercise, into approximately 60,000 shares of common stock.
f. 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.
g. 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
F-16
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
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.
h. On November 15, 1998, the Board determined to grant options (such grant to
be effective as of the date of the IPO) to purchase an aggregate 50,500
shares of common stock under the New Stock Plan to certain employees of the
Company, most of whom were formerly employed by HII. Such options will be
incentive 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.
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 8).
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 September 30, 1998,
cumulative undeclared and unpaid dividends on this preferred stock totaled
$7,827,000.
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 renumeration 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>
F-17
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
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.
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. 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 was valued at
$2,537,000 using the Black-Scholes Option Pricing Model and is recorded in other
assets. The Medic Warrant is being amortized over the life of the Processing
Agreement, five years. 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 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.
F-18
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
12. 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.
13. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial statements
for the fiscal year ended 1998, the Company's management determined that it was
necessary to revise the valuation of the write-off of in-process research and
development incurred in connection with the TCS acquisition in February 1997. As
a result, the Company's financial statements for the fiscal years ended June 30,
1997 and 1998 have been restated from the amounts previously reported in order
to reflect the effects of the adjustment to the write-off of in-process research
and development. Such write-off, which occurred during the year ended June 30,
1997, was reduced from $4,354,000 to $1,556,000. As a result, goodwill was
increased by $2,798,000. The effect of the restatement is as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------- -----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
--------------- ------------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
AT JUNE 30:
Goodwill ....................................... $ 24,834 $ 27,465 $ 32,522 $ 34,753
Accumulated deficit ............................ (47,839) (45,208) (52,474) (50,243)
FOR THE YEAR ENDED JUNE 30:
Depreciation and amortization .................. 5,293 5,460 6,743 7,143
Acquired in-process research and development 4,354 1,556 -- --
Net loss ....................................... (11,464) (8,833) (4,635) (5,035)
Net loss applicable to common stock ............ (13,864) (11,233) (7,035) (7,435)
Basic and diluted net loss per common share..... $ (2.56) $ (2.07) $ (1.24) $ (1.31)
</TABLE>
14. SUBSEQUENT EVENTS
a. Acquisition -- In October 1998, the Company acquired all the outstanding
shares of capital stock of Healthcare Interchange Inc. ("HII") a St. Louis,
Missouri-based provider of EDI transaction processing services to hospitals
and physician groups in Missouri, Kansas and Illinois. Prior to the
acquisition of HII, two unrelated healthcare services divisions, Intercare
and Telemedical, were divested from HII in separate transactions. HII was
purchased for a total cash payment of approximately $11.7 million, including
transaction expenses and was financed with borrowings under the Credit
Facility. The acquisition will be accounted for under the purchase method of
accounting.
The following unaudited pro forma information for the year ended June 30,
1998 includes the operations of the Company, inclusive of the operations of
both Stockton and HII as if the acquisitions had occurred as of July 1, 1997.
The pro forma information for the three months ended September 30, 1998
includes the operations of the Company, inclusive of the operations of HII as
if the acquisition had occurred at July 1, 1997. 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 related to financing the
acquisitions, and related income tax effects. The allocation of the purchase
price is preliminary and subject to change upon review by management of
additional evidence relating to the fair value of assets acquired and
liabilities assumed at the closing date. Adjustments to the purchase price
allocation, if any, would likely relate to amounts assigned to intangible
assets.
F-19
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
--------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues ..................................... $ 48,880 $ 13,318
======== ========
Income (Loss) from operations ................ (1,034) 44
======== ========
Net loss ..................................... (5,695) (1,245)
======== ========
Net loss applicable to common stock .......... (8,095) (1,845)
-------- --------
Basic and diluted net loss per share ......... (1.43) (0.32)
======== ========
</TABLE>
b. Credit Facility -- 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 October 31, 1998. Interest for the term
and revolver loans would be computed at .25% above the bank's base rate, or
1.25% above a Eurodollar based rate. Such borrowing rates would be at the
option of the Company for any particular period during which borrowings
exist. The Company is currently negotiating with the lender to increase such
total available credit to $20.0 million.
F-20
<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-21
<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-22
<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-23
<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-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Healthcare Interchange, Inc.:
We have audited the accompanying consolidated balance sheet of Healthcare
Interchange, Inc. and subsidiary (Company) as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the nine-month period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 consolidated 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 audit provides a reasonable basis for our
opinion.
As described in notes 3 and 15, on October 30, 1998, the Company completed the
sale of it financial transactions business to MEDE America and the disposal of
the assets and operations of the discontinued Telemedical and Intercare
segments.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Healthcare
Interchange, Inc. and subsidiary as of June 30, 1998, and the results of their
operations and their cash flows for the nine-month period ended June 30, 1998,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
September 8, 1998, except as to notes 3 and 15,
which is as of October 30, 1998
F-25
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
--------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 140,042 $ 38,083
Service accounts receivable, less allowance for doubtful accounts of
$30,709 and $32,207 (unaudited), respectively.......................... 616,044 556,025
Due from stockholders ................................................... 105,483 104,505
Inventories ............................................................. 13,286 12,822
Net current assets of discontinued operations ........................... 236,772 243,960
Prepaid expenses ........................................................ 62,472 16,929
------------ ------------
Total current assets ............................................... 1,174,099 972,324
Property, equipment and computer software, net ........................... 611,578 576,559
Other assets ............................................................. 26,246 25,537
Net non-current assets of discontinued operations ........................ 176,455 176,455
------------ ------------
$ 1,988,378 1,750,875
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facilities ............................................. $ 2,260,000 $ 2,260,000
Notes payable ........................................................... 73,751 64,701
Accounts payable ........................................................ 1,162,125 956,320
Accounts payable to stockholders ........................................ 151,705 183,376
Dividends payable ....................................................... 70,313 93,750
Accrued expenses and other liabilities .................................. 865,935 612,745
------------ ------------
Total current liabilities .......................................... 4,583,829 4,170,892
============ ============
Stockholders' equity (deficit):
Cumulative redeemable convertible preferred stock, $1 par value; ........
62,500 shares authorized, issued, and outstanding ..................... 62,500 62,500
Common stock:
Class A - $1 par value; 66,250 shares authorized, 35,000 shares
issued and outstanding ............................................. 35,000 35,000
Class B - $1 par value; 66,250 shares authorized, 35,000 shares
issued and outstanding ............................................. 35,000 35,000
Class C - $1 par value; 30,000 shares authorized, 20,001 shares
issued and outstanding ............................................. 20,001 20,001
Additional paid-in capital ........................................... 3,016,898 2,993,461
Accumulated deficit .................................................. (5,764,850) (5,565,979)
------------ ------------
Total stockholders' equity (deficit) ............................... (2,595,451) (2,420,017)
------------ ------------
$ 1,988,378 $ 1,750,875
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
--------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Claims service revenue .............................................. $ 2,814,030 $1,032,672
Claim service revenue from stockholders ............................. 843,787 258,506
Other revenue ....................................................... 69,137 20,597
------------ ----------
3,726,954 1,311,775
------------ ----------
Operating expenses:
Operating expenses .................................................. 1,285,832 479,003
Sales, marketing and client service ................................. 993,512 263,320
General and administrative .......................................... 752,033 248,032
Depreciation and amortization ....................................... 131,806 43,761
Provision for doubtful accounts ..................................... 2,000 14,896
------------ ----------
3,165,183 1,049,012
------------ ----------
Operating income .................................................. 561,771 262,763
Interest expense ..................................................... 148,213 63,892
------------ ----------
Income from continuing operations ................................. 413,558 198,871
Discontinued operations:
Loss from operations of discontinued segments ....................... (2,026,784) --
Loss on disposal of segments (including $342,971 for operating losses
during phase-out period) .......................................... (2,073,601) --
------------ ----------
Net income (loss) ................................................. (3,686,827) 198,871
Preferred stock dividends declared ................................ (70,313) (23,437)
------------ ----------
Net income (loss) attributable to common stockholders ............. $ (3,757,140) $ 175,434
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE-MONTH PERIOD ENDED JUNE 30, 1998 AND
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
PREFERRED
STOCK CLASS A CLASS B CLASS C
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 ................ $62,500 $35,000 $35,000 $20,001
Preferred stock dividends declared ......... -- -- -- --
Net loss ................................... -- -- -- --
------- ------- ------- -------
Balance, June 30, 1998 ..................... 62,500 35,000 35,000 20,001
Preferred stock dividends declared
(unaudited) ............................... -- -- -- --
Net income (unaudited) ..................... -- -- -- --
------- ------- ------- -------
Balance, September 30, 1998 (unaudited) $62,500 $35,000 $35,000 $20,001
======= ======= ======= =======
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, September 30, 1997 ................ $3,087,211 $ (2,078,023) $ 1,161,689
Preferred stock dividends declared ......... (70,313) -- (70,313)
Net loss ................................... -- (3,686,827) (3,686,827)
---------- ------------ ------------
Balance, June 30, 1998 ..................... 3,016,898 (5,764,850) (2,595,451)
Preferred stock dividends declared
(unaudited) ............................... (23,437) -- (23,437)
Net income (unaudited) ..................... -- 198,871 198,871
---------- ------------ ------------
Balance, September 30, 1998 (unaudited) $2,993,461 $ (5,565,979) $ (2,420,017)
========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
--------------- -------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ (3,686,827) $ 198,871
Loss on disposal of segments ........................................ 2,073,601 --
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ..................................... 390,821 43,761
Provision for doubtful accounts ................................... 40,013 14,896
Increase (decrease) in cash from changes in assets and liabilities:
Service accounts receivable ...................................... 523,789 37,935
Due from stockholders ............................................ 181,781 978
Inventories ...................................................... (19,378) 464
Prepaid expenses ................................................. 32,102 45,543
Accounts payable ................................................. 819,323 (197,571)
Accrued expenses and other liabilities ........................... 45,013 (229,753)
------------ ----------
Net cash provided by (used in) operating activities ............ 400,238 (84,876)
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment ................................. (276,548) (8,742)
Capitalized software development expenditures ....................... (293,442) -
Other non-current assets ............................................ 1,297 709
------------ ----------
Net cash used in investing activities .......................... (568,693) (8,033)
------------ ----------
Cash flows from financing activities:
Advances on revolving credit facilities ............................. 350,000 --
Payments on notes payable ........................................... (71,490) (9,050)
Dividends paid on cumulative convertible preferred stock ............ (23,437) --
------------ ----------
Net cash provided by (used in) financing activities ............ 255,073 (9,050)
------------ ----------
Net increase (decrease) in cash and cash equivalents ........... 86,618 (101,959)
Cash and cash equivalents, beginning of period ....................... 53,424 140,042
------------ ----------
Cash and cash equivalents, end of period ............................. $ 140,042 $ 38,083
============ ==========
Noncash investing activities:
Write-offs of long-term assets due to disposal of segments .......... $ 1,208,989 $ --
Accrual for operating losses of discontinued segments during
phase-out period .................................................. 342,971 --
============ ==========
Supplemental disclosure of cash flow information - cash paid for
interest ............................................................ $ 148,212 $ 55,448
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
1. ORGANIZATION AND BUSINESS
Healthcare Interchange, Inc. was incorporated in 1991 and began operations in
1992. Healthcare Interchange, Inc. and subsidiary (Company) is in the business
of providing electronic health data network services to a national clientele
through three operating segments; financial transactions, medical televideo, and
intercare. The financial transactions segment processes electronic claims for
health care providers. The medical televideo segment develops, sells, and
services televideo and minor medical equipment through a wholly owned
subsidiary, HII Telemedical Corp. (Telemedical). The Intercare segment
(Intercare) began operations in fiscal 1997, providing electronic claims
processing and data analysis for health care providers. Prior to October 1,
1996, Intercare was a development stage enterprise.
The consolidated financial statements at June 30, 1998 include the accounts of
Healthcare Interchange, Inc. and its wholly owned domestic subsidiary after
elimination of intercompany accounts and transactions.
Unaudited Interim Consolidated Financial Statements -- The consolidated balance
sheet of the Company as of September 30, 1998 and the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the three-month period ended September 30, 1998 included in the
accompanying consolidated financial statements, which are unaudited, include the
accounts of Healthcare Interchange, Inc. and its wholly-owned subsidiary. All
significant intercompany accounts have been eliminated in consolidation. In the
opinion of management, all adjustments necessary for a fair presentation of such
financial statements have been included. Adjustments consist only of normal
recurring items.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash and Cash Equivalents -- The Company considers cash equivalents to be
securities held for cash management purposes having original maturities of
three months or less at the time of investment.
b. Inventories -- Inventories are stated at the lower of cost or market. Cost is
determined principally using the specific identification method. Inventories
at June 30, 1998 are comprised principally of raw materials.
c. Property, Equipment and Computer Software -- Property, equipment and computer
software are carried at cost. Depreciation and amortization is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset. Costs associated with the internal
development of software are capitalized once the marketability and
technological feasibility of the software have been established.
The property, equipment and computer software are depreciated on the
straight-line basis over the following useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Building ....................................... 28
Leasehold improvements ......................... 10
Furniture ...................................... 7
Communications equipment ....................... 5
Computers and data handling equipment .......... 5
Purchased computer software .................... 5
Developed computer software .................... 3
</TABLE>
d. Income Taxes -- Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of exist-
F-30
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
ing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those differences are expected to be recovered or settled.
e. Revenue Recognition -- The Company recognizes revenue from the sale of its
services in the period that the services are delivered or provided. Unearned
income on service contracts is amortized by the straight-line method over the
term of the contracts.
Revenue from the sale of the Company's products is recognized in the period
that the products are shipped to the customers.
f. Stock-Based Compensation -- The Company uses the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations in accounting
for its stock options. The Company has adopted the pro forma disclosures-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.
g. Use of Estimates -- 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. Estimates also affect the reported amounts of
revenues and expenses during the period. Actual results may differ from those
estimates.
3. DISCONTINUED OPERATIONS
In fiscal 1999, the Company's Board of Directors approved a plan to
discontinue the operations of its Televideo and Intercare operating segments;
and on September 17, 1998, signed a letter of intent to sell substantially
all the assets of the financial transactions business to MEDE America
Corporation (MEDE America). See note 15.
The Company's consolidated financial statements as of June 30, 1998 and for
the nine-month period then ended include a charge of $2,073,601 to provide
for an after-tax loss on the disposal of the discontinued operations,
including estimated operating losses of $342,971 through the expected date of
disposal.
Operating results for the nine-month period ended June 30, 1998 and financial
position as of June 30, 1998 of the discontinued segments are summarized
below:
Results of operations:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
--------------------
<S> <C>
Net revenues .............................. $ 528,552
Loss from discontinued operations ......... (4,100,385)
============
Financial position:
AS OF
JUNE 30, 1998
--------------
<S> <C>
Current:
Accounts receivable, net ......................................... $ 162,271
Inventories ...................................................... 74,501
---------
$ 236,772
=========
Non-current - property, equipment and computer software, net ...... $ 176,455
=========
</TABLE>
F-31
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
4. SERVICE ACCOUNTS RECEIVABLE
A summary of activity in the allowance for doubtful accounts of the continuing
operations of the Company for the nine-month period ended June 30, 1998 is
summarized as follows:
<TABLE>
<S> <C>
Balance at beginning of period .......... $ 52,238
Provision for doubtful accounts ......... 2,000
Accounts written-off .................... (23,529)
---------
Balance at end of period ................ $ 30,709
=========
</TABLE>
5. PROPERTY, EQUIPMENT AND COMPUTER SOFTWARE
Property, equipment and computer software of the continuing operations of the
Company as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
Land ................................................... $ 7,652
Building ............................................... 30,610
Leasehold improvements ................................. 64,220
Furniture .............................................. 453,499
Communications equipment ............................... 165,127
Computers and data handling equipment .................. 436,435
Computer software ...................................... 160,724
---------
1,318,267
Less accumulated depreciation and amortization ......... 706,689
---------
$ 611,578
=========
</TABLE>
6. REVOLVING CREDIT FACILITIES
On November 4, 1996, the Company entered into a revolving credit facility with a
local bank which allows the Company to borrow up to a maximum of $750,000. The
revolving credit facility bears interest at a fixed prime plus 1% (9.5% at June
30, 1998) and requires monthly payments of interest. The due date on the
revolving credit facility has been extended from the original December 31, 1997
due date and is now due on October 31, 1998. The average outstanding borrowings
on the revolving credit facility arrangement was $750,000 at a weighted average
interest weight of 9.6% for the nine-month period ended June 30, 1998. The
revolving credit facility had a balance of $750,000 at June 30, 1998.
On November 4, 1996, the Company entered into a revolving credit facility with a
local bank which allows the Company to borrow up to a maximum of $500,000. The
revolving credit facility bears interest at a fixed prime less 0.5% (8.0% at
June 30, 1998) and requires monthly payments of interest, with the balance due
on November 4, 1998. The average outstanding borrowings on the revolving credit
facility was $500,000 at a weighted average interest weight of 8.1% for the
nine-month period ended June 30, 1998. The revolving credit facility had a
balance of $500,000 at June 30, 1998.
On June 4, 1997, the Company entered into a revolving credit facility with a
local bank which allows the Company to draw up to a maximum of $2,500,000. The
revolving credit facility bears an interest rate of prime less 0.625% (7.88% at
June 30, 1998), requires monthly payments of interest, and is secured by
substantially all assets of the Company with the balance due on December 31,
1999. The average outstanding borrowings on the revolving credit facility was
approximately $877,000 at a weighted average interest rate of 8.0% for the
nine-month period ended June 30, 1998. The revolving credit facility had a
balance of $1,010,000 at June 30, 1998.
F-32
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
As of June 30, 1998, the carrying value of the Company's revolving credit
facilities approximated fair value based upon borrowing rates currently
available for debt instruments with similar remaining terms and maturities. The
Company's $750,000 revolving credit facility and notes payable are secured by
substantially all of the Company's assets. Additionally, the $500,000 and
$2,500,000 revolving credit facilities are guaranteed by two of the Company's
stockholders.
The Company's commitment agreement with the local bank for the notes payable and
revolving credit facilities contains restrictive covenants which include the
maintenance of minimum tangible net worth, as defined, and certain financial
ratios. The Company failed to meet certain covenant requirements which has
placed the Company in technical default. Consequently, the Company has
classified the entire outstanding balance of borrowings under the notes payable
and revolving credit facilities as a current liability.
7. NOTES PAYABLE
On February 28, 1995, the Company entered into a $300,000 note payable with a
local bank. The note was paid in full by the Company in February 1998. The note
payable accrued interest at a fixed rate of 9.0% and required monthly payments
of principal and interest.
On May 30, 1995, the Company entered into a $170,000 note payable with a local
bank. The note bears interest at a fixed rate of 9.75%, requires monthly
payments of principal and interest, with the balance due on May 30, 2000, and is
secured by substantially all assets of the Company. The note is payable on
demand, and accordingly, is classified as a current liability. The balance at
June 30, 1998 was $73,751.
8. RELATED PARTY TRANSACTIONS
During the nine-month period ended June 30, 1998, two stockholders provided
network and other services to the Company. Total expenses incurred by the
Company for these services totaled approximately $116,000 for the nine-month
period ended June 30, 1998. At June 30, 1998, the Company owed approximately
$152,000, to these stockholders for such services.
Revenue received from services provided to stockholders totaled approximately
$844,000 for the nine-month period ended June 30, 1998. Due from stockholders
represents amounts receivable for services provided to the stockholders.
9. LEASE COMMITMENTS
The Company leases certain office space and equipment under various lease
agreements. Rent expense of the continuing operations of the Company totaled
$183,291 for the nine-month period ended June 30, 1998.
Future minimum lease payments under noncancellable operating leases with
maturities in excess of one year related to continuing operations are as
follows:
<TABLE>
<S> <C>
1999 ................. $238,240
2000 ................. 240,133
2001 ................. 212,320
2002 ................. 208,969
2003 ................. 199,460
Thereafter ........... 395,841
========
</TABLE>
F-33
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
10. STOCKHOLDERS' EQUITY
Each share of cumulative convertible preferred stock (Preferred Stock) held and
issuable to common holders requires a $1.50 annual dividend. Preferred Stock is
redeemable, at the option of the Company, for cash of $24 per share plus unpaid
dividends quarterly. Each share of Preferred Stock is convertible, at the option
of the holder, into a share of common stock (the class of common stock the
holder already owns) upon change in control of the Company or sale of
substantially all the Company's assets, as defined in the Company's Articles of
Incorporation. The Company has reserved 31,250 shares of Class A and Class B
common stock for the purpose of effecting the conversion of the Preferred Stock.
Pursuant to an agreement between all stockholders and the Company, all preferred
and common stock outstanding is subject to certain restrictions on disposition
and transfer. The stockholder agreement requires that stockholders must first
offer shares to be sold or transferred to other stockholders and/or the Company
in accordance with terms specified in the stockholder agreement.
11. EMPLOYEE STOCK OPTION PLANS
1994 Stock Option Plan -- On March 22, 1994, the Board of Directors of the
Company adopted the 1994 Stock Option Plan (1994 Plan) pursuant to which
incentive stock options may be granted to employees or directors. Under the 1994
Plan, options to purchase 12,000 shares of Class C common stock may be granted
for a term not to exceed 10 years (five years with respect to a stockholder who
owns more than 10% of the capital stock of the Company) and must be granted
within 10 years from the date of adoption of the 1994 Plan. The exercise price
of all stock options must be at least equal to the fair market value (110% of
fair market value for a stockholder who owns more than 10% of the capital stock
of the Company) of the shares on the date granted.
1997 Stock Option Plan -- On October 30, 1997, the Company's Board of Directors
adopted a second stock option plan, the 1997 Stock Option Plan (1997 Plan). The
purpose of the 1997 Plan is to provide additional employee incentives. Under the
1997 Plan, up to 24,000 options to purchase Class C common stock may be granted.
The other significant provisions under the 1997 Plan are similar to those under
the 1994 Plan, as described above.
Aggregate information relating to stock option activity under the 1994 Plan and
1997 Plan for the nine-month period ended June 30, 1998 is as follows:
<TABLE>
<S> <C>
Number of shares under stock options:
Outstanding at beginning of period ......... 9,999
Granted .................................... 12,850
------
Outstanding at end of period ............... 22,849
======
Exercisable at end of period ............... 9,999
======
Weighted average exercise price:
Granted .................................... $ 100
Outstanding at end of period ............... 66.74
Exercisable at end of period ............... 24.00
=========
</TABLE>
Aggregate information relating to stock options outstanding and stock options
exercisable at June 30, 1998 is a follows:
F-34
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
OPTIONS OUTSTANDING:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING AT REMAINING
EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE
- ---------------- ---------------- -----------------
<S> <C> <C>
$ 24 9,999 6.25
100 12,850 9.25
====== ====== ====
22,849
======
OPTIONS EXERCISABLE:
WEIGHTED AVERAGE
OUTSTANDING AT REMAINING
EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE
- ---------------- ---------------- -----------------
<S> <C> <C>
$ 24 9,999 3.72
====== ===== ====
</TABLE>
No compensation expense relating to stock option grants was recorded in the
nine-month period ended June 30, 1998 as the option exercise prices were equal
to the estimated fair value at the dates of grant.
Pro forma information regarding loss and loss per share is required by SFAS No.
123, and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS No. 123. However, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented below as compensation cost
does not reflect options granted prior to October 1, 1996 which vest subsequent
to that date. The fair value for options granted in the nine-month period ended
June 30, 1998 was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
---------------------
<S> <C>
Risk-free interest rate ................ 8.5%
Dividend yield ......................... 0.0%
Volatility factor ...................... 0.0%
Weighted average expected life ......... 10 years
</TABLE>
The Company's pro forma net loss compared to reported amounts are as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
--------------------
<S> <C>
Net loss:
As reported ........................................... $ (3,686,827)
Pro forma ............................................. (3,783,647)
Weighted average fair value per share of options granted
during the year ....................................... 56.31
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified, contributory, 401(k) profit-sharing plan
covering substantially all employees. Employees are allowed to contribute
between 1% and 15% of their compensation to the plan, not to exceed the
statutory maximum. The plan provides for contributions by the Company of 50% of
the first 6% of an employee's salary deferral. The plan also provides for
discretionary contributions
F-35
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
by the Company in such amounts as the Board of Directors may annually determine.
There were no discretionary contributions made in the nine-month period ended
June 30, 1998. Expense associated with the plan for continuing operations of the
Company totaled $39,371 for the nine-month period ended June 30, 1998.
13. INCOME TAXES
No provision for income taxes was recorded for the nine-month period ended June
30, 1998, as substantially all income tax attributable to continuing and
discontinued operations was offset by the utilization of net operating loss
carryforwards.
The difference between the effective income tax rate applied to income from
continuing operations for financial statement purposes and the U.S. federal
income tax rate of 34% for the nine-month period ended June 30, 1998 is as
follows:
<TABLE>
<S> <C>
Expected provision at statutory rate .......... $ 140,610
Nondeductible meals and entertainment ......... 9,894
State income taxes ............................ 5,624
Change in valuation allowance ................. (156,128)
----------
$ --
==========
The tax effects of temporary differences that give rise to the deferred tax
assets and liability as of June 30, 1998 are as follows:
CURRENT NONCURRENT
------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................... $ -- $ 1,362,687
Provision for doubtful accounts ..................... 11,669 --
Deferred income ..................................... 21,563 --
Loss on discontinued operations ..................... 787,968 --
Other ............................................... 2,949 --
---------- ------------
824,149 1,362,687
Less valuation allowance ............................ (824,149) (1,332,185)
---------- ------------
-- 30,502
Deferred tax liability - excess of tax over financial
statement fixed assets ............................. -- (30,502)
---------- ------------
Net deferred tax asset (liability) .................. $ -- --
========== ============
</TABLE>
SFAS No. 109 requires that a valuation allowance be established for deferred tax
assets if, based on the weight of evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. The Company has approximately $3,500,000 of net
operating loss carryforwards for income tax purposes, which will begin to expire
in the year 2009.
14. YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a "00" date"
as the year 1900 rather than the year 2000. This could result in computer
F-36
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
normal business activities. The Company has developed a Year 2000 remediation
plan and has begun testing and converting its computer systems and applications
in order to identify and solve significant Year 2000 issues. In addition, the
Company is discussing with its vendors the possibility of any communication
difficulties or other disruptions that may affect the Company.
15. EVENTS SUBSEQUENT TO BALANCE SHEET DATE
Sale of Company's Capital Stock -- On October 30, 1998, the Company completed
the sale of its financial transactions business to MEDE America. This
transaction was effected through the sale of the Company's capital stock to MEDE
America for cash of $11.6 million. Proceeds from the sale were used as follows:
<TABLE>
<S> <C>
Repayment of borrowings under revolving credit facilities and
notes payable, including accrued interest ......................... $ 2,339,990
Payment of certain accrued expenses and other liabilities ........... 1,299,982
Deposit into escrow account related to post-sale contingencies ...... 400,000
Distributions to stockholders ....................................... 7,560,028
------------
$ 11,600,000
============
</TABLE>
Disposition of Discontinued Operations -- Prior to the closing of the sale, the
Company disposed of the assets and operations of the discontinued Televideo and
Intercare segments. Substantially all assets and a contract of Televideo were
transferred to a former employee in settlement of a legal action, and the stock
of the Televideo subsidiary was distributed to the Company's stockholders. The
assets and operations of Intercare were sold to Providers Edge Incorporated, a
corporation formed by certain former Intercare employees. The accounts payable,
accrued liabilities, and borrowings related to Televideo and Intercare were
retained by the Company.
F-37
<PAGE>
================================================================================
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 AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS
OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF
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
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 10
Use Of Proceeds ............................... 19
Dividend Policy ............................... 19
Capitalization ................................ 20
Dilution ...................................... 21
Unaudited Pro Forma Consolidated Financial
Information ................................ 22
Selected Consolidated Financial Data .......... 28
Management's Discussion And Analysis Of Fi-
nancial Condition And Results Of Operations. 30
Business ...................................... 44
Management .................................... 55
Certain Transactions .......................... 61
Principal Stockholders ........................ 62
Description Of Capital Stock .................. 65
Shares Eligible For Future Sale ............... 68
Underwriting .................................. 70
Legal Matters ................................. 71
Experts ....................................... 71
Additional Information ........................ 72
Index To Financial Statements ................. F-1
</TABLE>
----------------------------------------
UNTIL , 1999 (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 OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
4,167,667 SHARES
[GRAPHIC OMITTED]
MEDE AMERICA
CORPORATION
COMMON STOCK
--------------------------
PROSPECTUS
--------------------------
SALOMON SMITH BARNEY
WILLIAM BLAIR & COMPANY
VOLPE BROWN WHELAN & COMPANY
JANUARY , 1999
================================================================================
<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 ...................... 500,000
Blue Sky Fees and Expenses ................... 10,000
Accounting Fees and Expenses ................. 800,000
Printing and Engraving ....................... 300,000
Transfer Agent and Register Fees and Expenses. *
Miscellaneous ................................ *
----------
Total ........................................ $1,700,000
==========
</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 (share data prior to July 1, 1998, 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 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.
II-2
<PAGE>
On October 7, 1998, in connection with their agreement to extend their
guaranty of the Registrant's obligations under the Credit Facility to cover an
additional $16 million of indebtedness, the Registrant issued to WCAS V and
Blair V warrants to purchase an aggregate 84,050 shares of Common Stock at a per
share 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 warrants are
immediately exercisable and may be exercised up to five years from 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 November 30, 1998 and prior to giving effect
to the Reverse Stock split, 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------------
<S> <C> <C>
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 Part- ners V,
L.P., and Warrants issued thereunder.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------
<S> <C> <C>
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 Part- ners V,
L.P., and Warrants issued thereunder.
4.5+ -- Warrant Agreement dated as of December 18, 1995 among MEDE
AMERICA Corpora- tion, 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 Cor- poration 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.
4.11 -- Warrant Agreement dated as of October 7, 1998 among MEDE AMERICA
Corporation, Welsh, Carson Anderson & Stowe VI, L.P., William
Blair Leveraged Capital Fund Limited Partnership and William
Blair Capital Partners V.I.P., and Warrants issued thereunder.
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.
10.11 -- Fifth Amendment To Credit Agreement dated as of October 7, 1998
between MEDE AMERICA Corporation and Bank of America National
Trust and Savings Association.
10.12 -- Sixth Amendment to Credit Agreement dated as of December 15, 1998
between MEDE AMERICA Corporation and Bank of America National
Trust and Savings Association.
10.13 -- Stock Purchase Agrement, dated as of October 20, 1998 among MEDE
AMERICA Corporation and the Stockholders of Healthcare
Interchange, Inc. named in Schedule I thereto.
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 KPMG Peat Marwick LLP, independent accountants.
23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------
<S> <C> <C>
24.1+ -- Power of Attorney.
27.1+ -- Financial Data Schedule.
</TABLE>
- ----------
* 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 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 December 23, 1998.
MEDE AMERICA CORPORATION
By: /s/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 December 23, 1998
- ------------------------- Officer (Principal executive officer);
Thomas P. Staudt Director
THOMAS P. STAUDT* Chief Financial Officer (Principal December 23, 1998
- ------------------------- financial and accounting officer)
Richard P. Bankosky
THOMAS P. STAUDT* Director December 23, 1998
- -------------------------
Thomas E. McInerney
THOMAS P. STAUDT* Director December 23, 1998
- -------------------------
Anthony J. de Nicola
THOMAS P. STAUDT* Director December 23, 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------------
<S> <C> <C>
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 Part- ners V,
L.P., and Warrants issued thereunder.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------
<S> <C> <C>
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 Part- ners V,
L.P., and Warrants issued thereunder.
4.5+ -- Warrant Agreement dated as of December 18, 1995 among MEDE
AMERICA Corpora- tion, 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 Cor- poration 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.
4.11 -- Warrant Agreement dated as of October 7, 1998 among MEDE AMERICA
Corporation, Welsh, Carson Anderson & Stowe VI, L.P., William
Blair Leveraged Capital Fund Limited Partnership and William
Blair Capital Partners V.I.P., and Warrants issued thereunder.
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.
10.11 -- Fifth Amendment To Credit Agreement dated as of October 7, 1998
between MEDE AMERICA Corporation and Bank of America National
Trust and Savings Association.
10.12 -- Sixth Amendment to Credit Agreement dated as of December 15, 1998
between MEDE AMERICA Corporation and Bank of America National
Trust and Savings Association.
10.13 -- Stock Purchase Agrement, dated as of October 20, 1998 among MEDE
AMERICA Corporation and the Stockholders of Healthcare
Interchange, Inc. named in Schedule I thereto.
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 KPMG Peat Marwick LLP, independent accountants.
23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------
<S> <C> <C>
24.1+ -- Power of Attorney.
27.1+ -- Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment.
** Confidential treatment requested.
+ Previously filed.
EXHIBIT 4.11
AGREEMENT
AGREEMENT dated as of October 7, 1998, among MEDE AMERICA
CORPORATION, a Delaware corporation (the "Company"), WELSH, CARSON, ANDERSON &
STOWE V, L.P., a Delaware limited partnership ("WCAS V"), WELSH, CARSON,
ANDERSON & STOWE VI, L.P., a Delaware limited partnership ("WCAS VI"), WILLIAM
BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP, an Illinois limited
partnership, ("Blair LF") and WILLIAM BLAIR CAPITAL PARTNERS V, L.P., a Delaware
limited partnership, ("Blair V"; WCAS V, WCAS VI, Blair LF and Blair V being
hereinafter referred to individually as a "Guarantor" and collectively as the
"Guarantors").
WHEREAS, the Guarantors are collectively the owners of
approximately 80% of the outstanding common and preferred stock of the Company;
WHEREAS, the Company and Bank of America Illinois (the "Bank")
are parties to a Credit Agreement, dated as of December 18, 1995 (the "Credit
Agreement"), as amended, providing for the extension by the Bank to the Company
of a revolving line of credit (the "Line of Credit");
WHEREAS, the maximum amount of Line of Credit was originally
$10,000,000, which was increased to $13.5 million as of February 10, 1997 (the
"February Increase"), subsequently decreased to $5 million and then increased to
a total of $20 million as of October 31, 1997 (the "October Increase").
WHEREAS, in connection with the establishment of the Line of
Credit and the February Increase and the October Increase in the maximum amounts
thereof, the Guarantors gave certain guarantees to the Bank with respect to the
Line of Credit and, in consideration thereof, were issued warrants to purchase
shares of the Company's Common Stock;
WHEREAS, the Company and the Bank have entered into the Fifth
Amendment to Credit Agreement, dated as of the date hereof (the "Fifth
Amendment"), providing, among other things, for an increase in the Line of
Credit of $16 million (the "Additional Indebtedness"), which will permit the
Bank to advance a total of $36 million thereunder;
WHEREAS, in order to induce the Bank to increase and extend
the Line of Credit pursuant to the October Increase, the Bank, WCAS VI, Blair V
and the other Guarantors agreed to modify the Guarantor Percentages provided for
in the Credit Agreement, with the effect that, effective as of the date thereof,
only WCAS VI and Blair V would be liable to the Bank on the Guaranty;
<PAGE>
WHEREAS, in order to induce the Bank to increase and extend
the Line of Credit pursuant to the Fifth Amendment, the Bank and the Guarantors
have agreed to modify the Guarantor Percentages provided for in the Credit
Agreement, with the effect that, effective as of the date hereof, WCAS V will
also be liable to the Bank on the Guaranty;
WHEREAS, WCAS V and Blair V are willing to assume the
additional financial risk associated with the Additional Indebtedness under the
Guaranty, and in consideration thereof, the Company is willing to issue to WCAS
V and Blair V warrants to purchase an additional 84,050 shares of its Common
Stock, on the terms and conditions hereinafter set forth;
WHEREAS, as a result of the forgoing, the Guarantors wish to
amend and extend the previous agreements among themselves with respect to the
manner in which they will bear the economic incidence of any payments made by
any of them under the Guaranty;
WHEREAS, the Guarantors hereby confirm that they are assuming
the financial risk associated with the Guaranty and the Line of Credit
(including but not limited to the financial risk associated with the Additional
Indebtedness) in order to protect their existing substantial equity investments
in the Company and to ensure the Company's future financial viability; and
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements contained herein, the parties hereby agree as follows:
I. ARTICLE
ISSUANCE OF WARRANTS
Section 1.01 Issuance of Warrants. (a) In consideration of the assumption
by WCAS V and Blair V of the additional financial risk associated with the
Additional Indebtedness under the Guaranty, the Company shall execute and
deliver to each of WCAS V and Blair a warrant in the form annexed hereto as
Exhibit 1 (individually a "Warrant" and collectively the "Warrants") to purchase
shares of the Company's Common Stock, $.01 par value ("Common Stock"), at an
exercise price specified therein. WCAS V shall be entitled to a Warrant to
purchase 80% shares of Common Stock and Blair V shall be entitled to a Warrant
to purchase 20% shares of Common Stock.
Section 1.02 Tax and Accounting Treatment. The Company, WCAS V and Blair V
agree that for federal, state and local income tax as well as for financial
accounting purposes, the issuance of the Warrants by the Company to WCAS V and
Blair V is in the nature of a dividend distribution and is not compensation (or
a payment) for any services, and each hereby agrees to treat the issuance of the
Warrants in such manner for all such purposes, all to the maximum extent
permitted by applicable law.
2
<PAGE>
II. ARTICLE
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, WCAS
V and Blair V as follows:
Section 2.01 Organization. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and is duly licensed or qualified to do business as a foreign corporation in
good standing in each of the jurisdiction in which it owns or leases any real
property or in which the nature of business transacted by it makes such
licensing or qualification necessary and where the failure to be so licensed or
qualified would have a material adverse affect on the business, operations or
financial condition of the Company. The Company has the corporate power and
authority to own and hold its properties and to carry on its business as
currently conducted, to execute, deliver and perform this Agreement and the
Warrants and to issue, sell and deliver the shares of Common Stock issuable upon
the exercise of the Warrants (the "Warrant Shares").
Section 2.02 Authorization of Agreement, etc. (a)The execution, delivery
and performance by the Company of this Agreement and the Warrants, and the
issuance, sale and delivery of the Warrant Shares upon exercise of the Warrants,
have been duly authorized by all requisite corporate action and will not (i)
violate any provision of law, any order of any court or other agency of
government, the Amended and Restated Certificate of Incorporation or By-laws of
the Company, or any provision of any indenture, agreement or other instrument by
which the Company or any of its subsidiaries or any of their respective
properties or assets is bound or affected; (ii) conflict with, result in a
breach of or constitute (with due notice or lapse of time or both) a default any
such indenture, agreement or other instrument; or (iii) result in the creation
or imposition of any lien, charge or incumbrance of any nature upon any of the
properties or assets of the Company or any of its subsidiaries.
(b) The Warrant Shares have been duly reserved for issuance upon exercise
of the Warrants and, when so issued, will be duly authorized, validly issued and
outstanding, fully paid and nonassessable shares of Common Stock. Neither the
execution and delivery of the Warrants nor the issuance and delivery of the
Warrant Shares upon exercise thereof is subject to any preemptive rights of
shareholders of the Company or to any right of first refusal or other similar
right in favor of any person.
Section 2.03 Validity. This Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms. The Warrants, when executed
in accordance with this Agreement, will constitute legal, valid and binding
obligations of the Company, enforceable in accordance with their respective
terms.
3
<PAGE>
III. ARTICLE
REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS
Each of WCAS V and Blair V represents and warrants to the
Company that it is acquiring the Warrants, and will, upon exercise thereof,
acquire the Warrant Shares, for its own account for purpose of investment and
not with a view to or for sale in connection with any distribution thereof. Each
of WCAS V and Blair V further represents that it understands (i) that neither
the Warrants nor the Warrant Shares have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), by reason of their issuance in
transactions exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof, (ii) the Warrants and, upon exercise thereof,
the Warrant Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or is otherwise exempt from such
registration, (iii) the Warrants and the Warrant Shares will bear a legend to
such effect and (iv) the Company will make a notation on its transfer books to
such effect. Each of WCAS V and Blair V further understands that the exemption
from registration afforded by Rule 144 under the Securities Act depends on the
satisfaction of various conditions and that, if applicable, affords the basis of
sales of the Warrants and/or the Warrant Shares in limited amounts under certain
conditions. Each of WCAS V and Blair V (i) acknowledges that it has had a full
opportunity to request from the Company to review and has received all
information deemed relevant in making a decision to enter into this Agreement
and consummate the transactions contemplated thereby and (ii) will comply with
the restrictions on transferability of the Warrants and Warrant Shares contained
in the Warrant. Each of WCAS V and Blair V is an "Accredited Investor" within
the meaning of Rule 501(a) of the Securities Act.
IV. ARTICLE
AGREEMENTS AMONG THE GUARANTORS
The Guarantors agree that, as among themselves, the liability
for any and all payments made by any of them pursuant to the Guaranty will be
allocated to and borne by them, as follows: (i) 80% to WCAS VI, 18.4% to Blair V
and 1.6% to Blair LF with respect to the first $20 million of principal
indebtedness (and any interest, penalties and other charges thereon) and (ii)
80% to WCAS V and 20% to Blair V with respect to any payments in excess of $20
million of principal indebtedness (and any interest, penalties and other charges
thereon) pursuant to the Fifth Amendment. Each of the Guarantors agrees to
indemnify each of the other Guarantors for any payments made pursuant to the
Guaranty (or to indemnify other Guarantors in accordance with this Article IV)
by such other Guarantor that were in excess of such other Guarantor's pro rata
share of all amounts paid by the Guarantors under the Guaranty, determined in
accordance with the first sentence of this Article IV, but only to the extent of
the excess, if any, of its own payments made pursuant to the Guaranty plus the
indemnity payments made by it to other Guarantors in accordance with this
Article IV, over its pro rata share of all amounts paid by the Guarantors under
the Guaranty, determined in accordance with the first sentence of this Article
4
<PAGE>
IV. The foregoing shall apply irrespective of which of the Guarantors has
actually made or is liable to make payment under the terms and provisions of the
Guaranty and without regard to the release of any Guarantor of its obligations
under the Guaranty by the Bank or any assignee thereof.
V. ARTICLE
AGREEMENTS OF THE COMPANY
The Company covenants and agrees that any right to payment
received by the Guarantors in respect of the Credit Agreement, as amended, and
their guaranty thereof, whether by way of purchase, subrogation or otherwise,
and regardless whether and to what extent the same shall be subordinated to
other indebtedness to the Banks or shall have been waived pending certain
events, may be applied, both as to principal and accrued and unpaid interest,
dollar for dollar, by the Guarantors, or any of them, as the purchase price of
any equity securities offered by the Company to investors for cash. In addition,
in the event that the Company shall be unable to make a payment under the Credit
Agreement, as amended, the Guarantors shall have the right (but not the
obligation) (i) to purchase additional equity securities of the Company and (ii)
to require the Company to use the net proceeds of such purchase to make such
payment under the Credit Agreement, as amended. The right set forth in the
preceding sentence may only be exercised upon joint approval by the Guarantors,
and the securities so purchased shall be issued at fair value, based upon
current market conditions for the issuance of equity securities. The Company
shall use its best efforts to provide the Guarantors with sufficient notice in
advance of a payment default under the Credit Agreement, as amended, to enable
the Guarantors to exercise their rights under this Article V.
VI. ARTICLE
MISCELLANEOUS
Section 6.01 Expenses. Each party hereto will pay its own expenses in
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated; provided, however, that the Company shall pay
the fees and disbursements of the Guarantors' special counsel, Messrs. Reboul,
MacMurray, Hewitt, Maynard & Kristol.
Section 6.02 Survival of Agreements. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the Warrants and the issuance, sale and delivery
of the Warrant Shares.
5
<PAGE>
Section 6.03 Parties in Interest. All covenants and agreements contained in
this Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
Section 6.04 Notices. All notices, requests, consent and other
communications hereunder shall be in writing and shall be mailed by first class
registered mail, postage prepaid, or sent by a recognized courier service
addressed as follows:
If to the Company to it at:
90 Merrick Avenue, Suite 501
East Meadow, New York 11554
Fax: (516) 542-4508
Attention: David M. Goldwin, Esq.
If to WCAS VI or WCAS V to it at
320 Park Avenue
Suite 2500
New York, New York 10022
Attention: Anthony J. de Nicola
If to Blair LF or Blair V to it at
222 W. Adams Street
Chicago, Illinois 60606
Attention: Timothy M. Murray
or, in any such case, at such other address or addresses as shall have been
furnished in writing my such party to the others.
SECTION 6.05 LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6.06 Entire Agreement. This Agreement constitutes the entire
Agreement of the parties with respect to the subject matter hereof and may not
be modified or amended except in writing.
Section 6.07 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company and the Guarantors have
executed this Agreement as of the day and year first above written.
MEDE AMERICA CORPORATION
By
----------------------------------
Name:
Title:
WELSH, CARSON, ANDERSON &
STOWE V, L.P.
By WCAS V Partners, General Partner
By
----------------------------------
General Partner
WELSH, CARSON, ANDERSON &
STOWE VI, L.P.
By WCAS VI Partners, L.P., General
Partner
By
----------------------------------
General Partner
WILLIAM BLAIR LEVERAGED CAPITAL
FUND LIMITED PARTNERSHIP
By William Blair Leveraged Capital
Management, L.P.
By William Blair & Company,
General Partner
By
---------------------------------
WILLIAM BLAIR CAPITAL
PARTNERS V, L.P.
By William Blair Capital Partners,
LLC,
General Partner
By
--------------------------------
<PAGE>
EXHIBIT 1
FORM OF WARRANT
THIS WARRANT HAS BEEN ISSUED IN RELIANCE UPON THE REPRESEN TATION OF
THE HOLDER THAT IT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT
WITH A VIEW TOWARDS THE RESALE OR OTHER DISTRIBUTION THEREOF. NEITHER
THIS WARRANT NOR THE SHARES ISSU ABLE UPON THE EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
MEDE AMERICA CORPORATION
Stock Subscription Warrant
Warrant to Subscribe October 7, 1998
for shares
Void After October 7, 2003
----------
THIS CERTIFIES that, for value received, [NAME OF HOLDER], a [
] ("Holder"), or its registered assigns, is entitled to subscribe for and
purchase from MEDE AMERICA CORPORATION, a Delaware corporation (hereinafter
called the "Corporation"), at an exercise price (the "Warrant Exercise Price")
of (i) $8.00 per share (subject to adjustment as hereinafter provided) or (ii)
in the event an initial public offering for the Corporation's Common Stock (as
herein defined) is completed by March 31, 1999, the offering price per share, at
any time prior to October 7, 2003, up to [ ( )] (subject to adjustment as
hereinafter provided) fully paid and nonassessable shares of Common Stock,
subject, however, to the provisions and upon the terms and conditions
hereinafter set forth. This Warrant and any warrant or warrants subsequently
issued upon exchange or transfer hereof and each other warrant issued pursuant
to the Agreement, dated as of October 7, 1998 (the "Agreement"), among the Corpo
ration and the stockholders of the Corporation named therein, and any warrant or
warrants subse
<PAGE>
quently issued upon exchange or transfer thereof, are hereinafter collectively
called the "War rants".
Section 1. Exercise of Warrant.
(a) Method of Exercise. The rights represented by this Warrant
may be exercised by the holder hereof, in whole at any time or from
time to time in part, but not as to a fractional share of Common Stock,
by the surrender of this Warrant (properly endorsed) at the office of
the Corporation as it may designate by notice in writing to the holder
hereof at the address of such holder appearing on the books of the
Corporation, and as further provided below in this Section 1:
(i) Cash Exercise. By payment to the Corporation of the
Warrant Exercise Price in cash or by certified or official bank check,
for each share being purchased;
(ii) Surrender of Indebtedness of or Claims Against
Corporation. By surrender to the Corporation for cancellation of any
indebtedness of or claim against the Corporation (including without
limitation any claim against the Corporation as subrogee in the event
the Holder shall have performed under its guarantee under the Credit
Agreement, as defined in the Agreement), or of any portion thereof, for
which credit shall be given toward the Warrant Exercise Price for each
share being acquired on a dollar-for-dollar basis with reference to the
principal amount canceled;
(iii) Net Issue Exercise. By an election to receive shares the
aggregate fair market value of which as of the date of exercise is
equal to the fair market value of this Warrant (or the portion thereof
being exercised) on such date, in which event the Corporation, upon
receipt of notice of such election, shall issue to the holder hereof a
number of shares of the Corporation's Common Stock equal to (A) the
number of shares of Common Stock acquirable upon exercise of all or any
portion of this Warrant being exercised, as at such date, multiplied by
(B) the balance remaining after deducting (x) the Warrant Exercise
Price, as in effect on such date, from (y) the fair market value of one
share of the Corpora tion's Common Stock as at such date and dividing
the result by (C) such fair market value; or
(iv) Combined Payment Method. By satisfaction of the Warrant
Exercise Price for each share being acquired in any combination of two
or more of the methods described in clauses (i), (ii) and (iii) above.
(b) Definition of Fair Market Value. For the purposes of this
Section 1, "fair market value" shall mean, as to any security, as
follows: if that security is listed or admit ted to trading on one or
more national securities exchanges, the average of the last reported
sales prices per share regular way or, in case no such reported sales
takes place on any such day, the average of the last reported bid and
asked prices per share regular
2
<PAGE>
way, in either case on the principal national securities exchange on
which that security is listed or admitted to trading, for the 20
trading days immediately preceding the date upon which the fair market
value is determined (the "Determination Date"); if that security is not
listed or admitted to trading on a national securities exchange but is
quoted by the NASD Automated Quotation System ("NASDAQ"), the average
of the last reported sales prices per share regular way or, in case no
reported sale takes place on any such day or the last reported sales
prices are not then quoted by NASDAQ, the average for each such day of
the last reported bid and asked prices per share, for the 20 trading
days immediately preceding the Determination Date as furnished by the
National Quotation Bureau Incor porated or any similar successor
organization; and if that security is not listed or admitted to trading
on a national securities exchange or quoted by NASDAQ or any other
nation ally recognized quotation service, the "fair market value" shall
be the fair value thereof determined jointly by the Corporation and the
registered holders of Warrants outstanding representing a majority of
the shares of Common Stock acquirable upon exercise of the Warrants,
provided, however, that if such parties are unable to reach agreement
within a reasonable time, the "fair market value" shall be determined
in good faith by an inde pendent investment banking firm selected
jointly by the Corporation and the registered holders of Warrants
outstanding representing a majority of the shares of Common Stock
issuable upon exercise of the Warrants or, if that selection cannot be
made within 15 days, by an independent investment banking firm selected
by the American Arbitration Associa tion in accordance with its rules.
Anything in this paragraph (b) to the contrary notwith standing, the
fair market value of this Warrant or any portion thereof as of any
Determina tion Date shall be equal to (i) the fair market value of the
shares of Common Stock issuable upon exercise of this Warrant (or such
portion thereof), (determined in accor dance with the foregoing
provisions of this paragraph (b)), minus (ii) the aggregate Warrant
Exercise Price of this Warrant (or such portion thereof).
(c) Delivery of Certificates, Etc. In the event of any
exercise of the rights repre sented by this Warrant, a certificate or
certificates for the shares of Common Stock so purchased, registered in
the name of the holder, shall be delivered to the holder hereof within
a reasonable time, not exceeding ten days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant
has expired, a new Warrant representing the number of shares (except a
remaining fractional share), if any, with respect to which this Warrant
shall not then have been exercised shall also be issued to the holder
hereof within such time. The person in whose name any certificate for
shares of Common Stock is issued upon exercise of this Warrant shall
for all purposes be deemed to have become the holder of record of such
shares on the date on which the Warrant was surrendered and payment of
the Warrant Exercise Price and any applicable taxes was made, except
that, if the date of such surrender and payment is a date on which the
stock transfer books of the Corporation are closed, such person shall
be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books
are open.
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Section 2. Adjustment of Number of Shares. Upon each
adjustment of the Warrant Exercise Price as provided in Section 3, the holder of
this Warrant shall thereafter be entitled to purchase, at the Warrant Exercise
Price resulting from such adjustment, the number of shares (calculated to the
nearest tenth of a share) obtained by multiplying the Warrant Exercise Price in
effect immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant Exercise Price resulting from such adjustment.
Section 3. Adjustment of Price Upon Issuance of Common Stock.
If and whenever the Corporation shall issue or sell any shares of its Common
Stock for a consideration per share less than the Warrant Exercise Price in
effect immediately prior to the time of such issue or sale, then, forthwith upon
such issue or sale the Warrant Exercise Price shall be reduced to the price
(calculated to the nearest $.01) determined by dividing (i) an amount equal to
the sum of (a) the number of shares of Common Stock outstanding immediately
prior to such issue or sale (in cluding as outstanding all shares of Common
Stock issuable upon conversion of all outstanding Convertible Securities (as
hereinafter defined) or exercise of outstanding Warrants multiplied by the then
existing Warrant Exercise Price, and (b) the consideration, if any, received by
the Corpo ration upon such issue or sale, by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale (including as
outstanding all shares of Common Stock issuable upon conversion of all
outstanding Convertible Securities or exercise of outstanding Warrants). No
adjustments of the Warrant Exercise Price, however, shall be made in an amount
less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to $.01 per share or more.
For purposes of this Section 3, the following paragraphs (a)
to (p), inclusive, shall also be applicable:
(a) Issuance of Rights or Options. In case at any time the
Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock
or securities convertible into or exchangeable for Common Stock (such
rights or options being herein called "Options", and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such
Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consider ation for
the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable
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upon the issue or sale of such Convert ible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the
Warrant Exercise Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed
to have been issued for such price per share as of the date of granting
of such Options and thereafter shall be deemed to be outstanding.
Except as otherwise provided in paragraph (c), no adjustment of the
Warrant Exercise Price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such
Options or upon the actual issue of such Common Stock upon conversion
or exchange of such Convertible Securities.
(b) Issuance of Convertible Securities. In case the
Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange (determined by
dividing (i) the total amount received or receivable by the Corporation
as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or exchange of all such
Convertible Securities) shall be less than the Warrant Exercise Price
in effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have
been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall be deemed to
be outstanding, provided that (i) except as otherwise provided in
paragraph (c) below, no adjustment of the Warrant Exercise Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and (ii) if any such issue or
sale of such Convertible Securities is made upon exercise of any Option
to purchase any such Convertible Securi ties for which adjustments of
the Warrant Exercise Price have been or are to be made pursuant to
other provisions of this Section 3, no further adjustment of the
Warrant Exercise Price shall be made by reason of such issue or sale.
(c) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in paragraph (a), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in paragraph (a) or (b), or the rate
at which any Convertible Securities referred to in paragraph (a) or (b)
are convertible into or exchangeable for Common Stock shall change at
any time (other than under or by reason of provisions designed to
protect against dilution), the Warrant Exercise Price in effect at
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the time of such event shall forthwith be readjusted to the Warrant
Exercise Price whichffect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; and on the expiration of any
such Option or the termination of any such right to convert or exchange
such Convertible Securities, the Warrant Exercise Price then in effect
hereunder shall forthwith be increased to the Warrant Exercise Price
which would have been in effect at the time of such expiration or
termination had such Option or Convertible Security, to the extent
outstanding immediately prior to such expiration or termination, never
been issued, and the Common Stock issuable thereunder shall no longer
be deemed to be outstanding.
If the purchase price provided for in any such Option referred to in
paragraph (a) or the rate at which any Convertible Securities referred
to in paragraph (a) or (b) are convertible into or exchangeable for
Common Stock, shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against dilution,
then in case of the delivery of Common Stock upon the exercise of any
such Option or upon conversion or exchange of any such Convertible
Security, the Warrant Exercise Price then in effect hereunder shall
forthwith be adjusted to such respective amount as would have been
obtained had such Option or Convertible Security never been issued as
to such Common Stock and had adjustments been made upon the issuance of
the shares of Common Stock delivered as aforesaid, but only if as a
result of such adjustment the Warrant Exercise Price then in effect
hereunder is thereby reduced.
(d) Stock Dividends. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the
Corporation payable in Common Stock, Options or Convertible Securities,
any Common Stock, Options or Convertible Securities, as the case may
be, issuable in payment of such dividend or distribution shall be
deemed to have been issued in a subdivision of outstanding shares as
provided in paragraph (h) below.
(e) Consideration for Stock. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith.
In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold for a consideration other than cash, the amount
of the consideration other than cash received by the Corporation shall
be deemed to be the fair value of such consideration as determined by
the Board of Directors of the Corporation, without deduction of any
expenses incurred or any under writing commissions or concessions paid
or allowed by the Corporation in connection therewith. The amount of
consideration deemed to be received by the Corporation pursuant to the
foregoing provisions of this paragraph (e) upon any issuance and/or
sale, pursuant to an established compensation plan of the Corporation,
to directors, officers or
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employees of the Corporation in connection with their employment of
shares of Common Stock, Options or Convertible Securities, shall be
increased by the amount of any tax benefit realized by the Corporation
as a result of such issuance and/or sale, the amount of such tax
benefit being the amount by which the Federal and/or State income or
other tax liability of the Corporation shall be reduced by reason of
any deduction or credit in respect of such issuance and/or sale. In
case any Options shall be issued in connection with the issue and sale
of other securities of the Corporation, together comprising one
integral transaction in which no specific consideration is allocated to
such Options by the parties thereto, such Options shall be deemed to
have been issued without consideration. In case any shares of Common
Stock, Options or Convertible Securities shall be issued in connection
with any merger or consolidation in which the Corporation is the
surviving corporation, the amount of consideration therefor shall be
deemed to be the fair value as determined by the Board of Directors of
the Corporation of such portion of the assets and business of the
non-surviving corporation as such Board shall determine to be
attributable to such Common Stock, Options or Convertible Securities,
as the case may be. In the event of any consolidation or merger of the
Corporation in which the Corporation is not the surviving corporation
or in the event of any sale of all or substantially all of the assets
of the Corporation for stock or other securities of any corporation,
the Corporation shall be deemed to have issued a number of shares of
its Common Stock for stock or securities of the other corporation
computed on the basis of the actual exchange ratio on which the
transaction was predicated and for a consideration equal to the fair
market value on the date of such transaction of such stock or
securities of the other corporation, and if any such calculation
results in adjustment of the Warrant Exercise Price, the determination
of the number of shares of Common Stock receivable under this Warrant
immediately prior to such merger, consolidation or sale, for purposes
of paragraph (j), shall be made after giving effect to such adjustment
of the Warrant Exercise Price.
(f) Record Date. In case the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them
(i) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities, or (ii) to subscribe for or
purchase Common Stock, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase,
as the case may be.
(g) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by
or for the account of the Corporation, and the disposition of any such
shares shall be considered an issue or sale of Common Stock for the
purposes of this Section 3.
(h) Subdivision or Combination of Stock. In case the
Corporation shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares,
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the Warrant Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Corporation shall be
combined into a smaller number of shares, the Warrant Exercise Price in
effect immediately prior to such combination shall be proportionately
increased.
(i) Certain Issues of Common Stock Excepted. Anything herein
to the contrary notwithstanding, the Corporation shall not be required
to make any adjustment of the Warrant Exercise Price in the case of the
issuance of shares of Common Stock upon exercise of employee stock
options approved by the Board of Directors of the Corporation.
(j) Reorganization, Reclassification, Consolidation, Merger or
Sale. If any capital reorganization or reclassification of the capital
stock of the Corporation or any consolidation or merger of the
Corporation with another corporation, or the sale of all or
substantially all of its assets to another corporation shall be
effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange
for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate
provisions shall be made whereby each holder of the Warrants shall
thereafter have the right to receive upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common
Stock of the Corporation immediately theretofore receivable upon the
exercise of such Warrant or Warrants, such shares of stock, securities
or assets (including cash) as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock
equal to the number of shares of such stock immediately theretofore so
receivable had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of
such holder to the end that the provisions hereof (including without
limitation provisions for adjustments of the Warrant Exercise Price)
shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
exercise of such exercise rights (in cluding an immediate adjustment,
by reason of such reorganization or reclassification, of the Warrant
Exercise Price to the value for the Common Stock reflected by the terms
of such reorganization or reclassification if the value so reflected is
less than the Warrant Exercise Price in effect immediately prior to
such reorganization or reclassification). In the event of a merger or
consolidation of the Corporation as a result of which a greater or
lesser number of shares of common stock of the surviving corporation
are issuable to holders of Common Stock of the Corporation outstanding
immediately prior to such merger or consolidation, the Warrant Exercise
Price in effect immediately prior to such merger or consolidation shall
be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Corpo
ration. The Corporation will not effect any such consolidation, merger
or any sale of all or substantially all of its assets of properties,
unless prior to the consummation thereof the
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successor corporation (if other than the Corporation) resulting from
such consolidation or merger or the corporation purchasing such assets
shall assume by written instrument executed and mailed or delivered to
each holder of the Warrants at the last address of such holder
appearing on the books of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled
to receive.
(k) Notice of Adjustment. Upon any adjustment of the Warrant
Exercise Price, then and in each such case, the Corporation shall give
written notice thereof, by first class mail, postage prepaid, addressed
to each holder of the Warrants at the address of such holder as shown
on the books of the Corporation, which notice shall state the Warrant
Exercise Price resulting from such adjustment, setting forth in
reasonable detail the method of calculation and the facts upon which
such calculation is based.
(l) Certain Events. If any event occurs as to which in the
opinion of the Board of Directors of the Corporation the other
provisions of this Section 3 are not strictly applicable or if strictly
applicable would not fairly protect the exercise rights of this
Warrant, in accordance with the essential intent and principles of such
provisions to protect against dilution, then such Board of Directors
shall in good faith make an adjust ment in the application of such
provisions, in accordance with such essential intent and principles, so
as to protect such exercise rights as aforesaid.
(m) Stock to Be Reserved. The Corporation will at all times
reserve and keep available out of its authorized Common Stock or its
treasury shares, solely for the purpose of issue upon the exercise of
this Warrant as herein provided, such number of shares of Common Stock
as shall then be issuable upon the exercise of this Warrant. The
Corpora tion covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, and, without limiting the generality of the
foregoing, the Corporation covenants that it will from time to time
take all such action as may be requisite to assure that the par value
per share of the Common Stock is at all times equal to or less than the
effective Warrant Exercise Price. The Corporation will take all such
action as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or
regulation, or of any requirements of any national securities exchange
upon which the Common Stock of the Corporation may be listed. The
Corporation will not take any action which results in any adjustment of
the Warrant Exercise Price if the total number of shares of Common
Stock issued and issuable after such action upon exercise of this
Warrant would exceed the total number of shares of Common Stock then
authorized by the Corporation's Articles of Incorporation. The
Corporation has not granted and will not grant any right of first
refusal with respect to shares issuable upon exercise of this Warrant,
and there are no preemptive rights associated with such shares.
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(n) Issue Tax. The issuance of certificates for shares of
Common Stock upon exercise of the Warrants shall be made without charge
to the holders of such Warrants for any issuance tax in respect thereof
provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of
any holder of the Warrants.
(o) Closing of Books. The Corporation will at no time close
its transfer books against the transfer of the shares of Common Stock
issued or issuable upon the exercise of this Warrant in any manner
which interferes with the timely exercise of this Warrant.
(p) Definition of Common Stock. As used herein the term
"Common Stock" shall mean and include the Common Stock, $.01 par value,
of the Corporation as autho rized on the date hereof and also any
capital stock of any class of the Corporation hereinafter authorized
which shall not be limited to a fixed sum or percentage in respect of
the rights of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corpora tion, provided, however, that
the shares purchasable pursuant to this Warrant shall include only
shares designated as Common Stock, $.01 par value, of the Corporation
on the date hereof, or shares of any class or classes resulting from
any reclassification or reclass ifications thereof which are not
limited to any such fixed sum or percentage and are not subject to
redemption by the Corporation and, in case at any time there shall be
more than one such resulting class, the shares of each class then so
issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such
reclassifications bears to the total number of shares of all such
classes resulting from all such reclassifications.
Section 4. Notices of Record Dates. In the event of
(1) any taking by the Corporation of a record of the holders
of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution
(other than cash dividends out of earned surplus), or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other
right, or
(2) any capital reorganization of the Corporation,
any reclassification or recapitalization of the capital stock of the
Corporation or any transfer of all or substantially all the assets of
the Corporation to or consolidation or merger of the Corporation with
or into any other corporation, or
(3) any voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation,
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then and in each such event the Corporation will give notice to the holder of
this Warrant specifying (i) the date on which any such record is to be taken for
the purpose of such dividend, distribution or right and stating the amount and
character of such dividend, distribution or right, and (ii) the date on which
any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock will be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reorganiza tion, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be given at least 20 days and not more than 90
days prior to the date therein specified, and such notice shall state that the
action in question or the record date is subject to the effectiveness of a
registration statement under the Securities Act or to a favorable vote of
stockholders, if either is required.
Section 5. [omitted]
Section 6. No Stockholder Rights or Liabilities. This Warrant
shall not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Corporation. No provi sion hereof, in the absence of
affirmative action by the holder hereof to purchase shares of Common Stock, and
no mere enumeration herein of the rights or privileges of the holder hereof,
shall give rise to any liability of such holder for the Warrant Exercise Price
or as a stockholder of the Corporation, whether such liability is asserted by
the Corporation or by creditors of the Corporation.
Section 7. Investment Representation and Legend. The holder,
by acceptance of the Warrant, represents and warrants to the Corporation that it
is acquiring the Warrant and the shares of Common Stock (or other securities)
issuable upon the exercise hereof for investment purposes only and not with a
view towards the resale or other distribution thereof and agrees that (a) it
will not offer, sell, transfer, encumber or otherwise dispose of the Warrant or
any of the shares of Common Stock (or other securities) issuable upon the
exercise hereof unless either (i) there is an effective registration statement
under said Act relating thereto or (ii) the Corporation has received an opinion
of counsel, reasonably satisfactory in form and substance to the Corpora tion,
stating that such registration is not required; and (b) the Corporation may
affix upon this Warrant the following legend:
"This Warrant has been issued in reliance upon the
representation of the holder that it has been acquired for investment
purposes and not with a view towards the resale or other distribution
thereof. Neither this Warrant nor the shares issuable upon the exercise
of this Warrant have been registered under the Securities Act of 1933."
The holder, by acceptance of this Warrant, further agrees that the Corporation
may affix the following legend to certificates for shares of Common Stock issued
upon exercise of this Warrant:
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"The securities represented by this certificate have been
issued in reliance upon the representation of the holder that they have
been acquired for investment and not with a view toward the resale or
other distribution thereof, and have not been registered under the
Securities Act of 1933. Neither the securities evidenced hereby, nor
any interest therein, may be offered, sold, transferred, encumbered or
otherwise disposed of unless either (i) there is an effective
registration statement under said Act relating thereto or (ii) the
Corporation has received an opinion of counsel, reasonably satisfactory
in form and substance to the Corporation, stating that such
registration is not required."
Section 8. Lost, Stolen, Mutilated or Destroyed Warrant. If
this Warrant is lost, stolen, mutilated or destroyed, the Corporation may, on
such terms as to indemnity or otherwise as it may in its discretion reasonably
impose (which shall, in the case of a mutilated Warrant, include the surrender
thereof), issue a new Warrant of like denomination and tenor as the Warrant so
lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an
original contractual obligation of the Corporation, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
Section 9. Notices. All notices, requests and other
communications required or permitted to be given or delivered hereunder shall be
in writing, and shall be delivered, or shall be sent by certified or registered
mail, postage prepaid and addressed, if to the holder to such holder at the
address shown on such holder's Warrant or at such other address as shall have
been furnished to the Corporation by notice from such holder. All notices,
requests and other communications required or permitted to be given or delivered
hereunder shall be in writing, and shall be delivered, or shall be sent by
certified or registered mail, postage prepaid and addressed to the Corporation
at such address as shall have been furnished to the holder by notice from the
Corporation.
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IN WITNESS WHEREOF, MedE America Corporation has executed this
Warrant on and as of the day and year first above written.
MEDE AMERICA CORPORATION
By_____________________________
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SUBSCRIPTION AGREEMENT
To:
Dated:
The undersigned, pursuant to the provisions set forth in the
within Warrant, hereby agrees to subscribe for and purchase ____shares of Common
Stock of MedE America Corporation, a Delaware Corporation (the "Corporation")
covered by such Warrant, and makes payment herewith in full therefor [at the
price per share provided by such Warrant [in cash] [by surrender of indebtedness
of the Corporation as provided in Section 1(a)(ii) of such Warrant] [as provided
in Section 1(a)(iii) of such Warrant].
Signature
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Address
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EXHIBIT 10.11
FIFTH AMENDMENT TO CREDIT AGREEMENT
This Amendment, dated as of October 7, 1998 (this "Amendment") is
entered into by and between MEDE AMERICA CORPORATION, a Delaware corporation
(the "Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
"Bank").
RECITALS
The Company and the Bank are parties to a Credit Agreement dated as of
December 18, 1995, as amended (the "Credit Agreement"), pursuant to which the
Bank extended a revolving credit facility. Capitalized terms used and not
otherwise defined or amended in this Amendment shall have the meanings
respectively assigned to them in the Credit Agreement.
The Company has requested that the Bank extend the maturity date, to
increase the commitment and to change the relative percentage contributions of
the Guarantors. In order to induce the Bank to agree to the foregoing, the Bank
has requested, and the Company has agreed, to pay an amendment fee. The Company
has requested that the Bank enter into this Amendment in order to approve and
reflect the foregoing, and the Bank has agreed to do so, all upon the terms and
provisions and subject to the conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and
agreement hereinafter set forth, the parties hereto mutually agree as follows:
A. AMENDMENTS.
1. Amendment of Section 1.01. Section 1.01 is hereby amended by
amending the definitions of:
(a) "Guarantor's Support Percentage" shall mean (A) with
respect to the first $20,000,000 of Loans outstanding (i) with respect
to WCAS V, 0%; (ii) with respect to WCAS VI, 80%; (iii) with respect to
WB Leveraged Capital, 1.6%; and (iv) with respect to WB Capital
Partners, 18.4%; and (B) with respect to the remaining $16,000,000 of
Loans outstanding (i) with respect to WCAS V, 80%; (ii) with respect to
WCAS VI, 0%; (iii) with respect to WB Leveraged Capital, 0%; and (iv)
with respect to WB Capital Partners, 20%.
(c) "Revolving Commitment" by deleting the amount
"$20,000,000" and substituting the amount "$36,000,000" therefor; and
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(d) "Revolving Termination Date" by deleting the date "October
31, 1998" and substituting the date "October 29, 1999".
2. Addition of New Covenant. Article VI is hereby amended by
adding the following as a new Section 6.14:
Section 6.14 Year 200 Compliance. The Company has completed or
accomplished, or will complete or accomplish, the following:
(a) By August 31, 1999, prepare a comprehensive,
detailed inventory and assessment of the risk posed by the
"Year 2000 problem" as it may affect the Company's own
business, properties or operations;
(b) By August 31, 1999, make a detailed inquiry of
material suppliers, vendors and customers of the Company, to
ascertain whether such persons are aware of the need to
address the Year 2000 problem and whether they are taking
appropriate steps to do so;
(c) By August 31, 1999, prepare a detailed project
plan and budget for ensuring that the Year 2000 problem is
successfully addressed in all material respects as it pertains
to thou Company's own business, properties or operations, and
containing contingency plans to mitigate the effects of any
third party's unexpected failure to address the Year 2000
problem;
(d) By August 31, 1999, renovate all systems and
equipment affected by the Year 2000 problem to cause them to
perform correctly date-sensitive functions for relevant date
data from before and after December 31, 1999 ("Year 2000
Compliance") or replace them with technology not so affected,
and commence testing; and
(e) By August 31, 1999, complete testing and
installation of all material systems and equipment to ensure
timely Year 2000 Compliance.
For the purpose of this Section 6.14, "'Year 2000 Problem'
shall mean the inability of computers, as well as embedded microchips
in non-computing devices, to perform properly date-sensitive functions
with respect to certain dates prior to and after December 31, 1999."
B. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents and warrants to the Bank that:
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1. No Event of Default specified in the Credit Agreement and no event
which with notice or lapse of time or both would become such an Event of Default
has occurred and is continuing;
2. The representations and warranties of the Company pursuant to the
Credit Agreement are true on and as of the date hereof as if made on and as of
said date;
3. The making and performance by the Company of this Amendment have
been duly authorized by all corporate action; and
4. No consent, approval, authorization, permit or license from any
federal or state regulatory authority is required in connection with the making
or performance of the Credit Agreement as amended hereby.
C. CONDITIONS PRECEDENT.
This Amendment will become effective as of October 7, 1998 provided
that the Bank shall have received in form and substance satisfactory to the
Bank, all of the following:
1. A copy of a resolution passed by the Board of Directors of the
Company, certified by the Secretary or an Assistant Secretary of the Company as
being in full force and effect on the date hereof, authorizing the borrowing
herein provided for and the execution, delivery and performance of the Credit
Agreement as hereby amended.
2. A certificate of incumbency certifying the names of the officers of
the Company authorized to sign this Amendment, together with the true signatures
of such officers.
3. Executed counterparts of this Amendment.
4. Payment of an amendment fee in the amount of $25,000.
5. A copy of the executed asset purchase agreement among the Company
and the stockholders of HealthCare Interchange Inc. (the "Asset Purchase").
6. Evidence that all conditions to the closing of the Asset Purchase
have occurred and all documents and agreements required thereby have been
executed and delivered
D. MISCELLANEOUS.
1. This Amendment may be signed in any number of counterparts, each of
which shall be an original, with same effect as if the signatures thereto and
hereto were upon the same instrument.
3
<PAGE>
2. Except as herein specifically amended, fill terms, covenants and
provisions of the Credit Agreement shall remain in full force and effect and
shall be performed by the parties hereto according to its terms and provisions
and all references therein or in the Exhibits shall henceforth refer to the
Credit Agreement as amended by this Amendment.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first written.
MEDE AMERICA CORPORATION
By:
---------------------------
Title:
------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
---------------------------
Title:
------------------------
ACKNOWLEDGED AND AGREED:
WELSH, CARSON, ANDERSON & STOWE V, L.P.
By: WCAS V PARTNERS
Its General Partner
By:
-----------------------------------
Its General Partner
WELSH, CARSON, ANDERSON & STOWE VI, L.P.
By: WCAS VI PARTNERS
Its General Partner
By:
-----------------------------------
Its General Partner
WILLIAM BLAIR LEVERAGED CAPITAL FUND
LIMITED PARTNERSHIP
By: WILLIAM BLAIR LEVERAGED CAPITAL
MANAGEMENT, L.P.
By: WILLIAM BLAIR & COMPANY,
General Partner
By:
-----------------------------------
5
<PAGE>
WILLIAM BLAIR CAPITAL PARTNERS V, L.P.
By: WILLIAM BLAIR CAPITAL PARTNERS, LLC,
General Partner
By:
-----------------------------------
6
EXHIBIT 10.12
SIXTH AMENDMENT TO CREDIT AGREEMENT
This Amendment, dated as of December 15, 1998 (this "Amendment") is entered
into by and between MEDE AMERICA CORPORATION, a Delaware corporation (the
"Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
"Bank").
RECITALS
The Company and the Bank are parties to a Credit Agreement dated as of
December 18, 1995, as amended (the "Credit Agreement"), pursuant to which the
Bank extended a revolving credit facility. Capitalized terms used and not
otherwise defined or amended in this Amendment shall have the meanings
respectively assigned to them in the Credit Agreement.
The Company has requested that the Bank modify the financial covenants and
waive non-compliance with the financial covenants for the period ending
September 30, 1998. In order to induce the Bank to agree to the foregoing, the
Bank has requested, and the Company has agreed, to pay an Amendment fee. The
Company has requested that the Bank enter into this Amendment in order to
approve and reflect the foregoing, and the Bank has agreed to do so, all upon
the terms and provisions and subject to the conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreement
hereinafter set forth, the parties hereto mutually agree as follows:
A. AMENDMENTS
1. Amendment of Section 7.15. Section 7.15 is hereby amended and restated
as follows:
7.15 Maximum Leverage Ratio. The Leverage Ratio at the end of each
quarterly period shall not exceed the ratio set forth below for the periods
set forth below:
Quarter Ending Maximum Ratio
-------------- -------------
September 30, 1998 3.00
December 31, 1998 6.80
March 31, 1999 6.20
June 30, 1999 4.50
September 30, 1999 and
and thereafter 4.10
<PAGE>
For purposes of calculating the Leverage Ratio hereunder, (i) EBITDA
shall include EBITDA of the Company and its Subsidiaries adjusted, on a pro
forma basis, to include the EBITDA for the applicable period of any
business acquired by the Company; and (ii) Indebtedness shall include
Indebtedness of the Company and its Subsidiaries.
2. Amendment of Section 7.16. Section 7.16 is hereby amended and restated
as follows:
7.16 Minimum Interest Coverage Ratio. The Minimum Interest Coverage
Ratio for each fiscal quarter shall not be less than the ratio set forth
below at the end of each fiscal quarter for the periods set forth below:
Quarter Ending Maximum Ratio
-------------- -------------
September 30, 1998 3.00
December 31, 1998 1.65
March 31, 1999 1.70
June 30, 1999 2.20
September 30, 1999
and thereafter 2.30
For purposes of calculating the Minimum Interest Coverage Ratio hereunder,
EBITDA and cash interest expense shall include, respectively, EBITDA and cash
interest expense of the Company and its Subsidiaries adjusted, on a pro forma
basis, to include the EBITDA and incremental projected cash interest expenses if
any, with respect to the acquisition of any business acquired by the Company
during the two fiscal quarters prior to the date of calculation of the Minimum
Interest Coverage Ratio.
B. WAIVER.
The Company has requested and the Bank has agreed to waive compliance with
Sections 7.15 and 7.16 for the period ending September 30, 1998.
C. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Bank that:
1. No Event of Default specified in the Credit Agreement and no event which
with notice or lapse of time or both would become such an Event of Default has
occurred and is continuing;
2. The representations and warranties of the Company pursuant to the Credit
Agreement are true on and as of the date hereof as if made on and as of said
date;
2
<PAGE>
3. The making and performance by the Company of this Amendment have been
duly authorized by all corporate action; and
4. No consent, approval, authorization, permit or license from any federal
or state regulatory authority is required in connection with the making or
performance of the Credit Agreement as amended hereby.
D. CONDITIONS PRECEDENT
This Amendment will become effective as of December 15, 1998 provided that
the Bank shall have received in form and substance satisfactory to the Bank, all
of the following:
1. Executed counterparts of this Amendment.
2. Payment of an amendment fee in the amount of $54,000.
E. MISCELLANEOUS
1. This Amendment may be signed in any number of counterparts, each of
which shall be an original, with same effect as if the signatures thereto and
hereto were upon the same instrument.
2. Except as herein specifically amended, all terms, covenants and
provisions of the Credit Agreement shall remain in full force and effect and
shall be performed by the parties hereto according to its terms and provisions
and all references therein or in the Exhibits shall henceforth refer to the
Credit Agreement as amended by this Amendment.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first written.
MEDE AMERICA CORPORATION
By: _______________________________________
Title: ____________________________________
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: _______________________________________
Title: ____________________________________
ACKNOWLEDGED AND AGREED:
WELSH, CARSON, ANDERSON & STOWE V, L.P.
By: WCAS V PARTNERS
Its General Partner
By: ________________________
Its General Partner
WELCH, CARSON, ANDERSON & STOWE VI, L.P.
By: WCAS VI PARTNERS
Its General Partner
By: __________________________
Its General Partner
4
<PAGE>
WILLIAM BLAIR LEVERAGED CAPITAL FUND
LIMITED PARTNERSHIP
By: WILLIAM BLAIR LEVERAGED CAPITAL
MANAGEMENT, L.P.
By: WILLIAM BLAIR & COMPANY,
General Partner
By: ______________________
5
EXHIBIT 10.13
================================================================================
STOCK PURCHASE AGREEMENT
among
MEDE AMERICA CORPORATION
and
THE STOCKHOLDERS OF
HEALTHCARE INTERCHANGE, INC.
NAMED IN SCHEDULE I HERETO
Dated as of October 20, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I. SALE AND TRANSFER OF SHARES; PURCHASE PRICE; CLOSING..................................................1
SECTION 1.01 Sale and Transfer of Shares............................................................1
SECTION 1.02 Delivery of Shares and Payment of Purchase Price.......................................1
SECTION 1.03 Closing................................................................................2
ARTICLE II. REPRESENTATIONS AND WARRANTIES AS TO THE COMPANY ....................................................2
SECTION 2.01 Organization, Qualifications and Corporate Power; Subsidiaries.........................2
SECTION 2.02 Capitalization.........................................................................3
SECTION 2.03 Financial Statements...................................................................3
SECTION 2.04 Absence of Undisclosed Liabilities.....................................................4
SECTION 2.05 Absence of Certain Changes or Events...................................................4
SECTION 2.06 Consents and Approvals.................................................................5
SECTION 2.07 Title to Properties, Absence of Liens and Encumbrances.................................5
SECTION 2.08 List of Properties, Contracts and Other Data...........................................6
SECTION 2.09 Third-Party Payer and Customer Contracts...............................................7
SECTION 2.10 Intangible Rights......................................................................7
SECTION 2.11 Software...............................................................................7
SECTION 2.12 Litigation, Etc........................................................................8
SECTION 2.13 Taxes..................................................................................8
SECTION 2.14 Governmental Authorizations and Regulations...........................................10
SECTION 2.15 Labor Matters; Employees..............................................................10
SECTION 2.16 Insurance.............................................................................11
SECTION 2.17 Use of Real Property..................................................................11
SECTION 2.18 Condition of Assets...................................................................11
SECTION 2.19 Employee Benefit Plans................................................................11
SECTION 2.20 Related Party Transactions............................................................13
SECTION 2.21 Environmental Matters.................................................................13
SECTION 2.22 System Capacity.......................................................................13
SECTION 2.23 Stock and Asset Transfers.............................................................13
SECTION 2.24 Securities Laws Matters...............................................................14
SECTION 2.25 Y2K Compliance........................................................................14
SECTION 2.26 Limit on Employee Obligations.........................................................14
</TABLE>
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ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.................................................15
SECTION 3.01 Organization, Qualifications and Corporate Power......................................15
SECTION 3.02 Authorization of Agreements, Etc......................................................15
SECTION 3.03 Validity..............................................................................15
SECTION 3.04 Title to Shares.......................................................................15
SECTION 3.05 Brokers' or Finders' Fees.............................................................16
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.....................................................16
SECTION 4.01 Organization, Power, Etc..............................................................16
SECTION 4.02 Authorization of Agreements, Etc......................................................16
SECTION 4.03 Validity..............................................................................16
SECTION 4.04 Governmental Approvals................................................................17
SECTION 4.05 Litigation Relating to Transaction....................................................17
SECTION 4.06 Brokers' or Finders' Fees.............................................................17
ARTICLE V. COVENANTS............................................................................................17
SECTION 5.01 Certain Covenants of the Stockholders ................................................17
SECTION 5.02 Books and Records.....................................................................18
SECTION 5.03 Preparation of Certain Financial Statements...........................................18
SECTION 5.04 Certain Tax Matters...................................................................18
SECTION 5.05 Certain Balance Sheet Transactions....................................................19
SECTION 5.06 Consents and Approvals................................................................21
SECTION 5.07 Retention of Employees................................................................21
SECTION 5.08 Intercare and MTI Dispositions........................................................21
SECTION 5.09 Employee Bonuses......................................................................21
SECTION 5.10 Access to Tax and Other Records.......................................................21
ARTICLE VI. CONDITIONS PRECEDENT................................................................................23
SECTION 6.01 Conditions Precedent to the Obligations of the Purchaser..............................23
SECTION 6.02 Conditions Precedent to the Obligations of the Stockholders...........................26
ARTICLE VII. INDEMNIFICATION....................................................................................26
SECTION 7.01 Survival of Representations and Warranties; Limitation................................26
SECTION 7.02 Tax Indemnity.........................................................................27
SECTION 7.03 General Indemnity by the Stockholders.................................................27
</TABLE>
ii
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SECTION 7.04 General Indemnity by the Purchaser....................................................28
SECTION 7.05 Third Party Claims....................................................................28
SECTION 7.06 Procedure.............................................................................29
SECTION 7.07 Remedies Limited......................................................................29
SECTION 7.08 Limited Y2K Indemnity.................................................................30
ARTICLE VIII. TERMINATION AND ABANDONMENT...........................................................31
SECTION 8.01 Termination...........................................................................31
SECTION 8.02 Procedure and Effect of Termination...................................................31
ARTICLE IX. MISCELLANEOUS.........................................................................32
SECTION 9.01 Expenses, Etc.........................................................................32
SECTION 9.02 Execution in Counterparts.............................................................32
SECTION 9.03 Notices...............................................................................32
SECTION 9.04 Waivers...............................................................................33
SECTION 9.05 Amendments, Supplements, Etc..........................................................33
SECTION 9.06 Entire Agreement......................................................................33
SECTION 9.07 Applicable Law........................................................................33
SECTION 9.08 Binding Effect; Benefits..............................................................34
SECTION 9.09 Assignability.........................................................................34
SECTION 9.10 Pre-Closing Breach....................................................................34
</TABLE>
iii
<PAGE>
INDEX TO EXHIBITS AND SCHEDULES
Exhibit Description
- ------- -----------
A Escrow Agreement
B-1 Amended and Restated Payer Agreement (Right Choice)
B-2 Amended and Restated Payer Agreement (General)
C Data Processing Agreement
D-1 Form of Employment Agreement
D-2 Form of Transition Agreement
D-3 Form of Release (Intercare employees hired by PEI)
D-4 Form of Release (employees to be terminated)
D-5 Form of Release (Intercare employees not hired by PEI)
D-6 Form of Release Letter (Kruessel)
E Form of Opinion of Counsel for the Stockholders
F Form of Non-Competition and Confidentiality Agreement
G Non-Competition Agreement (Romer)
Schedule Description
- -------- -----------
I Stockholders
2.01 Subsidiaries
2.02 Shares of Capital Stock; Warrants, etc.
2.03 Financial Statements
2.04 Absence of Undisclosed Liabilities
2.05 Changes Since June 30, 1998
2.06 Consents and Approvals
2.07 Title, Liens and Related Matters
2.08 List of Properties, Contracts, Etc.
2.10 Intangible Rights
2.11 Software
2.12 Litigation
2.13 Tax Matters
2.14 Regulations and Governmental Authorizations
2.15 Employees
2.16 Insurance
2.18 Condition of Assets
2.19 Severance and Other Benefits
2.20 Related Party Transactions
2.25 Y2K Compliance
5.05(b) Certain Payments
5.09 Employee Bonuses
6.01(e) Employees
iv
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of October 20, 1998, among
MEDE AMERICA CORPORATION, INC., a Delaware corporation (the "Purchaser"), and
the stockholders of Healthcare Interchange, Inc., a Missouri corporation (the
"Company"), named in Schedule I hereto (hereinafter sometimes referred to
individually as a "Stockholder" and collec tively as the "Stockholders").
WHEREAS, on the Closing Date (as defined herein), the
Stockholders will own all of the issued and outstanding shares of capital stock
of the Company, consisting of (i) 35,000 shares (the "A Common Shares") of Class
A Common Stock, $1 par value ("A Common Stock"), (ii) 35,000 shares (the "B
Common Shares") of Class B Common Stock, $1 par value ("B Common Stock"), (iii)
20,001 shares (the "C Common Shares") of Class C Common Stock, $1 par value ("C
Common Stock"), and (iv) 62,500 shares (the "Preferred Shares," and collectively
with the A Common Shares, the B Common Shares and the C Common Shares, the
"Shares") of Convertible Cumulative Preferred Stock, $1 par value ("Preferred
Stock"); and
WHEREAS, the Stockholders desire to sell and the Purchaser
desires to purchase the Shares, all on the terms and subject to the conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties agree as follows:
ARTICLE I.
SALE AND TRANSFER OF SHARES;
PURCHASE PRICE; CLOSING
SECTION 1.01. Sale and Transfer of Shares. Subject to the
terms and conditions set forth herein, on the Closing Date (as hereinafter
defined) each Stockholder shall sell to the Purchaser, and the Purchaser shall
purchase from such Stockholder, the number of A Common Shares, B Common Shares,
C Common Shares and Preferred Shares set forth opposite the name of such
Stockholder in Part B of Schedule I hereto under the headings "A Common Shares,"
"B Common Shares," "C Common Shares" and "Preferred Shares," as applicable.
SECTION 1.02. Delivery of Shares and Payment of Purchase
Price. (a) On the Closing Date, each Stockholder shall deliver to the Purchaser
a certificate or certificates in defini tive form, registered in the name of
such Stockholder or accompanied by a stock transfer power duly executed by the
registered holder of such certificate and transferring the Shares evidenced
thereby to such Stockholder, evidencing the Shares being sold by such
Stockholder hereunder, duly endorsed for transfer or accompanied by stock
transfer powers duly endorsed in blank, with all requisite stock transfer taxes
paid and stamps affixed.
<PAGE>
(b) As payment in full of the purchase price for the Shares
and against delivery of the certificates evidencing the Shares as aforesaid, on
the Closing Date the Purchaser shall:
(i) pay an aggregate $11,200,000 (the "Initial Cash
Consideration") to the Stockholders or as otherwise directed in writing
by the Stockholders, by wire transfer of immediately available funds in
the amounts set forth opposite the name of each Stockholder in Schedule
I hereto under the heading "Cash Paid at Closing;" and
(ii) cause $400,000 in cash (the "Escrow Amount," collectively
with the Initial Cash Consideration, the "Purchase Price") to be
deposited in an escrow account pursuant to an Escrow Agreement among
the Purchaser, the Stockholders and the Escrow Agent named therein,
substantially in the form of Exhibit A hereto (the "Escrow Agreement"),
to secure in part the indemnification obligations of the Stockholders
pursuant to Article VII hereof.
SECTION 1.03. Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Thompson Coburn, One Mercantile Center, St. Louis, Missouri 63101, within two
business days after the satisfaction or waiver of all conditions to closing set
forth herein, or at such other place or at such other date and time as the
Stockholders and the Purchaser may mutually agree (the date and time of the
Closing is herein called the "Closing Date").
ARTICLE II.
REPRESENTATIONS AND WARRANTIES AS TO
THE COMPANY
The Stockholders jointly and severally represent and warrant
to the Purchaser as follows:
SECTION 2.01. Organization, Qualifications and Corporate
Power; Subsidiaries. (a) The Company is a corporation duly incorporated and
validly existing under the laws of the State of Missouri and is duly licensed or
qualified as a foreign corporation in each other juris diction in which it owns
or leases any real property or, to the extent the failure to so qualify would
have a Material Adverse Effect (as defined herein), in which the nature of
business transacted by it makes such licensing or qualification necessary. The
Company has the corporate power and authority, and the legal right, to own and
operate its properties and to carry on its business as currently conducted.
(b) Except as set forth in Schedule 2.01 hereto, the Company
does not own of record or beneficially, or have any right or obligation to
acquire, directly or indirectly, (i) any shares of outstanding capital stock or
securities convertible into or exchangeable for capital stock
2
<PAGE>
of any other corporation or (ii) any participating interests in any partnership,
joint venture or other non-corporate business enterprise.
SECTION 2.02. Capitalization. (a) The authorized capital stock
of the Company consists of (i) 66,250 shares of A Common Stock, of which 35,000
shares are issued and outstanding, fully paid and nonassessable and owned as set
forth in Part A of Schedule I hereto, (ii) 66,250 shares of B Common Stock, of
which 35,000 shares are issued and outstanding, fully paid and nonassessable and
owned as set forth in Part A of Schedule I hereto, (iii) 56,000 shares C Common
Stock, of which 20,001 shares are issued and outstanding, fully paid and
nonassessab le and owned as set forth in Part A of Schedule I hereto, and (iv)
62,500 shares of Preferred Stock, of which 62,500 shares are issued and
outstanding, fully paid and nonassessable and owned as set forth in Part A of
Schedule I hereto. As of the Closing Date, all shares of capital stock of the
Company shall be owned as set forth in Part B of Schedule I hereto. Except as
set forth in Schedule 2.02 hereto, none of the Shares are subject to, nor were
any of them issued in violation of, any preemptive rights of stockholders of the
Company or to any right of first refusal or other similar right in favor of any
person.
(b) Except as set forth in Schedule 2.02 hereto, (i) no
subscription, warrant, option, convertible security or other right (contingent
or other) to purchase or acquire any shares of any class of capital stock of the
Company are authorized or outstanding, (ii) there is not any commitment of the
Company to issue any shares, warrants, options or other such rights or to
distribute to holders of any class of its capital stock any evidences of
indebtedness or assets and (iii) the Company has no obligation (contingent or
other) to purchase, redeem or otherwise acquire any shares of the capital stock
of the Company or any interest therein or to pay any dividend or make any other
distribution in respect thereof. At the Closing, neither the stock options
listed or reflected on Schedule 2.02 hereto (or in any other Schedule hereto),
nor any right to receive payment of any sort in respect of such stock options,
will be outstanding.
(c) Effective upon the consummation of the transactions
contemplated hereby, each of the Stockholders, by its execution and delivery of
this Agreement, acknowledges satisfaction in full of all dividends payable in
respect of the Preferred Stock through the Closing Date, and forever waives any
claim, right, title or interest in or to any such dividends not actually paid as
of the Closing Date.
SECTION 2.03. Financial Statements. Attached hereto as
Schedule 2.03 are the balance sheet of the Company as of June 30, 1998, and the
related statements of operation, cash flows and stockholders' equity (deficit)
for the nine months then ended, including the notes thereto (collectively, the
"Financial Statements"). The Financial Statements (i) are complete and correct
in all material respects, (ii) were prepared from the books and records of the
Company in conformity with generally accepted accounting principles applied on a
consistent basis (subject to normal year-end adjustments) and (iii) fairly
present the financial position and stockholders' equity of the Company as of the
dates specified therein and the income and cash flows for the periods then
ended.
3
<PAGE>
SECTION 2.04. Absence of Undisclosed Liabilities. Except (i)
as and to the extent reflected in the Financial Statements, (ii) as set forth in
Schedule 2.04 hereto, or (iii) for immaterial trade payables and similar
operating liabilities incurred since June 30, 1998 in the ordi nary course of
business and consistent with past practice, the Company has no liabilities or
obliga tions of any kind or nature, whether known or unknown, secured,
unsecured, absolute, accrued, contingent or otherwise, and whether due or to
become due (including without limitation any tax liabilities due or to become
due, or whether incurred in respect of or measured by the assets, sales, income
or receipts of the Company for any period), which liabilities or obligations
would be required to be reflected on a balance sheet of the Company prepared in
accordance with generally accepted accounting principles.
SECTION 2.05. Absence of Certain Changes or Events. Since June
30, 1998, except as otherwise set forth in Schedule 2.05 hereto or as expressly
contemplated by this Agreement, the Company has not:
(a) changed or amended its Articles of Incorporation or
By-laws;
(b) incurred any obligation or liability (fixed or
contingent), except normal trade or business obligations incurred in
the ordinary course of business and consistent with past practice, none
of which individually or in the aggregate is materially adverse;
(c) discharged or satisfied any material lien, security
interest, charge or other encumbrance or paid any material obligation
or liability (fixed or contingent), other than in the ordinary course
of business and consistent with past practice;
(d) mortgaged, pledged or subjected to any lien, security
interest, charge or other encumbrance any of its assets or properties
(other than Permitted Liens as defined in Section 2.07 below);
(e) transferred, leased or otherwise disposed of any of its
material assets or properties, except for fair consideration in the
ordinary course of business and consistent with past practice, or
acquired any material assets or properties, except in the ordinary
course of business and consistent with past practice;
(f) declared, set aside or paid any distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or redeemed or other wise acquired any of its capital
stock or split, combined or otherwise similarly changed its capital
stock or authorized the creation or issuance of or issued or sold any
capital stock or any securities or obligations convertible into or
exchangeable therefor, or given any person any right to acquire any
capital stock from the Company, or agreed to take any such action;
4
<PAGE>
(g) made any investment of a capital nature, whether by
purchase of stock or securities, contributions to capital, property
transfers or otherwise, in any other partner ship, corporation or other
entity, or purchased any material property or assets;
(h) canceled or compromised any debt or claim, other than in
the ordinary course of business consistent with past practice;
(i) waived or released any rights of material value, including
without limita tion, any Intangible Rights (as defined in Section
2.08(b) below);
(j) transferred or granted any rights under or with respect to
any Intangible Rights, or permitted any license, permit or other form
of authorization relating to an Intangible Right to lapse;
(k) made or granted any wage or salary increase applicable to
any group or classification of employees generally, entered into any
employment contract with, or made any loan to, or entered into any
material transaction of any other nature with, any officer or employee
of the Company; or
(l) suffered any casualty loss or damage (whether or not such
loss or damage shall have been covered by insurance) which affects in
any material respect its ability to conduct its business.
SECTION 2.06. Consents and Approvals. Except as set forth on
Schedule 2.06 hereto, no order, authorization, approval or consent from, or
filing with, (i) any federal or state governmental or public body or other
authority having jurisdiction over either Stockholder or the Company or (ii) any
third party (including, without limitation, pursuant to any contract to which
the Company is a party) is necessary (A) for the execution, delivery and
performance by such Stockholder of its obligations under this Agreement or the
Ancillary Agreements (as defined herein), to the extent that such Stockholder is
a party thereto, or the consummation of the transactions contemplated hereby or
(B) in order that the business of the Company can be conducted immediately
following the Closing Date substantially in the same manner as heretofore
conducted.
SECTION 2.07. Title to Properties, Absence of Liens and
Encumbrances. Except as set forth in Schedule 2.07 hereto, the Company has, and
will have as of the Closing Date, good and valid title to all its assets and
properties, in each case free and clear of all liens, charges, security
interests or other encumbrances of any nature whatsoever, other than (x) liens
for taxes not yet due, (y) mechanic's, materialman's and similar statutory liens
arising in the ordinary course of business and which, in the aggregate, would
not have a material adverse effect on the business, properties, prospects or
condition (financial or other) of the Company (a "Material Adverse Effect"), or
(z) security interests securing indebtedness not in default for the purchase
price of or lease rental payments on property purchased or leased under capital
lease arrange-
5
<PAGE>
ments in theordinary course of business (the liens, charges, security interests
and other encumbrances described in clauses (x), (y) and (z) above being
referred to herein as "Permitted Liens").
SECTION 2.08. List of Properties, Contracts and Other Data.
Annexed hereto as
Schedule 2.08 is a list setting forth the following:
(a) a description of all leases of real or personal property
to which the Company is a party, either as lessee or lessor, including
a description of the parties to each such lease, the property to which
each such lease relates, and the rental term and monthly (or other)
rents payable under each such lease;
(b) (i) all patents, trademarks and trade names, trademark and
trade name registrations, logos, servicemark registrations, copyright
registrations, all applications pending on the date hereof for patent
or for trademark, trade name, servicemark or copy right registrations,
and all other material intellectual property rights (collectively "In
tangible Rights") owned by the Company (specifying the nature of the
rights therein), and (ii) all licenses granted by or to the Company and
all other agreements to which the Company is a party that relate, in
whole or in part, to any Intangible Rights mentioned in (i) above or to
other proprietary rights reasonably necessary to the Company, whether
owned by any of the Stockholders or the Company or otherwise;
(c) all collective bargaining agreements, employment and
consulting agree ments, independent contractor agreements, executive
compensation plans, bonus plans, deferred compensation agreements,
employee pension plans or retirement plans, employee profit sharing
plans, employee stock purchase and stock option plans, group life
insurance, hospitalization insurance, severance or other similar plans
or arrangements maintained for or providing benefits to employees of,
or independent contractors or other agents for the Company (in any such
case, whether oral or written);
(d) all contracts, including without limitation guarantees,
mortgages, inden tures and loan agreements, to which the Company is a
party, or to which the Company or its assets or properties is subject
and which are not specifically referred to in clauses (a), (b), or (c)
above, provided, however, that there need not be listed in said
Schedule 2.08 pursuant to this clause (d) any sales contracts, supply
contracts with suppliers and other such contracts incurred in the
ordinary course of business and consistent with past practice, other
than any such contract which (i) is a contract or group of related
contracts which exceeds $5,000 in amount, (ii) contains warranties by
the Company in excess of those customary in its business, (iii) cannot
be performed in the normal course within 12 months after the Closing
Date without breach or penalty or (iv) would be terminable or result in
a penalty or additional obligation on the part of the Company upon the
consum mation of the transactions contemplated hereby; and
(e) all agreements with third party payers and customers.
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Schedule 2.08 indicates, for each contract listed therein,
whether such contract relates to the so-called "Financial Services" business or
the so-called "Intercare" business (or to both, as the case may be). True and
complete copies of all documents and complete descriptions of all binding oral
commitments (if any) referred to in said Schedule 2.08 have been provided or
made available to the Purchaser and/or its counsel. Except as disclosed in such
Schedule, all material provisions of the contracts referred to in such Schedule
are valid and enforceable obligations of the Company and, to the knowledge of
the Company and the Stockholders, of the other parties thereto. Neither the
Company nor any of the Stockholders has been notified of, or is aware that any
basis exists for, any claim that any contract referred to in such Schedule is
not valid and enforceable in accordance with its terms for the periods stated
therein, or that there is under any such contract any existing default or event
of default or event which with notice or lapse of time or both would constitute
such a default.
The lease for premises at 2452 Centerline Ind. Dr., Maryland
Heights, Missouri 63043 will be validly terminated prior to the Closing Date.
SECTION 2.09. Third-Party Payer and Customer Contracts. Other
than with respect to the third-party payers and customers of HIIT (as defined
herein) or relating to the "Intercare" business, the Company has not lost since
June 30, 1998, and neither the Company nor any of the Stockholders has been
notified that the Company will lose or suffer diminution in, and to the
knowledge of the Company and the Stockholders, no representative of a
third-party payer or other customer has notified the Company or any of the
Stockholders that, in the event of a sale of the Company, the Company would lose
or suffer diminution in, its relationship with any third-party payer(s) or other
customer(s) that, in the aggregate, accounted for more than five percent (5%) of
the revenues of the Company during the nine months ended June 30, 1998.
SECTION 2.10. Intangible Rights. Except as set forth in
Schedule 2.10 hereto, (i) the Company has complied with its contractual
obligations relating to the protection of such of the Intangible Rights used by
it pursuant to licenses or other contracts, (ii) the Company has the right to
use its Intangible Rights to provide, sell and produce the services provided and
sold by it and to conduct its business as heretofore conducted, and the
consummation of the transactions contemplated hereby will not alter or impair
any such Intangible Rights, (iii) all such Intangible Rights are valid,
enforceable and in good standing, and no claims have been asserted with respect
to the use by the Company of any of the Intangible Rights or otherwise for
patent, copyright or trademark infringement, and (iv) to the knowledge of the
Company and the Stockholders, no person is infringing on or violating the
Intangible Rights or know-how used by the Company.
SECTION 2.11. Software. (a) The operating and applications
computer software programs and databases used by the Company in the conduct of
its business (other than programs and databases that are generally commercially
available for a per unit license fee of less than $1,000) (collectively, the
"Software") are described in Schedule 2.11 hereto. Except as set forth in
Schedule 2.11, the Company owns outright or holds valid licenses to all copies
of the Software used by it in its business. None of the Software used by the
Company, and no use by the
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Company thereof, infringes upon or violates any patent, copyright, trade secret
or other proprietary right of any other person and, to the knowledge of the
Company and the Stockhold ers, no claim with respect to any such infringement or
violation is threatened. The Company has taken all steps reasonably necessary to
protect its right, title and interest in and to the Software owned by the
Company, including, without limitation, the use of written agreements containing
appropriate confidentiality provisions with all third parties having access to
the source code relating to the Software.
(b) The Company possesses or has access to the original and
all copies of all documentation, including, without limitation, all source code
for all Software owned by it. Upon consummation of the transactions contemplated
by this Agreement, except as set forth in Schedule 2.11, the Company will
continue to own all the Software owned by it, free and clear of all claims,
liens, encumbrances, obligations and liabilities, and, with respect to all
agreements for the lease or license of Software which require consents or other
actions as a result of the consummation of the transactions contemplated by this
Agreement in order for the Company to continue to use and operate such Software
after the Closing Date, the Company will have obtained such consents or taken
such other actions so required.
(c) Any programs, modifications, enhancements or other
inventions, improve ments, discoveries, methods or works of authorship included
in the Software that were created by employees of the Company were made in the
regular course of such employees' employment with the Company using the
Company's facilities and resources and, as such, constitute "works made for
hire."
SECTION 2.12. Litigation, Etc. Schedule 2.12 hereto sets forth
a complete list and an accurate description of all claims, actions, suits,
proceedings and investigations pending or, to the knowledge of the Company and
the Stockholders, threatened, by or against the Company or any of its
properties, assets, rights or businesses. No such pending or threatened claims,
actions, suits, proceedings or investigations, if adversely determined, would,
individually or in the aggregate, have a Material Adverse Effect. Neither the
Company nor any of the Stockholders has any knowledge of any basis for any other
such claim, action, suit, proceeding or investigation which, if adversely
decided, would have a Material Adverse Effect. There are no actions, suits,
proceedings or claims pending before or by any court, arbitrator, regulatory
authority or government agency against or affecting any of the Stockholders or
the Company that might enjoin or prevent the consummation of the transactions
contemplated by this Agreement.
SECTION 2.13. Taxes.
(a) Except as set forth in Schedule 2.13 hereto, the Company
has (i) duly and timely filed all returns, declarations, reports, estimates,
information returns and statements ("Re turns") required to be filed by it in
respect of any Taxes (as hereinafter defined), all of which Returns (including
all informational Returns) were correct as filed (or as subsequently amended)
and correctly reflect the facts regarding the income, business, assets,
operations, activities and
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status of the Company as well as any Taxes required to be paid or collected by
the Company; (ii) timely paid or withheld all Taxes that are due and payable
with respect to the Returns referred to in clause (i); (iii) established,
consistent with past practice, an adequate reserve, if any, on its books and
records for the payment of all Taxes with respect to any taxable period (or
portion thereof) ending on or prior to the Closing Date; and (iv) complied with
all applicable laws, rules and regulations relating to the payment and
withholding of Taxes and has timely withheld from employee wages and paid over
to the proper governmental authorities when due all amounts required to be so
withheld and paid over.
For purposes of this Agreement, "Taxes" shall mean (A) any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, value added, transfer, franchise, profits, license, withholding
on amounts paid or received, payroll, employment, excise, severance, stamp,
occupation, premium, property, environmental or windfall profit taxes, custom
duties or other taxes, governmental fees or other like assessments or charges of
any kind whatsoever, together with any interest or any penalty, addition to tax
or additional amount imposed on the Company by any governmental authority
responsible for the imposition of any such taxes (domestic or foreign) ("Taxing
Authorities"), (B) liability for the payment of any amounts of the type
described in (A) as a result of being a member of an affiliated, consolidated,
combined or unitary group, or being a party to any agreement or arrangement
whereby liability for payments of such amounts was determined or taken into
account with reference to the liability of any other person for any period prior
to the Closing Date and (C) liability with respect to the payment of any amounts
described in (A) as a result of any express or implied obligation to indemnify
any other person.
(b) Except as set forth in Schedule 2.13 hereto, no Federal,
state or local income Tax Returns of the Company are being examined or have been
examined by any Taxing Authority.
(c) Except as set forth in Schedule 2.13 hereto, the Company
has never (A) requested or received a Tax ruling (other than a determination
with respect to a qualified employee benefit plan) or entered into a legally
binding agreement (such as a closing agreement) with any Taxing Authority, which
ruling or agreement could have an effect on the Taxes of the Company on or after
the Closing Date or (B) filed any election or caused any deemed election under
Section 338 of the Code, or any similar state or local provision.
(d) Except as set forth in Schedule 2.13 hereto, (A) no
extensions of time have been granted to the Company to file any Return, which
Return has not been filed in the time period permitted by any such extension,
(B) no deficiency or adjustment for any Taxes has been proposed, asserted or
assessed against the Company, which deficiency or adjustment has not been paid
in full, and no Federal, state, local or foreign audits or other administrative
proceedings or court proceedings are currently in progress or pending against
the Company with respect to any Taxes owed by the Company, and (C) no waiver or
consent extending any statute of limitations for the assessment or collection of
any Taxes owed by the Company, which waiver or consent
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remains in effect, has been executed by the Company or on behalf of the Company,
nor are any re quests for such waivers or consents pending.
(e) Except as set forth in Schedule 2.13 hereto, the Company
has never (A) been a member of any consolidated, combined or unitary group for
Federal, state, local or foreign Tax law purposes or (B) been a party to any
Tax-sharing or allocation agreement.
(f) The Company is not a party to any agreement, contract or
arrangement that would result, by reason of the consummation of any of the
transactions contemplated herein, separately or in the aggregate, in the payment
of any "excess parachute payment" within the meaning of Section 280G of the
Code.
SECTION 2.14. Governmental Authorizations and Regulations.
(a) Except as set forth in Schedule 2.14 hereto, the Company
has all govern mental licenses, franchises and permits ("Governmental Permits")
required under applicable law for the conduct of its business as currently
conducted.
(b) The business of the Company is being conducted in material
compliance with all applicable laws, ordinances, rules and regulations of all
governmental authorities relating to its properties or applicable to its
business, including without limitation the terms of all Governmental Permits and
federal securities laws. Neither the Company nor any of the Stock holders has
received any notice of any alleged violation of any of the foregoing.
(c) Neither the Company nor any of its properties, operations
or businesses is subject to any court or administrative order, judgment,
injunction or decree. To the knowledge of the Company and the Stockholders, no
action has been taken or recommended by any govern mental or regulatory
official, body or authority, either to revoke, withdraw or suspend any license
used in the operations of the Company.
SECTION 2.15. Labor Matters; Employees. (a) No collective
bargaining agreement is applicable to any employees of the Company. There are
not any disputes between the Company and any of its employees that might
reasonably be expected to have a Material Ad verse Effect. To the knowledge of
the Company and the Stockholders, there are not any organi zational efforts
presently being made or threatened involving any of such employees. Neither the
Company nor any of the Stockholders has received notice of any claim that the
Company has failed to comply with any laws relating to employment, including any
provisions thereof relating to wages, hours, collective bargaining, the payment
of social security and other payroll or similar taxes, equal employment
opportunity, employment discrimination and employment safety, or that the
Company is liable for any arrears of wages or any taxes or penalties for failure
to comply with any of the foregoing.
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(b) There are no proceedings pending or, to the knowledge of
the Company and the Stockholders, threatened before the National Labor Relations
Board with respect to any employees of the Company. There are no discrimination
charges (relating to sex, age, religion, race, national origin, ethnicity,
handicap or veteran status) against the Company pending before any federal or
state agency or authority.
(c) Schedule 2.15 hereto lists all employees of the Company as
of the date hereof, and indicates for each employee (i) whether, to the
knowledge of the Stockholders and the Company, such employee will be employed in
connection with the "Intercare" business following the Closing, (ii) the salary
now received by such Employee and (iii) the total amount (including
stay/severance benefits and amounts payable on exercise of any "in the money"
stock options held by such Employee) of all benefits that will be payable to the
Employee as a result of the consum mation of the transactions contemplated
hereby.
SECTION 2.16. Insurance. All policies of fire, liability,
workers' compensation and other forms of insurance providing insurance coverage
to or for the Company are listed in Schedule 2.16 hereto and, except as set
forth in said Schedule 2.16, (i) the Company is a named insured under such
policies, (ii) all premiums with respect thereto covering all periods up to and
including the Closing Date have been paid and (iii) no notice of cancellation or
termination has been received with respect to any such policy. All such policies
are in full force and effect and will remain in full force and effect to and
including the Closing Date, and coverage thereunder will continue to be in
effect immediately after the Closing Date, without limit as to time, for occur
rences prior to the Closing Date.
SECTION 2.17. Use of Real Property. The leased real properties
listed in Schedule 2.08 hereto are used and operated by the Company in
compliance and conformity with all applicable leases. Neither the Company nor
any of the Stockholders has received notice of any violation of any applicable
zoning or building regulation, ordinance or other law, order, regulation or
requirement relating to the respective real estate operations or assets of the
Company and, to the knowledge of the Company and the Stockholders, there are no
such violations.
SECTION 2.18. Condition of Assets. Except as set forth in
Schedule 2.18 hereto, all tangible personal property, fixtures and equipment
comprising the assets of the Company are in a good state of repair (ordinary
wear and tear excepted) and operating condition, and are sufficient and adequate
to permit the Company to conduct its business as of the Closing Date.
SECTION 2.19. Employee Benefit Plans. (a) Schedule 2.08
attached hereto lists each employee benefit plan within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA") maintained
by the Company or to which the Company contributes or is required to contribute
or in which any employee of the Company participates (a "Plan"). The Company has
complied and currently is in compliance in all material respects, both
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as to form and operation, with the provisions of ERISA and the Internal Revenue
Code of 1986, as amended (the "Code") applicable to each Plan.
(b) Each of the Plans which is intended to qualify under
Section 401(a) of the Code does so qualify and is exempt from taxation pursuant
to Section 501(a) of the Code, and the Company has received favorable and
unrevoked determination letters from the Internal Revenue Service to that
effect.
(c) The Company has not maintained, contributed to or been
required to contribute to, and the employees of the Company do not participate
in, a "multiemployer plan" (as defined in Section 3(37) of ERISA) or a "defined
benefit plan" (as defined in Section 3(35) of ERISA). No amount is due or owing
from the Company on account of a multiemployer plan or on account of any
withdrawal therefrom.
(d) Notwithstanding anything else set forth herein, neither
the Company nor any of the Stockholders has incurred any liability with respect
to any Plan under ERISA (in cluding, without limitation, Title I or Title IV of
ERISA), the Code or other applicable law, which has not been satisfied in full,
and no event has occurred, and there exists no condition or set of circumstances
which could result in the imposition of any liability under ERISA (including,
without limitation, Title I or Title IV of ERISA), the Code or other applicable
law with respect to any of the Plans.
(e) No Plan, other than a Plan which is an employee pension
benefit plan (within the meaning of Section 3(2)(A) of ERISA), provides
benefits, including without limita tion, death, health or medical benefits
(whether or not insured), with respect to current or former employees of the
Company beyond their retirement or other termination of service with the Company
(other than (i) coverage mandated by applicable law, (ii) deferred compensation
benefits accrued as liabilities on the books of the Company or (iii) benefits
the full cost of which is borne by the current or former employee (or his
beneficiary)).
(f) Except as otherwise set forth in Schedule 2.19 hereto, the
consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former employee or officer of the Company to severance
pay, unemployment compensation or any other payment, or (ii) accelerate the time
of payment or vesting, or increase the amount of compen sation due any such
employee or officer.
(g) The Company has provided to the Purchaser true and
complete copies of the following, to the extent each is applicable, for each
Plan: (i) the Plan; (ii) summary plan description of the Plan; (iii) the trust
agreement, insurance policy or other instrument relating to the funding of the
Plan; (iv) the most recent Annual Report (Form 5500 series) and accompanying
schedule filed with the Internal Revenue Service or United States Department of
Labor with respect to the Plan; (v) the most recent audited financial statement
for the Plan; (vi) the most recent actuarial report of the Plan; (vii) the
policy of fiduciary liability insurance (and agreements
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related thereto) maintained in connection with the Plan; and (viii) the most
recent determination letter issued by the Internal Revenue Service with respect
to each of the Plans that is intended to qualify under Section 401(a) of the
Code.
SECTION 2.20. Related Party Transactions. Except as set forth
in Schedule 2.20 hereto or as contemplated by this Agreement, there are no
existing material arrangements or proposed material transactions between the
Company or its subsidiaries and (i) any officer or director of the Company or
its subsidiaries or any member of the immediate family of any of the foregoing
persons (such officers, directors and family members being hereinafter
individually re ferred to as a "Related Party"), (ii) any business (corporate or
otherwise) which a Related Party owns, directly or indirectly, or in which a
Related Party has an ownership interest, or (iii) between any Related Party and
any business (corporate or otherwise) with which the Company or its subsidiaries
regularly does business.
SECTION 2.21. Environmental Matters. (a) The Company, its
business, operations, properties and assets comply in all material respects with
all existing Environmental Laws (as defined below). The Company has not received
notice of violations of any existing Environmental Law relating to the Company,
its business or operations or any of its assets or properties that might
reasonably be expected to have a Material Adverse Effect.
(b) For the purposes of this Agreement, "Environmental Laws"
shall mean any law, statute, regulation, rule, order, ordinance, consent decree,
settlement agreement or govern mental requirement of any governmental authority,
as in effect on the date of this Agreement, which relates to or otherwise
imposes liability or standards of conduct concerning the protection or pollution
of the environment, or community health and safety, including, but not limited
to the Comprehensive Environmental Response Compensation and Liability Act, as
amended, the Federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act and the Hazardous and Solid Waste Amendments, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Toxic Substance
and Control Act, the Federal Safe Drinking Water Act, and any similar or
analogous statute, regulation, decisional law, legally binding conditions,
standards, prohibitions, requirements or judgments or any governmental
authority, as now exist.
SECTION 2.22. System Capacity. The computer hardware, Software
and communications equipment now being used by the Company are sufficient to
accommodate the electronic data interchange and transaction processing currently
performed by the Company and as proposed to be performed for the next twelve
months (given reasonably anticipated Company growth and transaction volume
absent the transactions contemplated by this Agreement).
SECTION 2.23. Stock and Asset Transfers. The consummation of
the transac tions contemplated by the "MTI Transfer Agreement" and the
"Intercare Transfer Agreement" (as defined in Section 5.08 hereof), as
contemplated by Section 5.08 hereof, will result in the valid and legally
binding release (effective immediately after the Closing) of the Company, the
Purchaser and their respective affiliates, parents, subsidiaries, directors,
officers, employees and
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agents, from all liabilities and obligations of any nature and howsoever arising
(whether arising before, on or after the Closing Date, whether known or unknown,
secured, unsecured, absolute, accrued, contingent or otherwise, and whether due
or to become due) to the extent the same relate to the business now conducted by
the Company's subsidiary, HII Telemedical Corp. ("HIIT"), and the so-called
"Intercare" business now being conducted by the Company, other than any such
obligations that are explicitly set forth either on the "Closing Balance Sheet"
or the "Backup Materials" (as each is defined in Section 5.05 hereof).
SECTION 2.24. Securities Laws Matters. Neither the Company
nor, to the knowledge of the Company and the Stockholders, any person authorized
by the Company or any Stockholder as agent, broker, dealer or otherwise in
connection with the offering or sale of the Shares, or any similar securities
has taken or will take any action (including without limitation any offer or
sale of any securities under circumstances which would require the integration
of such securities with the Common Shares being transferred by such Stockholder
hereunder under the Securities Act of 1933 (the "Securities Act"), or the rules
and regulations of the Securities and Exchange Commission (the "Commission")
thereunder), which would subject such transfer to the registration provisions of
the Securities Act.
SECTION 2.25. Y2K Compliance. Anything in this Agreement to
the contrary notwithstanding, the Purchaser acknowledges and agrees that neither
the Company nor the Stockholders have made any representation or warranty to, or
covenant with, the Purchaser with respect to issues surrounding the so called
"Year 2000" or "Y2K" problem or Y2K compliance of any of the Company's or any
Stockholder's equipment, software, computer hardware or other assets; provided,
however, that notwithstanding the foregoing, the Stockholders hereby represent
and warrant that, except as set forth in Schedule 2.25 hereto, the Company has
made no agreement or contract with or commitment to any third party that the
Company's equipment, software or computer hardware will be Y2K compliant prior
to December 1, 1999.
SECTION 2.26. Limit on Employee Obligations. Upon the
execution and delivery of the "Employment Agreements," "Transition Agreements"
and "Releases" (as defined herein) required by Section 6.01(e), by the employees
listed on Schedule 6.01(e), after the Closing Date neither the Company, nor the
Purchaser shall have any payment, severance, bonus or other compensatory
obligations of any sort whatsoever arising from or relating to the employment of
any employee of the Company or HIIT on or prior to the Closing Date, except for
(i) the obligations of the Purchaser and the Company listed in the Employment
Agreements, Transition Agreements and Releases, (ii) the obligation to provide
credit for past services in determining eligibility and status in the
Purchaser's employee benefit plans, (iii) the obligation to pay salary for the
pay period in which the Closing Date takes place, (iv) reimbursement obligations
for business expenses incurred by such employees and submitted for payment in
accordance with the Pur chaser's policies now in effect and (v) for any other
liabilities specifically listed on the Closing Balance Sheet or the Backup
Materials.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF
THE STOCKHOLDERS
Each Stockholder, severally and not jointly, represents and
warrants as to itself to the Purchaser as follows:
SECTION 3.01. Organization, Qualifications and Corporate
Power. Such Stockholder has been duly incorporated and is in good standing under
the laws of its jurisdiction of incorporation. Such Stockholder has all
requisite corporate power and authority to execute and deliver (i) this
Agreement, (ii) the Escrow Agreement, (iii) a Non-Competition and Confiden
tiality Agreement in the form of Exhibit F hereto (the "Non-Competition
Agreement"), (iv) in the case of RightCHOICE Managed Care, Inc. ("RightCHOICE"),
an Amended and Restated Payer Agreement in the form of Exhibit B-1 hereto (the
"RightCHOICE Payer Agreement") and a Data Processing Agreement in the form of
Exhibit C hereto (the "Data Processing Agreement"), and (v) in the case of
General American Life Insurance Company ("General"), an Amended and Restated
Payer Agreement in the form of Exhibit B-2 hereto (the "General Payer
Agreement," and collectively with the Escrow Agreement, the Non-Competition
Agreement, the RightCHOICE Payer Agreement and the Data Processing Agreement,
the "Ancillary Agreements"), and to perform its obligations hereunder and
thereunder.
SECTION 3.02. Authorization of Agreements, Etc. The execution
and delivery by such Stockholder of this Agreement and the Ancillary Agreements
to which it is a party, and the performance by such Stockholder of its
obligations hereunder and thereunder, have been duly authorized by all requisite
corporate action and will not (x) violate any provision of law, any order of any
court or other agency of government, the charter or By-laws of such Stockholder,
or any judgment, award or decree to which such Stockholder is a party, or by
which such Stockholder or any of such Stockholder's properties or assets is
bound or affected or (y) result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the Shares.
SECTION 3.03. Validity. This Agreement has been duly executed
and delivered by such Stockholder and constitutes the legal, valid and binding
obligations of such Stockholder, enforceable against such Stockholder in
accordance with its terms. Each of the Ancillary Agreements, when executed and
delivered by such Stockholder (if a party thereto) as contem plated hereby, will
constitute the legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms.
SECTION 3.04. Title to Shares. Such Stockholder is the lawful
holder of record and beneficial owner of the number of Shares set forth opposite
the name of such Stockholder in Schedule I to this Agreement, in each case free
and clear of any and all pledges, security interests, liens, charges or other
encumbrances of any nature whatsoever. The delivery by such
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Stockholder of certificates or instruments and agreements evidencing the number
of Shares set forth opposite the name of such Stockholder as aforesaid, duly
endorsed for transfer or accompanied by stock transfer powers duly endorsed in
blank, to the Purchaser pursuant to Section 1.02(a) above, against payment or in
exchange for such Shares pursuant to Section 1.02(b) above, will transfer valid
title to said Shares to the Purchaser, free and clear of any and all pledges,
security interests, liens, charges or other encumbrances of any nature
whatsoever.
SECTION 3.05. Brokers' or Finders' Fees. All negotiations
relative to this Agreement and the transactions contemplated hereby have been
carried out directly with the Purchaser or through the Stockholders' agent,
Jefferies & Company, Inc. (whose fees and expenses shall be borne solely by the
Stockholders), without the intervention of any person on behalf of the Company
or the Stockholders in such manner as to give rise to any claim by any person
against the Purchaser for a finder's fee, brokerage commission or similar
payment.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Stockholders as
follows:
SECTION 4.01. Organization, Power, Etc. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Purchaser has full corporate power and authority
to execute and deliver this Agreement and the Ancillary Agreements to which it
is a party, and to perform its obligations hereunder and thereun der.
SECTION 4.02. Authorization of Agreements, Etc. The execution
and delivery by the Purchaser of this Agreement and the Ancillary Agreements to
which it is a party, and the performance by the Purchaser of its obligations
hereunder and thereunder, have been duly authorized by all requisite corporate
action on the part of the Purchaser and will not (x) violate any provision of
law, any order of any court or other agency of government, the Amended and
Restated Certificate of Incorporation or By-laws of the Purchaser, any judgment,
award or decree or any indenture, agreement or other instrument to which the
Purchaser is a party, or by which it or any of its properties or assets is bound
or affected; (y) conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agree ment
or other instrument; or (z) result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the properties or
assets of the Purchaser.
SECTION 4.03. Validity. This Agreement has been duly executed
and delivered by the Purchaser and constitutes the legal, valid and binding
obligations of the Purchaser, enforce able against the Purchaser in accordance
with its terms. Each of the Ancillary Agreements, when executed and delivered by
the Purchaser (if a party thereto) as contemplated hereby,
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will constitute the legal, valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms.
SECTION 4.04. Governmental Approvals. No order, authorization,
approval or consent from, or filing with, any federal or state governmental or
public body or other authority having jurisdiction over the Purchaser is
necessary for the execution, delivery and performance by the Purchaser of its
obligations under this Agreement or the Ancillary Agreements (to the extent that
the Purchaser is a party thereto).
SECTION 4.05. Litigation Relating to Transaction. There are no
actions, suits, proceedings or claims pending before any court, arbitrator or
government agency against or affecting the Purchaser which might enjoin or
prevent the consummation of the transactions contemplated by this Agreement or
the Ancillary Agreements.
SECTION 4.06. Brokers' or Finders' Fees. All negotiations
relative to this Agreement and the transactions contemplated hereby have been
carried out by the Purchaser directly with the Stockholders, without the
intervention of any person on behalf of the Purchaser in such manner as to give
rise to any claim by any person against the Stockholders for a finder's fee,
brokerage commission or similar payment.
ARTICLE V.
COVENANTS
SECTION 5.01. Certain Covenants of the Stockholders. (a)
During the period from the date of this Agreement to the Closing Date, the
Stockholders will cause the Company to conduct its business and operations
according to its ordinary course of business consistent with past practice and
use its best efforts (i) to preserve its relationships with business partners,
employees and customers, (ii) to maintain the contracts with third-party payers
and customers in full force and effect in accordance with their terms and (iii)
to ensure that the Company will continue to provide its services to such third
party payers and customers. Without limiting the generality of the foregoing,
except as otherwise expressly contemplated by this Agreement, prior to the
Closing Date, without the prior written consent of the Purchaser, the
Stockholders will cause the Company not to do any of the things listed in
paragraphs (a) through (k) of Section 2.05 above.
(b) Upon prior notice and at reasonable times, between the
date hereof and the Closing Date, the Stockholders shall, and shall cause the
Company to, provide access to repre sentatives of the Purchaser to the
financial, accounting and legal records of the Company, and to key employees of
the Company designated by the Purchaser, and, in connection therewith, shall
permit representatives of the Purchaser to visit the premises of the Company.
Such activities
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shall be performed, so far as is reasonably possible, in such a manner as to
avoid disruption of normal operations.
(c) Between the date hereof and the Closing Date, the
Stockholders shall cause the Company not to, except as required by consistently
applied accounting methods, (A) utilize accounting principles different from
those used in the preparation of the financial statements as of June 30, 1998
referred to in Section 2.03 above, (B) change in any manner its method of main
taining its books of account and records from such methods as in effect on June
30, 1998, or (C) accelerate booking of revenues or the deferral of expenses,
other than as shall be consistent with past practice and in the ordinary course
of business.
(d) Between the date hereof and the Closing Date, the
Stockholders shall not, and shall cause the Company not to, enter into any
transaction, make any agreement or commit ment, or take any action which would
result in any of the representations, warranties or covenants of the
Stockholders contained in this Agreement not being true and correct at and as of
the time immediately after the occurrence of such transaction, event or action.
SECTION 5.02. Books and Records. Promptly after the Closing
Date, the Stockholders shall deliver to the Purchaser or the Company all books
and records used in the operation of the business of the Company and all files,
documents, papers, agreements, books of account and other records pertaining to
the business of the Company, to the extent that such books, records, files and
other materials are not located at the offices of the Company.
SECTION 5.03. Preparation of Certain Financial Statements. (a)
After the Closing and at no cost to the Stockholders, the Stockholders shall
provide the Company's auditors with all financial information, other than
information held by the Company, and data reasonably necessary to enable its
independent accountants to prepare and review an audited consolidated balance
sheet of the Company as of June 30, 1999 and the related statements of income,
stockhol ders' equity and cash flows for the year then ended.
(b) The Stockholders agree that, if requested by the Company
as being necessary to prepare the audited financial statements as contemplated
by Section 5.03(a) hereof, the Stockholders shall provide to the Company's
auditors a management representation letter in a form reasonably acceptable to
such auditors covering the period referred to above.
SECTION 5.04. Certain Tax Matters.
(a) Transfer Taxes. All stamp, transfer, sales and use Taxes
imposed upon or incurred by any of the parties hereto in connection with the
transfer of the Shares to the Purchaser under this Agreement, and any legal and
other expenses relating thereto, shall be borne by the Stockholders. The
Stockholders shall, at their own expense, prepare and file all necessary Tax
Returns and other documents with respect to all such stamp, transfer, sales and
use Taxes.
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(b) Tax Returns. The Purchaser shall prepare and file all Tax
Returns of the Company that have not yet been filed. Before filing any Tax
Returns relating in whole or in part to the any period prior to the Closing
Date, the Purchaser shall deliver a copy of such Tax Returns to the Stockholders
for their review and approval (which will not be unreasonably withheld or
delayed). The Purchaser shall make any changes requested by the Stockholders and
reasonably acceptable to the Purchaser. For all Tax Returns relating both to
periods before and after the Closing Date, all reasonable fees and expenses
relating to the preparation of such returns shall be apportioned between the
Stockholders, on the one hand, and the Company and the Purchaser, on the other
hand, on the basis set forth in paragraph (c) below. The Stockholders shall
provide the Purchaser with all reasonable assistance required to prepare and
file such Tax Returns. The Stockholders shall be responsible for, and shall pay
all Taxes shown on such Tax Returns that relate to any Tax period (or any
portion thereof) ending on or before the close of business on the Closing Date
(a "Prior Tax Period"). The Purchaser shall be responsible for, and shall pay,
any such Taxes for which the Stockholders are not responsible.
(c) Straddle Periods. Subject to Section 5.04(b), with respect
to any Tax period that straddles the Closing Date, (i) the portion of any Tax
based on income, profits or revenue that is attributable to a Prior Tax Period
shall be determined based on a closing of the Company's books as of the close of
business on the Closing Date and (ii) the portion of any other Tax attributable
to a Prior Tax Period will be determined by multiplying the amount of such Tax
by a fraction, the numerator of which shall equal the number of days in such
Prior Tax Period up to and including the Closing Date and the denominator of
which shall equal the total number of days in such Tax period.
(d) Tax Disputes. In the event that the Stockholders dispute
their responsi bility for any Tax under this Section 5.04, the Stockholders
shall not be relieved of their obligation to pay, in the first instance, the
amount of such Tax. If, within 15 days of the payment by the Stockholders of the
disputed Tax, the Stockholders, on the one hand, and the Purchaser, on the
other, are unable to resolve the dispute among themselves, they shall select a
nationally recog nized financial accounting firm and shall give such firm the
authority to resolve the dispute in its sole discretion.
SECTION 5.05. Certain Balance Sheet Transactions.
(a) Prior to or on the Closing Date, the Stockholders shall
cause the Company (or direct the Purchaser to disburse a portion of the Purchase
Price) to repay all indebtedness of the Company for borrowed money, and to take
such actions as may be necessary or appropriate to release all liens,
encumbrances, mortgages and security interests securing such indebtedness.
(b) On or prior to the Closing Date, the Stockholders shall
cause the Company to take such actions as may be necessary to cause (i) the Net
Working Capital of the Company to be at least $1 on the Closing Date and (ii)
the Tangible Net Worth of the Company on the Closing Date
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to be at least $425,000, in each case after giving effect to (i) the
transactions contemplated by the MTI Transfer Agreement and the Intercare
Transfer Agreement and (ii) the payments listed on Schedule 5.05(b) hereof;
provided, however, that the Net Working Capital and Tangible Net Worth may be
reduced below such amounts by the amount payable to KPMG Peat Marwick LLP in
connection with its audit of the Company as of and for the nine months ended
June 30, 1998; provided, further, however, that such amount so payable shall not
exceed $30,000. For purposes hereof, "Net Working Capital" shall be calculated
by subtracting the sum of the Company's current liabilities from the sum of the
Company's "cash," "accounts receivable" (excluding, however, any accounts
receivable arising from the Company's "Intercare" business and the business
conducted by HIIT (collectively, the "Excluded Receivables")), "deposits" and
"prepaids," in each case deter mined in accordance with generally accepted
accounting principles consistently applied and (to the extent not inconsistent
with GAAP) in a manner consistent with that used by the Company in preparing the
Financial Statements. For purposes hereof, "Tangible Net Worth" means the total
assets of the Company (excluding, however, any Excluded Receivables) less the
value of capitalized software, goodwill, other intangible assets and less all
liabilities, in each case determined in accordance with generally accepted
accounting principles consistently applied and (to the extent not inconsistent
with GAAP) in a manner consistent with that used by the Company in preparing the
Financial Statements.
(c) On the Closing Date, the Stockholders shall deliver to the
Purchaser a balance sheet (the "Closing Balance Sheet") of the Company,
unaudited but certified by the Company's chief executive officer, reflecting (in
accordance with paragraphs (a) and (b) above) the repayment of indebtedness and
the revised Net Working Capital and Tangible Net Worth of the Company as of the
Closing Date, and also reflecting the transactions contemplated by the MTI
Transfer Agreement and the Intercare Transfer Agreement (and otherwise
reflecting no material changes to the Company's audited June 30, 1998 balance
sheet other than those described in Schedule 2.04 hereto). For all purposes of
this Agreement, the Closing Balance Sheet shall be deemed to be part of the
Financial Statements (without limiting the foregoing, the representations and
warranties made by the Stockholders regarding the Financial Statements shall
apply to the Closing Balance Sheet). The Stockholders shall also deliver to the
Purchaser such supporting materials (collectively, the "Backup Materials")
relating to the Closing Balance Sheet as the Purchaser may reasonably request,
including without limitation worksheets of all accounts receiv able, accounts
payable and accrued but unpaid expenses that are reflected on the Closing
Balance Sheet.
(d) Notwithstanding any policy of the Purchaser to the
contrary, the Purchaser agrees to cause the Company to pay all accrued sales
commissions set forth in the Backup Materials as and when due in accordance with
the Company's policies prior to the Closing Date, whether or not such employees
are then employed by the Purchaser or the Company.
(e) The Purchaser agrees that, in connection with the
transactions contemplated by the Intercare Transfer Agreement and the MTI
Transfer Agreement, the Company will surrender
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all right, title and interest in and to the Excluded Receivables. In the event
that, after the Closing Date, the Company shall receive any amounts in payment
of the Excluded Receivables, the Purchaser shall cause the Company to remit
one-half of any such amount to each Stockholder (with the result that such
amount shall be remitted in full to the Stockholders). Such remittances shall be
made in a reasonably commercially prompt manner.
SECTION 5.06. Consents and Approvals. Between the date hereof
and the Closing Date, the Stockholders shall, and shall cause the Company to,
use their respective best efforts to make the filings and procure the consents
and approvals listed on Schedule 2.06 hereto.
SECTION 5.07. Retention of Employees. Effective as of the
Closing Date, the Purchaser will offer employment to certain employees (the
"Retained Employees") of the Company principally engaged in the "Financial
Services" business. The Retained Employees will be employed on the terms set
forth in the "Employment Agreements" referred to in Section 6.01(e) below.
Effective as of the Closing Date, the Purchaser will offer employment to certain
other employees (the "Transitional Employees") on a transitional basis for
periods of time up to one year, on the terms set forth in the "Transition
Agreements" referred to in Section 6.01(e) below.
SECTION 5.08. Intercare and MTI Dispositions. Between the date
hereof and the Closing Date, the Stockholders shall, and shall cause the Company
to, use their best efforts to execute and deliver agreements transferring from
the Company all operations and liabilities relating to the business conducted by
HIIT (such agreements being collectively referred to as the "MTI Transfer
Agreement") and the so-called "Intercare" business being conducted by the
Company (such agreements being collectively referred to as the "Intercare
Transfer Agreement"). Among other things, the Intercare Transfer Agreement and
the MTI Transfer Agreement shall provide (in terms satisfactory to the Purchaser
and its counsel) that after the Closing Date the Company shall have no
obligations or liabilities of any sort relating to the businesses so disposed,
other than any such obligations that are explicitly set forth either on the
Closing Balance Sheet or the Backup Materials. In connection with the
transactions contemplated by the Intercare Transfer Agreement, the Purchaser
agrees to negotiate in good faith with the proposed acquiror of the Intercare
business the terms of any short-term transitional service agreements that may be
required by such acquiror after the Closing Date.
SECTION 5.09. Employee Bonuses. On the Closing Date, the
Stockholders will cause a portion of the Purchase Price to be paid to the
Company for the purpose of enabling the Company to pay (and the Stockholders
shall cause the Company to pay) to each of the employees of the Company set
forth on Schedule 5.09 hereto, a bonus in the amount set forth opposite the name
of such employee.
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SECTION 5.10. Access to Tax and Other Records.
(a) After the Closing Date, if and to the extent that the
Purchaser has asserted a claim for Damages under Article VII hereof, or any
other third party has asserted a claim against either the Company or either
Stockholder with respect to any act or omission alleged to have been taken or
omitted by the Company on or prior to the Closing Date, then upon the request of
either Stockholder the Purchaser shall (i) grant to such Stockholder and its
representatives the right, during normal business hours, to inspect and copy the
books, records and other documents of the Company and (ii) use commercially
reasonable efforts to cause the Company's auditors to permit such Stockholder to
inspect and copy worksheets and other information pertaining to the Company and
its financial statements, in each case as reasonably necessary to defend such
Stockholder against any such claim. In connection with any such inspection, the
Stockholder making such inspection shall reimburse the Purchaser's, the
Company's and the auditors' (as the case may be) reasonable out-of-pocket
expenses only.
(b) After the Closing Date, in connection with any claim or
investigation by the Internal Revenue Service or any state or local taxing
authority with respect to (i) the Company, for any periods ending on or prior to
the Closing Date, or (ii) the transactions contemplated by this Agreement, the
Purchaser shall cause the Company to make available to either Stockholder access
to appropriate employees, agents and representatives of the Company, in each
case as reasonably necessary to defend itself against any such claim or to
represent itself in any such investigation. Any out-of-pocket expenses
reasonably and actually incurred by the Purchaser or the Company in complying
with the provisions of this paragraph (b) shall be borne by the Stockholder
requesting such assistance.
(c) The Purchaser shall, and shall cause the Company to, keep
and maintain all their tax books, records and other tax information pertaining
to the Company for all tax periods ending on or prior to the Closing Date for a
period of six (6) years after the Closing Date, and thereafter shall (and shall
cause the Company to) offer such tax information to the Stockholders prior to
the disposal thereof.
(d) To the extent that either Stockholder requests information
pursuant to this Section 5.10, such Stockholder shall keep such information
confidential as though it were "Confidential Information," as such term is
defined in the Non-Competition Agreement; provided, however, that
notwithstanding the terms of the Non-Competition Agreement, such Stockholder may
use such information for its own benefit in connection with the claim,
investigation or proceeding giving rise to such Stockholder's request for
information. Notwithstanding the provisions of this Section 5.10, in the event
that Purchaser is advised in writing by its outside legal counsel that
disclosure of any information hereunder would destroy or compromise a legally
accepted privilege against disclosure (including without limitation privileges
relating to attorney-client communications or attorney work products), the
Purchaser and the Company shall not be obligated to disclose such information.
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ARTICLE VI.
CONDITIONS PRECEDENT
SECTION 6.01. Conditions Precedent to the Obligations of the
Purchaser. The obligation of the Purchaser to consummate the transactions
contemplated by this Agreement is subject, at the option of the Purchaser, to
the satisfaction at or prior to the Closing Date of each of the following
conditions:
(a) Accuracy of Representations and Warranties. The
representations and warranties of each Stockholder contained in this Agreement
or in any certificate or document delivered to the Purchaser pursuant hereto
shall be true and correct on and as of the Closing Date as though made at and as
of that date, and each Stockholder shall have so certified to the Purchaser in
writing.
(b) Compliance with Covenants. Each Stockholder shall have
performed and complied in all material respects with all terms, agreements,
covenants and conditions of this Agreement to be performed or complied with by
it at or prior to the Closing Date, and each Stockholder shall have so certified
to the Purchaser in writing.
(c) Balance Sheet Adjustments. The Stockholders shall have
made (or caused the Company to make) the payments, and delivered to the
Purchaser the Closing Balance Sheet, contemplated by and in accordance with
Sections 5.05 and 5.09 hereof. Such adjustments, and the form of such balance
sheet after giving effect to such adjustments, shall be reasonably acceptable to
the Purchaser.
(d) Indebtedness for Borrowed Money. The Stockholders shall
have caused the Company to repay all indebtedness for borrowed money, and shall
have caused all liens, encumbrances, mortgages and security interests in respect
thereof to be released. The Stockhold ers shall have caused the Company to
deliver to the Purchaser evidence of such repayments and releases, which
evidence shall be reasonably satisfactory to the Purchaser and its counsel.
(e) Employment Arrangements. Each of the Retained Employees
listed on Schedule 6.01(e) hereto shall have executed and delivered to the
Company and the Purchaser an Employment Agreement in the form of Exhibit D-1
hereto (collectively, the "Employment Agreements"). Each of the Transitional
Employees listed on Schedule 6.01(e) hereto shall have executed and delivered to
the Company and the Purchaser a Transition Agreement in the form of Exhibit D-2
hereto (collectively, the "Transition Agreements"). Each of the other employees
of the Company or HIIT shall have executed and delivered to the Company and the
Purchaser a Release in the form of either Exhibit D-3, Exhibit D-4, Exhibit D-5,
or Exhibit D-6 hereto (collectively, the "Releases"), as specified by Schedule
6.01(e).
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(f) All Proceedings To Be Satisfactory. All proceedings to be
taken by the Company and the Stockholders in connection with the transactions
contemplated hereby and all documents incident thereto shall be reasonably
satisfactory in form and substance to the Purchaser and its counsel, and the
Purchaser and said counsel shall have received all such counterpart origi nals
or certified or other copies of such documents as they may reasonably request.
(g) No Material Adverse Change. Except as disclosed on the
Schedules to this Agreement, there shall not have occurred since June 30, 1998
any material adverse change (i) in the financial condition or results of
operations of the business of the Company or (ii) in the capacity of the Company
to conduct such business in a manner consistent with past practice.
(h) Opinion of Counsel. The Purchaser shall have received the
opinion of Thompson Coburn, counsel to the Stockholders, in substantially the
form of Exhibit E hereto.
(i) Consents and Approvals. All authorizations, consents,
waivers and approvals set forth in Schedule 2.06 hereto shall have been duly
obtained and shall be in form and substance reasonably satisfactory to the
Purchaser and its counsel.
(j) Legal Actions or Proceedings. No legal action or
proceeding shall have been instituted by any party or threatened by any
governmental department, agency or authority, in either case seeking to
restrain, prohibit, invalidate or otherwise affect the consummation of the
transactions contemplated hereby or which would, if adversely decided, have a
Material Adverse Effect.
(k) Ancillary Agreements. The Stockholders, the Company and
the Escrow Agent shall have executed and delivered the Ancillary Agreements to
which each of them is a party, and the Ancillary Agreements shall be in full
force and effect with respect to each of them.
(l) MTI Transfer Agreement and Intercare Transfer Agreement.
The MTI Transfer Agreement and the Intercare Transfer Agreement (in form and
substance satisfactory to the Purchaser and its counsel) shall be have been
executed and delivered by all parties thereto, all conditions to closing set
forth therein shall have been satisfied, and such agreements shall have been
consummated in accordance with their respective terms.
(m) Intercare Switching Agreement. The Company and the
acquiror of the Intercare business shall have executed and delivered an
Intercare Switching Agreement on mutually agreeable terms.
(n) Resignations. The Purchaser shall have received from each
person who is, immediately prior to the Closing Date, a director or officer of
the Company, his or her written resignation, effective as of the Closing Date,
from such position.
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(o) Supporting Documents. On or prior to the Closing Date, the
Purchaser and its counsel shall have received copies of the following supporting
documents:
(i) (A) the charter documents of the Company and each of the
Stockholders certified as of a recent date by the Secretary of State of
such corporation's jurisdiction of incorporation and (B) a certificate
of such Secretary of State as to the due incorporation and good
standing of the Company or such Stockholder, as the case may be, and
listing all documents on file with said official;
(ii) a certificate of the Secretary or an Assistant Secretary
of the Company and each of the Stockholders, dated the Closing Date and
certifying (A) that attached thereto is a true and complete copy of the
By-laws of the Company or such Stockholder, as the case may be, as in
effect on the date of such certification; (B) that the charter of the
Company or such Stockholder, as the case may be, have not been amended
since the date of the last amendment referred to in the certificate
delivered pursuant to clause (i)(B) above; (C) in the case of each
Stockholder, that attached thereto is a true and complete copy of the
resolutions adopted by the Board of Directors or an authorized
committee of the Board of Directors of such Stockholder, authorizing
the execution, delivery and performance of this Agreement and the
Ancillary Agreements; and (D) as to the incum bency and signature of
each officer of the Company or such Stockholder that is executing any
Ancillary Agreement or other certificate or document delivered in
connection with the Closing; and
(iii) such additional supporting documents as the Purchaser or
its counsel may rea sonably request.
All such documents shall be satisfactory in form and substance to the Purchaser
and its counsel.
(p) Non-Competition Agreement. John Romer shall have executed
and delivered a Non-Competition Agreement substantially in the form of Exhibit G
hereto, and the same shall be in full force and effect.
(q) Settlement of Litigation. The lawsuit described on
Schedule 2.12 hereto shall have been settled and dismissed with prejudice. The
terms of such settlement shall be satisfactory to the Purchaser and its counsel.
(r) Financing. The Purchaser shall have obtained financing
from Bank of America NT&SA in an amount sufficient to enable it to pay the
Purchase Price.
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SECTION 6.02. Conditions Precedent to the Obligations of the
Stockholders. The obligations of the Stockholders under this Agreement are
subject, at the option of the Stockholders, to the satisfaction at or prior to
the Closing Date of each of the following condi tions:
(a) Accuracy of Representations and Warranties. The
representations and warranties of the Purchaser contained in this Agreement or
in any certificate or document delivered to the Stockholders pursuant hereto
shall be true and correct on and as of the Closing Date as though made at and as
of that date.
(b) Compliance with Covenants. The Purchaser shall have
performed and complied in all material respects with all terms, agreements,
covenants and conditions of this Agreement to be performed or complied with by
it at or prior to the Closing Date.
(c) All Proceedings to Be Satisfactory. All proceedings to be
taken by the Purchaser in connection with the transactions contemplated hereby
and all documents incident thereto shall be reasonably satisfactory in form and
substance to the Stockholders and their counsel, and the Stockholders and said
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
(d) Employment Arrangements. Each of the Retained Employees
shall have executed and delivered to the Company and the Purchaser an Employment
Agreement. Each of the Transitional Employees shall have executed and delivered
to the Company and the Purchaser a Transition Agreement. Each of the Company's
employees not to be retained by the Company or the Purchaser following the
Closing Date shall have executed and delivered to the Company and the Purchaser
a Release.
(e) Legal Actions or Proceedings. No legal action or
proceeding shall have been instituted by any party or threatened by any
governmental department, agency or authority, in either case seeking to
restrain, prohibit, invalidate or otherwise affect the consummation of the
transactions contemplated hereby.
(f) Ancillary Agreements. The Purchaser, the Company and the
Escrow Agent shall have executed and delivered the Ancillary Agreements to which
each of them is a party, and the Ancillary Agreements shall be in full force and
effect with respect to each of them.
ARTICLE VII.
INDEMNIFICATION
SECTION 7.01. Survival of Representations and Warranties;
Limitation. All representations and warranties made by any party hereto in this
Agreement or pursuant hereto
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shall survive the Closing Date hereunder for a period of eighteen months, except
for (i)those representations and warranties set forth in Section 2.13 hereof,
which shall survive until the expiration of all applicable Tax statutes of
limitations (including any extensions thereof) and (ii) those representations
and warranties set forth in Sections 2.02 and 3.04 hereof, which shall survive
indefinitely. Notwithstanding the other provisions of this Article VII, no party
hereto shall be obligated to indemnify any other party hereto until the
aggregate amount of Taxes and/or Damages (as defined herein) in respect of which
indemnification is sought exceeds $30,000, it being understood that the
foregoing limitation is a "threshold" and not a "deductible." In addition, the
maximum aggregate liability of the Stockholders for "Damages" (as defined
herein) shall be $11,600,000. There shall be no maximum aggregate liability of
the Stockholders for Taxes payable in accordance with Section 7.02 hereof.
SECTION 7.02. Tax Indemnity. (a) The Stockholders jointly and
severally agree to and will indemnify, defend and hold harmless the Purchaser
and the Company from and against any and all Taxes incurred by, imposed upon or
attributable to the Company or HIIT, including reasonable legal fees and
expenses incurred by the Company, HIIT or any party hereto and relat ing
thereto, for any Prior Tax Period, including without limitation any amount due
for sales and use Taxes payable as a result of an audit conducted by state or
local governmental authorities.
(b) For purposes of this Section 7.02, any interest, penalty
or additional charge included in Taxes shall be deemed to be a Tax for the
period to which the item or event giving rise to such interest, penalty or
additional charge is attributable, and not a Tax for the period during which
such interest, penalty or additional charge accrues.
(c) The indemnity provided for in this Section 7.02 shall be
independent of any other indemnity provision hereof and, anything in this
Agreement to the contrary notwithstanding, shall survive until the expiration of
the applicable statutes of limitation, including any extensions thereof, for the
Taxes referred to herein. Any Taxes, legal fees and expenses subject to
indemnifi cation under this Section 7.02 shall not be subject to indemnification
under Section 7.03 or Section 7.04 hereof.
SECTION 7.03. General Indemnity by the Stockholders. Subject
to the terms and conditions of this Article VII, the Stockholders agree to and
will, jointly and severally, indemnify, defend and hold the Purchaser and the
Company (together with their respective directors, officers, employees, agents,
stockholders and affiliates) harmless from and against all demands, claims,
actions or causes of action, assessments, losses, damages, liabilities, costs
and expenses, including without limitation interest, penalties and reasonable
attorneys' fees and expenses (hereinafter collectively called "Damages"),
asserted against, resulting to, imposed upon or incurred by the Company or the
Purchaser (or such other parties) by reason of, resulting from or arising out
of:
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(i) a breach of any representation or warranty of any
Stockholder contained in or made pursuant to this Agreement, except as
and to the extent that Section 7.02 above shall be applicable thereto,
in which case the provisions of said section shall govern;
(ii) any breach of any covenant or agreement of any
Stockholder contained in or made pursuant to this Agreement;
(iii) any claims, actions, suits, proceedings, or
investigations described in Schedule 2.12 hereof, or any other claim,
action, suit, proceeding, or investigation against the Company or the
Stockholders, whether known or unknown as of the Closing Date, to the
extent arising from an event occurring or a claim arising on or prior
to the Closing Date (including, without limitation, any claims for
severance or other employment-related benefits by any employee of the
Company beyond those specifically assumed by the Purchaser pursuant to
the Employment Agreements, the Transition Agreements and the Releases);
or
(iv) any liabilities or obligations of any nature and
howsoever arising (whether arising before, on or after the Closing
Date, whether known or unknown, secured, unse cured, absolute, accrued,
contingent or otherwise, and whether due or to become due) to the
extent the same relate to the business conducted by HIIT or to the
so-called "Intercare" business conducted by the Company on or prior to
the Closing Date, other than any liabilities or obligations of the
Company specifically listed on the Closing Balance Sheet or the Backup
Materials.
SECTION 7.04. General Indemnity by the Purchaser. Subject to
the terms and conditions of this Article VII, the Purchaser agrees to and will
indemnify, defend and hold the Stockholders (together with their respective
directors, officers, employees, agents, stockholders and affiliates) harmless
from and against all Damages asserted against, resulting to, imposed upon or
incurred by the Stockholders (or such other parties) by reason of, resulting
from or arising out of:
(i) a breach of any representation or warranty of the
Purchaser contained in or made pursuant to this Agreement,
(ii) any breach of any covenant or agreement of the Purchaser
contained in or made pursuant to this Agreement or
(iii) any liabilities or obligations of the Company
specifically listed on the Closing Balance Sheet or the Backup
Materials.
SECTION 7.05. Third Party Claims. The respective obligations
and liabilities of the Stockholders, on the one hand, and the Purchaser, on the
other hand (herein sometimes called the "indemnifying party"), to the other
(herein sometimes called the "party to be indemnified" or
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the "indemnified party") under Sections 7.03 and 7.04 hereof with respect to
claims resulting from the assertion of liability by third parties shall be
subject to the following terms and conditions:
(a) Within 30 days after receipt of notice of commencement of
any action or the assertion of any claim by a third party, the party to be
indemnified shall give the indemnifying party written notice thereof together
with a copy of such claim, process or other legal pleading (provided that
failure so to notify the indemnifying party of the assertion of a claim within
such period shall not affect its indemnity obligation hereunder except as and to
the extent that such failure shall adversely affect the defense of such claim),
and the indemnifying party shall have the right to undertake the defense thereof
by representatives of its own choosing.
(b) In the event that the indemnifying party, by the 30th day
after receipt of notice of any such claim (or, if earlier, by the tenth day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim),
does not elect to defend against such claim, the party to be indemnified will
(upon further notice to the indemnifying party) have the right to undertake the
defense, compro mise or settlement of such claim on behalf of and for the
account and risk of the indemnifying party, subject to the right of the
indemnifying party to assume the defense of such claim at any time prior to
settlement, compromise or final determination thereof.
(c) Anything in this Section 7.05 to the contrary
notwithstanding, (i) if there is a reasonable probability that a claim may
materially and adversely affect the party to be indem nified other than as a
result of money damages or other money payments, the indemnified party shall
have the right, at its own cost and expense, to compromise or settle such claim,
but (ii) the party to be indemnified shall not, without the prior written
consent of the indemnifying party, settle or compromise any claim or consent to
the entry of any judgment which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to the indemnifying party a
release from all liability in respect of such claim.
(d) In connection with any such indemnification, the party to
be indemnified will cooperate in all reasonable requests of the indemnifying
party.
SECTION 7.06. Procedure. In the event that a party incurs
Damages or Taxes for which it in good faith believes it is entitled to
indemnification under this Article VII, and the procedure set forth in Section
7.05 is not applicable, then at any time after incurring or paying such Damages
or Taxes, such party shall notify the Purchaser or the Stockholders, as
applicable, of such payment or incurrence in writing and request that such party
or parties pay to it the amount of such Damages or Taxes. Within 30 days after
receiving such a written request, the party or parties from whom indemnity is
sought shall, in good faith, either (i) pay the amounts so requested to be
indemnified or (ii) notify the party seeking indemnification that it does not
intend to pay such amounts, in which case the party seeking indemnification may
pursue any and all lawful remedies in respect of its claims.
29
<PAGE>
SECTION 7.07. Remedies Limited. From and after the Closing
Date, the indemnification provisions of this Article VII shall be the sole and
exclusive contractual remedy of the parties hereto with respect to any breach of
this Agreement; provided that the foregoing shall not prohibit any claim for
injunctive or non-monetary equitable relief.
SECTION 7.08. Limited Y2K Indemnity. (a) The Purchaser shall
have no right of indemnification for Damages to the extent the same arise out of
or relate to the Y2K problem, other than for a breach of the representations set
forth in the proviso to Section 2.25 of this Agreement and except as
specifically provided in this Section 7.08.
(b) In the event that:
(i) between the Closing Date and June 30, 1999, a client or
clients (each a "Terminat ing Client") of the Company
terminate their respective contracts with the Company;
(ii) the principal grounds for termination of such Terminating
Client's contract is the failure of the Company to abide by a
representation or warranty (whether oral or written and
whether set forth on Schedule 2.25 or otherwise), made by the
Company on or prior to the Closing Date, relating to the date
prior to which the Company's systems or services would be Y2K
compliant; and
(iii) the aggregate revenues of all Terminating Clients for the
twelve months ended September 30, 1998 exceeded $500,000;
then the Stockholders shall jointly and severally pay to the Purchaser an amount
equal to 40% of (i) the "net sales" (computed in accordance with the "net sales"
shown on the "Schedule of Financial Services Customer Agreements" appended to
Schedule 2.08(d) hereof) generated by each such Terminating Client in the month
prior to the termination of such Terminating Client's contract, multiplied by
(ii) eighteen.
(c) The Stockholders jointly and severally agree to indemnify,
defend and hold harmless the Purchaser and the Company from and against any and
all Damages resulting from claims by any clients of the Company to the extent
that such claims relate to an actual or alleged failure of the Company to abide
by a representation or warranty (whether oral or written and whether set forth
on Schedule 2.25 or otherwise), made by the Company on or prior to the Closing
Date, relating to the date prior to which the Company's systems or services
would be Y2K compliant.
(d) In no event shall the Stockholders be obligated to
indemnify the Purchaser and/or the Company under this Section 7.08 for any
amounts in excess of $1,000,000 in the aggregate.
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ARTICLE VIII.
TERMINATION AND ABANDONMENT
SECTION 8.01. Termination. This Agreement may be terminated
at any time prior to the Closing:
(a) by the mutual consent of the Stockholders and the
Purchaser;
(b) by a "Breaching Party" (as defined in Section 9.10
hereof), subject to the terms (including the payment obligations) of
Section 9.10; or
(c) by the Purchaser, on the one hand, or the Stockholders, on
the other hand, if the Closing shall not have occurred on or before
November 30, 1998 or such later date as may be agreed upon by the
parties hereto, provided, however, that the right to termi nate this
Agreement under this clause (c) shall not be available to any party (a
"Defaulting Party") whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the
Closing to occur on or before such date.
If the Closing shall not have occurred, or this Agreement shall not have been
terminated in accordance with this Section 8.01, by December 31, 1998, this
Agreement shall automatically terminate on said date, provided, however, that
such termination shall not affect the liability hereunder of any Defaulting
Party.
SECTION 8.02. Procedure and Effect of Termination. In the
event of termination of this Agreement and abandonment of the transactions
contemplated hereby by any or all of the parties pursuant to Section 8.01 above,
written notice thereof shall forthwith be given to the other parties to this
Agreement (other than in the event of an automatic termination as provided in
such Section) and this Agreement (except for this Section and Sections 8.01 and
9.01, which shall continue) shall terminate and the transactions contemplated
hereby shall be abandoned, without further action by any of the parties hereto.
If this Agreement is terminated as provided in this Agreement:
(a) the parties hereto will promptly redeliver all documents,
work papers and other material of any other party relating to the
transactions contemplated hereby, whether obtained before or after the
execution hereof, to the party furnishing the same; and
(b) no party shall have any liability or further obligation to
any other party to this Agreement pursuant to this Agreement except as
provided in this Article VIII.
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<PAGE>
ARTICLE IX.
MISCELLANEOUS
SECTION 9.01. Expenses, Etc. (a) Subject to Section 9.10
hereof, all costs and expenses, including fees and disbursements of counsel,
advisors, accountants and consultants, incurred in connection with the
negotiation, preparation, execution and delivery of this Agreement and the
closing of the transactions contemplated hereby (collectively, "Expenses"),
shall be paid by the party incurring such Expenses. All transfer, documentary,
stamp and other similar taxes, if any, in connection with the transfer of the
Shares as provided herein shall be borne by the Stockholder selling or
exchanging such Shares.
(b) The Stockholders, on the one hand, and the Purchaser, on
the other hand, will indemnify the other and hold it or them harmless from and
against any claims for finders' fees or brokerage commissions in relation to or
in connection with such transactions as a result of any agreement or
understanding between such indemnifying party and any third party.
SECTION 9.02. Execution in Counterparts. For the convenience
of the parties, 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.
SECTION 9.03. Notices. All notices which are required or may
be given pursuant to the terms of this Agreement shall be in writing and shall
be sufficient and deemed to be received if (i) delivered personally, (ii) mailed
by registered or certified mail, return receipt requested and postage prepaid,
or (iii) sent via a nationally recognized overnight courier service, in each
case as follows:
if to the Purchaser, to:
MEDE AMERICA Corporation
Suite 501
90 Merrick Avenue
East Meadow, New York 11554
Attention: Thomas P. Staudt
with a copy to:
Reboul, MacMurray, Hewitt,
Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Attention: Mark J. Tannenbaum, Esq.
32
<PAGE>
if to any Stockholder, to the address appearing under the name of such
Stockholder in Schedule I hereto, and in each case with a copy to:
Thompson Coburn
One Mercantile Center
Suite 3500
St. Louis, Missouri 63101
Attention: Donald B. Dorwart, Esq.
or such other address or addresses as the Stockholders, on the one hand, or the
Purchaser, on the other hand, shall have designated by notice in writing to the
other.
SECTION 9.04. Waivers. Either the Stockholders, on the one
hand, or the Purchaser, on the other hand, may, by written notice to the other,
(i) extend the time for the performance of any of the obligations or other
actions of the other under this Agreement, (ii) waive any inaccuracies in the
representations or warranties of the other contained in this Agreement or in any
document delivered pursuant to this Agreement, (iii) waive compliance with any
of the conditions or covenants of the other contained in this Agreement, or (iv)
waive performance of any of the obligations of the other under this Agreement.
Except as provided in the preceding sentence, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
SECTION 9.05. Amendments, Supplements, Etc. At any time this
Agreement may be amended or supplemented by such additional agreements, articles
or certificates, as may be determined by the parties hereto to be necessary,
desirable or expedient to further the purposes of this Agreement, or to clarify
the intention of the parties hereto, or to add to or modify the covenants, terms
or conditions hereof or to effect or facilitate any governmental approval or
acceptance of this Agreement or to effect or facilitate the filing or recording
of this Agreement or the consummation of any of the transactions contemplated
hereby. Any such instrument must be in writing and signed by all parties hereto.
SECTION 9.06. Entire Agreement. This Agreement, its Exhibits
and Schedules and the documents executed on the Closing Date in connection
herewith, constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral and written, between the parties hereto with respect to the
subject matter hereof.
SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUSIVE
OF THE CONFLICTS OF LAWS PROVISIONS THEREOF.
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<PAGE>
SECTION 9.08. Binding Effect; Benefits. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted as signs. Notwithstanding anything contained
in this Agreement to the contrary, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 9.09. Assignability. Neither this Agreement nor any
of the parties' rights hereunder shall be assignable by any party hereto without
the prior written consent of the other parties hereto.
SECTION 9.10. Pre-Closing Breach.
(a) Between the date hereof and the Closing Date, if as a
result of any investigation by any party or any information disclosed to or
discovered by such party prior to the Closing Date, such party determines that
any representation or warranty of another party hereunder is not true, or that
any covenant of another party (in either case, the "Breaching Party") is
impracticable or impossible of performance (a "Pre-Closing Breach"), the party
making such determination will use reasonable efforts to communicate the
existence of a possible Pre-Closing Breach to the Breaching Party. Promptly
after learning of any Pre-Closing Breach, the Breaching Party shall use its best
efforts to remedy or cure the same; provided that, in the event the Breaching
Party determines that the cost of remedying such Pre-Closing Breach is greater
than $100,000 or that such Pre-Closing Breach cannot be remedied prior to the
Closing Date, the Breaching Party may terminate this Agreement and its
obligations hereunder by paying all fees, expenses and internal allocated costs
of each other party hereto relating to the negotiation, execution or
implementation of the acquisition contemplated hereby. As of the date hereof,
the total of such costs for the Purchaser is $150,000. Any party entitled to
reimbursement for fees, expenses and costs (whether arising before or after the
date hereof) shall submit reasonably detailed supporting documentation to the
Breaching Party.
(b) Nothing in paragraph (a) above shall restrict the
requirement that the Breaching Party either satisfy or obtain a waiver of all
conditions precedent set forth in Section 6.01 or Section 6.02 hereof, as the
case may be, in order to cause the Purchaser or the Stockhold ers, as the case
may be, to be obligated to consummate the transactions contemplated hereby
(c) Notwithstanding anything to the contrary set forth in this
Agreement, no investigation or acquisition of information (whether actual,
alleged or imputed) by any party hereto shall in any way operate as a waiver of
the representations, warranties and covenants made to or for the benefit of such
party in this Agreement. In addition to and without limiting the generality of
the foregoing, after the Closing Date any actual or alleged failure by any party
hereto to disclose a Pre-Closing Breach shall in no way restrict such party from
seeking indemnification or any other available remedy hereunder for such
Pre-Closing Breach.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties hereto as of the day and year first above written.
MEDE AMERICA CORPORATION
By
----------------------------------
Richard P. Bankosky
Chief Financial Officer
STOCKHOLDERS:
RIGHTCHOICE MANAGED CARE, INC.
By
----------------------------------
Name:
Title:
GENERAL AMERICAN LIFE INSURANCE COMPANY
By
----------------------------------
Name:
Title:
35
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I, PART B
<S> <C> <C> <C> <C> <C>
A Common B Common C Common Preferred Initial Cash
Name and Address of Stockholder Shares Shares Shares Shares Payment
- ------------------------------- ------------- ------------- ------------- ----------- --------------
RightCHOICE Managed Care, Inc. 0 35,000 10,000.5 31,250 $5,600,000
1831 Chestnut
St. Louis, Missouri 63103
Attn: Sandra Van Trease
General American Life Insurance Company 35,000 0 10,000.5 31,250 $5,600,000
13045 Tesson Ferry Road
St. Louis, Missouri 63128
Attn: Michael P. Ingrassia
</TABLE>
Subsidiaries of the Registrant:
MEDE America Corporation of Ohio
Healthcare Interchange, Inc.
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. 5 to Registration Statement No. 333-55977
of MEDE America Corporation on Form S-1 of our report dated August 5, 1998
(October 7, 1998 as to Note 6.b., October 30, 1998 as to Note 14 and December
11, 1998 as to Note 13) (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the restatement described in Note 13) 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
December 23, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
MEDE America Corporation
East Meadow, New York
We consent to the use in Amendment No. 5 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
December 23, 1998
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
HealthCare Interchange, Inc.:
We consent to the use, in Amendment No. 5 to registration statement No.
333-55977 on Form S-1 of MEDE America Corporation, of our audit report, dated
September 8, 1998, except as to notes 3 and 15, which are as of October 30,
1998, on the consolidated balance sheet of HealthCare Interchange, Inc. and
subsidiary as of June 30, 1998 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the nine-month
period ended June 30, 1998, which report appears in the Form S-1 of MEDE America
Corporation dated December 23, 1998 and to the reference to our firm under the
heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
St. Louis, Missouri
December 23, 1998
