AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999
REGISTRATION NO. 333-55977
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 6
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:
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
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 JANUARY 11, 1999
P R O S P E C T U S
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.
================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
Per Share ......... $ $ $
- --------------------------------------------------------------------------------
Total(3) .......... $ $ $
================================================================================
(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
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
, 1999
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, ENTERING 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 December 31, 1998, the Company
processed over 900,000 transactions per business 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 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
opportunity to convert remaining 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................................... 12,613,084 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 December 31, 1998 under the MEDE AMERICA Corporation and
Its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Stock
Plan"), of which 233,668 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
increase, 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 Guaranty 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 PRO FORMA(1)
----------------------------------------------------------------------------
1995 1996 1997(3) 1998(3) 1998(3)
---------------- ---------------- ------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(4) .............................. $ 16,246 $ 31,768 $ 35,279 $ 42,290 $ 48,880
Operating expenses:
Operations .............................. 9,753 19,174 16,817 16,958 18,882
Sales, marketing and client services 3,615 7,064 8,769 10,765 12,376
Research and development ................ 2,051 2,132 3,278 3,941 3,984
General and administrative .............. 3,119 6,059 5,263 4,865 6,027
Depreciation and amortization ........... 2,995 5,176 5,460 7,143 8,645
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 49,914
--------- --------- --------- -------- --------
Income (loss) from operations ............ (16,342) (18,340) (8,165) (1,382) (1,034)
Other (income) expense ................... -- 313 (893) (12) (12)
Interest expense (income), net ........... 189 584 1,504 3,623 639
--------- --------- --------- -------- --------
Loss before provision for income
taxes ................................... (16,531) (19,237) (8,776) (4,993) (1,661)
Provision for income taxes ............... 70 93 57 42 42
--------- --------- --------- -------- --------
Net loss ................................. (16,601) (19,330) (8,833) (5,035) (1,703)
Preferred stock dividends ................ (27) (2,400) (2,400) (2,400) --
--------- --------- --------- -------- --------
Net loss applicable to common
stockholders ............................ $(16,628) $(21,730) $ (11,233) $ (7,435) $ (1,703)
========= ========= ========= ======== ========
Basic and diluted net loss per com-
mon share ............................... $ (3.17) $ (4.14) $ (2.07) $ (1.31)(9) $ (0.14)
Weighted average common shares
outstanding - Basic and diluted ......... 5,238 5,245 5,425 5,679 12,308
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------------
ACTUAL PRO FORMA(2)
----------------------------- -------------
1997(3) 1998 1998
----------- ----------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(4) .............................. $ 9,241 $ 12,006 $13,318
Operating expenses:
Operations .............................. 4,285 4,793 5,272
Sales, marketing and client services 2,385 2,930 3,208
Research and development ................ 806 1,106 1,106
General and administrative .............. 1,061 1,263 1,511
Depreciation and amortization ........... 1,698 1,894 2,177
Write-down of intangible assets ......... -- -- --
Acquired in-process research and
development(7) ........................ -- -- --
Other charges(8) ........................ -- -- --
-------- -------- -------
Total operating expenses ................. 10,235 11,986 13,274
-------- -------- -------
Income (loss) from operations ............ (994) 20 44
Other (income) expense ................... -- -- --
Interest expense (income), net ........... 655 1,089 214
-------- -------- -------
Loss before provision for income
taxes ................................... (1,649) (1,069) (170)
Provision for income taxes ............... 12 16 16
-------- -------- -------
Net loss ................................. (1,661) (1,085) (186)
Preferred stock dividends ................ (600) (600) --
-------- -------- -------
Net loss applicable to common
stockholders ............................ $ (2,261) $ (1,685) $ (186)
======== ======== =======
Basic and diluted net loss per com-
mon share ............................... $ (0.40) $ (0.30)(9) $ (0.02)
Weighted average common shares
outstanding - Basic and diluted ......... 5,674 5,685 12,314
</TABLE>
<PAGE>
<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 PRO FORMA(1)
------------------------------------------------------------------------
1995 1996 1997(3) 1998(3) 1998(3)
------------- ------------- ----------- --------------------------------
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(11) ............................... $ (13,347) $ (13,164) $ (2,705) $ 5,761 $ 7,611
Adjusted EBITDA(11) ...................... (2,292) (2,052) 2,211 5,761 7,611
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 ................................ -- 107,030 126,211 188,114 191,663
Medical ................................. -- 15,687 23,075 31,564 46,821
Dental .................................. -- 6,021 12,188 14,681 14,681
--------- --------- --------- ---------- ----------
Total transactions processed .......... -- 128,738 161,474 234,359 253,165
Transactions per FTE(12)(13) ............. -- 321 415 642 633
Revenue per FTE(13) ...................... $ 48 $ 79 $ 91 $ 116 $ 122
Operating expenses per transac-
tion(12) ................................ -- 0.39 0.27 0.19 0.20
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, 1998
------------------------------------
ACTUAL PRO FORMA(2)
---------------------- -------------
1997 1998 1998
----------- ---------- -------------
(IN THOUSANDS, EXCEPT PER TRANSACTION DATA)
<S> <C> <C> <C>
OTHER DATA:
EBITDA(11) ............................... $ 704 $ 1,914 $ 2,221
Adjusted EBITDA(11) ...................... 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 ................................ 38,513 53,466 53,466
Medical ................................. 7,762 8,348 12,601
Dental .................................. 3,546 4,135 4,135
--------- ------- --------
Total transactions processed .......... 49,821 65,949 70,202
Transactions per FTE(12)(13) ............. 137 174 170
Revenue per FTE(13) ...................... $ 25 $ 32 $ 32
Operating expenses per transac-
tion(12) ................................ 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 of Notes to
Consolidated Financial Statements of the Company.
(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:
<PAGE>
<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 of Notes to Consolidated Financial Statements of
the Company.
(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 $32,420,358 (including $8,424,758 of
accrued dividends) as of December 31, 1998, 2,701,643 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. 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.
The Credit Facility is scheduled to terminate on October 29, 1999. Although
the Company has received a letter from its current lender undertaking to provide
financing for working capital and other uses beyond such date, such undertaking
is subject to a number of conditions and there can be no
10
<PAGE>
assurance that such financing will be made available. Accordingly, there can be
no assurance that the Company will be able to obtain financing on terms
favorable to the Company and the failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
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
11
<PAGE>
processors such as the Company. Furthermore, if EDI processing extensively
penetrates the healthcare market or becomes highly standardized, it is possible
that competition among transaction processors will focus increasingly on
pricing. If competition causes the Company to reduce its pricing in order to
retain market share, the Company may suffer a material adverse change in its
business, financial condition and results of operations.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied significantly in the
past and are likely to vary from quarter to quarter in the future. Quarterly
revenues and operating results may fluctuate as a result of a variety of
factors, including: integration of acquired businesses; seasonal variability of
demand 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."
12
<PAGE>
RISK OF INTERRUPTION OF DATA PROCESSING
The Company currently processes its data through its facilities in
Twinsburg, Ohio, Mitchel Field, New York, and Atlanta, Georgia. The Twinsburg
and Mitchel Field sites are designed to be redundant. Additionally, the Company
transmits data through a number of different telecommunications networks, using
a variety of different technologies. However, the occurrence of an event that
overcomes the data processing and transmission redundancies then in place could
lead to service interruptions and could have a material adverse effect on the
Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, prior to January 1, 2000, computer systems
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 claims
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 that HII's
systems would be Year 2000 compliant by January 1, 1999. While the Company is
actively engaged in a remediation program to provide HII's clients with Year
2000 compliant products and services, it is likely that such remediation program
will not be completed prior to mid-1999. Consequently, certain of HII's clients
may elect to terminate their relationships with HII.
The Credit Facility contains a covenant on the part of the Company to cause
its products to be Year 2000 compliant by August 31, 1999. Failure to achieve
such compliance on a timely basis would create a default under the Credit
Facility. In addition, the terms of the Company's proposed credit facility also
contemplate a Year 2000 compliance covenant. There can be no assurance that such
compliance will be achieved on a timely basis. Failure to do so 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."
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.
13
<PAGE>
UNCERTAINTY AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. Federal and state legislatures periodically
consider programs to modify or amend the United States healthcare system at both
the federal and state level. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise
change the environment in which healthcare industry participants operate.
Healthcare industry participants may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including investments in the Company's products and services. In addition, many
healthcare providers are consolidating to create larger healthcare delivery
organizations. This consolidation reduces the number of potential clients for
the Company's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for the Company's
services. Other healthcare information companies, such as billing services and
practice management vendors, which currently utilize the Company's services,
could develop or acquire transaction processing and networking capabilities and
may cease utilizing the Company's services in the future. The impact of these
developments in the healthcare industry is difficult to predict and could have a
material adverse effect on the Company's business, financial condition and
results of operations. To the extent that the current trend toward consolidation
in the industry continues, MEDE AMERICA may find it more difficult to obtain
access to payors, information 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.
14
<PAGE>
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, 48.3% 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 ownership, 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
15
<PAGE>
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
Company will have 12,613,084 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 8,446,417 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 7,342,360 shares of Common Stock and options to
purchase 482,823 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
$25.2 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 $19.6 million of the net
proceeds will be used to reduce outstanding indebtedness and accrued interest
under the 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
$8,424,758 as of December 31, 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, is expected to be replaced with a new
facility, which will not be guaranteed by a third party. See "Use of Proceeds"
and "Certain Transactions."
16
<PAGE>
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, the terms of the proposed credit facility prohibit the Company
from paying dividends on the Common Stock. See "Dividend Policy."
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 December 31, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
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 $25.2 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) the balance (approximately $19.6 million) to reduce 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 December 31, 1998, such accrued dividends totaled $8,424,758. See
"Certain Transactions." Pending application to the foregoing uses, such proceeds
will be invested in short-term, investment-grade, interest-bearing obligations.
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, the terms of the proposed credit facility 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 10,493
Other debt ................................... 1,222 1,222
--------- ---------
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) additional borrowings of $11.7 million in
connection with 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 December 31, 1998, at a weighted average exercise price of $4.84 per
share, of which 233,668 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 services...... 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 (Income from continu-
ing operations as it relates to HII) ..... (4,993) 847 561 (2,068)
Provision for income taxes ................ 42 -- -- --
--------- ------ ------ --------
Net income (loss) (Income from con-
tinuing operations as it relates to
HII) ..................................... (5,035) 847 $ 561 (2,068)
======
Preferred stock dividends ................. (2,400) -- --
--------- ------ --------
Net income (loss) applicable to
common stockholders ...................... $ (7,435) $ 847 $ (2,068)
========= ====== ========
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 services...... -- 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 (Income from continu-
ing operations as it relates to HII) ..... -- (5,653) 3,992 (1,661)
Provision for income taxes ................ -- 42 -- 42
---------- --------- ---------- ---------
Net income (loss) (Income from con-
tinuing operations as it relates to
HII) ..................................... -- (5,695) 3,992 (9) (1,703)
Preferred stock dividends ................. 2,400 (10) -- -- --
---------- --------- ---------- ---------
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 (11) 8,141 4,167 (12) 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(13) HII ACQUISITION
------------- --------- -----------------
<S> <C> <C> <C>
Revenues ................................. $ 12,006 $1,312 $ --
Operating expenses:
Operations .............................. 4,793 479 --
Sales, marketing and client services..... 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 (7)
--------- ------ ------
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 (14)
--------- ------ ------
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 services..... -- 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 (10) -- -- --
---------- --------- ---------- --------
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 (11) 8,147 4,167 (12) 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):
Cash purchase price ....................... $10,674
=======
Computer equipment ........................ $ 260
Purchased client lists .................... 903
Purchased software and technology ......... 1,230
Goodwill .................................. 8,281
-------
$10,674
=======
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):
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
=======
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.
The Company's acquisition of HII was consummated on October 30, 1998. For
the month of October 1998, HII reported a net loss of $653,000 (compared to a
net loss of $104,000 for the corresponding month of the prior year). For the
month of October 1998, HII's loss from continuing operations (which were the
only operations of HII acquired by the Company) was $653,000 (compared to
income of $70,000 for the corresponding month of the prior year). The
decrease was primarily attributable to charges incurred in connection with
the acquisition of HII by the Company, including $467,000 of banking and
legal fees, $74,000 of severance payments and a $263,000 charge relating to
the settlement of stock options owned by a terminated executive.
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 of Notes to Consolidated Financial Statements of
the Company.
(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. Discontinued operating segments of HII were not
acquired by the Company. The loss from such discontinued operations of HII
for the 12 months ended June 30, 1998 was $4,395,000.
(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 $2,000,000 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 the Preferred Stock
due to the Recapitalization.
(11)Represents the conversion of the Preferred Stock and accrued dividends
thereon into Common Stock due to the Recapitalization.
(12)Represents the sale by the Company of 4,166,667 shares of Common Stock in
the Offering.
(13)Represents the historical continuing operations of HII for the three
months ended September 30, 1998.
(14)Represents the elimination of the dividends accrued on HII's preferred
stock.
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
========== ========= ==========
</TABLE>
<PAGE>
<TABLE>
<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) (1,545)(10) (52,873)
------------ --------- ------------ ---------
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).
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)
========
* 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):
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)
=========
(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 certain 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
</TABLE>
<PAGE>
<TABLE>
<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 .................................. -- 107,030 126,211 188,114 38,513 53,466
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 ............. -- 128,738 161,474 234,359 49,821 65,949
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 of Notes to Consolidated Financial Statements of
the Company.
(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 business 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>
- -----------------------------------------------------------------------------------------------------------
PRIMARY PRODUCTS DIVESTED PRODUCTS
DATE OF FOUNDING/ OF FOUNDING/ DATE
FOUNDING COMPANIES ACQUIRED MARKET ACQUIRED COMPANY ACQUIRED COMPANY DIVESTED
- ------------------ -------- ------ ---------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
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 certain assets of 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, such
33
<PAGE>
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 certain assets and assumed certain
liabilities of 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.
The Company did not acquire such businesses or any proceeds from the disposition
thereof. 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
approximately $11,013,000, consisting of $2,713,000 of client lists and
approximately $8,300,000 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 collectively 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 considered 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
$239,000, 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 of Notes to Consolidated Financial Statements
of the Company.
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 32%. 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 $239,000 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 of the Company.
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 of the
Company.
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.
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 of Notes to Consolidated Financial Statements of the
Company.
39
<PAGE>
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 bore interest at a weighted
average rate of 6.97% 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 lender has granted a waiver relating to the noncompliance with these
covenants of the Credit Facility 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. In October 1998, the
total availability under the Credit Facility was increased to $36.0 million, and
the Company drew down an additional $13.2 million, of which $11.7 million was
used to finance the HII acquisition. As of December 31, 1998, the Company had
outstanding borrowings of $31.1 million under the Credit Facility. Such
borrowings bore interest at a weighted average rate of 6.41% per annum as of
December 31, 1998. All indebtedness under the Credit Facility has been, and
currently is, guaranteed by the Company's four principal stockholders. See
"Certain Transactions." 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. See "Risk Factors -- Year 2000 Compliance."
On January 8, 1999, the Company received a letter from the lender under the
Credit Facility undertaking to provide a new credit facility in the amount of
$25 million (the "Proposed Credit Facility") subject to a number of conditions
including the satisfactory completion by the lender of its due diligence review
of the Company's operations, negotiation of mutually satisfactory documentation
and approval by the lender's commitment committee. The letter contemplates that
the Proposed 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 subsidiaries. The lender under the Credit Facility has waived
certain provisions of the Credit Facility related to restrictions on the
repayment of borrowings and payment of certain dividends and has amended a
provision relating to minimum stock ownership by the guarantors of the Credit
Facility in order to permit the Credit Facility to remain outstanding upon
consummation of the Offering and if the Proposed Credit Facility is not made
available upon consummation of the Offering.
The Proposed Credit Facility is expected to contain covenants similar to
those under the existing agreement, including Year 2000 compliance and
restrictions on the payment of dividends on the Common Stock. See "Dividend
Policy." If the Proposed Credit Facility becomes available to the Company, which
will not occur prior to the consummation of the Offering, the Company intends to
borrow sufficient funds under the Proposed Credit Facility in order to repay all
amounts outstanding under the Credit Facility. There can be no assurance that
the Proposed Credit Facility will become available on the terms contemplated or
otherwise. In the event that the lender does not make the Proposed Credit
Facility available, the Company will need to obtain alternative financing prior
to October 29, 1999, when the Credit Facility terminates. See "Risk Factors --
Acquisition Strategy; Need for Additional Capital."
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
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<PAGE>
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
accounts receivable ($729,000), formulary 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 $25.2 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 $19.6 million of the net proceeds will be
used to reduce outstanding indebtedness and accrued interest under the Credit
Facility. In connection with the repayment of 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 Proposed Credit Facility to finance the
Company's future acquisitions and general working capital needs, subject to
satisfaction of covenants set forth therein. See "Risk Factors -- Year 2000
Complaince." 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 Proposed 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.
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<PAGE>
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 HII's 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 $6,491,000 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 $8,183,000 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 $512,000 had been
expended through December 31, 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.
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
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 would 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 hardware
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.
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<PAGE>
As contingency planning, the Company has three available options should
certain functions not operate properly on January 1, 2000. First, 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 supplied
provider data and to send those claims in paper form to non-Year 2000 compliant
payors. Third, 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 common carriers and the
Internet. See "Risk Factors -- Year 2000 Compliance."
IMPACT OF INFLATION
Inflation has not had a material impact on the Company's historical
operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted at this date, include SFAS No. 130, "Reporting
Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", 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 of the Company.
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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 December 31, 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 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.
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 62%. During such period the number of claims
pro-
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cessed 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
opportunity to convert remaining 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-
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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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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 127 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:
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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 98 associates organized according to market, client
type and product category. The Company also has a client services organization
consisting of 66 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 December 31, 1998, the Company employed 86 people in the areas of
product design, research and development, and 41 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 December 31, 1998, the Company employed 405 people, including 110 in
operations, 98 in sales and marketing, 66 in client services, 86 in research and
development, 35 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 35 Eligibility 2,000,000 January 2003
and Pharmacy Data Center) Enrollment 25,000
Georgia (Dental Data Center) 57 Dental Claims 1,600,000 January 2001
Corporate Headquarters, 140 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) 21 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 Company did not acquire such businesses or any proceeds from the disposition
thereof.
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
58
<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 December 31, 1998, options to purchase up
to an aggregate 482,823 shares of Common Stock were outstanding, of which
233,668 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 51,500 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 the proceeds of the Offering to repay in
full the 10% Senior Subordinated Note and to reduce the indebtedness under the
Credit Facility. 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 December 31, 1998, and as adjusted
to reflect the sale of Common Stock offered hereby, by (i) each person (or group
of affiliated persons) known by the Company to own beneficially more than five
percent of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers and (iv) all directors and
executive officers of the Company as a group. The numbers of shares set forth
below (i) give effect to the Recapitalization and the Reverse Stock Split, (ii)
assume an Offering price of $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) ............. 6,153,182 72.27% 48.53%
320 Park Avenue, 25th Floor
New York, NY 10019
William Blair & Co., L.L.C. (4) ................. 991,151 11.71% 7.85%
222 West Adams Street
Chicago, Illinois 60606
Southlake & Co., as Nominee ..................... 656,881 7.78% 5.21%
c/o State Street Bank & Trust Co.
222 Franklin Street -- Concourse
Boston, MA 02110 ...............................
Thomas P. Staudt (5) ............................ 170,591 1.99% 1.34%
Richard P. Bankosky (6) ......................... 12,873 - -
James T. Stinton (7) ............................ 21,603 - -
William M. McManus (8) .......................... 22,256 - -
Linda K. Ryan (9) ............................... 1,918 - -
Roger L. Primeau (10) ........................... 8,334 - -
Thomas E. McInerney (11) ........................ 6,012,579 70.62% 47.42%
320 Park Avenue, 25th Floor
New York, NY 10019
Anthony J. de Nicola (12) ....................... 5,987,212 70.32% 47.22%
320 Park Avenue, 25th Floor
New York, NY 10019
Timothy M. Murray (13) .......................... 987,806 11.67% 7.82%
222 West Adams Street
Chicago, Illinois 60606
All current directors and executive officers as a 7,243,635 83.28% 56.31%
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 8,446,417 shares of Common Stock
outstanding on December 31, 1998, plus, as to each entity or group listed
unless otherwise noted, the number of shares of Common Stock deemed to be
owned by such holder pursuant to Rule 13d-3 under the Exchange Act as of
such date, assuming exercise of options held by such holder that are
exercisable within 60 days of the date of this Prospectus.
(3) Includes 2,731,420 shares of Common Stock held by WCAS V, 2,745,720 shares
of Common Stock held by WCAS VI, 66,164 shares of Common Stock held by WCAS
Information Partners L.P. ("WCAS Info."), 370,993 shares of Common Stock
held by WCAS CP II, 171,645 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 637,814 shares of Common Stock held by Blair V, 333,182 shares of
Common Stock held by Blair LCF, 3,345 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 111,732 shares of Common Stock.
(6) Includes options to purchase up to 1,527 shares of Common Stock.
(7) Includes options to purchase up to 21,603 shares of Common Stock.
(8) Includes options to purchase up to 22,256 shares of Common Stock.
(9) Includes options to purchase up to 1,613 shares of Common Stock.
(10) Includes options to purchase up to 8,334 shares of Common Stock.
(11) Includes 2,731,420 shares of Common Stock held by WCAS V, 2,745,720 shares
of Common Stock held by WCAS VI, 66,164 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 2,731,420 shares of Common Stock held by WCAS V, 2,745,720 shares
of Common Stock held by WCAS VI, 66,164 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 637,814 shares of Common Stock held by Blair V, 332,182 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 12,613,084 shares of Common Stock (13,238,084 shares if the
Underwriters' over-allotment option is exercised) and no shares of Preferred
Stock outstanding. As of December 31, 1998, before giving effect to the
Recapitalization but after giving effect to the Reverse Stock Split, there were
5,684,847 shares of Common Stock outstanding and 239,956 shares of Preferred
Stock outstanding, held of record by 126 stockholders. In addition, as of
December 31, 1998, before giving effect to the Recapitalization but after giving
effect to the Reverse Stock Split, there were outstanding options to purchase
482,823 shares of Common Stock and warrants to purchase 105,062 shares of Common
Stock. Pursuant to the Recapitalization, all such warrants will be exercised (on
a "net exercise" basis) (for an aggregate 59,926 shares), and all shares of
Preferred Stock will be converted into an aggregate 2,701,643 shares of Common
Stock (based on the aggregate liquidation preference of the Preferred Stock as
of December 31, 1998, assuming no exercise of the Underwriters' over-allotment
option) prior to the consummation of the Offering. On July 17, 1998, the Company
issued to Medic a warrant to purchase 1,250,000 shares of the Company's Common
Stock. 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 2,701,643 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
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
65
<PAGE>
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 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, the 1998 Guaranty 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
1998 Guaranty Warrants are immediately exercisable and may be exercised up to
five years from the date of grant.
In addition to the Medic Warrant and the 1998 Guaranty Warrants referred to
above, as of December 31, 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. The Medic Warrant and the 1998 Guaranty
Warrants will remain outstanding following completion of the Offering. See
"Certain Transactions."
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
66
<PAGE>
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions, as provided
in Section 174 or successor provisions of the DGCL or (iv) for any transaction
from which the Director derives an improper personal benefit.
The Amended and Restated Certificate of Incorporation and Bylaws provide
that the Company shall indemnify its Directors and officers to the fullest
extent permitted by Delaware law (except in some circumstances, with respect to
suits initiated by the Director or officer) and advance expenses to such
Directors or officers to defend any action for which rights of indemnification
are provided. In addition, the Amended and Restated Certificate of Incorporation
and Bylaws also permit the Company to grant such rights to its employees and
agents. The Bylaws also provide that the Company may enter into indemnification
agreements with its Directors and officers and purchase insurance on behalf of
any person whom it is required or permitted to indemnify. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as Directors, officers and employees.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
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; Possible Adverse Effect on Future Market Price."
Upon completion of this Offering, the Company expects to have 12,613,084
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)
(13,238,084 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 8,446,417 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, 626,758 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 7,819,659 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), 1,083,546
restricted shares will be eligible for sale in the public market immediately
after this Offering, 20,511 restricted shares 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 126,131 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, 7,342,360 shares of Common Stock and options to
purchase 482,823 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
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.
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------- -----------------
Salomon Smith Barney Inc. ................
Bear, Stearns & Co. Inc. .................
William Blair & Company, L.L.C. ..........
Total .................................
============
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., Bear, Stearns & Co.
Inc. and William Blair & Company, L.L.C. 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>
At the Company's request, the Underwriters have reserved up to 5% of the
shares of Common Stock (the "Directed Shares") for sale at the initial public
offering price to persons who are directors, officers or employees of, or
otherwise associated with, the Company and its affiliates and who have advised
the Company of their desire to purchase shares of Common Stock. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent of sales of Directed Shares to any of the persons for whom they
have been reserved. Any shares of Common Stock not so purchased will be offered
by the Underwriters on the same basis as all other shares of Common Stock
offered hereby. The Company has agreed to indemnify those Underwriters against
certain liabilities and expenses, including liabilities under the Securities
Act, in connection with the sales of the Directed Shares.
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.
71
<PAGE>
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.
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 KPMG LLP, independent certified public accountants.
Such financial statements have been included herein and in the registration
statement in reliance upon the report of KPMG 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., December 11, 1998 as to Note 13
and January 8, 1999 as to Note 14)
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
--------- --------- ---------
SERIES A REDEEMABLE CUMULATIVE PREFERRED
STOCK:
$.01 par value; 250 shares authorized; 240 shares issued and
outstanding (aggregate liquidation value of $23,996 plus ac-
crued dividends) (Notes 8 and 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
========= ========== =========
</TABLE>
<PAGE>
<TABLE>
<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 into common stock
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 pro-
F-9
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
cessing and information management services to healthcare providers and
pharmacies through integrated electronic data interchange systems. The
acquisition was financed by a portion of the proceeds from the Senior
Subordinated Note and Share Purchase Agreement (as hereinafter defined) (Note
6).
c. Stockton -- In November 1997, the Company purchased certain assets and
assumed certain liabilities of The Stockton Group, Inc. ("Stockton") for a
cash purchase price of $10,674,000, including transaction expenses. In
addition, the Company is contingently liable for additional consideration of
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
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Purchased client lists .................... $2,989 $3,893
Less, accumulated amortization ............ 1,518 2,220
------ ------
1,471 1,673
------ ------
Purchased software and technology ......... 6,859 8,288
Less, accumulated amortization ............ 2,973 4,922
------ ------
3,886 3,366
------ ------
Software development costs ................ -- 462
------ ------
Other intangible assets -- net ............ $5,357 $5,501
====== ======
</TABLE>
Subsequent to the issuance of the June 30, 1997 financial statements, the
Company's management determined that a lower discount rate should have been
utilized to value purchased software and technology acquired in the TCS
acquisition. As a result, the Company reclassified $343,000 from goodwill to
purchased software and technology.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and related employee benefits ......... $1,010 $1,609
Rebate liability .................................... 488 291
Pharmacy claims liability ........................... 576 604
Accrued professional fees ........................... 795 364
Deferred revenue .................................... 749 614
Accrued reorganization costs (a) .................... 1,005 --
Due to former owners of acquired business ........... 2,216 1,945
Accrued litigation settlement ....................... 860 --
Accrued interest .................................... 5 864
Other ............................................... 1,491 1,424
------ ------
Total ............................................... $9,195 $7,715
====== ======
</TABLE>
- ----------
(a) As a result of the Spin-off (Note 1), the Company recorded a charge
amounting to $2,864,000 during the year ended June 30, 1995. Such charge
represented amounts to be paid to former stockholders of MedE (who remained
as executives of MedE) pursuant to contractual agreements which require such
payments to be made upon a change in control. The net present value of
remaining payments totaled $1,005,000 as of June 30, 1997, which was
included in accrued reorganization costs.
F-11
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Senior subordinated note less unamortized discount of $2,000,000 and $1,641,000
at June 30, 1997 and 1998, respectively (a) ...................................... $23,000 $23,359
Credit Facility (b) ............................................................... -- 16,725
Obligations under capital leases (c) .............................................. 769 436
Loan payable relating to an acquisition, collateralized by $224,000 of certifi-
cates of deposits at June 30, 1998 due in quarterly payments ranging from
$15,000 to $25,000 through February 2002, interest at 6.7 percent................. 342 271
Note payable, in connection with the sale of certain assets due in monthly
installments of $6,000 through January 2000, interest at 6.8 percent.............. 180 114
Notes payable to former shareholders of EC&F, repaid in 1998 ...................... 95 --
Note payable, collateralized by land and building of MEDE OHIO, due in
monthly installments of $19,000 through July 2000, interest at 12.5 percent....... 592 419
Note payable to bank, repaid in 1998 .............................................. 173 --
Other ............................................................................. 10 --
------- -------
25,161 41,324
Less current portion .............................................................. 538 269
------- -------
Total ............................................................................. $24,623 $41,055
======= =======
</TABLE>
(a) On February 14, 1997, the Company entered into an agreement with an
affiliate of certain shareholders of the Company under which the Company
issued a $25,000,000 senior subordinated note (the "Senior Subordinated
Note") and 370,993 shares of its common stock valued at $2,125,000
(representing the estimated fair value of the common stock) for total
consideration of $25,000,000 (the "Senior Subordinated Note and Share
Purchase Agreement"). The $2,125,000 relating to the shares of common stock
was recorded as a discount on the Senior Subordinated Note and is being
amortized over the term of the Senior Subordinated Note. The Senior
Subordinated Note bears interest at the rate of 10% per annum, payable
quarterly. One half of the principal sum is due on February 14, 2001, and
the second half is due on February 14, 2002. The terms of the Senior
Subordinated Note and Share Purchase Agreement place restrictions on the
consolidation, merger, or sale of the Company, indebtedness, and the payment
of any cash dividends.
(b) The revolving line of credit from a bank (the "Credit Facility"), as
currently amended on October 7, 1998, provides for maximum borrowings of
$36,000,000 and expires on October 29, 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.
Maturities of long-term debt as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DISCOUNT
YEAR ENDING JUNE 30, GROSS ON NOTE NET
- ---------------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1999 ................. $ 664 $ 395 $ 269
2000 ................. 17,164 437 16,727
2001 ................. 12,594 483 12,111
2002 ................. 12,543 326 12,217
------- ------ -------
Total ................ $42,965 $1,641 $41,324
======= ====== =======
</TABLE>
Based upon the borrowing rates currently available to the Company for loans with
similar terms, the fair value of the Company's debt approximates the carrying
amounts.
7. INCOME TAXES
The provision for income taxes for the fiscal years ended June 30, 1996, 1997
and 1998 consists entirely of current state income taxes.
The provision for income taxes varies from the amount computed by applying the
statutory U.S. Federal income tax rate to the loss before provision for income
taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Federal statutory rate ................... $ (6,541) $ (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, of which 250,000 were designated as relating to
Series A redeemable cumulative preferred stock (Note 9).
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
other than the Medic Warrant (as herein defined) and warrants to purchase
84,050 shares of common stock issued on October 7, 1998. (See Note 6.b.).
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
F-16
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
employees of the Company (including certain executive officers) contingent
upon consummation of the IPO. Such options, which include both incentive and
non-qualified stock options, will have an exercise price equal to the price
to the public in the IPO and generally will vest ratably over four years from
the date of grant except that the initial installment of options to be
granted to certain executive officers will vest immediately upon consummation
of the IPO.
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 51,500
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. SERIES A 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 remuneration 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 levels 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 annual 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 stockholders ..... (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 $11,718,000, 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. Proposed Credit Facility -- On January 8, 1999, the Company received a letter
from the lender under the Credit Facility undertaking to provide a new credit
facility in the amount of $25 million (the "Proposed Credit Facility")
subject to a number of conditions including the satisfactory completion by
the lender of its due diligence review of the Company's operations,
negotiation of mutually satisfactory documentation and approval by the
lender's commitment committee. The letter contemplates that the Proposed
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 subsidiaries.
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. The Company's fiscal year
end is September 30.
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>
F-30
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 existing 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:
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
--------------------
Net revenues .............................. $ 528,552
Loss from discontinued operations ......... (4,100,385)
============
Financial position:
AS OF
JUNE 30, 1998
--------------
Current:
Accounts receivable, net ................ $ 162,271
Inventories ............................. 74,501
---------
$ 236,772
=========
Non-current - property, equipment and $ 176,455
computer software, net ......... =========
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 out-
F-32
<PAGE>
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
standing 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.
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:
1999 ........... $238,240
2000 ........... 240,133
2001 ........... 212,320
2002 ........... 208,969
2003 ........... 199,460
Thereafter ..... 395,841
=======
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
======
</TABLE>
OPTIONS EXERCISABLE:
<TABLE>
<CAPTION>
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)
----------
$ --
==========
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liability as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
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>
<TABLE>
<S> <C>
===============================================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS 4,166,667 SHARES
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 [GRAPHIC OMITTED]
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 MEDE AMERICA
SOLICITATION OF AN OFFER TO BUY ANY OF THE CORPORATION
SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
--------------------------------------
TABLE OF CONTENTS COMMON STOCK
PAGE
----
Prospectus Summary ............................ 3
Risk Factors .................................. 10
The Company ................................... 18
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
Financial Condition And Results Of --------------------------
Operations ................................. 30 P R O S P E C T U S
Business ...................................... 44 , 1999
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 ....................................... 72
Additional Information ........................ 72
Index To Financial Statements ................. F-1 SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
-----------------
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.
===============================================================================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee and the National Association of Securities Dealers, Inc.
("NASD") Filing Fee, the amounts listed below are estimates:
<TABLE>
<S> <C>
SEC Registration Fee ......................... $ 18,320
NASD Filing Fee .............................. 6,710
Nasdaq Listing Fees .......................... *
Legal Fees and Expenses ...................... 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 -- Letter dated January 8, 1999 from Nationsbank N.A. to MEDE
AMERICA Corporation, re- garding the proposed 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.
10.14 -- Letter Agreement dated as of January 8, 1999 between MEDE AMERICA
Corporation and Bank of America Illinois.
21.1+ -- Subsidiaries of the Company.
23.1 -- Consent of Deloitte & Touche LLP, independent accountants.
23.2 -- Consent of Deloitte & Touche LLP, independent accountants.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
23.3 -- Consent of KPMG LLP, independent accountants.
23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
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 January 11, 1999.
MEDE AMERICA CORPORATION
By: THOMAS P. STAUDT
------------------------------
Thomas P. Staudt
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
THOMAS P. STAUDT President and Chief Executive January 11, 1999
- ------------------------- Officer (Principal executive officer);
Thomas P. Staudt Director
THOMAS P. STAUDT* Chief Financial Officer (Principal January 11, 1999
- ------------------------- financial and accounting officer)
Richard P. Bankosky
THOMAS P. STAUDT* Director January 11, 1999
- -------------------------
Thomas E. McInerney
THOMAS P. STAUDT* Director January 11, 1999
- -------------------------
Anthony J. de Nicola
THOMAS P. STAUDT* Director January 11, 1999
- -------------------------
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>
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.
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.
<PAGE>
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 -- Letter dated January 8, 1999 from Nationsbank N.A. to MEDE
AMERICA Corporation, re- garding the proposed 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.
10.14 -- Letter Agreement dated as of January 8, 1999 between MEDE AMERICA
Corporation and Bank of America Illinois.
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 LLP, independent accountants.
23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
24.1+ -- Power of Attorney.
27.1+ -- Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment.
** Confidential treatment requested.
+ Previously filed.
EXHIBIT 1.1
MedE America Corporation
4,166,667 Shares
Common Stock
($.01 par value)
Underwriting Agreement
New York, New York
, 1999
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
William Blair & Company, L.L.C.,
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
MedE America Corporation, a Delaware corporation (the
"Company"), proposes to sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), for whom you (the "Representatives") are acting as
representatives, 4,166,667 shares of common stock, $.01 par value ("Common
Stock") of the Company (said shares to be issued and sold by the Company being
hereinafter called the "Underwritten Securities"). The Company also proposes to
grant to the Underwriters an option to purchase up to 625,000 additional shares
of Common Stock to cover over-allotments (the "Option Securities"; the Option
Securities, together with the Underwritten Securities, being hereinafter called
the "Securities"). To the extent there are no additional Underwriters listed on
Schedule I other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. Certain terms used herein
are defined in Section 17 hereof.
As part of the offering contemplated by this Agreement,
Salomon Smith Barney has agreed to reserve out of the Shares set forth opposite
its name on the Schedule I to this Agreement, up to 5% of the Underwritten
Securities, for sale to the Company's employees, officers, and directors and
other parties associated with the Company (collectively, "Participants"), as set
forth in the Prospectus under the heading "Underwriting" (the "Directed Share
Program"). The Shares to be sold by Salomon
<PAGE>
Smith Barney pursuant to the Directed Share Program (the "Directed Shares") will
be sold by Salomon Smith Barney pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the business day on which this Agreement is executed
will be offered to the public by Salomon Smith Barney as set forth in the
Prospectus.
1. Representations and Warranties. The Company represents and warrants to,
and agrees with, each Underwriter as set forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a registration
statement (file number 333-55977) on Form S-1, including a related preliminary
prospectus, for registration under the Act of the offering and sale of the
Securities. The Company has filed one or more amendments thereto, including a
related preliminary prospectus, each of which has previously been furnished to
you. The Company will next file with the Commission either (1) prior to the
Effective Date of such registration statement, a further amendment to such
registration statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b). In the case of clause (2), the Company has included
in such registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and the rules
thereunder to be included in such registration statement and the Prospectus. As
filed, such amendment and form of final prospectus, or such final prospectus,
shall contain all Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree in
writing to a modification (which agreement shall not be unreasonably withheld),
shall be in all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has advised you,
prior to the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or will, and when
the Prospectus is first filed (if required) in accordance with Rule 424(b) and
on the Closing Date (as defined herein) and on any date on which Option
Securities are purchased, if such date is not the Closing Date (a "settlement
date"), the Prospectus (and any supplements thereto) will, comply in all
material respects with the applicable requirements of the Act and the rules
thereunder; on the Effective Date and at the Execution Time, the Registration
Statement did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, except for Rule 430A
pricing information; and, on the Effective Date, the Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing pursuant to
Rule 424(b) and on the Closing Date and any settlement date, the Prospectus
(together with any supplement thereto) will not, include any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the
2
<PAGE>
circumstances under which they were made, not misleading; provided, however,
that the Company makes no representations or warranties as to the information
contained in or omitted from the Registration Statement, or the Prospectus (or
any supplement thereto) in reliance upon and in conformity with information
furnished herein or in writing to the Company by or on behalf of any Underwriter
through the Representatives specifically for inclusion in the Registration
Statement or the Prospectus (or any supplement thereto).
(c) Each of the Company and its Subsidiaries (as defined herein) has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized with
full corporate power and authority to own or lease, as the case may be, and to
operate its properties and conduct its business as described in the Prospectus,
and is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such qualification,
except where the failure as to due qualification to do business would not have a
material adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and the Subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto) (a "Material Adverse Effect");
(d) All the outstanding shares of capital stock of the Subsidiaries have
been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of the Subsidiaries are owned by the Company
directly free and clear of any perfected security interest or any other security
interests, claims, liens or encumbrances;
(e) The Company's authorized equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material respects
to the description thereof contained in the Prospectus; the outstanding shares
of Common Stock have been duly and validly authorized and issued and are fully
paid and nonassessable; the Securities have been duly and validly authorized,
and, when issued and delivered to and paid for by the Underwriters pursuant to
this Agreement, will be fully paid and nonassessable; the Securities are duly
listed, and admitted and authorized for trading, subject to official notice of
issuance and evidence of satisfactory distribution, on the Nasdaq National
Market; the certificates for the Securities are in valid and sufficient form;
the holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Securities except
for such rights of WCAS Capital Partners II, L.P. as have been effectively
waived; and, except as set forth in the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of capital
stock of or ownership interests in the Company are outstanding;
3
<PAGE>
(f) There is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectus, or to be
filed as an exhibit thereto, which is not described or filed as required; and
the statements in the Prospectus under the headings "Risk Factors -- Proposed
Healthcare Data Confidentiality Legislation," "Business -- Government
Regulation" and "Business -- Legal Proceedings" fairly summarize the matters
therein described.
(g) This Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by federal and state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by general
principles of equity.
(h) The Company is not and, after giving effect to the offering and sale of
the Securities and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in the Investment
Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of any court
or governmental agency or body is required in connection with the transactions
contemplated herein, except such as have been obtained under the Act and such as
may be required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the Securities by the Underwriters in the
manner contemplated herein and in the Prospectus.
(j) Neither the issue and sale of the Securities nor the consummation of
any other of the transactions herein contemplated nor the fulfillment of the
terms hereof will conflict with, result in a breach or violation of or the
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or the Subsidiaries pursuant to, (i) the charter or by-laws of the
Company or the Subsidiaries, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company or the
Subsidiaries are a party or bound or to which its or their property is subject,
or (iii) any statute, law, rule, regulation, judgment, order or decree
applicable to the Company or the Subsidiaries, of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or the Subsidiaries or any of its or their
properties, except as to clauses (ii) and (iii) where such breach, violation,
lien, charge or encumbrance would not have a Material Adverse Effect,
individually or in the aggregate.
4
<PAGE>
(k) No holders of securities of the Company have rights to the registration
of such securities under the Registration Statement except for such rights of
WCAS Capital Partners II, L.P. as have been effectively waived.
(l) The consolidated historical financial statements and schedules of the
Company and its consolidated Subsidiaries included in the Prospectus and the
Registration Statement present fairly in all material respects the financial
condition, results of operations and cash flows of the Company as of the dates
and for the periods indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Consolidated Financial Data" in the
Prospectus and Registration Statement fairly present, on the basis stated in the
Prospectus and the Registration Statement, the information included therein. The
pro forma financial statements included in the Prospectus and the Registration
Statement include assumptions that provide a reasonable basis for presenting the
significant effects directly attributable to the transactions and events
described therein, the related pro forma adjustments give appropriate effect to
those assumptions, and the pro forma adjustments reflect the proper application
of those adjustments to the historical financial statement amounts in the pro
forma financial statements included in the Prospectus and the Registration
Statement. The pro forma financial statements included in the Prospectus and the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of Regulation S-X under the Act and the pro
forma adjustments have been properly applied to the historical amounts in the
compilation of those statements.
(m) No action, suit or proceeding by or before any court or governmental
agency, authority or body or any arbitrator involving the Company or the
Subsidiaries or its or their property is pending or, to the best knowledge of
the Company, threatened that (i) could reasonably be expected to have a material
adverse effect on the performance of this Agreement or the consummation of any
of the transactions contemplated hereby or (ii) could reasonably be expected to
have a Material Adverse Effect.
(n) Each of the Company and the Subsidiaries owns or leases all such
properties as are necessary to the conduct of its operations as presently
conducted.
(o) Neither the Company nor the Subsidiaries is in violation or default of
(i) any provision of its charter or bylaws, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument to which it is a
party or bound or to which its property is subject, or (iii) any statute, law,
rule, regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or the Subsidiaries or any of its or their
properties, as applicable, except
5
<PAGE>
as to clauses (ii) and (iii) where such violation or default would not have a
Material Adverse Effect, individually or in the aggregate.
(p) Deloitte & Touche LLP and KPMG Peat Marwick LLP, each of whom have
certified certain financial statements of the Company and its consolidated
Subsidiaries and delivered their reports with respect to the audited
consolidated financial statements and schedules included in the Prospectus, each
are independent public accountants with respect to the Company within the
meaning of the Act and the applicable published rules and regulations
thereunder.
(q) There are no transfer taxes or other similar fees or charges under
Federal law or the laws of any state, or any political subdivision thereof,
required to be paid in connection with the execution and delivery of this
Agreement or the issuance by the Company or sale by the Company of the
Securities.
(r) The Company has filed all foreign, federal, state and local tax returns
that are required to be filed or has requested extensions thereof (except in any
case in which the failure so to file would not have a Material Adverse Effect)
and has paid all taxes required to be paid by it and any other assessment, fine
or penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently being
contested in good faith or as would not have a Material Adverse Effect.
(s) No labor problem or dispute with the employees of the Company or the
Subsidiaries exists or is threatened or imminent, and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of its or
the Subsidiaries' principal suppliers, contractors or customers, that could have
a Material Adverse Effect.
(t) The Company and the Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which they are engaged; all
policies of insurance and fidelity or surety bonds insuring the Company or the
Subsidiaries or their respective businesses, assets, employees, officers and
directors are in full force and effect; the Company and the Subsidiaries are in
compliance with the terms of such policies and instruments in all material
respects; and there are no claims by the Company or the Subsidiaries under any
such policy or instrument as to which any insurance company is denying liability
or defending under a reservation of rights clause; neither the Company nor the
Subsidiaries have been refused any insurance coverage sought or applied for; and
neither the Company nor the Subsidiaries have any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not have a Material Adverse
Effect.
6
<PAGE>
(u) The Subsidiaries are not currently prohibited, directly or indirectly,
from paying any dividends to the Company, from making any other distribution on
the Subsidiaries' capital stock, from repaying to the Company any loans or
advances to the Subsidiaries from the Company or from transferring any of the
Subsidiaries' property or assets to the Company, except as described in or
contemplated by the Prospectus.
(v) The Company and the Subsidiaries possess all licenses, certificates,
permits and other authorizations issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective businesses,
and neither the Company nor the Subsidiaries have received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect.
(w) The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) The Company has not taken, directly or indirectly, any action designed
to or which has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Securities.
(y) The Company and the Subsidiaries are (i) in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
have received and are in compliance with all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any disposal or
release of hazardous or toxic substances or wastes, pollutants or contaminants,
except where such non-compliance with Environmental Laws, failure to receive
required permits, licenses or other approvals, or liability would not,
individually or in the aggregate, have a Material Adverse Effect. Except as set
forth in the Prospectus, neither the Company nor the Subsidiaries have been
named as a "potentially responsible party" under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
7
<PAGE>
(z) In the ordinary course of its business, the Company periodically
reviews the effect of Environmental Laws on the business, operations and
properties of the Company and the Subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws, or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a Material Adverse Effect.
(aa) Each of the Company and the Subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of the
United States Employee Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder with respect to each "plan"
(as defined in Section 3(3) of ERISA and such regulations and published
interpretations) in which employees of the Company and the Subsidiaries are
eligible to participate and each such plan is in compliance in all material
respects with the presently applicable provisions of ERISA and such regulations
and published interpretations. The Company and the Subsidiaries have not
incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to any such plan
under Title IV of ERISA.
(ab) MedE America of Ohio, an Ohio corporation, Healthcare Interchange,
Inc. and Wellmark, Incorporated, a Delaware corporation, are the only
subsidiaries of the Company (the "Subsidiaries").
(ac) The Company and the Subsidiaries own, possess, license or have other
rights to use, on reasonable terms, all patents, patent applications, trade and
service marks, trade and service mark registrations, trade names, copyrights,
licenses, inventions, trade secrets, technology, know-how and other intellectual
property (collectively, the "Intellectual Property") material to the conduct of
the Company's business as now conducted or as proposed in the Prospectus to be
conducted. Except as set forth in the Prospectus under the caption
"Business--Intellectual Property" or as would not have a Material Adverse
Effect, (a) other than rights granted by the Company in its ordinary course of
business, there are no rights of third parties in Intellectual Property owned by
the Company; (b) there is no material infringement by third parties as to
Intellectual Property owned by the Company; (c) there is no pending or, to the
Company's knowledge, threatened action, suit, proceeding or claim against the
Company by others challenging the Company's rights in or to any such
Intellectual Property, and the Company is unaware of any facts which would form
a reasonable basis for any such claim against the Company; (d) there is no
pending or, to the Company's knowledge, threatened action, suit, proceeding or
claim by others challenging the validity or scope of any such Intellectual
Property, and the Company is unaware of any facts which would form a reasonable
basis for any such claim; (e) there is no pending
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or, to the Company's knowledge, threatened action, suit, proceeding or claim
against the Company by others that the Company infringes or otherwise violates
any patent, trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim; (f) there is no U.S. patent or published
U.S. patent application which contains claims that dominate or may dominate any
Intellectual Property described in the Prospectus as being owned by the Company
or that interferes with the issued or pending patents to any such Intellectual
Property; and (g) there is no prior art of which the Company is aware that may
render any U.S. patent held by the Company invalid or any U.S. patent
application held by the Company unpatentable which has not been disclosed to the
U.S. Patent and Trademark Office.
(ad) The statements contained in the Prospectus under the captions "Risk
Factors--Dependence on Intellectual Property; Risk of Infringement,"
"Business--Intellectual Property" and "Business -- Legal Proceedings," insofar
as such statements summarize legal matters, agreements, documents, or
proceedings discussed therein, are accurate and fair summaries of such legal
matters, agreements, documents or proceedings.
(ae) Except as disclosed in the Registration Statement and the Prospectus,
the Company (i) does not have any material lending or other relationship with
any bank or lending affiliate of an Underwriter and (ii) does not intend to use
any of the proceeds from the sale of the Securities hereunder to repay any
outstanding debt owed to any affiliate of an Underwriter.
(af) The statements contained in the Prospectus under the captions "Risk
Factors--Year 2000 Compliance," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance" and
"Business--Year 2000 Compliance," are accurate and fair summaries of the
Company's efforts to address the risk that the computer hardware and software
used by them may be unable to recognize and properly execute date-sensitive
functions involving certain dates prior to and any dates after December 31, 1999
(the "Year 2000 Problem") and the Company is in compliance with the directives
of the Commission's Release No. 33-7558 relating to Year 2000 compliance.
(ag) Any certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to each Underwriter.
Furthermore, the Company represents and warrants to Salomon Smith Barney
that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any
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preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed shares are offered
outside the United States.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to sell
to each Underwriter, and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $ per share,
the amount of the Underwritten Securities set forth opposite such
Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not
jointly, up to 625,000 Option Securities at the same purchase price per
share as the Underwriters shall pay for the Underwritten Securities. Said
option may be exercised only to cover over-allotments in the sale of the
Underwritten Securities by the Underwriters. Said option may be exercised
in whole or in part at any time (but not more than once) on or before the
30th day after the date of the Prospectus upon written or telegraphic
notice by the Representatives to the Company setting forth the number of
shares of the Option Securities as to which the several Underwriters are
exercising the option and the settlement date. The number of Option
Securities to be purchased by each Underwriter shall be the same percentage
of the total number of shares of the Option Securities to be purchased by
the several Underwriters as such Underwriter is purchasing of the
Underwritten Securities, subject to such adjustments as you in your
absolute discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on_______,
1999, or at such time on such later date not more than three Business Days after
the foregoing date as the Representatives shall designate, which date and time
may be postponed by agreement between the Representatives and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for the
Securities being herein called the "Closing Date"). Delivery of the Securities
shall be made to the Representatives for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. Delivery of the Underwritten Securities and the Option Securities
shall be
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made through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised after the
third Business Day prior to the Closing Date, the Company will deliver the
Option Securities (at the expense of the Company) to the Representatives on the
date specified by the Representatives (which date shall be reasonably agreed
upon by the Company and the Representative, but in any event within three
Business Days after exercise of said option) for the respective accounts of the
several Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. If settlement for the Option Securities occurs after the Closing
Date, the Company will deliver to the Representatives on the settlement date for
the Option Securities, and the obligation of the Underwriters to purchase the
Option Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Securities for sale to the public as set forth in the
Prospectus.
5. Agreements. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering of
the Securities, the Company will not file any amendment of the Registration
Statement or supplement to the Prospectus or any Rule 462(b) Registration
Statement unless the Company has furnished you a copy for your review prior
to filing and will not file any such proposed amendment or supplement to
which you reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule 424(b),
the Company will cause the Prospectus, properly completed, and any
supplement thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to the Representatives of such timely
filing. The Company will promptly advise the Representatives (1) when the
Registration Statement, if not effective at the Execution Time, shall have
become effective, (2) when the Prospectus, and any supplement thereto,
shall have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been filed
with the Commission, (3) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have been
filed or become effective, (4) of any request by the Commission or its
staff for any amendment of the Registration Statement, or any Rule 462(b)
Registration Statement, or for any supplement to the Prospectus or
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<PAGE>
for any additional information, (5) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or the institution or threatening of any proceeding for that purpose and
(6) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order or the suspension of any such qualification and, if
issued, to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be necessary to amend
the Registration Statement or supplement the Prospectus to comply with the
Act or the rules thereunder, the Company promptly will (1) notify the
Representatives of any such event; (2) prepare and file with the
Commission, subject to the second sentence of paragraph (a) of this Section
5, an amendment or supplement which will correct such statement or omission
or effect such compliance; and (3) supply any supplemented Prospectus to
you in such quantities as you may reasonably request.
(c) As soon as practicable, the Company will make generally available
to its security holders and to the Representatives an earnings statement or
statements of the Company and the Subsidiaries which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act.
(d) The Company will furnish to the Representatives and counsel for
the Underwriters signed copies of the Registration Statement (including
exhibits thereto) and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the Prospectus and any supplement
thereto as the Representatives may reasonably request.
(e) The Company will arrange, if necessary, for the qualification of
the Securities for sale under the laws of such jurisdictions as the
Representatives may designate and will maintain such qualifications in
effect so long as required for the distribution of the Securities; provided
that in no event shall the Company be obligated to qualify to do business
in any jurisdiction where it is not now so qualified or to take any action
that would subject it to service of process in suits, other than those
arising out of the offering or sale of the Securities, in any jurisdiction
where it is not now so subject.
(f) The Company 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,
or file (or
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<PAGE>
participate in the filing of) a registration statement (other than a
Registration Statement on Form S-8 or S-4) with the Securities and Exchange
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder with respect to, any shares of capital stock of the
Company or any securities convertible into or exercisable or exchangeable
for such capital stock, or publicly announce an intention to effect any
such transaction, for a period of 180 days after the date of the Final
Prospectus, other than shares of Common Stock disposed of as bona fide
gifts approved by Salomon Smith Barney Inc.
(g) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating to the
following matters: (i) the preparation, printing or reproduction and filing
with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Preliminary Prospectus, the
Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and
all amendments or supplements to any of them, as may, in each case, be
reasonably requested for use in connection with the offering and sale of
the Securities; (iii) the preparation, printing, authentication, issuance
and delivery of certificates for the Securities, including any stamp or
transfer taxes in connection with the original issuance and sale of the
Securities; (iv) the printing (or reproduction) and delivery of this
Agreement, any blue sky memorandum and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of
the Securities; (v) the registration of the Securities under the Exchange
Act and the listing of the Securities on the Nasdaq National Market; (vi)
any registration or qualification of the Securities for offer and sale
under the securities or blue sky laws of the several states (including
filing fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii) any
filings required to be made with the National Association of Securities
Dealers, Inc. (including filing fees and the reasonable fees and expenses
of counsel for the Underwriters relating to such filings); (viii) the
transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective purchasers
of the Securities; (ix) the fees and expenses of the Company's accountants
and the fees and expenses of counsel (including local and special counsel)
for the Company; and (x) all other costs and expenses incident to the
performance by the Company of its obligations hereunder.
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(i) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the
NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of the effectiveness of the
Registration Statement. Salomon Smith Barney will notify the Company as to
which Participants will need to be so restricted. The Company will direct
the transfer restrictions upon such period of time.
(j) The Company agrees to pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program
and stamp duties, similar taxes or duties or other taxes, if any, incurred
by the Underwriters in connection with the Directed Share Program.
6. Conditions to the Obligations of the Underwriters. The obligations of
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of the Prospectus, or any supplement thereto, is required pursuant
to Rule 424(b), the Prospectus, and any such supplement, will be filed in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted
or threatened.
(b) The Company shall have caused Reboul, MacMurray, Hewitt, Maynard &
Kristol, counsel for the Company, to have furnished to the Representatives
their opinion, dated the Closing Date and addressed to the Representatives,
to the effect that:
(i) each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its
business as described in
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<PAGE>
the Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the
failure as to due qualification to do business would not have a
Material Adverse Effect, individually or in the aggregate.
(ii) all the outstanding shares of capital stock of each of the
Subsidiaries have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in
the Prospectus, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company directly free and clear of any
perfected security interest and, to the knowledge of such counsel,
after due inquiry, any other security interest, claim, lien or
encumbrance;
(iii) the Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable;
the Securities have been duly and validly authorized, and, when issued
and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be fully paid and nonassessable; the Securities are
duly listed, and admitted and authorized for trading, subject to
official notice of issuance and evidence of satisfactory distribution,
on the Nasdaq National Market; the certificates for the Securities are
in valid and sufficient form; the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or other
rights to subscribe for the Securities from the Company except for
such rights of WCAS Capital Partners II, L.P. as have been effectively
waived; and, except as set forth in the Prospectus, no options,
warrants or other rights to purchase, agreements or other obligations
to issue, or rights to convert any obligations into or exchange any
securities for, shares of capital stock of or ownership interests in
the Company are outstanding;
(iv) to the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or the Subsidiaries or its or their property of a character
required to be disclosed in the Registration Statement which is not
adequately disclosed in the Prospectus, and to the knowledge of such
counsel, there is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements included in the
Prospectus under the headings "Risk Factors -- Proposed Healthcare
Data Confidentiality Legislation," "Risk Factors--Dependence on
Intellectual Property; Risk of Infringement," "Business -- Government
Regulation," "Business -- Legal Proceedings" and "Business-
15
<PAGE>
-Intellectual Property" fairly summarize the legal matters therein
described;
(v) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); to the knowledge of
such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued, no proceedings for that
purpose have been instituted or threatened and the Registration
Statement and the Prospectus (other than the financial statements and
other financial information contained therein, as to which such
counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations thereunder; and such counsel has no reason to believe that
on the Effective Date or at the Execution Time the Registration
Statement contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, or that the Prospectus
as of its date and on the Closing Date included or includes any untrue
statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (in each
case, other than the financial statements and other financial
information contained therein, as to which such counsel need express
no opinion);
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof
as described in the Prospectus, will not be, an "investment company"
as defined in the Investment Company Act of 1940, as amended;
(viii) no consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such other
approvals (specified in such opinion) as have been obtained;
(ix) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation of or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or its
subsidiaries pursuant to, (i) the
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charter or by-laws of the Company or the Subsidiaries, (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company or the Subsidiaries are a
party or bound or to which its or their property is subject, however,
the opinion in this section (ix)(ii) may be based upon the knowledge
of such counsel with respect to any such agreement, obligation,
condition, covenant or instrument which is not otherwise disclosed in,
or filed as an exhibit to, the Registration Statement, or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable
to the Company or the Subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or the Subsidiaries or
any of their properties; and
(x) to the knowledge of such counsel, no holders of securities of
the Company have rights to the registration of such securities under
the Registration Statement except for such rights of WCAS Capital
Partners II, L.P. as have been effectively waived and the rights of
Medic Computer Systems, Inc., which rights will not be effective until
the exercise of its warrant at least 180 days following the sale of
the Securities to the Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the States
of Delaware and New York or the Federal laws of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters and (B) as to matters of fact,
to the extent they deem proper, on certificates of responsible officers of
the Company and public officials. References to the Prospectus in this
paragraph (b) include any supplements thereto at the Closing Date.
(c) The Representatives shall have received from Dewey Ballantine LLP,
counsel for the Underwriters, such opinion or opinions, dated the Closing
Date and addressed to the Representatives, with respect to the issuance and
sale of the Securities, the Registration Statement, the Prospectus
(together with any supplement thereto) and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(d) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the Closing Date, to the effect that the signers of such certificate
have carefully examined the Registration Statement, the Prospectus, any
supplements to the Prospectus and this Agreement and that:
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(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing Date with the same effect as if made on the Closing Date
and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to
the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement thereto),
there has been no Material Adverse Effect.
(e) The Representatives shall have received letters addressed to you
dated the date hereof and the Closing Date from Deloitte & Touche LLP and
KPMG Peat Marwick LLP, each independent certified public accountants,
substantially in the forms heretofore approved by you.
(f) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in paragraph (e) of this Section 6 or
(ii) any change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), earnings, business or
properties of the Company and the Subsidiaries taken as a whole, whether or
not arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any supplement
thereto) the effect of which, in any case referred to in clause (i) or (ii)
above, is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(g) The Securities shall have been listed and admitted and authorized
for trading on the Nasdaq National Market and satisfactory evidence of such
actions shall have been provided to the Representatives.
(h) At or prior to the Execution Time, the Company shall have
furnished to the Representatives a letter substantially in the form of
Exhibit A hereto from each officer, director and certain stockholders of
the Company, whose aggregate holdings of Common Stock represent ______
shares of Common Stock (___% of the total outstanding Common Stock),
addressed to the Representatives.
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(i) The Company shall have provided evidence to the Underwriters, in
form and substance satisfactory to the Representatives, that concurrently
with the Closing (i) the Senior Subordinated Note and the Credit Facility
(as such terms are defined in the Prospectus) will be repaid in full in the
manner set forth in the Prospectus under the heading "Use of Proceeds" and
(ii) the Recapitalization (as defined in the Prospectus) will be completed.
(j) The Company shall have provided evidence to the Underwriters, in
form and substance satisfactory to the Representatives, that the Amended
Credit Facility has been executed on the terms set forth in the Prospectus.
(k) The Company shall have provided evidence to the Underwriters, in
form and substance satisfactory to the Representatives, that the Company's
Certificate of Incorporation has been amended to provide for the issuance
of up to 5,000,000 shares of Preferred Stock as set forth in the Prospectus
under the headings "Risk Factors--Potential Adverse Effect of Anti-Takeover
Provisions," "Description of Capital Stock" and "Description of Capital
Stock--Preferred Stock."
(l) Prior to the Closing Date, the Company shall have furnished to the
Representatives such further information, certificates and documents as the
Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects
reasonably satisfactory in form and substance to the Representatives and
counsel for the Underwriters, this Agreement and all obligations of the
Underwriters hereunder may be canceled at, or at any time prior to, the
Closing Date by the Representatives. Notice of such cancelation shall be
given to the Company in writing or by telephone or facsimile confirmed in
writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Dewey Ballantine LLP, counsel for the
Underwriters, at 1301 Avenue of the Americas, New York, New York, on the
Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to
the obligations of the Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or comply with any provision hereof other than
by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally through Salomon Smith Barney on demand
for all out-of-pocket expenses (including reasonable fees and disbursements
of counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities.
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8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the meaning
of either the Act or the Exchange Act against any and all losses, claims,
damages or liabilities, joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for
the registration of the Securities as originally filed or in any amendment
thereof, or in any Preliminary Prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein; provided further, that with respect to
any untrue statement or omission of material fact made in any Preliminary
Prospectus, the indemnity agreement contained in this Section 8(a) shall
not inure to the benefit of any Underwriter from whom the person asserting
any such loss, claim, damage or liability purchased the securities
concerned, to the extent that any such loss, claim, damage or liability of
such Underwriter occurs under the circumstance where it shall have been
determined by a court of competent jurisdiction by final and nonappealable
judgment that (w) the Company had previously furnished copies of the
Prospectus to the Representatives, (x) delivery of the Prospectus was
required by the Act to be made to such person, (y) the untrue statement or
omission of a material fact contained in the Preliminary Prospectus was
corrected in the Prospectus and (z) there was not sent or given to such
person, at or prior to the written confirmation of the sale of such
securities to such person, a copy of the Prospectus. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) The Company agrees to indemnify and hold harmless Salomon Smith
Barney and each person, if any, who controls Salomon Smith Barney within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act ("Salomon Smith Barney Entities"), from and against any and
all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any
untrue statement or alleged untrue
20
<PAGE>
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable preliminary prospectus,
not misleading; (ii) caused by the failure of any Participant to pay for
and accept delivery of the shares which immediately following the effective
of the Registration Statement, were subject to a properly confirmed
agreement to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, provided that, the Company
shall not be responsible under this subparagraph (iii) for any losses,
claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Salomon Smith Barney Entities.
(c) Each Underwriter severally and not jointly agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter, but
only with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through the
Representatives specifically for inclusion in the documents referred to in
the foregoing indemnity. This indemnity agreement will be in addition to
any liability which any Underwriter may otherwise have. The Company
acknowledges that the statements set forth in the last paragraph of the
cover page regarding delivery of the Securities, the legend in block
capital letters on page 2 related to stabilization, syndicate covering
transactions and penalty bids and, under the heading "Underwriting" or
"Plan of Distribution," (i) the sentences related to concessions and
reallowances and (ii) the paragraph related to stabilization, syndicate
covering transactions and penalty bids in any Preliminary Prospectus and
the Prospectus constitute the only information furnished in writing by or
on behalf of the several Underwriters for inclusion in any Preliminary
Prospectus or the Prospectus.
(d) The Company hereby confirms that at its request Salomon Smith
Barney has without compensation acted as "qualified independent
underwriter" (in such capacity, the "QIU") within the meaning of Rule 2720
of the Conduct Rules of the National Association of Securities Dealers,
Inc. ("Rule 2720") in connection with the offering of the Offered
Securities. The Company agrees to indemnify and hold harmless the QIU, the
directors, officers, employees and agents of the QIU and each person who
controls the QIU within the meaning of either the Act or the Exchange Act
against any and all losses, claims, damages or liabilities, joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any
21
<PAGE>
untrue statement or alleged untrue statement of a material fact contained
in the registration statement for the registration of the Securities as
originally filed or in any amendment thereof, or in any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, and agrees to reimburse each
such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the QIU through the
Representatives specifically for inclusion therein. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(e) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a), (b), (c) or (d)
above unless and to the extent it did not otherwise learn of such action
and such failure results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) will not, in any event, relieve
the indemnifying party from any obligations to any indemnified party other
than the indemnification obligation provided in paragraph (a), (b), (c) or
(d) above. The indemnifying party shall be entitled to appoint counsel of
the indemnifying party's choice at the indemnifying party's expense to
represent the indemnified party in any action for which indemnification is
sought (in which case the indemnifying party shall not thereafter be
responsible for the fees and expenses of any separate counsel retained by
the indemnified party or parties except as set forth below); provided,
however, that such counsel shall be satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall
have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses
of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would, under any
applicable standard of professional conduct as determined by such
indemnified party, present such counsel with a conflict of interest, (ii)
the actual or potential defendants in, or targets of, any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
(iii) the indemnifying party shall not have employed counsel satisfactory
to the indemnified party to represent the indemnified party within a
22
<PAGE>
reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party
will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect
to any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding. It is understood, however,
that the Company shall, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for
the fees and expenses of only one separate firm of attorneys (in addition
to any local counsel) at any time for all such Underwriters and controlling
persons, which firm shall be designated in writing by Salomon Smith Barney.
Notwithstanding anything contained herein to the contrary, if indemnity may
be sought pursuant to Section 8(b) hereof in respect of such action or
proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local
counsel) for Salomon Smith Barney for the defense of any losses, claims,
damages and liabilities arising out of the Directed Share Program, and all
persons, if any, who control Salomon Smith Barney within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act.
(f) In the event that the indemnity provided in paragraph (a), (b),
(c) or (d) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company and the
Underwriters severally agree to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and by the Underwriters on
the other from the offering of the Securities; provided, however, that in
no case shall (i) any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or
commission applicable to the Securities purchased by such Underwriter
hereunder or (ii) the QIU in its capacity as "qualified independent
underwriter" (within the meaning of Rule 2720) be responsible for any
amount in excess of the compensation received by the QIU for acting in such
capacity. If the allocation provided by the immediately preceding sentence
is unavailable for any reason, the Company and the Underwriters severally
shall contribute in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the
one hand and of the Underwriters on the other in connection with the
statements or omissions which resulted in such Losses as well as any
23
<PAGE>
other relevant equitable considerations. Benefits received by the Company
shall be deemed to be equal to the total net proceeds from the offering
(before deducting expenses) received by it, and benefits received by the
Underwriters shall be deemed to be equal to the total underwriting
discounts and commissions, in each case as set forth on the cover page of
the Prospectus. Benefits received by the QIU in its capacity as "qualified
independent underwriter" shall be deemed to be equal to the compensation
received by the QIU for acting in such capacity. Relative fault shall be
determined by reference to, among other things, whether any untrue or any
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information provided by the
Company on the one hand or the Underwriters on the other, the intent of the
parties and their relative knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (f), no
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning
of either the Act or the Exchange Act and each director, officer, employee
and agent of an Underwriter shall have the same rights to contribution as
such Underwriter, and each person who controls the Company within the
meaning of either the Act or the Exchange Act, each officer of the Company
who shall have signed the Registration Statement and each director of the
Company shall have the same rights to contribution as the Company, subject
in each case to the applicable terms and conditions of this paragraph (f).
9. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase
shall constitute a default in the performance of its or their obligations
under this Agreement, the remaining Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the
amount of Securities set forth opposite their names in Schedule I hereto
bears to the aggregate amount of Securities set forth opposite the names of
all the remaining Underwriters) the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase; provided,
however, that in the event that the aggregate amount of Securities which
the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to
purchase all, but shall not be under any obligation to purchase any, of the
Securities, and if such nondefaulting Underwriters do not purchase all the
Securities, this Agreement will terminate without liability to any
nondefaulting Underwriter or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be
postponed for such period, not exceeding five Business Days, as the
Representatives shall determine in order that the required changes in the
Registration Statement and the Prospectus or in any
24
<PAGE>
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if
any, to the Company and any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to the Company
prior to delivery of and payment for the Securities, if at any time prior
to such time (i) trading in the Company's Common Stock shall have been
suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have
been established on such Exchange or National Market, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation
of hostilities, declaration by the United States of a national emergency or
war, or other calamity or crisis the effect of which on financial markets
is such as to make it, in the sole judgment of the Representatives,
impractical or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Prospectus (exclusive of any supplement
thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements
of the Company or its officers and of the Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or the Company
or any of the officers, directors or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the
Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancelation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney General Counsel
(fax no.: (212) 816-7912) and confirmed to the General Counsel, Salomon
Smith Barney, at 388 Greenwich Street, New York, New York, 10013,
Attention: General Counsel; or, if sent to the Company, will be mailed,
delivered or telefaxed to (516) 542-4508 and confirmed to it at 90 Merrick
Avenue, Suite 501, East Meadow, New York 11554, attention of the Legal
Department.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8
hereof, and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
25
<PAGE>
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for convenience
only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus included
in the Registration Statement at the Effective Date that omits Rule 430A
Information.
"Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no
filing pursuant to Rule 424(b) is required, shall mean the form of final
prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include
26
<PAGE>
any Rule 430A Information deemed to be included therein at the Effective
Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating
to the offering covered by the registration statement referred to in
Section 1(a) hereof.
"Salomon Smith Barney" shall mean Salomon Smith Barney Inc.
27
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding
agreement among the Company and the several Underwriters.
Very truly yours,
MedE America Corporation
By:
-------------------------
Name:
Title:
<PAGE>
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
William Blair & Company, L.L.C.
By: Salomon Smith Barney Inc.
By:
--------------------------------
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
29
<PAGE>
SCHEDULE I
Number of
Underwritten Securities
Underwriters to be Purchased
- ------------ ---------------
Salomon Smith Barney Inc.............................
Bear, Stearns & Co. Inc. ............................
William Blair & Company, L.L.C.......................
-----------------------
Total.............................. -----------------------
<PAGE>
[Form of Lock-Up Agreement] EXHIBIT A
[Letterhead of officer, director or shareholder of
Corporation]
MEDE AMERICA CORPORATION
Initial Public Offering of Common Stock
June ___, 1998
Smith Barney Inc.
William Blair & Company, L.L.C.
Volpe Brown Whelan & Company, LLC
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between MEDE AMERICA
Corporation, a Delaware corporation (the "Company"), and each of you as
Underwriters named therein, relating to an underwritten initial public offering
of Common Stock, $.01 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Smith Barney Inc., sell, offer to sell, solicit an offer to purchase,
contract to sell, grant any option to sell, pledge or otherwise dispose of, or
file (or participate in the filing of) a registration statement with the
Securities and Exchange Commission in respect of, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent position within
the meaning of Section 16 of the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder with respect to, any shares of capital stock of the
Company or any securities convertible into or exercisable or exchangeable for
such capital stock, or publicly announce an intention to effect any such
transaction, for a period of 180 days after the date of the Final Prospectus,
other than shares of Common Stock disposed of as bona fide gifts approved by
Smith Barney Inc.
<PAGE>
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
----------------------------------
Stockholder Name
By: ------------------------------
Name:
Title:
Address:
EXHIBIT 10.6
January 8, 1999 CONFIDENTIAL
MEDE AMERICA CORPORATION
------------------------
$25,000,000 SENIOR SECURED CREDIT FACILITIES
--------------------------------------------
COMMITMENT LETTER
-----------------
MedE America Corporation
90 Merrick Avenue, Suite 501
East Meadow, NY 11554
Attention: Mr. Richard Bankosky
Ladies and Gentlemen:
NationsBank N.A. ("NationsBank") is pleased to advise you that it is willing,
subject to credit approval, and to the terms and conditions contained in this
letter and in the attached Summary of Terms and Conditions (the "Term Sheet"),
to commit up to $25,000,000 of senior secured credit facilities (the "Senior
Facilities").
It is agreed that NationsBank will act as the sole and exclusive Administrative
Agent for the Senior Facilities. You agree that no other agents, co-agents or
arrangers will be appointed, no other titles will be awarded and no compensation
(other than that expressly contemplated by the Term Sheet) will be paid in
connection with the Senior Facilities unless you and we shall so agree.
In addition to the conditions to funding or closing set forth herein and in the
Term Sheet, NationsBank's commitment to provide financing hereunder is subject
to, among other conditions, (i) approval of the credit facility by NationsBank;
(ii) satisfactory completion of due diligence with respect to the borrower's
operations and business affairs by NationsBank in its sole discretion; (iii) the
negotiation and execution of a definitive credit agreement (the "Credit
Agreement") and other related documentation satisfactory to the Lenders' (iv)
there being no material adverse change in the reasonable opinion of NationsBank
in the financial condition, business, operations, properties or prospects of the
Borrower and its consolidated subsidiaries from the date of the audited
financial statements most recently provided prior to the date hereof; (v) there
be no competing offering, placement, or arrangement of any debt securities or
bank financial by or on behalf of the Borrower, until the closing of the
transaction.
Whether or not the transactions contemplated hereby are consummated, the
Borrower hereby agrees to indemnify and hold harmless NationsBank, and their
respective directors, officers, employees and affiliates (each, an "indemnified
person") from and against any and all losses, claims, damages, liabilities (or
actions or other proceedings commenced or threatened in respect thereof) and
expenses that arise out of, result from or in any way related to this commitment
letter, or the providing of the Senior Facilities, and to reimburse each
indemnified person, upon its demand, for any legal or other expenses (including
the allocated cost of in-house counsel) incurred in connection with
investigating, defending or participating in any such loss, claim, damage,
liability or action or other proceeding (whether or not such indemnified person
is a party to any action or proceeding out of which any such expenses arise),
other than any of the foregoing claimed by any indemnified person to the extent
incurred by reason of the gross negligence or willful misconduct of such person.
Neither NationsBank, nor any of their affiliates, shall be responsible or liable
to the Borrower or any other person for any consequential damages which may be
alleged.
<PAGE>
MedE America Corporation
January 8, 1999
Page 2
In addition, the Borrower hereby agrees to reimburse NationsBank from time to
time upon demand for their reasonable out-of-pocket costs and expenses incurred
at any time, including (i) attorneys' fees and allocated costs of internal
counsel (without duplication) in connection with the preparation and delivery of
the Credit Agreement and all related documents, and (ii) costs and expenses in
connection with due diligence and the negotiation, closing, and enforcement of
the Senior Facilities, regardless of whether the Senior Facilities close. The
Borrower shall also pay all costs and expenses of the Administrative Agent
associated with amendments and other charges to the Credit Agreement, and all
costs and expenses of the Lenders in the collection of the obligations of the
Borrower (including reasonable attorney's fees and allocated costs of internal
counsel).
Upon your delivery to us of a signed copy of this letter, this letter shall
become a binding agreement under New York law as of the date so accepted.
NationsBank's commitment hereunder shall remain in effect until 5:00 p.m. New
York time, on February 15, 1999 when, if not to accepted, NationsBank commitment
hereunder will terminate. This commitment will expire on March 31, 1999 if the
Senior Facilities have not closed on or before that date.
We are pleased to have the opportunity to work with you on this important
financing.
Very truly yours,
NATIONSBANK N.A.
By: /s/
------------------------------
Title: Attorney-in-fact
------------------------------
ACCEPTED AND AGREED TO:
MEDE AMERICA CORPORATION
THIS 8TH DAY OF JANUARY, 1999
By:
----------------------------
Title:
-------------------------
<PAGE>
CONFIDENTIAL MEDE AMERICA CORPORATION
- --------------------------------------------------------------------------------
SUMMARY OF TERMS AND CONDITIONS (1)
MEDE AMERICA CORPORATION
$25,000,000 SENIOR SECURED CREDIT FACILITIES
BORROWER: MEDE AMERICA CORPORATION ("MedE" or the "Borrower").
GUARANTORS: All material operating subsidiaries and holding companies of
the Borrower.
ADMINSTRATIVE NationsBank N.A. (in such capacity "NationsBank" or
"Administrative Agent")
FACILITIES: Senior Secured Credit Facility (the "Senior Facility") up to
$25,000,000 consisting of a two year non amortizing Revolving
Credit Facility.
LENDERS: NationsBank N.A., and other financial institutions
satisfactory to NationsBank.
PURPOSE: Senior Facility will be used for working capital, general
corporate purposes and acquisitions. All acquisitions shall
be subject to the approval of the Administrative Agent, and
be in a similar line of business, and there shall exist no
Default or Event of Default under the Senior Facility.
AVAILABILITY: Senior Facility will be available on a revolving basis after
the closing ("Closing Date") and prior to the maturity
thereof.
MATURITY DATE: Two year anniversary of the Closing Date, but no later than
February 28, 2001.
MANDATORY
PREPAYMENTS/
COMMITMENT
REDUCTIONS: The Senior Credit Facility will be prepaid by an amount equal
to (i) 100% of the net cash proceeds of all asset sales by
the
- ---------------------
(1) Unless otherwise defined herein, capitalized terms used herein shall have
the respective meanings set forth in the Commitment Letter to which this
Exhibit A is attached.
Page 1 January 8, 1999
- --------------------------------------------------------------------------------
BANK OF AMERICA
<PAGE>
CONFIDENTIAL MEDE AMERICA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Company net of all selling expenses and taxes to the extent
that taxes are paid;
(ii) 100% of the net cash proceeds of the issuance of any
debt; and
(iii) 50% of the net cash proceeds of the issuance of any
equity.
Senior Facility will be required to be prepaid or cash
collateralized, as appropriate, if at any time the
outstanding amount thereof exceeds the total commitments, and
the Senior Facility will terminate, upon the occurrence of a
change of control (to be defined) of the Borrower.
COLLATERAL: Substantially similar to that in existing credit agreement,
including, but not limited to:
(1) A first lien on all the present and future assets of the
Company and its subsidiaries.
(2) Stock of all present and future subsidiaries.
BORROWING
OPTIONS: At the Borrower's option, interest on borrowings shall accrue
on the following indexes plus the applicable spreads.
Eurodollar Rate: The Interbank Offered Rate (IBOR) for 1, 2,
3, 6 month dollar deposits as offered by NationsBank to
prime international banks in the offshore dollar market at
11:00 a.m. New York time two business days prior to the
borrowing date, adjusted for reserve requirements.
Base Rate: The higher of (a) the rate as publicly announced
from time to time by NationsBank as its "Reference Rate" or
(b) Federal Funds Rate plus one-half of one percent per
annum. Any change in the Base Rate shall take effect at the
opening of business on the date specified in the public
announcement of such change in the case of clause (a) above,
or on a daily basis in the case of clause (b) above.
BORROWING RATE: Initial pricing with respect to Base Rate Loans will be Base
Rate + 75 bps with a Pricing Grid to be determined.
Initial pricing with respect to Eurodollar Loans will be
LIBOR + 175 bps with a Pricing Grid to be determined.
Interest on Base Rate borrowings are to accrue based on a 365
(6)-day year and actual days elapsed. Interest on Eurodollar
Page 2 January 8, 1999
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BANK OF AMERICA
<PAGE>
CONFIDENTIAL MEDE AMERICA CORPORATION
- --------------------------------------------------------------------------------
borrowings and all fees are to accrue based on a 360-day year
and actual days elapsed.
INTEREST PAYMENTS: Interest on Base Rate advances shall be payable quarterly in
arrears. In the case of Eurodollar Loans, the earlier of the
end of each applicable interest period or quarterly in
arrears.
UPFRONT FEE: 2.0% of the total amount of the Senior Facilities.
COMMITMENT FEE: Commitment Fee equal to 0.50% per annum times the total
amount of the Senior Facility. Commitment Fees shall be
payable quarterly in arrears.
ADMINISTRATIVE
AGENT FEE: $25,000 payable at closing and on each annual anniversary
date therafter.
DEFAULT RATE: 2.00% above the rate otherwise applicable rate of Senior
Facility.
DRAWDOWNS: Revolver drawdowns are at the Borrower's option with one day
advance notice (by 11:00 a.m. New York time) for Base Rate
Loans and three business days advance notice (by 11:00 a.m.
New York time) for Eurodollar Loans, in minimum amounts to be
determined.
VOLUNTARY
PREPAYMENTS: Base Rate may be prepaid at any time, with same day notice
(by 11:00 a.m. New York time). Eurodollar Loans may be
prepaid at any time with at least three business days advance
notice (by 11:00 a.m. New York time), subject to compensating
the Lenders for any funding losses and related expenses in
connection with any prepayment made on a day other than the
last day of an interest period applicable thereto. Voluntary
prepayments shall be subject to minimum amounts to be
determined.
TERMINATION OR
VOLUNTARY REDUCTION
OF THE FACILITIES: The Borrower may irrevocably reduce the commitments under
the Senior Facility in amounts of at least $1,000,000 at any
time on three business days advance notice.
DOCUMENTATION: The Senior Facility will be subject to the execution of a
credit agreement (the "Credit Agreement") containing suitable
provisions mutually acceptable to the Borrower and the
Administrative Agent, including, without limitation,
representations and warranties, conditions precedent to
effectiveness, conditions precedent to
Page 3 January 8, 1999
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BANK OF AMERICA
<PAGE>
CONFIDENTIAL MEDE AMERICA CORPORATION
- --------------------------------------------------------------------------------
making advances, affirmative and negative convenants and
events of default, as outlined below.
REPRESENTATIONS
AND WARRANTIES: Those customarily found in credit agreements for similar
financings and such additional representations and warranties
as are appropriate under the circumstances, including but not
limited to representations related to corporate existence,
financial condition, litigation, no default, corporate
authority, subsidiaries, copyrights, binding effect, ERISA,
taxes, Investment Company Act, and other material agreements,
investments, compliance with laws and regulations, full
disclosure, assets, solvency, labor matters, environmental
manners, proprietary rights, real property, insurance and
Year 2000 compliance.
CONDITIONS TO
CLOSING: Those customarily found in credit agreements for similar
financings and such additional conditions as are appropriate
under the circumstances, including but not limited to:
o MedE's IPO occurs on or before March 31, 1999;
o Repayment and cancellation of existing bank credit
facilities and other indebtedness;
o All documents and agreements signed and delivered;
o No Default or Event of Default;
o All representations and warranties are true as of the
date of each advance;
o The Bank having completed (and being satisfied with)
its business, legal, accounting and financial due
diligence with respect to the operations and business
affairs of the Borrower and its subsidiaries and with
respect to the Senior Facility;
o No material adverse change in operations , business,
properties, condition (financial or otherwise) or
prospects of the Borrower or any of its subsidiaries
taken as a whole ("Material Adverse Change");
o No material adverse effect in the ability of the
Borrower or any of its subsidiaries to perform their
obligations under the Senior Facilities;
o No material adverse litigation
o Collaterial documents
CONDITIONS TO EACH
ADVANCE (INCLUDING
INITIAL ADVANCE) o No default or event of default under the Senior Facility.
o Continued accuracy in all material respects of the
representations and warranties.
</TABLE>
Page 4 January 8, 1999
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BANK OF AMERICA
<PAGE>
CONFIDENTIAL MEDE AMERICA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AFFIRMATIVE
COVENANTS: Standards for the Administrative Agent's similar financings
and such others as the Administrative Agent deems appropriate
in the context of the proposed Transaction, including the
obtaining of interest rate protection in amounts, and for
periods, to be determined.
FINANCIAL
COVENANTS: Usual and customary for transactions of this type including
but not limited to:
(i) Maximum Leverage Ratio of 2.0x:
(ii) Minimum Interest Coverage RAtio of 3.0x;
(iii) Minimum EBITDA TBD;
(iv) Minimum Net Worth TBD
NEGATIVE
COVENANTS: Standard for the Administrative Agent's similar financings
and such others as the Administrtive Agent deems appropriate
in the context of the proposed Senior Facility, including,
but not limited to:
o Year 2000 Compliance required by 9/30/99
o Change of control
o Restrictions on lines of business.
o Limitations on additional indebtedness and leasing
obligations.
o Restrictions on liens.
o Limitations on investments.
o Limitations on dividends and repayment of certain other
indebtedness.
o Restrictions on consolidations, mergers, acquisitons,
dissolutions, etc.
o Restrictions on asset dispostions.
o Restrictions on sale-leaseback transactions.
o Loan proceeds no to be used in violation of Regulation U.
o Restrictions on transactions with affiliates.
o Restrictions on the payment of management fees.
</TABLE>
Page 5
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BANK OF AMERICA
<PAGE>
CONFIDENTIAL MEDE AMERICA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EVENTS OF
DEFAULT: Standard for the Administrative Agent's similar financings
and such others as the Agent deems appropriate in the context
of the proposed Senior Facility.
INCREASED COSTS/
CHANGES OF
CIRCUMSTANCES/
CAPITAL ADQUACY/
INDEMNITIES: The Credit Agreement shall contain customary provisions
protecting and indemnifying the Lenders in the event of
unavailability of funding, illegality, increased costs,
capital adequacy charges and funding losses, and shall
provide for a withholding tax gross-up, and general
indemnification of the Administrative Agent, by the Borrower.
EXPENSES: The Borrower will pay all costs and expenses incurred at any
time by the Administrative Agent (including, without
duplication, reasonable attorneys' fees and allocated costs
of internal counsel) in connection with the preparation and
delivery of the Credit Agreement and all related documents,
and in the negotiation, closing, and enforcement of the
Facility, regardless of whether the Facility closes. The
Borrower shall also pay all costs and expenses of the
Administrative Agent associated with amendments and other
changes to the Credit Agreement, and all costs and expenses
of the Lenders in the collection of the obligations of the
Borrower (including reasonable attorneys' fees and allocated
costs of internal counsel).
DOCUMENTATIONS: Closing is subject to (among other conditions precedent) the
receipt by the Administrative Agent and the Lenders of loan
documentation in form and substance satisfactory to them.
GOVERNING LAW: State of New York.
</TABLE>
This Summary of Terms and Conditions (the "Term Share") does not attempt to
describe all of the terms and conditions that would pertain to the Senior
Facility, nor do its terms suggest the specific phrasing of documentation
clauses. This term sheet is not a commitment to provide, close or fund the
Senior Facility. Instead, it is intended to outline certain points of business
understanding around which the Senior Facility will be structured. The closing
of any financial transaction relating to the Senior Facility would be subject to
definitive loan documentation manually acceptable to the Borrower and the
Administrative Agent and would include various conditions precedent, including
without limitations the conditions set forth above.
Page 6
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BANK OF AMERICA
EXHIBIT 10.14
LETTER WAIVER
Dated as of January 8, 1999
Bank of America Illinois
Nine West 57th Street, 43rd Floor
New York, New York 10019
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of December 18,
1995, and amendments thereto dated as of January 10, 1997, April 4, 1997,
October 30, 1997, December 29, 1997, October 7, 1998 and December 15, 1998 (such
Credit Agreement, as so amended, the "CREDIT AGREEMENT") among the undersigned
and you. Capitalized terms not otherwise defined in this Letter Waiver shall
have the same meanings as specified therefor in the Credit Agreement.
We intend to issue up to 4,791,667 shares of our common stock,
par value $.01 per share (the "SHARES"), in an initial public offering (the
"IPO"). Upon consummation of the IPO, (i) the Guarantors will own approximately
56% of the voting stock of the Company (assuming that the underwriters'
overallotment option has not been exercised) and (ii) we expect to receive up to
$56,231,254 (the "PROCEEDS"), after deduction for underwriting fees and other
costs and expenses incurred in connection therewith.
We hereby request that you waive, solely with respect to the
IPO and the transactions contemplated thereby, the requirements of Sections 7.11
and 8.01(k) of the Credit Agreement in order to permit us to consummate the IPO,
and to enable us to use the Proceeds to (x) prepay all outstanding Indebtedness
under and in respect of the 10% Subordinated Note issued to WCAS Capital
Partners II, L.P. pursuant to the Note and Share Purchase Agreement dated as of
February 14, 1997 between WCAS Capital Partners II, L.P. and the Company, and
(y) only to the extent of any Proceeds received from Shares sold under the
underwriters' overallotment option, to pay accrued and unpaid dividends on the
Company's preferred stock, par value $.01 per share; provided, however, that (i)
the Proceeds remaining, if any, after such prepayment and such payment of
dividends, if any, has been made shall be applied to prepay amounts outstanding
under and in respect of the Credit Agreement in accordance with the terms of
Section 2.06 thereof and (ii) after the IPO, the Guarantors continue to own at
least 35% of the voting stock of the Company. A breach of the conditions in the
proviso to the immediately preceding sentence will constitute an Event of
Default under the Credit Agreement. Unless the IPO shall have been consummated
on or prior to March 31, 1999 (the "WAIVER TERMINATION DATE"), on the Waiver
Termination Date, without any further action by the Bank, all of the terms and
provisions set forth in the Loan Documents with respect to Defaults thereunder
that are waived hereunder and not cured prior to the Waiver Termination Date
shall have the same force and effect as if this Letter Waiver had not been
entered into by the parties hereto, and the Bank shall have all of the rights
and remedies afforded to it under the Loan Documents with respect to any such
Defaults as though no waiver had been granted by them hereunder.
This Letter Waiver shall become effective as of the date first
above written when, and only when the Bank shall have executed this Letter
Waiver and shall have received counterparts of this Letter Waiver executed by
us, and the consents attached hereto executed by each of the Guarantors. The
effectiveness of this Letter Waiver is conditioned upon the accuracy of the
factual matters described herein. This Letter Waiver is subject to the
provisions of Section 9.01 of the Credit Agreement.
The Credit Agreement, the Notes and each of the other Loan
Documents, except to the extent of the waiver specifically provided above, are
and shall continue to be in full force and effect and are hereby in all respects
ratified and confirmed. The execution, delivery and effectiveness of this Letter
Waiver shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Bank under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
If you agree to the terms and provisions of this Letter
Waiver, please evidence such agreement by executing and returning at least two
counterparts of this Letter Waiver to Shearman & Sterling, 599 Lexington Avenue,
New York, New York 10022, Attention: Douglas Buffone.
This Letter Waiver may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of a signature page to this Letter Waiver by telecopier shall be
effective as delivery of a manually executed counterpart of this Letter Waiver.
<PAGE>
This Letter Waiver shall be governed by, and construed in
accordance with, the laws of the State of New York.
Very truly yours,
MEDE AMERICA CORPORATION
By
----------------------
Name:
Title:
Agreed as of the date first above written:
BANK OF AMERICA ILLINOIS
By
----------------------
Name:
Title:
<PAGE>
CONSENT
Dated as of January 8, 1999
The undersigned, Welsh, Carson, Anderson & Stowe V, L.P., a
Delaware limited partnership, as a Guarantor under the Guaranty dated December
18, 1995 (the "GUARANTY") in favor of the Bank party to the Credit Agreement
referred to in the foregoing Letter Waiver, hereby consents to such Letter
Waiver and hereby confirms and agrees that notwithstanding the effectiveness of
such Letter Waiver, the Guaranty is, and shall continue to be, in full force and
effect and is hereby ratified and confirmed in all respects.
WELSH, CARSON, ANDERSON & STOWE V, L.P.
By WCAS V Partners, its General Partner
By
--------------------------------------
Name:
Title: General Partner
<PAGE>
CONSENT
Dated as of January 8, 1999
The undersigned, Welsh, Carson, Anderson & Stowe VI, L.P., a
Delaware limited partnership, as a Guarantor under the Guaranty dated December
18, 1995 (the "GUARANTY") in favor of the Bank party to the Credit Agreement
referred to in the foregoing Letter Waiver, hereby consents to such Letter
Waiver and hereby confirms and agrees that notwithstanding the effectiveness of
such Letter Waiver, the Guaranty is, and shall continue to be, in full force and
effect and is hereby ratified and confirmed in all respects.
WELSH, CARSON, ANDERSON & STOWE VI, L.P.
By WCAS VI Partners, its General Partner
By
---------------------------------------
Name:
Title: General Partner
<PAGE>
CONSENT
Dated as of January 8, 1999
The undersigned, William Blair Leveraged Capital Fund Limited
Partnership, a Delaware limited partnership, as a Guarantor under the Guaranty
dated December 18, 1995 (the "GUARANTY") in favor of the Bank party to the
Credit Agreement referred to in the foregoing Letter Waiver, hereby consents to
such Letter Waiver and hereby confirms and agrees that notwithstanding the
effectiveness of such Letter Waiver, the Guaranty is, and shall continue to be,
in full force and effect and is hereby ratified and confirmed in all respects.
WILLIAM BLAIR LEVERAGED CAPITAL FUND
LIMITED PARTNERSHIP
By William Blair Leveraged Capital Management, L.P.,
its General Partner
By William Blair & Company, its General Partner
By
----------------------------------------------------
Name:
Title:
<PAGE>
CONSENT
Dated as of January 8, 1999
The undersigned, William Blair Capital Partners V, L.P., a
Delaware limited partnership, as a Guarantor under the Guaranty dated December
18, 1995 (the "GUARANTY") in favor of the Bank party to the Credit Agreement
referred to in the foregoing Letter Waiver, hereby consents to such Letter
Waiver and hereby confirms and agrees that notwithstanding the effectiveness of
such Letter Waiver, the Guaranty is, and shall continue to be, in full force and
effect and is hereby ratified and confirmed in all respects.
WILLIAM BLAIR CAPITAL PARTNERS V, L.P.
By William Blair Capital Partners, LLC,
its General Partner
By
---------------------------------------
Name:
Title:
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. 6 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., December 11, 1998 as to Note 13 and January 8,
1999 as to Note 14) (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
January 11, 1999
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
MEDE America Corporation
East Meadow, New York
We consent to the use in Amendment No. 6 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
January 11, 1999
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
HealthCare Interchange, Inc.:
We consent to the use, in Amendment No. 6 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 January 11, 1999 and to the reference to our firm under the
heading "Experts" in the prospectus.
KPMG LLP
St. Louis, Missouri
January 11, 1999
