SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from to
COMMISSION FILE NUMBER 000-25327
MEDE AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3270245
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Merrick Avenue, Suite 501
East Meadow, New York 11554
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 516-542-4500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value,
13,006,557 shares outstanding as of April 30, 1999.
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
June 30, 1998
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited)
Consolidated Statements of Operations for the Nine Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited)
Notes to Consolidated Unaudited Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998(1)
---------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,042 $ 2,950
Accounts receivable, less allowance for
doubtful accounts of $643 and $468, respectively 10,422 7,920
Formulary receivables 4,910 2,341
Inventory 263 211
Prepaid expenses and other current assets 774 537
---------- ---------
Total current assets 20,411 13,959
PROPERTY AND EQUIPMENT - Net 5,424 4,711
GOODWILL - Net 41,585 34,753
OTHER INTANGIBLE ASSETS - Net 7,065 5,501
OTHER ASSETS 4,429 470
---------- ---------
TOTAL $ 78,914 $ 59,394
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 3,466 $ 3,630
Accrued expenses and other current liabilities 7,148 7,715
Current portion of long-term debt 425 269
---------- ---------
Total current liabilities 11,039 11,614
---------- ---------
LONG-TERM DEBT 6,346 41,055
---------- ---------
OTHER LONG-TERM LIABILITIES 178 194
---------- ---------
SERIES A REDEEMABLE CUMULATIVE
PREFERRED STOCK:
$.01 par value; 250 shares authorized; 240 shares
issued and outstanding as of June 30, 1998 - 31,223
---------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 30,000 shares authorized;
12,997 shares and 5,685 shares outstanding as of
March 31, 1999 and June 30, 1998, respectively 130 57
Additional paid-in capital 114,660 25,584
Accumulated deficit (53,439) (50,243)
Deferred compensation - (90)
---------- ---------
Total stockholders' equity (deficit) 61,351 (24,692)
---------- ---------
TOTAL $ 78,914 $ 59,394
========== =========
</TABLE>
(1) The consolidated balance sheet as of June 30, 1998 has been taken from the
audited financial statements at that date.
See notes to consolidated financial statements.
3
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
---------- ---------
<S> <C> <C>
REVENUES $ 14,776 $ 11,099
---------- ---------
OPERATING EXPENSES:
Operations 5,280 4,258
Sales, marketing and client services 3,325 2,952
Research and development 1,109 1,021
General and administrative 1,560 1,139
Depreciation and amortization 2,375 1,852
---------- ---------
Total operating expenses 13,649 11,222
---------- ---------
INCOME (LOSS) FROM OPERATIONS 1,127 (123)
OTHER (INCOME) EXPENSE - 13
INTEREST EXPENSE, Net 548 900
---------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 579 (1,036)
PROVISION FOR INCOME TAXES 19 13
---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 560 (1,049)
EXTRAORDINARY ITEM (NOTE 3) (1,619) -
---------- ---------
NET LOSS (1,059) (1,049)
PREFERRED STOCK DIVIDENDS (244) (600)
---------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,303) $ (1,649)
========== =========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item $ 0.03 $ (0.29)
Extraordinary item (0.16) -
---------- ---------
Net loss $ (0.13) $ (0.29)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--BASIC AND DILUTED 10,042 5,679
========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
---------- ---------
<S> <C> <C>
REVENUES $ 39,756 $ 30,189
---------- ---------
OPERATING EXPENSES:
Operations 14,975 12,485
Sales, marketing and client services 9,456 7,769
Research and development 3,379 2,886
General and administrative 4,138 3,307
Depreciation and amortization 6,460 5,248
---------- ---------
Total operating expenses 38,408 31,695
---------- ---------
INCOME (LOSS) FROM OPERATIONS 1,348 (1,506)
OTHER (INCOME) EXPENSE - 13
INTEREST EXPENSE, Net 2,822 2,470
---------- ---------
LOSS BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM (1,474) (3,989)
PROVISION FOR INCOME TAXES 103 37
---------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (1,577) (4,026)
EXTRAORDINARY ITEM (NOTE 3) (1,619) -
---------- ---------
NET LOSS (3,196) (4,026)
PREFERRED STOCK DIVIDENDS (1,444) (1,800)
---------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (4,640) $ (5,826)
========== =========
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss before extraordinary item $ (0.42) $ (1.03)
Extraordinary item (0.23) -
---------- ---------
Net loss $ (0.65) $ (1.03)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--BASIC AND DILUTED 7,116 5,677
========== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,196) $ (4,026)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary item 1,619 -
Depreciation and amortization 6,685 5,498
Provision for doubtful accounts 291 265
Loss on sale of assets - 13
Non-cash compensation expense 90 18
Changes in operating assets and liabilities
net of effects of businesses acquired:
Accounts receivable (2,011) (1,410)
Formularly receivables (2,569) (1,097)
Inventory (52) (68)
Prepaid expenses and other current assets (193) (3)
Other assets (642) 118
Accounts payable and accrued expenses and other current liabilities (2,603) (3,696)
Other long-term liabilities (16) 546
----------- -----------
Net cash used in operating activities (2,597) (3,842)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (11,428) (10,674)
Purchases of property and equipment (1,107) (646)
Additions to goodwill and other intangible assets (1,003) (492)
Proceeds from sale of property and equipment - 182
----------- -----------
Net cash used in investing activities (13,538) (11,630)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds under revolving credit facilities (10,725) 15,925
Principal repayments of debt (25,533) (508)
Principal repayments of capital lease obligations (345) (449)
Exercise of stock options 333 40
Payment of preferred dividends (8,371) -
Net proceeds from initial public offering 61,868 -
----------- -----------
Net cash provided by financing activities 17,227 15,008
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,092 (464)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,950 1,919
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,042 $ 1,455
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,338 $ 1,734
=========== ===========
Income taxes $ 7 $ 95
=========== ===========
Non-cash investing and financing activities:
Assets acquired under capital leases or by incurring debt $ 408 $ 120
=========== ===========
Issuance of warrants $ 4,094 $ 98
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Unaudited Financial Statements
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated unaudited
financial statements include all necessary adjustments (consisting of
normal recurring accruals) and present fairly the financial position of
MEDE AMERICA Corporation (the "Company" or the "Registrant") and
subsidiaries as of March 31, 1999 and the results of its operations for the
three and nine months ended March 31, 1999 and 1998 and its cash flows for
the nine months ended March 31, 1999 and 1998, in conformity with generally
accepted accounting principles for the interim financial information
applied on a consistent basis. The results of operations for the three and
nine months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in MEDE AMERICA Corporation's Registration Statement on
Form S-1 as filed with the Securities and Exchange Commission.
2. PROPOSED MERGER WITH HEALTHEON CORPORATION
On April 20, 1999, the Company, Healtheon Corporation ("Healtheon") and
Merc Acquisition Corp., a wholly-owned subsidiary of Healtheon ("Merger
Sub") entered into an Agreement and Plan of Reorganization (the "Merger
Agreement"), pursuant to which Merger Sub will be merged with and into the
Company, with the Company being the surviving corporation of such merger
(the "Merger"). Upon consummation of the Merger, the separate existence of
Merger Sub will cease, and the existing stockholders of the Company will
become stockholders of Healtheon in accordance with the terms of the Merger
Agreement.
The consideration for the Merger will consist of newly-issued shares of
Healtheon common stock, par value $.0001 per share ("Healtheon Common
Stock"), having an aggregate value of approximately $460 million, based
upon the closing sales price of $45.69 per share for the Healtheon Common
Stock as reported on Nasdaq on April 20, 1999. At the effective time of the
Merger, each outstanding share of common stock, par value $.01 per share,
of the Company ("Company Common Stock") will be converted into the right to
receive 0.6593 shares of Healtheon Common Stock (the "Exchange Ratio"),
subject to adjustment as described below.
In the event that the 10 day average closing price for Healtheon Common
Stock for the period ending two days prior to the date the Company's
stockholders meet to authorize the merger (the "Meeting Price") is greater
than $63.70 per share, the Company has the option to adjust the Exchange
Ratio to a ratio equal to $42 divided by the Meeting Price or, if the
Company chooses not to exercise such option, Healtheon can terminate the
Merger Agreement. In the event that the Meeting Price is less than $38.68
per share, Healtheon has the right to adjust the Exchange Ratio to a ratio
equal to $25.50 divided by the Meeting Price or, if the Healtheon chooses
not to exercise such option, the Company can terminate the Merger
Agreement.
7
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Unaudited Financial Statements (cont'd)
Concurrently with the execution of the Merger Agreement, Welsh, Carson,
Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe, VI, L.P., WCAS
Capital Partners II, L.P., WCAS Information Partners, L.P., William Blair
Leveraged Capital Fund Limited Partnership, and William Blair Capital
Partners V, L.P. (the "Principal Stockholders") entered into a Voting
Agreement with Healtheon whereby the Principal Stockholders agreed, among
other things, to vote their shares of Company Common Stock, which
represents approximately 48.1% of total shares of Company Common Stock, in
favor of the Merger. The Voting Agreement will terminate upon the
termination of the Merger Agreement.
The consummation of the Merger is subject to certain conditions, including,
among other things, approval by the stockholders of the Company and the
receipt of all necessary regulatory approvals pursuant to the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. Pursuant
to the Merger Agreement, Healtheon and the Company will prepare and file a
proxy statement/prospectus to be mailed to stockholders in connection with
calling a meeting of the stockholders of the Company to vote on the Merger.
3. INITIAL PUBLIC OFFERING
On February 5, 1999, the Company consummated an initial public offering
("IPO") of 5,307,710 shares of common stock at a price of $13.00 per share
(including 692,310 shares that were subject to the underwriters'
overallotment option, which was exercised in full). The net proceeds to the
Company were approximately $61.9 million (after deducting the underwriting
discount and offering expenses payable by the Company). The net proceeds to
the Company were used to (i) prepay approximately $25.2 million of
outstanding principal and accrued interest on its outstanding 10% Senior
Subordinated Note due February 1, 2002 and (ii) repay approximately $28.3
million of outstanding indebtedness and accrued interest under its
revolving credit facility (the "Credit Facility"). The remaining $8.4
million of net proceeds was used to pay a portion of the accrued dividends
on the Company's preferred stock, and the remainder of such accrued
dividends (approximately $301,000) was converted into 23,124 shares of
Common Stock. In addition, in connection with the IPO, all outstanding
shares of preferred stock were converted into 1,845,815 shares of common
stock at the IPO price of $13.00 per share.
In connection with the prepayment of the Senior Subordinated Note and the
establishment of the New Credit Facility (as defined herein), the Company
recorded an extraordinary charge of approximately $1.6 million relating to
the write-off of the remaining discount on the Senior Subordinated Note and
deferred financing costs.
4. NEW CREDIT FACILITY
On January 26, 1999, the Company entered into a Credit Agreement with
NationsBank, N.A., as Administrative Agent, and NationsBanc Montgomery
Securities LLC, as Syndication Agent (the "New Credit Facility"). The New
Credit Facility provides for a $25 million revolving credit facility that
matures on January 26, 2002. The New Credit Facility is not guaranteed by
8
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Unaudited Financial Statements (cont'd)
any third party, but is secured by substantially all of the Company's
assets, including the stock of the Company's subsidiaries. The closing of
the New Credit Facility occurred simultaneously with the consummation of
the IPO. The New Credit Facility contains various covenants and conditions,
including those relating to Year 2000 compliance, acquisitions, changes in
control and restrictions on the payments of dividends on the common stock.
5. ACQUISITION
In October 1998, the Company acquired all the outstanding shares of capital
stock of Healthcare Interchange, Inc. ("HII"), a St. Louis, Missouri-based
provider of EDI transaction processing services to hospitals and physician
groups in Missouri, Kansas, and Illinois. Prior to the acquisition of HII,
two unrelated healthcare services divisions, Intercare and Telemedical,
were divested from HII in separate transactions. HII was purchased for a
total cash payment of approximately $11.7 million, including transaction
expenses, and was financed with borrowings under the Credit Facility. The
acquisition was accounted for under the purchase method of accounting.
The acquisition was financed with borrowings under the Credit Facility
which was amended in October 1998 to increase the total availability to
$36.0 million. In connection with such amendment, certain stockholders of
the Company were issued warrants to purchase 84,050 common shares in
consideration for granting guarantees of all borrowings under the Credit
Facility.
The following unaudited pro forma information for the nine months ended
March 31, 1998 includes the operations of the Company, inclusive of the
operations of both The Stockton Group, Inc. (which was acquired in November
1997) and HII as if the acquisitions had occurred as of July 1, 1997. The
unaudited pro forma information for the nine months ended March 31, 1999
includes the operations of the Company, inclusive of the operations of HII
as if the acquisition had occurred at July 1, 1998. 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.
<TABLE>
Nine Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
(In thousands)
Revenues $ 41,532 $ 35,522
=========== ===========
Income (loss) from operations 690 (1,146)
=========== ===========
Loss before extraordinary item (2,479) (4,492)
=========== ===========
Loss before extraordinary item applicable to common stock (3,923) (6,292)
=========== ===========
Basic and diluted loss before extraordinary item per share $ (0.55) $ (1.11)
=========== ===========
</TABLE>
9
<PAGE>
MEDE AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Unaudited Financial Statements (cont'd)
6. 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 the Company 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 agreement may also be terminated by Medic within a period
of eight months after a change of control of the Company. 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 was not completed by March
31, 1999 at an exercise price equal to $8 per share. The Medic Warrant
contains customary weighted average antidilution provisions. The Medic
Warrant vests over a two year period (subject to acceleration upon a change
of control) and may be exercised up to five years after issuance. The Medic
Warrant was valued at $3,925,000 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 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 named a designee effective February 12, 1999.
7. CONTINGENCY
On April 1, 1999, the Company was notified by National Data Corporation
("NDC") that Healthcare Interchange, Inc. ("HII"), a subsidiary of the
Company acquired in November 1998, is in breach of a license agreement
entered into between HII and Healthcare Affiliated Services, Inc., which is
an affiliate of NDC. A total of 88 hospital clients, and approximately 700
physician clients of HII, providing monthly revenue to HII of approximately
$200,000, utilize the software licensed pursuant to the agreement. The
agreement provided for the termination of the license in the event HII was
sold or merged into an entity other than RightCHOICE Managed Care, Inc.,
formerly a 50% shareholder of HII.
NDC's letter to the Company demanded, among other things, that HII cease
using the licensed software and assign to NDC certain agreements with
hospital and physician clients. On April 9, 1999, NDC offered to license
the software retroactively to the HII acquisition date and sell the source
code to HII for $2.3 million. Because the software is not Year 2000
compliant and migration of the hospital and physician clients to other
software is underway in any event, HII rejected the offer. Further
negotiations with NDC have not been successful in reaching what the Company
believes to be a fair resolution of the issue. NDC has indicated it is
prepared to take legal action, if necessary, to protect its interests in
the software. The Company believes that HII has valid defenses to the claim
by NDC and intends to vigorously contest any legal action.
8. RECENT ACCOUNTING PRONOUNCEMENT
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in
fiscal 1999. For the nine months ended March 31, 1999, there were no items
of comprehensive income as defined in the pronouncement.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain items from
the consolidated statements of operations of MedE AMERICA Corporation expressed
as a percentage of total revenues.
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Operating Expenses
Operations 36 38 38 41
Sales, marketing and client services 23 27 24 26
Research and development 8 9 8 10
General and administrative 11 10 10 11
Depreciation and amortization 16 17 16 17
</TABLE>
THREE AND NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED MARCH 31, 1998
Revenues
Revenues in the three and nine months ended March 31, 1999 were $14.8 million
and $39.8 million, compared to $11.1 million and $30.2 million respectively, in
the corresponding periods of fiscal 1998, representing increases of 33% and 32%,
respectively. The increase in both periods was primarily attributable to growth
of the existing business and to incremental revenue from the acquisition of The
Stockton Group ("Stockton") in November 1997 and Healthcare Interchange Inc.
("HII") in October 1998. The Company processed 85.4 million and 227.8 million
transactions in the three and nine months ended March 31, 1999, respectively,
compared to 66.0 million and 171.0 million transactions processed in the
corresponding periods of fiscal 1998, representing increases of 29% and 33%,
respectively. The increases resulted from the incremental transactions from the
acquisition of Stockton and HII, the addition of new clients and the increased
transaction volume from existing clients. The average price per transaction
received by the Company for the three and nine months ended March 31, 1999
declined by 2% and 5%, respectively, compared with the corresponding periods of
the prior fiscal year, 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, partially
offset by the acquisition of HII and its relatively higher priced transactions
when compared to the Company's average in the three and nine months periods.
11
<PAGE>
Operating Expenses
Operations expense was $5.3 million and $15.0 million in the three and nine
months ended March 31, 1999, respectively, compared to $4.3 and $12.5 million in
the corresponding periods of fiscal 1998, representing increases of 24% and 20%,
respectively. As a percentage of revenues, operations expense decreased from 38%
and 41% in the three and nine months ended March 31, 1998, respectively, to 36%
and 38% in the corresponding periods of fiscal 1999. The increase in operations
expense was primarily due to the acquisition of Stockton in November 1997 and
HII in October 1998, and to 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 the recent acquisitions, the
effects of ongoing cost reduction programs, and to a lesser extent, the impact
of the divested operations, which results were included in the fiscal 1998
periods but not the fiscal 1999 periods.
Sales, marketing and client services expense was $3.3 million and $9.5 million
in the three and nine months ended March 31, 1999, respectively, compared to
$3.0 million and $7.8 million in the corresponding periods of fiscal 1998,
representing increases of 13% and 22%, respectively. As a percentage of
revenues, sales, marketing and client services expense decreased from 27% and
26% for the three and nine months ended March 31, 1998, respectively, to 23% and
24% in the corresponding periods of 1999. The increase in sales, marketing and
client services expense was primarily due to the inclusion of the Stockton and
HII acquisitions. The decrease in sales, marketing and client services expense
as a percentage of revenues was primarily due to operations leverage from
consolidation of recent acquisitions.
Research and development expense was $1.1 million and $3.4 million in the three
and nine months ended March 31, 1999, respectively, compared to $1.0 million and
$2.9 million in the corresponding periods of fiscal 1998, representing increases
of 9% and 17%, respectively. As a percentage of revenues, research and
development expense decreased from 9% and 10% for the three and nine months
ended March 31, 1998, respectively, to 8% in the corresponding periods of fiscal
1999. The Company capitalized $354,000 and $820,000 of software development
costs in the three and nine months ended March 31, 1999, respectively, compared
to $125,000 and $319,000 in the corresponding periods of fiscal 1998. The
increases in research and development costs in the fiscal 1999 periods were
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
$97,000 and $609,000 in the three and nine months ended March 31, 1999,
respectively, compared to $106,000 for both of the corresponding periods of
fiscal 1998.
General and administrative expense was $1.6 million and $4.1 million in the
three and nine months ended March 31, 1999, respectively, compared to $1.1
million and $3.3 million in the corresponding periods of fiscal 1998,
representing an increase of 25% and 37%, respectively. As a percentage of
revenues, general and administrative expense increased from 10% for the three
months ended March 31, 1998 to 11% in the corresponding period of fiscal 1999
and decreased from 11% for the nine months ended March 31, 1998 to 10% in the
corresponding period of 1999.
12
<PAGE>
Depreciation and amortization expense was $2.4 million and $6.5 million in the
three and nine months ended March 31, 1999, respectively, compared to $1.9
million and $5.2 million in the corresponding periods of fiscal 1998,
representing increases of 28% and 23%, respectively. The increase in
depreciation and amortization expense was primarily attributable to the Stockton
and HII acquisitions. As a percentage of revenues, depreciation and amortization
expense decreased to 16% in the three and nine months ended March 31, 1999 from
17% in the three and nine months ended March 31, 1998.
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. Prior to the IPO, 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) its Credit Facility. Since June 30, 1995 an investment fund
affiliated with Welsh, Carson, Anderson and Stowe ("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 Time-Share Computer Systems,
Inc., to repay borrowings under the Credit Facility and for general working
capital purposes. 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.
On January 26, 1999, the Company entered into a Credit Agreement (the "New
Credit Facility") with NationsBank, N.A., as Administrative Agent, and
NationsBanc Montgomery Securities LLC, as Syndication Agent. The New Credit
Facility provides for a $25 million revolving credit facility that matures on
February 5, 2002. The New Credit Facility is not guaranteed by any third party,
but is secured by substantially all of the Company's assets including the stock
of the Company's subsidiaries. The New Credit Facility contains various
covenants and conditions, including those relating to Year 2000 compliance,
changes in control and management and restrictions on the payment of dividends
on the Common Stock. The closing of the New Credit Facility occurred
simultaneously with the consummation of the IPO. As of March 31, 1999, the
Company had outstanding borrowings of $6.0 million under the New Credit
Facility. Such borrowings bore interest at a weighted average rate of 7.4% per
annum as of March 31, 1999.
On February 5, 1999, the Company consummated an IPO of 5,307,710 shares of
common stock at a price of $13.00 per share (including 692,310 shares that were
subject to the underwriters' overallotment option, which was exercised in full).
The net proceeds to the Company was approximately $61.9 million (after deducting
the underwriting discount and offering expenses payable by the Company). The net
proceeds to the Company were used to (i) prepay approximately $25.2 million of
outstanding principal and accrued interest on its outstanding 10% Senior
Subordinated Note due February 1, 2002 and (ii) repay approximately $28.3
million of outstanding indebtedness and accrued interest under its Credit
Facility. The Company used the remaining $8.4 million of net proceeds to pay a
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<PAGE>
portion of outstanding accrued dividends on its preferred stock, and
approximately $301,000 of accrued dividends were converted into 23,124 shares of
Common Stock. In addition, in connection with the IPO all outstanding shares of
preferred stock were converted into 1,845,815 shares of common stock at the IPO
price of $13.00 per share. In connection with the prepayment of the Senior
Subordinated Note and the establishment of the New Credit Facility, the Company
recorded an extraordinary charge of approximately $1.6 million relating to the
write-off of the remaining discount on the Senior Subordinated Note and deferred
financing costs.
As of March 31, 1999, the Company had cash and cash equivalents of $4.0 million
and net working capital of $9.4 million. Net cash used in operations was $8.1
million for the nine months ended March 31, 1999. The $8.1 million net cash used
in operations in the nine months ended March 31, 1999 resulted primarily from
increased investments in accounts receivable of $2.0 million, formularly
receivables of $2.6 million (as a result of growth in the pharmacy business),
and other assets of $642,000, as well as a decrease in accounts payable and
accrued expenses of $2.6 million due to the timing of payments, partially offset
by the $5.5 million of income from operations (after adding back non-cash
charges).
Cash used for investment purposes was $13.6 million in nine months ended March
31, 1999. Cash used for investment purposes during the nine months ended March
31, 1999 was primarily used to acquire HII for $11.4 million (net of cash
acquired), and to fund capital expenditures of $1.1 million and additions to
intangible assets of $1.0 million. The Company expects to pay 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 $17.2 million for the nine months
ended March 31, 1999. Cash provided by financing activities during the nine
months ended March 31, 1999 was primarily provided from net proceeds from the
IPO of $61.9 million, which was partially offset by principal repayments of debt
and capital lease obligations and the payment of preferred stock dividends.
On April 20, 1999, the Company, Healtheon Corporation ("Healtheon") and Merc
Acquisition Corp., a wholly-owned subsidiary of Healtheon ("Merger Sub") entered
into an Agreement and Plan of Reorganization (the "Merger Agreement"), pursuant
to which Merger Sub will be merged with and into the Company, with the Company
being the surviving corporation of such merger (the "Merger"). Upon consummation
of the Merger, the separate existence of Merger Sub will cease, and the existing
stockholders of the Company will become stockholders of Healtheon in accordance
with the terms of the Merger Agreement.
If the Merger is not consummated and the Company's independent existence
continues, the Company would expect to use the New Credit Facility to finance
the Company's future acquisitions and for general working capital needs, and
subject to satisfaction of the covenants set forth therein, might finance
acquisitions through the issuance of additional equity and debt securities. The
Company believes that existing cash balances and cash generated by operations in
the near term, and the borrowings available under the New Credit Facility, would
be sufficient to finance the Company's operations for at least an additional 18
months. However, future acquisitions might require funding beyond the Company's
cash resources and currently anticipated capital or operating requirements could
change, with the result that the Company would be required to raise additional
funds through the public or private sale of additional securities.
14
<PAGE>
YEAR 2000 COMPLIANCE
ASSESSMENT
Since 1996, the Company has specified that all developed software be Year 2000
compliant. In January 1998 the Company performed a product assessment on all
legacy products identifying all those that were not Year 2000 compliant, and
began the process of renovating its existing non-compliant products (usually in
connection with improving product functionality). In August 1998, all Year 2000
remediation programs were centralized under the direction of a Year 2000 Project
Manager. Also in 1998 the Company began tracking Year 2000 expenditures as a
separate category of expenditures. Total Year 2000 expenditures prior to August
1, 1998 amounted to approximately $225,000; expenditures from August 1, 1998
through March 31, 1999 totaled approximately $544,000.
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.
REMEDIATION AND IMPLEMENTATION
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 a Year 2000
compliant version of the UNIX software to replace the older non-compliant
version (which is no longer being supported by the vendor), as well as software
upgrades, with discounted hardware packages to enable such clients to utilize
the Year 2000 compliant system. 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 currently underway.
During its assessment phase, the Company identified potentially Year 2000
non-compliant "non-information technology" systems (such as embedded
microcontrollers). Accordingly, the Company is replacing its older (and
potentially non-compliant) computer and telecommunications hardware with
hardware that is Year 2000 compliant. These expenditures are being made in the
general course of the Company's renovation and modernization program, and as
such are accounted for as ordinary capital expenditures instead of Year 2000
expenses.
15
<PAGE>
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 in the spring of 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 $769,000 had been expended through
March 31, 1999. 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 healthcare 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. Implementation of Year 2000
compliant software is product-and platform-specific. If the software resides on
the host system, all clients will automatically access the new software.
Similarly, products that can receive updates remotely will be updated via remote
distribution. The existing telephone number for HII's bulletin board program can
be automatically redirected to connect to a Company product that is Year 2000
compliant. A small minority of the Company's clients (mostly retail pharmacy
clients) will require on-site installation (in most cases, this installation
will also provide the clients with the capability to receive future enhancements
that will not otherwise be available).
The Company's Medicare/Medicaid Payors are subject to a Year 2000 compliance
program undertaken by the Health Care Financing Administration. Under the HCFA
16
<PAGE>
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.
CONTINGENCIES
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. It is possible that failures of the type described in clause (i) of
the preceding sentence could cause clients of the Company to either terminate
their contracts with the Company and/or sue the Company for damages. Also, if
the Company fails to achieve Year 2000 compliance by September 30, 1999, such
failure could constitute a default under the New Credit Facility, which could in
turn have a material adverse effect on the Company's business, financial
condition and results of operations. 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. Although there can be
no assurance that the Company will not experience Year 2000 problems, based on
its assessment and remediation program to date, the Company believes that Year
2000 compliance issues will not have a material adverse effect on its business,
financial condition or prospects and will not, therefore, result in a default
under the Year 2000 compliance covenant in the New Credit Facility. However, due
to the uncertainties that are inherent in addressing the Year 2000 problem,
there can be no assurance that the Company will not experience unforeseen Year
2000 problems, which problems could have a material adverse effect on the
Company's business, financial condition and results of operations.
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.
IMPACT OF INFLATION
Inflation has not had a material impact on the Company's historical operations
or financial condition.
17
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which are not
required to be adopted at this date, include SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by the Company contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes", "expects", "may", "will", "should", or "anticipates" or the
negatives thereof of other variations thereon or comparable terminology, or by
discussions of strategy. Such forward-looking statements are subject to various
risks and uncertainties that could cause actual results to vary materially from
those projected in such forward-looking statements. These risks and
uncertainties are discussed in more detail in the Company's Registration
Statement on Form S-1 which was filed with the Securities and Exchange
Commission in connection with the IPO. No assurance can be given that future
results covered by the forward-looking statements will be achieved.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS:
On April 20, 1999, the Company filed a report on Form 8-K announcing its
proposed merger with Healtheon Corporation.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDE AMERICA CORPORATION
(Registrant)
By: /s/ Thomas P. Staudt
-----------------------------
Thomas P. Staudt
President and
Chief Executive Officer, on
behalf of the Registrant
By: /s/ Richard P. Bankosky
-----------------------------
Richard P. Bankosky
Chief Financial Officer
May 10, 1999
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