-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRlTtjvdi2/mB+uGJmmXsS8gxw1cpKkhXc3scpd4CknkXtmhwR2pc2lVonTMZ6Tc +inR5mdGiM+dyq7vMbDF7A== 0001005150-98-000709.txt : 19980720 0001005150-98-000709.hdr.sgml : 19980720 ACCESSION NUMBER: 0001005150-98-000709 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19980717 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MED E AMERICA CORP CENTRAL INDEX KEY: 0001062779 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 113270245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-55977 FILM NUMBER: 98668147 BUSINESS ADDRESS: STREET 1: 90 MERRICK AVENUE SUITE 501 CITY: EAST MEADOW STATE: NY ZIP: 11554 BUSINESS PHONE: 5165424500 MAIL ADDRESS: STREET 1: 90 MERRICK AVENUE STREET 2: SUITE 501 CITY: EAST MEADOW STATE: NY ZIP: 11554 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998 REGISTRATION NO. 333-55977 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- MEDE AMERICA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 7374 11-3270245 State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification Code Number)
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. ================================================================================ SUBJECT TO COMPLETION, DATED JULY 17, 1998 PROSPECTUS 3,600,000 SHARES [LOGO] MEDE AMERICA CORPORATION COMMON STOCK ------------------ All of the shares of Common Stock offered hereby (the "Offering") are being sold by MEDE AMERICA Corporation ("MEDE AMERICA" or the "Company"). Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company intends to apply to have the Company's Common Stock approved for quotation on the Nasdaq National Market under the symbol "MEDE." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECUR- ITIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMIS- SION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================
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 $950,000, payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 540,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and the Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered and accepted by them, and subject to their right to reject orders in whole or in part. It is expected that certificates for such shares of Common Stock will be made available for delivery at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001, on or about , 1998. ------------------ SALOMON SMITH BARNEY WILLIAM BLAIR & COMPANY VOLPE BROWN WHELAN & COMPANY , 1998 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY OVER-ALLOTMENT, STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." MEDE AMERICA is a trademark of the Company. All other trade names, trademarks or service marks appearing in this Prospectus are the property of their respective owners and are not the property of the Company. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. THE COMPANY MEDE AMERICA is a leading provider of electronic data interchange ("EDI") products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. Currently, the Company processes over 900,000 transactions per day for over 65,000 providers located in all 50 states. Since its formation in March 1995, the Company has expanded both through internal growth and the acquisition of five healthcare EDI processing businesses. As part of its strategy of providing an integrated suite of EDI solutions to a broad range of healthcare providers, the Company has focused on acquisitions that provided entry into new markets or expanded the Company's product suite. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or restructured various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. Innovations over the past decade in computer and telecommunications technologies have resulted in the development of EDI systems to electronically process and transmit information among the various participants in the healthcare industry. These systems were designed to replace the paper-based recording and transmission of information, enabling greater processing speed, reduced processing costs and more accurate data interchange. According to Health Data Directory, in 1997 over 4.1 billion electronic and paper claims were paid in all sectors of the healthcare services market. From 1993 to 1997, the proportion of total healthcare claims that were electronically processed increased from 41% to approximately 60%, at an average rate of 16% per year. The Company expects the electronic processing of healthcare claims to continue to increase as a result of increased reliance on electronic commerce and increased emphasis on cost containment in the healthcare industry. The penetration of electronic processing varies significantly among the different markets within the healthcare industry. According to Health Data Directory, in 1997 electronic processing accounted for approximately 13% of total dental claims, 38% of total physician medical claims, 83% of total hospital medical claims and 86% of total pharmacy claims. 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. 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 "best of 3 breed" technology and may be purchased as modular additions to the client's existing data storage and retrieval system, or as part of a comprehensive EDI processing system. The Company believes it is well positioned to take advantage of the expected growth of EDI in areas such as eligibility, managed care transactions and physician scripting. BROAD AND DIVERSIFIED CLIENT BASE. The Company's client base is highly diversified, consisting of approximately 42,000 pharmacies, 8,000 dental offices, 1,000 hospitals and clinics and 14,000 physicians. The Company's broad and diversified client base provides it with transaction-based revenues that tend to be recurring and positions it to capitalize on the rapid consolidation taking place within the healthcare industry. DIRECT RELATIONSHIPS WITH PROVIDERS AND PAYORS. The range of MEDE AMERICA's services and the extent of its connectivity with payors provides the opportunity to achieve deeper penetration of its provider base, while at the same time offering more complete solutions to new clients. MEDE AMERICA believes that it is strongly positioned to offer reliable, one-stop shopping to providers for all their EDI needs. FOCUS ON CLIENT SERVICE. The Company has focused on implementing a wide range of client service and support functions including the use of automated client service tracking software, expanded client help desk and account executive support functions and extensive client feedback mechanisms. The Company believes that its high quality client service enhances the satisfaction of its clients and generates new revenue opportunities in the form of expanded transaction volume and sales of new products and services. LEADING TECHNOLOGY AND PRODUCT PLATFORMS. Over the past two years, MEDE AMERICA has invested significant capital in new hardware and software systems to increase its transaction processing capacity. As a result of such technology investments, MEDE AMERICA believes it is able to provide high quality service to its clients in the form of high network availability, batch transaction reliability and high rates of payor claims acceptance. MEDE AMERICA also believes that its technology platform, which is operating at approximately one-third of its total capacity, provides the Company with substantial operating leverage. EXPERIENCED MANAGEMENT TEAM. Each member of the Company's senior management team has over 15 years of experience in the information technology and transaction processing industries and has extensive background in working with emerging companies in the information processing industry. The Company believes that the range and depth of its senior management team position it to address the evolving requirements of its clients and to manage the growth required to meet its strategic goals. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. To achieve this objective, the Company is pursuing a growth strategy comprised of the following elements: provide a comprehensive suite of EDI solutions; further penetrate its existing client base through cross-selling of emerging products and services; develop new EDI solutions to meet the evolving electronic transaction processing needs of its clients; continue to utilize strategic alliances with key players in the healthcare industry; and pursue strategic acquisitions in order to expand the Company's product offerings, enter new markets and capitalize on the Company's operating leverage. The Company's executive offices are located at 90 Merrick Avenue, Suite 501, East Meadow, New York 11554, and its telephone number is (516) 542-4500. 4 THE OFFERING COMMON STOCK OFFERED BY THE COMPANY.. 3,600,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING........................ 11,581,204 shares (1)(2) USE OF PROCEEDS.................... To retire all outstanding bank and subordinated indebtedness and accrued interest thereon, and for other general corporate purposes, including working capital. PROPOSED NASDAQ NATIONAL MARKET SYMBOL............................ MEDE - ----------- (1) Reflects the proposed recapitalization of the Company's capital stock (the "Recapitalization"). The Recapitalization involves the conversion of all outstanding Preferred Stock, including accrued but unpaid dividends, into Common Stock and the exercise of all outstanding warrants, however, cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into Common Stock. (2) Excludes 483,041 shares of Common Stock issuable upon the exercise of stock options outstanding as of June 30, 1998 under the MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Stock Plan"), of which 212,758 are exercisable. The weighted average exercise price of all outstanding stock options is $4.84 per share. See "Management -- Employee Benefit Plans." RECENT DEVELOPMENTS The Company is currently in the process of compiling preliminary financial results for the three months ended June 30, 1998 and expects to report the following financial information: Revenues for the three months ended June 30, 1998 were $12.1 million compared to $10.3 million in the corresponding period of fiscal 1997, representing an increase of 18%. Net loss for the three months ended June 30, 1998 was $(738,000) compared to $(3.6 million) in the corresponding period of fiscal 1997, representing a decrease of 80%. The Company processed 63.8 million transactions in the three months ended June 30, 1998, compared to 49.3 million transactions processed in the corresponding period of fiscal 1997, representing an increase of 29%. RISK FACTORS Prospective purchasers should consider all of the information contained in this Prospectus before making an investment in shares of Common Stock. In particular, prospective purchasers should consider the factors set forth herein under "Risk Factors." 5 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED JUNE 30, ------------------------------------------------------------------- ACTUAL PRO FORMA(1) ---------------------------------------------------- -------------- 1995 1996 1997 1997 ---------------- ---------------- ------------------ -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(3) ................................ $ 16,246 $ 31,768 $ 35,279 $ 41,824 Operating expenses: Operations ................................ 9,753 19,174 16,817 18,601 Sales, marketing and client services ...... 3,615 7,064 8,769 10,450 Research and development .................. 2,051 2,132 3,278 3,513 General and administrative ................ 3,119 6,059 5,263 5,516 Depreciation and amortization ............. 2,995 5,176 5,293 7,062 Write-down of intangible assets ........... 8,191 (4) 9,965 (5) -- -- Acquired in-process research and development(6) ........................... -- -- 4,354 4,354 Other charges(7) .......................... 2,864 538 2,301 3,581 --------- --------- --------- --------- Total operating expenses ................... 32,588 50,108 46,075 53,077 --------- --------- --------- --------- Loss from operations ....................... (16,342) (18,340) (10,796) (11,253) Other (income) expense ..................... -- 313 (893) (893) Interest expense (income), net ............. 189 584 1,504 356 --------- --------- --------- --------- Loss before provision for income taxes ..... (16,531) (19,237) (11,407) (10,716) Provision for income taxes ................. 70 93 57 57 --------- --------- --------- --------- Net loss ................................... (16,601) (19,330) (11,464) (10,773) Preferred stock dividends .................. (27) (2,400) (2,400) -- --------- --------- --------- --------- Net loss applicable to common stockholders............................... $(16,628) $(21,730) $ (13,864) $ (10,773) ========= ========= ========= ========= Basic net loss per common share ............ $ (3.17) $ (4.14) $ (2.56)(8) $ (1.18) Weighted average common shares outstanding - Basic ....................... 5,238 5,245 5,425 9,131
NINE MONTHS ENDED MARCH 31, --------------------------------------------- ACTUAL PRO FORMA(2) ------------------------------- ------------- 1997 1998 1998 ------------ ------------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(3) ................................ $ 24,964 $ 30,189 $31,835 Operating expenses: Operations ................................ 12,104 12,485 12,730 Sales, marketing and client services ...... 6,143 7,769 8,067 Research and development .................. 2,455 2,886 2,929 General and administrative ................ 3,340 3,307 3,468 Depreciation and amortization ............. 3,502 4,846 5,156 Write-down of intangible assets ........... -- -- -- Acquired in-process research and development(6) ........................... 4,354 -- -- Other charges(7) .......................... 990 -- -- -------- --------- ------- Total operating expenses ................... 32,888 31,293 32,350 -------- --------- ------- Loss from operations ....................... (7,924) (1,104) (515) Other (income) expense ..................... (885) 13 13 Interest expense (income), net ............. 779 2,470 (134) -------- --------- ------- Loss before provision for income taxes ..... (7,818) (3,587) (394) Provision for income taxes ................. 43 37 37 -------- --------- ------- Net loss ................................... (7,861) (3,624) (431) Preferred stock dividends .................. (1,800) (1,800) -- -------- --------- ------- Net loss applicable to common stockholders............................... $ (9,661) $ (5,424) $ (431) ======== ========= ======= Basic net loss per common share ............ $ (1.81) $ (0.96)(8) $ (0.05) Weighted average common shares outstanding - Basic ....................... 5,345 5,677 9,277
AS OF MARCH 31, 1998 --------------------------- ACTUAL AS ADJUSTED ------------ ------------ BALANCE SHEET DATA: Working capital ................................... $ 3,276 $ 7,889 Total assets ...................................... 54,179 58,363 Long-term debt, including current portion ......... 40,499 1,324 Redeemable cumulative preferred stock ............. 30,623 -- Stockholders' equity (deficit) .................... (25,337) 49,362
YEAR ENDED JUNE 30, ------------------------------------------------------- ACTUAL PRO FORMA(1) ---------------------------------------- -------------- 1995 1996 1997 1997 ------------- ------------- ------------ -------------- (IN THOUSANDS, EXCEPT PER TRANSACTION DATA) OTHER DATA: EBITDA(9) .................................. $ (13,347) $ (13,164) $ (5,503) $ (4,191) Adjusted EBITDA(9) ......................... (2,292) (2,052) 2,211 4,803 Cash flows from operating activities ....... (3,561) (1,653) (4,020) -- Cash flows from investing activities ....... (22,074) (4,919) (12,221) -- Cash flows from financing activities ....... 33,434 657 15,521 -- Transactions processed(10) Pharmacy .................................. -- 107,032 126,201 145,903 Medical ................................... -- 16,030 23,085 27,814 Dental .................................... -- 6,021 12,188 12,188 --------- --------- --------- -------- Total transactions processed ............. -- 129,083 161,474 185,905 Transactions per FTE(10)(11) ............... -- 322 415 478 Revenue per FTE(11) ........................ $ 48 $ 79 $ 91 $ 108 Operating expenses per transaction(10) ..... -- 0.39 0.29 0.29
NINE MONTHS ENDED MARCH 31, --------------------------------------- ACTUAL PRO FORMA(2) ------------------------- ------------- 1997 1998 1998 ------------ ------------ ------------- (IN THOUSANDS, EXCEPT PER TRANSACTION DATA) OTHER DATA: EBITDA(9) .................................. $ (4,422) $ 3,742 $ 4,641 Adjusted EBITDA(9) ......................... 922 3,742 4,641 Cash flows from operating activities ....... (2,991) (3,842) -- Cash flows from investing activities ....... (11,630) (11,630) -- Cash flows from financing activities ....... 15,818 15,008 -- Transactions processed(10) Pharmacy .................................. 88,463 136,685 140,234 Medical ................................... 14,921 23,514 23,514 Dental .................................... 8,759 10,767 10,767 --------- ---------- --------- Total transactions processed ............. 112,143 170,966 174,515 Transactions per FTE(10)(11) ............... 293 478 487 Revenue per FTE(11) ........................ $ 65 $ 84 $ 89 Operating expenses per transaction(10) ..... 0.29 0.18 0.19
(Footnotes on following page) 6 (1) Gives effect to (i) the acquisition of Time-Share Computer Systems, Inc. ("TCS") in February 1997, (ii) the acquisition of The Stockton Group, Inc. ("Stockton") in November 1997, (iii) the Recapitalization and (iv) the Offering, as if they had occurred on July 1, 1996. (2) Gives effect to (i) the acquisition of Stockton in November 1997, (ii) the Recapitalization and (iii) the Offering, as if they had occurred on July 1, 1996. (3) 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 $1,595,000, $3,517,000, $2,252,000, $1,941,000 and $241,000 in the fiscal years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997 and 1998, respectively. (4) Reflects the write-off of goodwill related to the acquisitions of Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"). (5) 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"). (6) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (7) Reflects (i) expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000, $2,301,000 and $990,000 in the fiscal years ended June 30, 1996 and 1997 and the nine months ended March 31, 1997, respectively, (ii) 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 (iii) non-cash stock compensation of $1,280,000 relating to Stockton in the pro forma fiscal year ended June 30, 1997. (8) Supplemental net loss per share, giving effect to the Recapitalization, would be $(1.55) and $(0.47) for the fiscal year ended June 30, 1997 and the nine months ended March 31, 1998, respectively. (9) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with generally accepted accounting principles ("GAAP") and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described below. The following table summarizes EBITDA and adjusted EBITDA for all periods presented:
YEAR ENDED JUNE 30, ------------------------------------------------------ ACTUAL PRO FORMA ------------------------------------------ ----------- 1995 1996 1997 1997 -------------- -------------- ------------ ----------- (IN THOUSANDS) EBITDA .................................. $ (13,347) $ (13,164) $ (5,503) $ (4,191) Contingent consideration paid to former owners of acquired busi- nesses ................................ -- 538 2,301 2,301 Write-down of intangible assets ......... 8,191 9,965 -- -- Acquired in-process research and development ........................... -- -- 4,354 4,354 Expenses related to the CES spin- off ................................... 2,864 -- -- -- Non-cash stock compensation ............. -- -- -- 1,280 Contract and legal settlement provi- sions ................................. -- 609 1,059 1,059 ---------- ---------- -------- -------- Adjusted EBITDA ......................... $ (2,292) $ (2,052) $ 2,211 $ 4,803 ========== ========== ======== ========
NINE MONTHS ENDED MARCH 31, ---------------------------------- ACTUAL PRO FORMA ----------------------- ---------- 1997 1998 1998 ------------ ---------- ---------- (IN THOUSANDS) EBITDA .................................. $ (4,422) $ 3,742 $ 4,641 Contingent consideration paid to former owners of acquired busi- nesses ................................ 990 -- -- Write-down of intangible assets ......... -- -- -- Acquired in-process research and development ........................... 4,354 -- -- Expenses related to the CES spin- off ................................... -- -- -- Non-cash stock compensation ............. -- -- -- Contract and legal settlement provi- sions ................................. -- -- -- -------- ------- ------- Adjusted EBITDA ......................... $ 922 $ 3,742 $ 4,641 ======== ======= =======
- ----------- (10) Transaction volumes are not available for the fiscal year ended June 30, 1995. (11) Full-time equivalents ("FTE") represents the number of full-time employees and part-time equivalents of full-time employees as of the end of the period shown. 7 QUARTERLY FINANCIAL INFORMATION The following table summarizes certain quarterly financial information for all periods presented:
THREE MONTHS ENDED --------------------------------------------------------------------------------- 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 ----------- ---------- ----------- ----------- ----------- ---------- ----------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues ............................... $ 8,179 $ 7,831 $ 8,954 $ 10,315 $ 9,241 $ 9,849 $ 11,099 Income (loss) from operations .......... (1,301) (1,108) (5,515) (2,872) (850) (264) 10 Net loss ............................... (1,465) (1,324) (5,072) (3,603) (1,517) (1,191) (916) OTHER DATA: EBITDA (1) ............................. $ (199) $ (64) $ (4,159) $ (1,081) $ 704 $ 1,309 $ 1,729 Contingent consideration paid to former owners of acquired businesses ........ 330 330 330 1,311 -- -- -- Acquired in-process research and devel- opment ............................... -- -- 4,354 -- -- -- -- Contract and legal settlement provisions -- -- -- 1,059 -- -- -- -------- -------- -------- -------- -------- -------- -------- Adjusted EBITDA(1) ..................... $ 131 $ 266 $ 525 $ 1,289 $ 704 $ 1,309 $ 1,729 ======== ======== ======== ======== ======== ======== ========
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Operating Results." - ----------- (1) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with GAAP and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described above. - ----------- Except as otherwise noted herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) has been adjusted to give effect to a one-for-4.5823 reverse stock split of all outstanding Common Stock (the "Reverse Stock Split"). The Company's Preferred Stock, $.01 par value ("Preferred Stock"), provides for conversion of the aggregate liquidation value of the Preferred Stock, including accrued but unpaid dividends, into Common Stock at the initial public offering price per share. However, cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into Common Stock. Except as otherwise noted herein, each reference in this Prospectus to Common Stock issuable upon conversion of all of the Preferred Stock assumes a conversion price of $14.00. Based on an aggregate liquidation preference of the Preferred Stock of $31,220,578 (including $7,224,978 of accrued dividends) as of June 30, 1998, 2,229,982 shares of Common Stock would be so issuable as of such date. In addition, concurrently with the consummation of the Offering, an additional 66,375 shares of Common Stock will be issued upon the exercise of all outstanding Common Stock purchase warrants. Such conversion of the Preferred Stock, and exercise of warrants, are referred to herein as the "Recapitalization". See "Capitalization," "Description of Common Stock," "Principal Stockholders" and "Underwriting." 8 RISK FACTORS In addition to other information contained in this Prospectus, prospective investors should carefully consider the following risk factors before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors and the matters set forth in this Prospectus generally. HISTORY OF OPERATING LOSSES; LIMITED OPERATING HISTORY The Company has experienced substantial net losses, including net losses of $16.6 million, $19.3 million, $11.5 million and $3.6 million for the fiscal years ended June 30, 1995, 1996 and 1997, respectively, and the nine months ended March 31, 1998. The Company had an accumulated deficit of approximately $51.5 million as of March 31, 1998. In connection with its acquisitions completed to date, the Company has incurred significant acquisition-related charges and will record significant amortization expense related to goodwill and other intangible assets in future periods. There can be no assurance that the Company will be able to achieve or sustain revenue growth or profitability on a quarterly or annual basis. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's operating history is limited. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with limited operating histories, particularly companies in new and rapidly evolving markets such as EDI and transaction processing. Such risks include, but are not limited to, an evolving and unpredictable business model and the difficulties inherent in the management of growth. To address these risks, the Company must, among other things, maintain and increase its client base, implement and successfully execute its business and marketing strategies, continue to develop and upgrade its technology and transaction-processing systems, provide superior client service, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks or in achieving profitability, and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. ACQUISITION STRATEGY; NEED FOR ADDITIONAL CAPITAL The Company's strategy includes acquisitions of healthcare EDI businesses that complement or supplement the Company's business. The success of such a strategy will depend on many factors, including the Company's ability to identify suitable acquisition candidates, the purchase price and the availability and terms of financing. Significant competition for acquisition opportunities exists in the healthcare EDI industry, which may significantly increase the costs of and decrease the opportunities for acquisitions. Although the Company is actively pursuing possible acquisitions, there can be no assurance that any acquisition will be consummated. No assurances can be given that the Company will be able to operate any acquired businesses profitably or otherwise successfully implement its expansion strategy. The Company may finance future acquisitions through borrowings or the issuance of debt or equity securities. There can be no assurance that future lenders will extend credit on favorable terms, if at all. Further, any borrowings would increase the Company's interest expense and any issuance of equity securities could have a dilutive effect on the holders of Common Stock. The Company will not be able to account for acquisitions under the "pooling of interests" method for at least two years following the Offering. Accordingly, such future acquisitions may result in significant goodwill and a corresponding increase in the amount of amortization expense and could also result in write-downs of purchased assets, all of which could adversely affect the Company's operating results in future periods. INTEGRATION OF ACQUIRED BUSINESSES The success of the Company's acquisition strategy also depends to a large degree on the Company's ability to effectively integrate the acquired products and services, facilities, technologies, personnel and operations into the Company. The process of integration often requires substantial management atten- 9 tion and other corporate resources, and the Company may not be able to accurately predict the resources that will be needed to integrate acquired operations. There can be no assurance that the Company will be able to effectively integrate any or all acquired companies or operations. Any failure to do so could result in operating inefficiencies, redundancies, management distraction or technological difficulties (among other possible adverse consequences), any of which could have a material adverse effect on the Company's business, financial condition and results of operations. EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards and the frequent introduction of new and enhanced services. The Company's success will depend upon its ability to enhance its existing services, to introduce new products and services on a timely and cost-effective basis to meet evolving client requirements, to achieve market acceptance for new products or services and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company will be able to respond effectively to technological changes or new industry standards. Moreover, there can be no assurance that other companies will not develop competitive products or services, or that any such competitive products or services will not have an adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON CONNECTIONS TO PAYORS The Company's business is enhanced by the substantial number of payors (such as insurance companies, Medicare and Medicaid agencies and Blue Cross/Blue Shield organizations) to which the Company has electronic connections. These connections may either be made directly or through a clearinghouse or other intermediary. The Company has attempted to enter into suitable contractual relationships to ensure long term payor connectivity; however, there can be no assurance that the Company will be able to maintain its links with all payors with whom it currently has connections. In addition, there can be no assurance that the Company will be able to develop new connections (either directly or through clearinghouses) on satisfactory terms, if at all. Lastly, certain third-party payors provide EDI systems directly to healthcare providers, bypassing third-party processors such as the Company. The failure to maintain its existing connections with payors and clearinghouses or to develop new connections as circumstances warrant, or an increase in the utilization of direct links between providers and payors, could have a material adverse effect on the Company's business, financial condition and results of operations. DEVELOPMENT OF EDI PROCESSING IN THE HEALTHCARE INDUSTRY The Company's strategy anticipates that electronic processing of healthcare transactions, including transactions involving clinical as well as financial information, will become more widespread and that providers and third-party payors increasingly will use EDI processing networks for the processing and transmission of data. Electronic transmission of healthcare transactions is still developing, and complexities in the nature and types of transactions which must be processed have hindered, to some degree, the development and acceptance of EDI processing in this market. There can be no assurance that continued conversion from paper-based transaction processing to EDI processing in the healthcare industry will occur or that, to the extent it does occur, healthcare providers and payors will use independent processors such as the Company. Furthermore, if EDI processing extensively penetrates the healthcare market or becomes highly standardized, it is possible that competition among transaction processors will focus increasingly on pricing. If competition causes the Company to reduce its pricing in order to retain market share, the Company may suffer a material adverse change in its business, financial condition and results of operations. POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS The Company's quarterly operating results have varied significantly in the past and are likely to vary from quarter to quarter in the future. Quarterly revenues and operating results may fluctuate as a result of a variety of factors, including: integration of acquired businesses; seasonal variability of demand 10 for healthcare services generally; the number, timing and significance of announcements and releases of product enhancements and new products by the Company and its competitors; the timing and significance of announcements concerning the Company's present or prospective strategic alliances; the loss of clients due to consolidation in the healthcare industry; legislation or changes in government policies or regulations relating to healthcare EDI processing; delays in product installation requested by clients; the length of the sales cycle or the timing of sales; client budgeting cycles and changes in client budgets; marketing and sales promotional activities; software defects and other quality factors; and general economic conditions. The Company's operating expense levels, which will increase with the addition of acquired businesses, are relatively fixed. If revenues are below expectations, net income is likely to be disproportionately adversely affected. Further, in some future quarters the Company's revenues or operating results may be below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock would likely be materially adversely affected. See "Summary -- Quarterly Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Operating Results." PROPOSED HEALTHCARE DATA CONFIDENTIALITY LEGISLATION Legislation that imposes restrictions on third-party processors' ability to analyze certain patient data without specific patient consent has been introduced in the U.S. Congress. Although the Company does not currently access or analyze individually identifiable patient information, such legislation, if adopted, could adversely affect the ability of third-party processors to transmit information such as treatment and clinical data, and could adversely affect the Company's ability to expand into related areas of the EDI healthcare market. In addition, the Health Insurance Portability and Accountability Act, passed in 1997, mandates the establishment of federal standards for the confidentiality, format and transmission of patient data, as well as recordkeeping and data security obligations. It is possible that the standards so developed will necessitate changes to the Company's operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The Company faces significant competition from healthcare and non-healthcare EDI processing companies. The Company also faces potential competition from other companies, such as vendors of provider information management systems, which have added or may add their own proprietary EDI processing systems to existing or future products and services. Competition may be experienced in the form of pressure to reduce per transaction prices or eliminate per transaction pricing altogether. If EDI processing becomes the standard for claims and information processing, a number of larger and better capitalized entities may elect to enter the industry and further increase competitive pricing pressures. Many of the Company's existing and potential competitors are larger and have significantly greater financial, marketing, technological and other resources than the Company. There can be no assurance that increased competition will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business - -- Competition." RISK OF INTERRUPTION OF DATA PROCESSING The Company currently processes its data through its facilities in Twinsburg, Ohio, Mitchel Field, New York, and Atlanta, Georgia. The Twinsburg and Mitchel Field sites are designed to be redundant. Additionally, the Company transmits data through a number of different telecommunications networks, using a variety of different technologies. However, the occurrence of an event that overcomes the data processing and transmission redundancies then in place could lead to service interruptions and could have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, prior to January 1, 2000, computer systems 11 and/or software used by many companies (including the Company) will need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential consequences of the Year 2000 phenomenon. Although the Company currently offers software products that are designed or have been modified to comply with the Year 2000 requirements, there can be no assurance that the Company's current software contains all necessary date code changes. The Company believes that certain installations of its products and certain products currently used by its clients in conjunction with third-party vendors' products are not Year 2000 compliant. Certain of the Company's physician benefit management clients are being migrated from the Company's PBM system in Ohio to its PBM system acquired from Stockton. The total revenue from such clients is expected to be $6,351,000 in fiscal 1999. A testing and migration timetable for all such clients has been developed, with migration activities scheduled for completion in mid-1999. While the Company has plans to address the problems related to its own products within the coming year, there can be no assurance that the costs of bringing these systems into compliance will not be significantly greater than expected or that compliance will be achieved in a timely manner. In addition, there can be no assurance that the Company's current products do not contain undetected errors or defects associated with Year 2000 date functions that may result in material costs to the Company. Moreover, even if the Company's products and services satisfy such requirements, the products and services provided to the Company's clients by other software vendors, and the systems used by certain payors, may not be Year 2000 compliant, thereby disrupting the ability of the Company's clients to use the Company's software or to obtain reimbursement in a timely manner. An adverse impact on such clients due to the Year 2000 issue could also have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Year 2000 Compliance." DEPENDENCE ON KEY PERSONNEL The Company's performance depends in significant part on the continued service of its executive officers, its product managers and key sales, marketing and development personnel. The Company considers its key management personnel to be Thomas P. Staudt, President and Chief Executive Officer, William M. McManus and Roger L. Primeau, in charge of the pharmacy/medical and dental operations, respectively, James T. Stinton, the Company's Chief Information Officer, and Richard Bankosky, the Company's Chief Financial Officer. No single individual is considered by the Company to be critical to the Company's success. The Company does not maintain employment agreements with these officers or other employees (with limited exceptions) and the failure to retain the services of such persons could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare industry participants. Federal and state legislatures periodically consider programs to modify or amend the United States healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including investments in the Company's products and services. In addition, many healthcare providers are consolidating to create larger healthcare delivery organizations. This consolidation reduces the number of potential clients for the Company's services, and the increased bargaining power of these organizations could lead to reductions in the amounts paid for the Company's services. Other healthcare information companies, such as billing services and practice management vendors, which currently utilize the Company's services, could develop or acquire transaction processing and networking capabilities and may cease utilizing the Company's services in the future. The impact of these developments in the healthcare industry is difficult to predict and could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent that the current trend toward consolidation in the industry continues, MEDE AMERICA may find it more difficult to obtain access to payors, information provid- 12 ers and practice management software vendors on whom its ability to deliver services and enroll new clients now depends. Loss of access to these industry participants could materially adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT The Company's ability to compete effectively depends to a significant extent on its ability to protect its proprietary information. The Company relies on a combination of statutory and common law copyright, trademark and trade secret laws, client licensing agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. The Company does not include in its software any mechanisms to prevent or inhibit unauthorized use, but generally enters into confidentiality agreements with its consultants, clients and potential clients and limits access to, and distribution of, its proprietary information. The Company has not filed any patent applications with respect to its intellectual property. It is the Company's policy to defend its intellectual property; however, there can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company is also subject to the risk of alleged infringement by it of intellectual property rights of others. Although the Company is not currently aware of any pending or threatened infringement claims with respect to the Company's current or future products, there can be no assurance that third parties will not assert such claims. Any such claims could require the Company to enter into license arrangements or could result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Furthermore, litigation may be necessary to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects that software developers will increasingly be subject to such claims as the number of products and competitors providing software and services to the healthcare industry increases and overlaps occur. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. RISK OF PRODUCT DEFECTS Products such as those offered by the Company may contain errors or experience failures, especially when initially introduced or when new versions are released. While the Company conducts extensive testing to address these errors and failures, there can be no assurance that errors or performance failures will not occur in products under development or in enhancements to current products. Any such errors or failures could result in loss of revenues and clients, delay in market acceptance, diversion of development resources, damage to the Company's reputation or increased service costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company has not experienced any material product defects. CONTROL BY EXISTING STOCKHOLDERS After the Offering, 49.7% of the Common Stock will be owned by investment funds affiliated with Welsh, Carson, Anderson & Stowe, a private investment firm ("WCAS") and 7.9% will be owned by investment funds affiliated with William Blair Capital Partners L.L.C. ("WBCP"). See "Principal Shareholders" and "Description of Capital Stock -- Recapitalization." As a result of this concentration of ownership, these shareholders may be able to exercise control over matters requiring shareholder ap- 13 proval, including the election of directors and approval of significant corporate transactions. Such control may have the effect of delaying or preventing a change in control of the Company. The Company's Board of Directors currently includes Thomas E. McInerney and Anthony J. de Nicola, designees of WCAS, and Timothy M. Murray, a designee of WBCP. The funds affiliated with WCAS may be deemed to be controlled by their respective general partners, the general partners of each of which include some or all of the following individuals: Thomas E. McInerney and Anthony J. de Nicola, directors of the Company, Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Andrew M. Paul, Robert A. Minicucci, Paul B. Queally and Laura M. VanBuren. The funds affiliated with WBCP may be deemed to be controlled by their respective general partners, the general partners of which include William Blair & Company L.L.C. and certain of its employees, including Timothy E. Murray, a director of the Company. NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price has been determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the market price of the Common Stock in the future. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The stock market has from time to time experienced extreme price and volume fluctuations, particularly in the securities of technology companies, which have often been unrelated to the operating performance of individual companies. Announcements of technological innovations or new and enhanced commercial products by the Company or its competitors, market conditions in the industry, developments or disputes concerning proprietary rights, changes in earnings, economic and other external factors, political and other developments and period-to-period fluctuations in financial results of the Company may have a significant impact on the market price and marketability of the Company's Common Stock. Fluctuations in the trading price of the Common Stock may also adversely affect the liquidity of the trading market for the Common Stock. POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS The Company's Board of Directors is authorized to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that may be issued in the future. While the Company has no present intention to issue shares of Preferred Stock, any such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have other rights, including economic rights senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. Furthermore, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"), which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of these provisions could have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Amended and Restated Certificate of Incorporation and the Company's Bylaws could also have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Laws and Certain Charter and Bylaw Provisions; Anti-Takeover Measures." SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE Sales of Common Stock (including Common Stock issued upon the exercise of outstanding stock options) in the public market after this Offering could materially adversely affect the market price of the Common Stock. Upon the completion of this Offering and giving effect to the Recapitalization, the 14 Company will have 11,581,204 shares of Common Stock outstanding, assuming no exercise of stock options and no exercise of the Underwriters' over-allotment option. Of these outstanding shares of Common Stock, the 3,600,000 shares sold in this Offering will be freely tradeable, without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 7,981,204 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act and were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be resold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144 under the Securities Act. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, approximately shares of Common Stock and options to purchase shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this Prospectus without the prior written consent of Smith Barney Inc. Upon expiration of the lock-up agreements, all shares of Common Stock currently outstanding will be immediately eligible for resale, subject to the requirements of Rule 144. The Company is unable to predict the effect that sales may have on the then prevailing market price of the Common Stock. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and "Shares Eligible for Future Sale." BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS Prospective investors should be aware that current holders of the Company's Common Stock and Preferred Stock will benefit from the Offering. Approximately $25.2 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 $17.8 million of the net proceeds will be used to repay all then outstanding indebtedness under the Company's current Credit Facility (as herein defined). The Credit Facility, which is guaranteed by the Company's four principal stockholders, will be replaced with a new facility, which will not be guaranteed by a third party. See "Use of Proceeds" and "Certain Transactions." After the Offering, all existing stockholders will benefit from certain changes including the creation of a public market for the Company's Common Stock. Moreover, the current shareholders will realize an immediate increase in market and tangible book value. Assuming an initial public offering price of $14.00 per share, the aggregate unrealized gain to current stockholders of the Company, based on the difference between such public offering price of the Common Stock and the acquisition cost of their equity, will be $82.7 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 $12.98 per share, at an assumed initial public offering price of $14.00 per share. To the extent that outstanding options to purchase Common Stock are exercised, there will be further dilution. See "Dilution." ABSENCE OF DIVIDENDS No dividends have been paid on the Common Stock to date and the Company does not anticipate paying dividends on the Common Stock in the foreseeable future. Moreover, it is expected that the terms of the Amended Credit Facility will prohibit the Company from paying dividends on the Common Stock. See "Dividend Policy." 15 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. 16 THE COMPANY MEDE AMERICA is a leading provider of EDI products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. Currently, the Company processes over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of Card Establishment Services, Inc. ("CES"), in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"), which comprised the heathcare services business of CES, historically provided EDI services to hospitals and physicians. After the spin-off, the Company made several strategic acquisitions to strengthen its core hospital/medical business and to expand into the pharmaceutical and dental markets. In March 1995, the Company acquired General Computer Corporation, subsequently renamed MEDE AMERICA Corporation of Ohio (referred to herein as "MEDE OHIO"), a developer of EDI systems and services for the pharmaceutical industry, and in June 1995 the Company acquired Latpon Health Systems, Incorporated ("Latpon"), a developer of proprietary EDI claims processing software for hospitals and physicians. These acquisitions were followed by acquisitions of Electronic Claims and Funding, Inc. ("EC&F"), and Premier Dental Systems, Corp. ("Premier"), in October 1995. These companies were engaged in the EDI and management software businesses in the dental market. The Company enhanced its presence in the pharmacy market by acquiring Time-Share Computer Systems, Inc. ("TCS"), in February 1997 and The Stockton Group, Inc. ("Stockton") in November 1997. The Company's executive offices are located at 90 Merrick Avenue, Suite 501, East Meadow, New York 11554, and its telephone number is (516) 542-4500. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, assuming an initial public offering price of $14.00 per share, are estimated to be $45.9 million ($53.0 million if the Underwriters' over-allotment option is exercised in full), after deducting the estimated offering fees and expenses payable by the Company. The Company intends to use the net proceeds from the Offering as follows: (i) approximately $25.2 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"); (ii) approximately $17.8 million to repay all then outstanding indebtedness under its current credit facility (the "Credit Facility"); and (iii) the balance for general corporate and working capital purposes. Cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into Common Stock. See "Certain Transactions." Pending application to the foregoing uses, such proceeds will be invested in short-term, investment-grade, interest-bearing obligations. Outstanding borrowings under the Credit Facility currently bear interest at a weighted average rate of 6.93% per annum, are guaranteed by WCAS and WBCP and mature on October 31, 1999. The Company has received a letter from the lender under the Credit Facility committing to provide an amended credit facility (the "Amended Credit Facility") with total available credit of $10.0 million upon substantially the same terms and conditions as the Credit Facility. Borrowings under the Amended Credit Facility will not be guaranteed by any third party. It is anticipated that the Amended Credit facility will take effect upon the consummation of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. Moreover, it is expected that the terms of the Amended Credit Facility will prohibit the Company from paying dividends on the Common Stock. The Company currently intends to retain any earnings to fund future growth and the operation of its business. See "Risk Factors -- Absence of Dividends." 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998 on an actual basis and as adjusted to reflect the Recapitalization and the issuance and sale by the Company of 3,600,000 shares of Common Stock offered hereby, assuming an initial public offering price of $14.00 per share, after deducting the estimated offering fees and expenses payable by the Company, and the application of the net proceeds thereof as described under "Use of Proceeds." The following table should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the "Unaudited Pro Forma Consolidated Financial Information" appearing elsewhere in this Prospectus.
AS OF MARCH 31, 1998 ----------------------------- ACTUAL AS ADJUSTED(1) ----------- --------------- (IN THOUSANDS) Long-term debt (including current portion) Senior Subordinated Note(2) .................. $ 23,250 $ -- Credit Facility(2) ........................... 15,925 -- Other debt ................................... 1,324 1,324 --------- --------- Total long-term debt ....................... 40,499 1,324 --------- --------- Redeemable cumulative preferred stock ......... 30,623 -- --------- --------- Stockholders' (deficit) equity Common Stock(3) .............................. 57 116 Additional paid-in capital ................... 26,069 102,555 Accumulated deficit .......................... (51,463) (53,309) --------- --------- Total stockholders' (deficit) equity ......... (25,337) 49,362 --------- --------- Total capitalization ......................... $ 45,785 $ 50,686 ========= =========
- ---------- (1) As adjusted to reflect the Recapitalization and the sale of 3,600,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $14.00 per share and the anticipated application of the estimated net proceeds therefrom. (2) As of June 30, 1998, the outstanding principal amount plus accrued interest on the Senior Subordinated Note was approximately $25.6 million and the outstanding indebtedness under the Credit Facility plus accrued interest was approximately $16.9 million. (3) Excludes 483,041 shares of Common Stock reserved for issuance upon exercise of stock options outstanding under the Stock Plans, as of June 30, 1998, at a weighted average exercise price of $4.84 per share, of which 212,758 are exercisable. See "Management-Employee Benefit Plans." Includes 66,375 shares of Common Stock issuable upon exercise of the Common Stock purchase warrants as contemplated by the Recapitalization. See "Description of Capital Stock." 19 DILUTION The pro forma deficit in net tangible book value of the Company as of March 31, 1998, after giving effect to the Recapitalization, was approximately $(32.4) million or $(4.08) 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 March 31, 1998, other than to give effect to (i) the sale of 3,600,000 shares of Common Stock by the Company in this Offering at an assumed initial public offering price of $14.00 per share and after deducting the estimated fees and offering expenses, (ii) the application of the estimated net proceeds therefrom and (iii) the Recapitalization, the pro forma net tangible book value of the Company as of March 31, 1998 would have been approximately $11.7 million or $1.02 per share. This represents an immediate increase in pro forma net tangible book value of $5.10 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $12.98 per share to new investors. The following table illustrates this dilution on a per share basis. Assumed initial public offering price per share ...................... $ 14.00 Pro forma net tangible book value per share before this Offering(1). $(4.08) Increase per share attributable to new investors ................... 5.10 ------ Pro forma net tangible book value per share after this Offering ...... 1.02 ------- Dilution per share to new investors(2) ............................... $ 12.98 =======
- ---------- (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 March 31, 1998 of $(32.4) 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 March 31, 1998, after giving effect to the Recapitalization, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders (excluding the fair value of companies contributed in the March 1995 spin-off from CES) and to be paid by new investors, based on an assumed initial public offering price of $14.00 per share and before deducting estimated fees and expenses payable by the Company:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------ -------------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ --------- -------------- --------- ---------- Existing stockholders ......... 7,932,917 68.8% $28,325,000 36.0% $ 3.57 New investors ................. 3,600,000 31.2 50,400,000 64.0 14.00 --------- ----- ----------- ----- Total ......................... 11,532,917 100.0% $78,725,000 100.0% ========== ===== =========== =====
The foregoing tables assume no exercise of any outstanding stock options to purchase Common Stock. At March 31, 1998 there were 488,497 shares of Common Stock issuable upon the exercise of stock options outstanding under the Company's Stock Plans, of which 212,083 were currently exercisable. Such options have a weighted average exercise price of $4.83 per share. To the extent such options are exercised, there will be further dilution to the new investors. See "Capitalization," "Management -- Employee Benefit Plans" and "Description of Capital Stock." 20 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, 1997 and the nine months ended March 31, 1998 include adjustments that give effect to (i) the acquisition of TCS in February 1997, (ii) the acquisition of Stockton in November 1997, (iii) the Recapitalization and (iv) the Offering, as if they had occurred as of July 1, 1996. The unaudited pro forma consolidated balance sheet as of March 31, 1998 gives effect to (i) the Recapitalization and (ii) the Offering as if they had occurred on such date. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma consolidated financial information should be read in conjunction with the historical financial statements of the Company and Stockton and the respective notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included herein. The unaudited pro forma consolidated financial information is provided for information purposes only and does not purport to be indicative of the results which would have been obtained had the acquisitions of TCS and Stockton, the Recapitalization and the Offering been completed on the dates indicated or which may be expected to occur in the future. 21 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL --------------------------------------- COMPANY TCS(1) STOCKTON(2) -------------- ---------- ------------- Revenues ...................................... $ 35,279 $ 2,743 $ 3,802 Operating expenses: Operations ................................... 16,817 1,145 563 Sales, marketing and client services ......... 8,769 781 900 Research and development ..................... 3,278 132 103 General and administrative ................... 5,263 93 160 Depreciation and amortization ................ 5,293 90 109 Non-cash stock compensation .................. -- -- 1,280 Contingent consideration paid to former owners of acquired businesses ............... 2,301 -- -- Acquired in-process research and development ................................. 4,354 -- -- ---------- ------- ------- Total operating expenses ...................... 46,075 2,241 3,115 ---------- ------- ------- Income (loss) from operations ................. (10,796) 502 687 Other (income) expense ........................ (893) -- -- Interest expense, net ......................... 1,504 -- 100 ---------- ------- ------- Income (loss) before provision for income taxes ........................................ (11,407) 502 587 Provision for income taxes .................... 57 -- -- ---------- ------- ------- Net income (loss) ............................. (11,464) 502 587 Preferred stock dividends ..................... (2,400) -- -- ---------- ------- ------- Net income (loss) applicable to common stockholders ................................. $ (13,864) $ 502 $ 587 ========== ======= ======= Basic net loss per common share ............... $ (2.56) Weighted average common shares outstanding - Basic .......................... 5,425 -- --
RECAPITALIZATION AND ACQUISITIONS PRO OFFERING PRO FORMA, ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED ------------------ ------------- ----------------- -------------- Revenues ...................................... $ -- $ 41,824 $ -- $ 41,824 Operating expenses: Operations ................................... 76 (3) 18,601 -- 18,601 Sales, marketing and client services ......... -- 10,450 -- 10,450 Research and development ..................... -- 3,513 -- 3,513 General and administrative ................... -- 5,516 -- 5,516 Depreciation and amortization ................ 1,627 (4) 7,062 7,062 (57)(5) Non-cash stock compensation .................. -- 1,280 -- 1,280 Contingent consideration paid to former owners of acquired businesses ............... -- 2,301 -- 2,301 Acquired in-process research and development ................................. -- 4,354 -- 4,354 --------- --------- ---------- ---------- Total operating expenses ...................... (1,646) 53,077 -- 53,077 --------- --------- ---------- ---------- Income (loss) from operations ................. (1,646) (11,253) -- (11,253) Other (income) expense ........................ -- (893) -- (893) Interest expense, net ......................... 1,583 (6) 3,187 (2,831)(7) 356 --------- --------- ---------- ---------- Income (loss) before provision for income taxes ........................................ (3,229) (13,547) 2,831 (10,716) Provision for income taxes .................... -- 57 -- 57 --------- --------- ---------- ---------- Net income (loss) ............................. (3,229) (13,604) 2,831 (8) (10,773) Preferred stock dividends ..................... 2,400 (9) -- -- -- --------- --------- ---------- ---------- Net income (loss) applicable to common stockholders ................................. $ (829) $ (13,604) $ 2,831 $ (10,773) ========= ========= ========== ========== Basic net loss per common share ............... $ (1.18) Weighted average common shares outstanding - Basic .......................... 106 (10) 5,531 3,600 (11) 9,131
22 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL ---------------------------- COMPANY STOCKTON(12) ------------- -------------- Revenues .................................. $ 30,189 $1,646 Operating expenses: Operations ............................... 12,485 216 Sales, marketing and client services. 7,769 298 Research and development ................. 2,886 43 General and administrative ............... 3,307 161 Depreciation and amortization ............ 4,846 54 --------- ------- Total operating expenses .................. 31,293 772 --------- ------ Income (loss) from operations ............. (1,104) 874 Other (income) expense .................... 13 -- Interest expense (income), net ............ 2,470 27 --------- ------ Income (loss) before provision for income taxes ............................. (3,587) 847 Provision for income taxes ................ 37 -- --------- ------ Net income (loss) ......................... (3,624) 847 Preferred stock dividends ................. (1,800) -- --------- ------ Net income (loss) applicable to common stockholders ...................... $ (5,424) $ 847 ========= ====== Basic net loss per common share ........... $ (0.96) Weighted average common shares outstanding - Basic ...................... 5,677 --
RECAPITALIZATION AND ACQUISITIONS OFFERING PRO FORMA, ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED ------------------ ------------- ----------------- ------------ Revenues .................................. $ -- $ 31,835 $ -- $ 31,835 Operating expenses: Operations ............................... 29 (3) 12,730 -- 12,730 Sales, marketing and client services. -- 8,067 -- 8,067 Research and development ................. -- 2,929 -- 2,929 General and administrative ............... -- 3,468 -- 3,468 Depreciation and amortization ............ 291 (4) 5,156 -- 5,156 (35)(5) --------- --------- ---------- --------- Total operating expenses .................. 285 32,350 -- 32,350 --------- --------- ---------- -------- Income (loss) from operations ............. (285) (515) -- (515) Other (income) expense .................... -- 13 -- 13 Interest expense (income), net ............ 258 (6) 2,755 (2,889)(7) (134) --------- --------- ---------- -------- Income (loss) before provision for income taxes ............................. (543) (3,283) 2,889 (394) Provision for income taxes ................ -- 37 -- 37 --------- --------- ---------- -------- Net income (loss) ......................... (543) (3,320) 2,889 (8) (431) Preferred stock dividends ................. 1,800 (9) -- -- -- --------- --------- ---------- -------- Net income (loss) applicable to common stockholders ...................... $ 1,257 $ (3,320) $ 2,889 $ (431) ========= ========= ========== ======== Basic net loss per common share ........... $ (0.05) Weighted average common shares outstanding - Basic ...................... -- 5,677 3,600 (10) 9,277
23 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS DESCRIPTION OF ACQUISITIONS The acquisitions of TCS and Stockton were accounted for using the purchase method of accounting and, accordingly, the net assets acquired have been recorded at estimated fair value on their respective dates of acquisition and the historical statement of operations data of the Company reflect the results of operations of these businesses from their respective dates of acquisition. The purchase prices and the allocation of the purchase prices to the acquired assets are as follows:
TCS STOCKTON ---------- --------- (IN THOUSANDS) Cash purchase price ......................... $11,645 $10,674 ======= ======= Computer equipment .......................... $ 400 $ 260 Purchased client lists ...................... -- 742 Purchased software and technology ........... 2,619 968 Goodwill .................................... 4,092 8,704 In-process research and development ......... 4,354 -- ------- ------- $11,645 $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. No accrual has been made for the contingent liability as of March 31, 1998. Such contingent consideration will be treated as additional purchase price and will, therefore, be added to goodwill when and if it becomes accruable. The Stockton purchased client lists are being amortized on a straight-line basis over five years. The purchased software and technology generally is being amortized on a straight-line basis over three years for TCS and over five years for Stockton. Goodwill is being amortized on a straight-line basis over seven years for the TCS acquisition and over 20 years for the Stockton acquisition. Computer equipment is being amortized on a straight-line basis over three years. (1) Represents the historical results of operations of TCS from July 1, 1996 through the date of acquisition by the Company in February 1997. (2) Represents the historical results of operations of Stockton from July 1, 1996 through June 30, 1997. (3) Represents rent expense relating to a new operating lease for the Stockton facility. (4) Represents adjustments for amortization expense related to the acquisitions of TCS and Stockton as if they had occurred July 1, 1996, as follows:
YEAR ENDED NINE MONTHS ENDED JUNE 30, 1997 MARCH 31, 1998 -------------------------------- ------------------ TCS STOCKTON TOTAL STOCKTON ------- ---------- --------- ------------------ (IN THOUSANDS) Purchased client lists .................... $ -- $ 148 $ 148 $ 55 Purchased software and technology ......... 509 194 703 73 Goodwill .................................. 341 435 776 163 ---- ----- ------ ----- $850 $ 777 $1,627 $ 291 ==== ===== ====== =====
(5) Represents the elimination of depreciation and amortization expenses relating to assets of Stockton that were not acquired. 24 (6) The interest expense adjustment relating to the TCS and Stockton acquisitions is as follows:
YEAR ENDED NINE MONTHS ENDED JUNE 30, 1997 MARCH 31, 1998 --------------- ------------------ (IN THOUSANDS) Elimination of historical interest expense of Stockton ........... $ (111) $ (38) Interest expense on portion of Senior Subordinated Note used to fund TCS acquisition including amortization of discount ..... 939 -- Interest expense on borrowings under the Credit Facility used to fund Stockton acquisition at a composite interest rate of 7.07% (The effect of a .125% variance in the interest rate on the pro forma adjustment for the year ended June 30, 1997 and the nine months ended March 31, 1998 would be $14 and $5, respectively.).............................................. 755 296 ------- ------ $ 1,583 $ 258 ======= ======
(7) The interest expense adjustment relating to the Offering is as follows:
YEAR ENDED NINE MONTHS ENDED JUNE 30, 1997 MARCH 31, 1998 --------------- ------------------ (IN THOUSANDS) Interest expense on Senior Subordinated Note including amortization of discount ........... $ (1,992) $ (2,125) Interest expense on borrowings under the Credit Facility ..................................... (839) (764) -------- -------- $ (2,831) $ (2,889) ======== ========
(8) In connection with the repayment of outstanding indebtedness under the Credit Facility and the Senior Subordinated Note, the Company will record an extraordinary charge relating to the elimination of deferred financing costs associated with the Credit Facility and the write-off of the remaining discount on the Senior Subordinated Note. Such charge would have approximated $86,000 as of July 1, 1996, representing solely the write-off of deferred financing costs associated with the Credit Facility. Such charge would have approximated $1,846,000 as of March 31, 1998, consisting of $96,000 relating to the write-off of deferred financing costs associated with the Credit Facility and $1,750,000 relating to the write-off of the remaining discount on the Senior Subordinated Note. Such charge has been excluded from the pro forma statements of operations. (9) Represents the elimination of the dividends accrued on the Preferred Stock due to the Recapitalization. (10) Represents the pro rata portion of Common Stock issued in connection with the Senior Subordinated Note relating to the TCS acquisition. (11) Represents the sale by the Company of 3,600,000 shares of Common Stock in the Offering. (12) Represents the historical results of operations of Stockton from July 1, 1997 through the date of acquisition by the Company in November 1997. 25 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998 ------------------------------- ADJUSTMENTS RELATING TO THE ACTUAL RECAPITALIZATION ------------ ------------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents .......................... $ 1,455 $ -- Accounts receivable, less allowance for doubt- ful accounts ..................................... 7,463 -- Formulary receivables .............................. 1,502 -- Inventory .......................................... 240 -- Prepaid expenses and other current assets .......... 489 -- --------- ----------- Total current assets ............................. 11,149 -- Property and equipment, Net ......................... 4,944 -- Goodwill-Net ........................................ 32,408 -- Other intangible assets-Net ......................... 5,247 -- Other assets ........................................ 431 -- --------- ----------- Total ............................................... $ 54,179 $ -- ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ................................... $ 2,753 $ -- Accrued expenses and other current liabilities. 4,880 -- Current portion of long-term debt .................. 240 -- --------- ----------- Total current liabilities ........................ 7,873 -- Long-term debt ...................................... 40,259 -- Other long-term liabilities ......................... 761 -- Redeemable cumulative preferred stock ............... 30,623 (30,623)(1) Stockholders' equity (deficit): ..................... Common Stock ....................................... 57 22 (1) 1 (2) Additional paid-in capital ......................... 26,069 30,601 (1) (1)(2) Accumulated deficit ................................ (51,463) -- --------- ----------- Total stockholders' equity (deficit) ............. (25,337) 30,623 --------- ----------- Total ............................................... $ 54,179 $ -- ========= ===========
AS OF MARCH 31, 1998 --------------------------------------------- ADJUSTMENTS RELATING TO PRO FORMA, PRO FORMA THE OFFERING AS ADJUSTED ----------- -------------------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents .......................... $ 1,455 $ 4,280 (3) $ 5,735 Accounts receivable, less allowance for doubt- ful accounts ..................................... 7,463 -- 7,463 Formulary receivables .............................. 1,502 -- 1,502 Inventory .......................................... 240 -- 240 Prepaid expenses and other current assets .......... 489 -- 489 --------- ------------ --------- Total current assets ............................. 11,149 4,280 15,429 Property and equipment, Net ......................... 4,944 -- 4,944 Goodwill-Net ........................................ 32,408 -- 32,408 Other intangible assets-Net ......................... 5,247 -- 5,247 Other assets ........................................ 431 (96)(4) 335 --------- ------------ --------- Total ............................................... $ 54,179 $ 4,184 $ 58,363 ========= ============ ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ................................... $ 2,753 -- $ 2,753 Accrued expenses and other current liabilities. 4,880 (717)(3) 4,163 Current portion of long-term debt .................. 240 384 (4) 624 --------- ------------ --------- Total current liabilities ........................ 7,873 (333)(3) 7,540 Long-term debt ...................................... 40,259 (40,925) (3) 700 1,366 (4) Other long-term liabilities ......................... 761 -- 761 Redeemable cumulative preferred stock ............... -- -- -- Stockholders' equity (deficit): ..................... Common Stock ....................................... 80 36 (3) 116 Additional paid-in capital ......................... 56,669 45,886 (3) 102,555 Accumulated deficit ................................ (51,463) (1,846)(4) (53,309) --------- ------------ --------- Total stockholders' equity (deficit) ............. 5,286 44,076 49,362 --------- ------------ --------- Total ............................................... $ 54,179 $ 4,184 $ 58,363 ========= ============ =========
26 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (1) Represents the conversion of outstanding Preferred Stock and $6,627,000 of accrued dividends on the Preferred Stock into Common Stock in connection with the Recapitalization. (2) Represents the exercise of all Common Stock purchase warrants in connection with the Recapitalization. (3) Represents the sale by the Company of 3,600,000 shares of Common Stock at an assumed public offering price of $14.00 per share and the application of the net proceeds to the Company as follows: PROCEEDS Gross proceeds from Offering ................................. $ 50,400 Underwriting discount and commissions ........................ (3,528) Estimated Offering expenses .................................. (950) --------- Net proceeds ............................................... 45,922 --------- USES Repay Senior Subordinated Note ............................... (25,000) Repay borrowings under the Credit Facility ................... (15,925) Repay accrued interest on Senior Subordinated Note and borrow- ings under the Credit Facility ............................. (717) --------- Total uses ................................................. (41,642) --------- Excess proceeds ............................................ $ 4,280 =========
(4) Represents a $96,000 decrease in other assets relating to the elimination of deferred financing costs associated with the Credit Facility and the write-off of the remaining discount on the Senior Subordinated Note of $1,750,000, both of which will be recorded as extraordinary items upon the consummation of the Offering. 27 SELECTED CONSOLIDATED FINANCIAL DATA The statement of operations data presented below for the years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1998 and the balance sheet data as of June 30, 1996 and 1997 and March 31, 1998, are derived from, and qualified by reference to, the audited consolidated financial statements of the Company included elsewhere herein. The balance sheet data as of June 30, 1995 and March 31, 1997 are derived from, and qualified by reference to, the respective audited and unaudited consolidated financial statements of the Company not included herein. The statement of operations data for the nine month period ended March 31, 1997 is derived from the unaudited consolidated financial statements of the Company included elsewhere herein. 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 period. The results for the nine month period ended March 31, 1998 are not necessarily indicative of the results to be expected for the related 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.
YEAR ENDED JUNE 30, ---------------------------------------------------- 1995 1996 1997 ---------------- ---------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(1) .......................................... $ 16,246 $ 31,768 $ 35,279 Operating expenses: Operations .......................................... 9,753 19,174 16,817 Sales, marketing and client services ................ 3,615 7,064 8,769 Research and development ............................ 2,051 2,132 3,278 General and administrative .......................... 3,119 6,059 5,263 Depreciation and amortization ....................... 2,995 5,176 5,293 Write-down of intangible assets ..................... 8,191 (2) 9,965 (3) -- Acquired in-process research and development (4).. -- -- 4,354 Other charges (5) ................................... 2,864 538 2,301 --------- --------- --------- Total operating expenses ............................. 32,588 50,108 46,075 --------- --------- --------- Loss from operations ................................. (16,342) (18,340) (10,796) Other (income) expense ............................... -- 313 (893) Interest expense, net ................................ 189 584 1,504 --------- --------- --------- Loss before provision for income taxes ............... (16,531) (19,237) (11,407) Provision for income taxes ........................... 70 93 57 --------- --------- --------- Net loss ............................................. (16,601) (19,330) (11,464) Preferred stock dividends ............................ (27) (2,400) (2,400) --------- --------- --------- Net loss applicable to common stockholders ........... $(16,628) $(21,730) $ (13,864) ========= ========= ========= Basic net loss per common share ...................... $ (3.17) $ (4.14) $ (2.56)(6) Weighted average common shares outstanding-Basic ..... 5,238 5,245 5,425
NINE MONTHS ENDED MARCH 31, ------------------------------- 1997 1998 ------------ ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(1) .......................................... $ 24,964 $ 30,189 Operating expenses: Operations .......................................... 12,104 12,485 Sales, marketing and client services ................ 6,143 7,769 Research and development ............................ 2,455 2,886 General and administrative .......................... 3,340 3,307 Depreciation and amortization ....................... 3,502 4,846 Write-down of intangible assets ..................... -- -- Acquired in-process research and development (4).. 4,354 -- Other charges (5) ................................... 990 -- -------- --------- Total operating expenses ............................. 32,888 31,293 -------- --------- Loss from operations ................................. (7,924) (1,104) Other (income) expense ............................... (885) 13 Interest expense, net ................................ 779 2,470 -------- --------- Loss before provision for income taxes ............... (7,818) (3,587) Provision for income taxes ........................... 43 37 -------- --------- Net loss ............................................. (7,861) (3,624) Preferred stock dividends ............................ (1,800) (1,800) -------- --------- Net loss applicable to common stockholders ........... $ (9,661) $ (5,424) ======== ========= Basic net loss per common share ...................... $ (1.81) $ (0.96)(6) Weighted average common shares outstanding-Basic ..... 5,345 5,677
AS OF JUNE 30, AS OF MARCH 31, ----------------------------------------- -------------------------- 1995 1996 1997 1997 1998 --------- ------------- ------------- ----------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital ................................... $ 504 $ (4,207) $ (2,567) $ (546) $ 3,276 Total assets ...................................... 59,511 43,031 45,459 47,784 54,179 Long-term debt, including current portion ......... 5,805 11,601 25,161 25,278 40,499 Redeemable cumulative preferred stock ............. 24,023 26,423 28,823 28,223 30,623 Stockholders' equity (deficit) .................... 12,942 (8,472) (20,069) (15,916) (25,337)
28
NINE MONTHS YEAR ENDED JUNE 30, ENDED MARCH 31, --------------------------------------------- --------------------------- 1995 1996 1997 1997 1998 ------------- ------------- ------------- ------------- ----------- (IN THOUSANDS, EXCEPT PER TRANSACTION DATA) OTHER DATA: EBITDA (7) ..................................... $ (13,347) $ (13,164) $ (5,503) $ (4,422) $ 3,742 Adjusted EBITDA (7) ............................ (2,292) (2,052) 2,211 922 3,742 Cash flows from operating activities ........... (3,561) (1,653) (4,020) (2,991) (3,842) Cash flows from investing activities ........... (22,074) (4,919) (12,221) (11,630) (11,630) Cash flows from financing activities ........... 33,434 657 15,521 15,818 15,008 Transactions processed(8) Pharmacy ...................................... -- 107,032 126,201 88,463 136,685 Medical ....................................... -- 16,030 23,085 14,921 23,514 Dental ........................................ -- 6,021 12,188 8,759 10,767 --------- --------- --------- --------- --------- Total transactions processed ................. -- 129,083 161,474 112,143 170,966 Transactions per FTE (8)(9) .................... -- 322 415 293 478 Revenue per FTE (9) ............................ $ 48 $ 79 $ 91 $ 65 $ 84 Operating expenses per transaction (8) ......... -- 0.39 0.29 0.29 0.18
- ---------- (1) During the periods presented, the Company made a series of acquisitions and divested certain non-core or unprofitable operations. Revenues attributable to these divested operations, which are included in the statement of operations data, were $1,595,000, $3,517,000, $2,252,000, $1,941,000 and $241,000 in the fiscal years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997 and 1998, respectively. (2) Reflects the write-off of goodwill related to the acquisitions of MPC and Wellmark. (3) Reflects the write-down of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. (4) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (5) Reflects: (i) expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000, $2,301,000, and $990,000 in the fiscal years ended June 30, 1996 and 1997 and the nine months ended March 31, 1997, respectively; and (ii) expenses of $2,864,000 relating to the spin-off of the Company by CES in the fiscal year ended June 30, 1995. (6) Supplemental net loss per share, giving effect to the Recapitalization, would be $(1.55) and $(0.47) for the fiscal year ended June 30, 1997 and the nine months ended March 31, 1998, respectively. (7) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with GAAP and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described below. The following table summarizes EBITDA and adjusted EBITDA for all periods presented:
NINE MONTHS YEAR ENDED JUNE 30, ENDED MARCH 31, ------------------------------------------ ------------------------ 1995 1996 1997 1997 1998 -------------- -------------- ------------ ------------- ---------- (IN THOUSANDS) EBITDA ............................................... $ (13,347) $ (13,164) $ (5,503) $ (4,422) $ 3,742 Contingent consideration paid to former owners of ac- quired businesses ................................... -- 538 2,301 990 -- Write-down of intangible assets ...................... 8,191 9,965 -- -- -- Acquired in-process research and development ......... -- -- 4,354 4,354 -- Expenses related to the CES spin-off ................. 2,864 -- -- Contract and legal settlement provisions ............. -- 609 1,059 -- -- ---------- ---------- -------- --------- ------- Adjusted EBITDA ...................................... $ (2,292) $ (2,052) $ 2,211 $ 922 $ 3,742 ========== ========== ======== ========= =======
- ---------- (8) Transaction volumes are not available for the fiscal year ended June 30, 1995. (9) Full-time equivalents ("FTE") represents the number of full-time employees and part-time equivalents of full-time employees as of the end of the period shown. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements, including the notes thereto, of the Company included elsewhere in this Prospectus. This Prospectus contains forward-looking statements relating to future events or future financial performance of the Company. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the risk factors set forth under "Risk Factors" and the matters set forth in this Prospectus generally. OVERVIEW MEDE AMERICA is a leading provider of EDI products and services to a broad range of providers and payors in the healthcare industry. The Company's integrated suite of EDI solutions and services allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. Currently, the Company processes over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., MPC and Wellmark, which comprised the heathcare services business of CES, historically provided EDI services to hospitals and physicians. Their combined financial results are reflected in the fiscal 1995 financial statements on a full year basis. Since its formation, the Company has expanded both through internal growth and the acquisition of five healthcare transaction processing businesses. As part of its strategy of providing an integrated suite of EDI products to a broad range of healthcare providers, the Company has focused on acquisitions that provided entry into new markets or expanded the Company's product suite. All acquisitions have been accounted for under the purchase method of accounting. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or modified various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. These integration activities impacted the Company's financial results in the fiscal years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1998 and are ongoing. 30 The following table summarizes the Company's acquisitions and divested products and operations:
PRIMARY PRODUCTS DIVESTED PRODUCTS DATE OF FOUNDING/ OF FOUNDING/ DATE FOUNDING COMPANIES ACQUIRED MARKET ACQUIRED COMPANY ACQUIRED COMPANY DIVESTED - ------------------ -------- ------ ---------------- ---------------- -------- MedE America, Inc. 4/94(1) Medical Eligibility Verification, -- -- Enrollment MPC 5/94(1) Medical Hospital Claims, Data Entry 1/97 Physician Billing Physician Billing 12/96 Physician Billing 8/97 Wellmark 5/94(1) Medical Hospital Claims, -- -- Physician Billing COMPANIES ACQUIRED BY MEDE AMERICA MEDE OHIO 3/95 Pharmacy Switching, PBM, Practice Management 2/96 Third Party Billing Software Practice Management 12/97 Software Latpon 6/95 Medical Hospital Claims Physician Billing 3/96 EC&F/Premier 10/95 Dental Dental Claims, Practice Practice Management 3/97 Management Software Software TCS 2/97 Pharmacy/ PBM, Switching, -- -- Medical Eligibility Verification 11/97 Pharmacy PBM -- -- Stockton
- ----------------- (1) Represents date acquired by CES. In March 1995, the majority stockholder of the Company acquired all of the outstanding shares of MEDE OHIO for a cash purchase price of approximately $22,593,000, including transaction expenses. The majority stockholder subsequently merged MEDE OHIO into the Company. MEDE OHIO develops EDI systems for the pharmacy market and provides transaction switching/routing services. 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, $2,527,000 of client lists and $22,395,000 of goodwill. During fiscal year 1996, the Company wrote-down $9,965,000 of costs relating to client lists and related allocable goodwill due to a loss of approximately 25% of the acquired MEDE OHIO client base. The loss of this significant portion of MEDE OHIO's client base was primarily due to problems experienced by the Company in the post-merger integration of MEDE OHIO's operations into the Company's operations. This post-merger integration process took place during the same general time period in which the Company was spun-off from CES and a new management team was installed at the Company. The Company generally is amortizing the software over three years and the remaining value of client lists is being amortized over five years. The goodwill is being amortized over 20 years. In June 1995, the Company acquired substantially all of the assets of Latpon for a cash purchase price of approximately $2,470,000, plus the assumption of approximately $963,000 of liabilities (primarily long-term debt). Latpon, a developer of claims processing software, provided EDI transaction processing services to hospitals and hospital-based physician groups. Latpon also provided electronic and 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. 31 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 earnout payments based on the achievement of certain EBITDA growth targets by the EC&F business over three one-year periods ending on September 30, 1998. The Company recorded expenses of $538,000 during fiscal year 1996 relating to the first such period and an aggregate $2,301,000 during fiscal year 1997 primarily relating to the second and third such periods. The Company does not believe that any additional amounts will be payable pursuant to this earn-out arrangement. The acquisitions of EC&F and Premier were accounted for under the purchase method and the Company recorded total intangible assets of $4,350,000, consisting of $764,000 of software, and $3,586,000 of goodwill. The Company generally is amortizing the software over three years and is amortizing the goodwill over 20 years. The Company sold Premier in January 1997 for a cash payment of $388,000. There was no gain or loss on the sale of Premier. In February 1997, the Company acquired TCS, a provider of pharmacy switching and PBM transaction processing systems and services for pharmacies and eligibility verification services for physicians, for a total cash payment of $11,465,000, including transaction expenses. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $11,065,000, consisting of $4,354,000 of in-process research and development, $2,619,000 of software and $4,092,000 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 for workers compensation; (2) medical claims processing system to meet the HCFA 1500 EDI 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)
WORKERS COMP. HCFA 1500 PHARMACY TOTAL --------------- ----------- ---------- ------ Fiscal 1997 .......... $ 58 $ 70 $ 65 $193 Fiscal 1998 .......... 80 97 90 267 ---- ---- ---- ---- Total ............... $138 $167 $155 $460 ==== ==== ==== ====
In November 1997, the Company acquired Stockton, a provider of PBM transaction processing systems and related services for the pharmacy market. Stockton was purchased for an initial cash payment of $10,674,000 including transaction expenses, and a contingent earnout payment based upon the achievement of certain revenue growth targets. If such revenue targets are achieved over the 12-month period ending September 30, 1998, a maximum payment of $2,600,000 (plus interest at an annual rate of 7.25%) will be made in December 1998. Such additional consideration will be treated as additional purchase price and will, therefore, be added to goodwill when and if it becomes accruable. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of 32 $10,414,000, consisting of $1,710,000 of software and client lists and $8,704,000 of goodwill. The Company generally is amortizing the software over five years and is amortizing the client lists and goodwill over five years and 20 years, respectively. Revenues Revenues are derived from the sale of transaction processing products and services primarily on a fee-for-transaction basis. Transaction fees vary depending upon transaction type and service provided. The Company currently receives fees from providers for the majority of its transactions including claims processing, eligibility verification, claims switching, pharmacy script processing and tracking and Medicaid enrollment. The Company also receives fees from payors for the transmission of electronic claims and formulary payments from pharmaceutical manufacturers relating to the Company's PBM script processing and management reporting services. These transaction-based revenues comprise the predominant portion of the Company's total revenues and tend to be recurring. Other revenue is derived from one-time payments related to installation and implementation services, software license fees and EDI systems equipment sales. See "Business -- Suite of EDI Products and Services." Transaction-based revenues and related formulary services revenues (if applicable), which constitute the majority of the Company's total revenues, are recognized at the time the transactions are processed and the services are provided. Revenues associated with software support and implementation fees, each constituting less than 3% of the Company's revenues for the nine months ended March 31, 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 nine months ended March 31, 1998, is recognized upon installation if it is determined that the Company has no significant remaining obligations and collectibility of the resulting receivable is probable. Operating Expenses Operations Expense. Operations expense consists of data and voice telecommunications expense, salaries and benefits for operations employees and other costs associated with transaction processing and services provided to clients, such as network and telecommunications, maintenance, computer operations and systems administration, facilities and other additional indirect expenses. Since 1996, operations expense as a percentage of revenues and operations expense per transaction have declined as a result of the Company's integration and restructuring efforts and increased operating leverage. Restructuring charges recorded in connection with the Company's integration activities have resulted in variability in the Company's quarterly operating results. Sales, Marketing and Client Services Expense. Sales, marketing and client services expense consists primarily of salaries, benefits, commissions and related indirect costs and expenditures for marketing programs, trade shows, advertising, help desk software and related client communications. As the Company continues to implement its growth strategy, sales, marketing and client services expenses are expected to continue to increase. Research and Development Expense. Research and development expense consists primarily of salaries, benefits and related indirect expenses associated with the design, research and development of new products and enhancements to existing current products. The development of new software products 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 33 the nine months ended March 31, 1998, the Company capitalized $319,000 of software development costs on a project for which technological feasibility had been established but was not yet available for client release. Prior to July 1, 1997, the Company did not have any software development projects for which significant development costs were incurred between the establishment of technological feasibility and general client release of the product. The Company believes that the development of enhanced and new product offerings are essential to remaining competitive and it expects that development expenses will increase in the future. General and Administrative Expense. General and administrative expense primarily consists of salaries, benefits and related indirect costs for the administrative, executive, finance, legal, human resources and internal systems personnel, as well as accounting and legal fees. As the Company implements its growth strategy, general and administrative expenses are expected to increase. Depreciation and Amortization Expense. The Company depreciates the cost of its tangible capital assets on a straight-line basis over the estimated economic life of the asset: three to five years for computer equipment, five years for furniture and fixtures, and 20 to 25 years for buildings and improvements. Acquisition-related intangible assets, which include the value of software and client lists, are amortized based on the estimated useful economic life of the asset at the time of acquisition, and therefore will vary among acquisitions. The Company recorded amortization expense relating to goodwill and other intangible assets of $3,541,000 and $3,389,000 during the fiscal year ended June 30, 1997 and the nine months ended March 31, 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.
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ------------------------------ ------------------ 1995 1996 1997 1997 1998 -------- -------- -------- -------- ------- Revenues ...................................... 100% 100% 100% 100% 100% Operating Expenses: Operations ................................... 60 60 48 48 41 Sales, marketing and client services ......... 22 22 25 25 26 Research and development ..................... 13 7 9 10 10 General and administrative ................... 19 19 15 13 11 Depreciation and amortization ................ 18 16 15 14 16
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997 Revenues Revenues for the nine months ended March 31, 1998 were $30.2 million compared to $25.0 million in the corresponding period of fiscal 1997, representing an increase of 21%. The increase was primarily attributable to incremental revenue from the acquisitions of TCS and Stockton in February 1997 and November 1997, respectively, 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 171 million transactions in the nine months ended March 31, 1998, compared to 112 million transactions processed in the corresponding period of fiscal 1997, representing an increase of 52%. 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 declined by 13% between such periods, 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. 34 Operating Expenses Operations expense was $12.5 million for the nine months ended March 31, 1998 compared to $12.1 million in the corresponding period of fiscal 1997, representing an increase of 3%. As a percentage of revenues, operations expense decreased from 48% for the first nine months of fiscal 1997 to 41% in the corresponding period of fiscal 1998. The containment of operations expense in the nine months ended March 31, 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 the 1997 period but not the 1998 period. Sales, marketing and client services expense was $7.8 million for the nine months ended March 31, 1998 compared to $6.1 million in the corresponding period of fiscal 1997, representing an increase of 26%. As a percentage of revenues, sales, marketing and client services expense increased from 25% for the first nine months of fiscal 1997 to 26% in the corresponding period of fiscal 1998. This increase was primarily due to the inclusion of TCS and Stockton in the results of operations for the nine months ended March 31, 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 $2.9 million for the nine months ended March 31, 1998 compared to $2.5 million in the corresponding period of fiscal 1997, representing an increase of 18%. As a percentage of revenues, research and development expense was 10% for each such period. The Company capitalized $319,000 of software development costs in the first nine months of 1998, however, no software development costs were capitalized in the corresponding period of fiscal 1997. 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. General and administrative expense was $3.3 million for the nine months ended March 31, 1998 and the corresponding period of fiscal 1997. As a percentage of revenues, general and administrative expense decreased from 13% for the first nine months of fiscal 1997 to 11% in the corresponding period of fiscal 1998. This decrease was primarily a result of cost controls and the consolidation and integration activities related to the Company's recent acquisitions. Depreciation and amortization expense was $4.8 million for the nine months ended March 31, 1998 compared to $3.5 million in the corresponding period of fiscal 1997, representing an increase of 38%. As a percentage of revenues, depreciation and amortization expense increased from 14% for the first nine months of fiscal 1997 to 16% in the corresponding period of fiscal 1998. This increase was primarily attributable to 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 nine months ended March 31, 1998, as compared to $5.3 million of such expenses in the corresponding period of fiscal 1997. Included in the amount for the prior period is a $4.4 million write-off related to in-process research and development from the acquisition of TCS (for software that had not achieved technological feasibility and had no alternative use), and a contingent earnout charge of $990,000 recorded by the Company in connection with the EC&F purchase agreement. In addition, in the nine months ended March 31, 1997, the Company recorded a gain of $885,000 from a sale of securities. See Note 12 of "Notes to Consolidated Financial Statements." YEAR ENDED JUNE 30, 1997 COMPARED TO 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. 35 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% during the first nine months of 1996 to 48% in fiscal 1996. 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. This increase was primarily due to the inclusion of the TCS acquisition in the results for five months and, to a lesser extent, to 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. This increase in research and development expense was 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. This decrease was primarily a result of consolidation and integration activities. Depreciation and amortization expense was $5.3 million for fiscal year ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an increase of 2%. As a percentage of revenues, depreciation and amortization expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997. Acquisition-related expenses for the fiscal year ended June 30, 1997 included a $4.4 million write-off related to in-process research and development from the acquisition of TCS (for software that had not achieved technological feasibility and had no alternative use), and a contingent earnout charge of $2.3 million recorded by the Company in connection with the EC&F purchase agreement. In addition, in the nine months ended March 31, 1997, the Company recorded a gain of $885,000 from a sale of securities. See Note 12 of "Notes to Consolidated Financial Statements." YEAR ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995 Revenues Revenues for the fiscal year ended June 30, 1996 were $31.8 million compared to $16.2 million in fiscal 1995, representing an increase of 96%. The increase in revenues was primarily attributable to the inclusion of MEDE OHIO results for the full 12 months in fiscal 1996, compared to nearly four months in fiscal 1995, the acquisition of Latpon in June 1995 and the acquisition of EC&F and Premier in October 1995. Operating Expenses Operations expense was $19.2 million in the fiscal year ended June 30, 1996 compared to $9.8 million in fiscal 1995, representing an increase of 97%. As a percentage of revenues, operations expense was 60% for both periods. 36 Sales, marketing and client services expense was $7.1 million in the fiscal year ended June 30, 1996 compared to $3.6 million in fiscal 1995, representing an increase of 95%, reflecting the impact of acquisitions. As a percentage of revenues, sales, marketing and client services expense was 22% for both periods. Research and development expense was $2.1 million for each of the fiscal years ended June 30, 1996 and 1995. As a percentage of revenues, research and development expense decreased from 13% in fiscal 1995 to 7% in fiscal 1996. This decrease in research and development expense as a percentage of revenues resulted from the inclusion of MEDE OHIO and EC&F in the Company's operations. Their products tended to be less development intensive. General and administrative expense was $6.1 million in the fiscal year ended June 30, 1996 compared to $3.1 million in fiscal 1995, representing an increase of 94%, reflecting the impact of acquisitions. As a percentage of revenues, general and administrative expense was 19% for both periods. Depreciation and amortization expense was $5.2 million in the fiscal year ended June 30, 1996 compared to $3.0 million in fiscal 1995, representing an increase of 73%. As a percentage of revenues, depreciation and amortization expense decreased from 18% in fiscal 1995 to 16% in fiscal 1996. The increase in depreciation and amortization expense was predominantly attributable to amortization related to three acquisitions treated under purchase accounting: MEDE OHIO in March 1995; Latpon in June 1995 and EC&F/Premier in October 1995. 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. 37 QUARTERLY OPERATING RESULTS
THREE MONTHS ENDED -------------------------------------------------------------------------------------- 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 ----------- ------------ ----------- ------------- ----------- ------------ ---------- (IN THOUSANDS) Revenues .................................. $ 8,179 $ 7,831 $ 8,954 $10,315 $ 9,241 $ 9,849 $11,099 Operating Expenses: Operations ............................... 4,298 3,683 4,123 4,713 4,285 3,942 4,258 Sales, marketing and client services. 1,925 1,957 2,261 2,626 2,385 2,432 2,952 Research and development ................. 783 754 918 823 806 1,059 1,021 General and administrative ............... 1,042 1,171 1,127 1,923 1,061 1,107 1,139 Depreciation and amortization ............ 1,102 1,044 1,356 1,791 1,554 1,573 1,719 Acquired in-process research and development ............................ -- -- 4,354 -- -- -- -- Payment to former owners of ac- quired businesses ...................... 330 330 330 1,311 -- -- -- -------- -------- -------- ------- -------- -------- ------- Total operating expenses .................. 9,480 8,939 14,469 13,187 10,091 10,113 11,089 -------- -------- -------- ------- -------- -------- ------- Income (loss) from operations ............. (1,301) (1,108) (5,515) (2,872) (850) (264) 10 Other (income) expense .................... -- -- (885) (8) -- -- 13 Interest expense, net ..................... 150 202 427 725 655 915 900 -------- -------- -------- --------- -------- -------- ------- Loss before provision for income taxes (1,451) (1,310) (5,057) (3,589) (1,505) (1,179) (903) Provision for income taxes ................ 14 14 15 14 12 12 13 -------- -------- -------- --------- -------- -------- ------- Net loss .................................. $ (1,465) $ (1,324) $ (5,072) $(3,603) $ (1,517) $ (1,191) $ (916) ======== ======== ======== ========= ======== ======== =======
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 $25,000,000 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 March 31, 1998, the Company had outstanding borrowings of $15,925,000 under the Credit Facility. Such borrowings currently bear interest at a weighted average rate of 7.07% per annum. The total availability under the Credit Facility is $20.0 million. See "Certain Transactions." All indebtedness under the Credit Facility has been, and currently is, guaranteed by the Company's four principal stockholders. The Company has received a letter from the lender under the Credit Facility committing to provide an amended credit facility with total available credit of $15.0 million. This facility would be comprised of a $7.5 million term loan to be used for acquisitions and a $7.5 million revolving credit loan to be used for working capital purposes, each with a maximum term of two years from October 31, 1998. Interest for the term and revolver loans is computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based rate. Such borrowing rates are at the option of the Company for any particular period during which borrowings exist. Covenants under the existing agreement include: customary covenants and restrictions on additional liabilities and disposition of assets, achieving year 2000 compliance by August 1999, maintaining financial records and reporting, a maximum quarterly leverage ratio, a minimum interest coverage ratio, as well as prior 38 approval for acquisitions. Borrowings under the Amended Credit Facility will not be guaranteed by any third party. It is anticipated that the Amended Credit Facility will take effect upon the consummation of the Offering. As of March 31, 1998, the Company had cash and cash equivalents of $1.5 million and net working capital of $3.3 million. Net cash used in operations was $1.7 million, $4.0 million and $3.8 million for the fiscal years ended June 30, 1996 and 1997 and the nine months ended March 31, 1998, respectively. The $3.8 million net cash used in operations for the nine months ended March 31, 1998 was used primarily for contingent earnout charges on acquisitions made in prior fiscal years, and other accounts payable and accrued expenses totaling $3.7 million. In addition, $1.1 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). Cash used for investment purposes was $4.9 million, $12.2 million and $11.6 million for the fiscal years ended June 30, 1996 and 1997 and the nine months ended March 31, 1998, respectively. Cash used for investment purposes during the nine months ended March 31, 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 $646,000. The Company expects to spend at least $2.0 million per annum for the foreseeable future for capital investment to support growth in transaction processing. Cash provided by financing activities was $657,000, $15.5 million and $15.0 million for the fiscal years ended June 30, 1996 and 1997 and the nine months ended March 31, 1998, respectively. Cash provided by financing activities during the nine months ended March 31, 1998 was primarily provided from borrowings under the Credit Facility which was partially offset by principal repayments of debt and capital lease obligations. In the fiscal year ended June 30, 1997, cash was provided by the issuance of a Senior Subordinated Note in the principal amount of $25,000,000 and 370,993 shares of Common Stock for aggregate proceeds of $25.0 million, which proceeds were partially offset by the repayment of outstanding borrowings under the Credit Facility and principal repayments of debt and capital lease obligations. Approximately $43.0 million of the proceeds of the Offering will be applied to the repayment of the Company's outstanding indebtedness under the Credit Facility and the Senior Subordinated Note. In connection with the repayment of outstanding indebtedness under the Credit Facility and the Senior Subordinated Note, the Company will record an extraordinary charge of approximately $1.7 million relating to the elimination of deferred financing costs associated with the Credit Facility and the write-off of the remaining discount on the Senior Subordinated Note. The Company expects to use the Amended Credit Facility to finance the Company's future acquisitions and general working capital needs. The Company also expects to finance acquisitions through the issuance of additional equity and debt securities. The Company believes that the proceeds of the Offering, together with existing cash balances and cash generated by operations in the near term, and the borrowings expected to be made available under the Amended Credit Facility, will be sufficient to finance the Company's operations for at least 18 months. However, future acquisitions may require funding beyond the Company's cash resources and currently anticipated capital or operating requirements could change, with the result that the Company may be required to raise additional funds through the public or private sale of additional securities. See "Risk Factors -- Acquisition Strategy; Need for Additional Capital." YEAR 2000 COMPLIANCE The Company has reviewed the Year 2000 compliance of its systems and has adopted a program intended to ensure that it achieves compliance with respect to all products, services and internal systems in a timely manner. Under such plan, $1,020,000 has been budgeted through December 1999, of which $160,000 has been spent through April 30, 1998. Certain of the Company's physician benefit management clients are being migrated from the Company's PBM system in Ohio to its PBM system acquired from Stockton. The total revenue from such clients is expected to be $6,351,000 in fiscal 1999. A testing and migration timetable for all such clients has been developed, with migration activities scheduled for completion in mid-1999. The Company believes that it does not require additional technology to achieve Year 2000 compliance and that it has sufficient resources to implement its plan. The Company expects 39 that the combined amount of budgeted expenses for Year 2000 compliance plus the ongoing product development and development expenditures will increase as a percent of revenue in future periods. However, there can be no assurance that expenditures required to achieve compliance with Year 2000 requirements will not exceed those amounts. See "Risk Factors -- Year 2000 Compliance" and "Business - -- Year 2000 Compliance." IMPACT OF INFLATION Inflation has not had a material impact on the Company's historical operations or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS Recent pronouncements of the Financial Accounting Standards Board, which are not required to be adopted at this date, include SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These pronouncements are not expected to have a material impact on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is not required to be adopted at this date. The Company is currently evaluating the impact of this statement on its financial statements. NET OPERATING LOSSES As of March 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $34,650,000. 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." 40 BUSINESS GENERAL MEDE AMERICA is a leading provider of EDI products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products and services reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. Currently, the Company processes over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., MPC, and Wellmark, which comprised the healthcare services business of CES, historically provided EDI services to hospitals and physicians. Since its formation, the Company has expanded both through internal growth and the acquisition of five healthcare transaction processing businesses. As part of its strategy of providing an integrated suite of EDI products and services to a broad range of healthcare providers, the Company has focused on acquisitions that provided entry into new markets or expanded the Company's product suite. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or restructured various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. INDUSTRY OVERVIEW Innovations over the past decade in computer and telecommunications technologies have resulted in the development of EDI systems to electronically process and transmit information among the various participants in the healthcare industry. These systems were designed to replace paper-based recording and transmission of information, enabling greater processing speed, reduced processing costs and more accurate data interchange. Electronic processing enables providers to verify patient eligibility or obtain authorization for services at the time of appointment, registration or at the time of claim submission. The healthcare EDI processor then interfaces with the payor to obtain an eligibility or authorization confirmation, which is transmitted back to the provider. To obtain payment, providers must submit claims information in formats specified by the respective payors. Healthcare EDI processors can facilitate this process by utilizing customized software programs that can perform "edits" to the data supplied by providers and re-format that data to meet the data specifications of payors. Electronically transmitted claims are sent either directly from the provider to the payor, or through the healthcare EDI processor (which in turn transmits the claims to the payor directly or through one or more intermediaries). The claim is received and reviewed by the payor and the remittance response is communicated (usually not electronically) back to the provider. Each of these steps in the healthcare delivery process gives rise to a current or potential EDI transaction. According to Health Data Directory, in 1997 over 4.1 billion electronic and paper claims were paid in all sectors of the healthcare services market, and over the past five years healthcare claims increased at an average rate of 5.5% per year. The Company expects the volume of healthcare claims to continue to grow as the U.S. population ages and life expectancy of the U.S. population increases. The increase in claims has been accompanied by an increase in the proportion of claims that are electronically processed. From 1993 to 1997, the proportion of total healthcare claims that were electronically processed 41 increased from 41% to approximately 60% at an average rate of 16% per year. The Company expects the electronic processing of healthcare claims to continue to increase as a result of increased reliance on electronic commerce and increased emphasis on cost containment in the healthcare industry. The penetration of electronic processing varies significantly among the different markets within the healthcare industry. According to Health Data Directory, in 1997 electronic processing accounted for approximately 13% of total dental claims, 38% of total physician medical claims, 83% of total hospital medical claims and 86% of total pharmacy claims. 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 "best of breed" technology and may be purchased as modular additions to the client's existing data storage and retrieval system, or as part of a comprehensive EDI processing system. They are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice management and billing systems. In addition, new products can be added to respond to changing client requirements, and the scalability of the Com- 42 pany's products permits the client to accommodate increasing transaction volumes without requiring substantial new investments in software and hardware. Because of these product characteristics, the Company believes it is well positioned to take advantage of the expected growth of EDI in areas such as eligibility, managed care transactions and pharmacy to physician scripting. BROAD AND DIVERSIFIED CLIENT BASE. The Company markets its products and services to a broad range of healthcare providers including the medical market, comprised of hospitals, clinics and physicians, the dental market comprised of small to medium-sized dental practice groups, and the pharmacy market, which includes retail pharmacies (independents and chains) as well as PBMs. In addition, the Company has relationships through practice management system vendors and other intermediaries. The Company's client base is highly diversified, consisting of approximately 42,000 pharmacies, 8,000 dental offices, 1,000 hospitals and clinics and 14,000 physicians. The Company's broad and diversified client base provides it with transaction-based revenues that tend to be recurring and positions it to capitalize on the rapid consolidation taking place within the healthcare industry. DIRECT RELATIONSHIPS WITH PROVIDERS AND PAYORS. The Company has developed over 540 direct connections with healthcare payors including Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and commercial insurance companies, and the Company is able to access over 500 additional payors through contractual relationships with multiple claims clearinghouses. Additionally, the Company has direct client relationships with providers such as hospitals, clinics, physicians and pharmacies. The range of MEDE AMERICA's services and the extent of its connectivity with payors provides the opportunity to achieve deeper penetration of its provider base, while at the same time offering more complete solutions to new clients. MEDE AMERICA believes that it is strongly positioned to offer reliable, one-stop shopping to both providers and payors for all their EDI needs. FOCUS ON CLIENT SERVICE. The Company has focused on implementing a wide range of client service and support functions. These support activities include the use of automated client service tracking software, expanded client help desk and account executive support functions, and extensive client feedback mechanisms. This focus has enhanced the Company's awareness of client needs and improved the Company's ability to respond to those needs. As a result of these activities, of the clients that contributed to the Company's revenues in the 1997 fiscal year, approximately 90% continued as clients of the Company and contributed to the Company's revenues in the nine months ended March 31, 1998. 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. 43 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 97 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 "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: 44 MEDE AMERICA'S SUITE OF EDI PRODUCTS AND SERVICES
NAME OF PRODUCT/SERVICE DESCRIPTION OF AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS - -------------------------- ----------------------------------------------- -------------------------------------------- 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. reconciliation and payor accounts re- o Reduces administrative expenses. ceivable management. Claims Tracking -- o Tracks and provides a lock box service o Improves accounts receivable manage- Dental for payor reimbursements. ment and accelerates cash flow. ELIGIBILITY VERIFICATION MEDE Eligibility -- o Verifies patients' eligibility for specific o Reduces costs by minimizing fraud. All Markets healthcare benefits for Medicaid and o Ensures patient services are supported commercial payors. by a designated health benefit plan. o Reduces administrative expenses. MEDICAID ENROLLMENT Medicaid o Processes and tracks Medicaid enrollment o Reduces expenses through on-line Enrollment Manage- applications allowing for the verification application process. ment System (MEMS) and processing of Medicaid claims. Uti- o Reduces application processing time. -- Medical lized by hospitals and government agen- o Improves Medicaid claims billing and col- cies in New York, New Jersey and lection. California. o Reduces bad debt. TRANSACTION SWITCHING MEDE Xchange -- o Routes real-time and batch transaction o Reduces costs. All Markets data from clients to facilitate transaction o Increases network availability and transmission to payors. reliability. o Supports a broad array of access methods o Provides extensive payor connectivity. including dial-up, dial to packet, ISDN and frame relay.
45
NAME OF PRODUCT/SERVICE DESCRIPTION OF AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS - ------------------------- --------------------------------------------- -------------------------------------------- REAL-TIME BENEFIT MANAGEMENT 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 manage- ment. o Reduces administrative expenses. PHARMACY PRACTICE MANAGEMENT SYSTEMS (PPM) Solution Plus -- o Facilitates dispensing, inventory and o Expands drug pricing and coverage Pharmacy pricing of products for hospital, outpa- capabilities. tient and clinic pharmacies. o Improves cash flow. o Provides on-line claims adjudication. o Improves efficiency of pharmacy management and operations. OTHER PRODUCTS AND SERVICES Link -- o Connects physicians to pharmacies for the o Reduces costs related to manual genera- Medical and Pharmacy transmission of prescriptions and related tion and transmission of prescriptions. information and approvals. o Increases accuracy and transmission speed of prescriptions. Formulary o Administers and manages formulary pro- o Reduces drug costs and increases PBM Management -- grams for PBMs. revenue through manufacturer incentives, Pharmacy o Promotes the usage by healthcare plans of o Promotes compliance with payor formu- designated drug products. laries. Patient Statements -- o Facilitates patient statement billing. o Reduces costs and improves patient All Markets relations. Credit/Debit Card and o Assists patients in making co-payments or o Reduces bad debt and enhances patient Check Guarantee -- paying other out-of-pocket charges. convenience. All Markets Additional EDI o Processes data relating to referrals, en- o Reduces practice expense and improves Transactions -- counters and benefit pre-certifications. efficiency and patient relations. All Markets
CLIENTS The Company markets its products primarily to hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups (including HMOs, PPOs and healthcare practice management vendors). The Company processes transactions for providers in all 50 states, with 75% of its transactions generated by providers in 28 states. The Company believes it is one of the largest pharmacy transaction routers in the U.S. (based on volume) serving more than 42,000 pharmacies in various EDI capacities. MEDE AMERICA has a strong presence in the medical market in New York, New Jersey, California, 46 Florida, Minnesota, and Ohio, currently providing EDI services to more than 1,000 hospitals and clinics, and 14,000 physicians. In the dental market, MEDE AMERICA serves more than 8,000 dental offices. No single client of the Company accounted for more than 3% of the Company's revenues in fiscal year 1997. SALES, MARKETING AND CLIENT SERVICES The Company markets its products through a national sales and client services organization consisting of 75 sales associates organized according to market, client type and product category. The Company also has a client services organization consisting of 57 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 June 30, 1998, the Company employed 65 people in the areas of product design, research and development, and 32 people in the areas of quality assurance and technical support. The Company's product development strategy is focused on continuous enhancement of its existing products to increase their functionality and ease of use, and the development of new products for additional EDI transactions and telecommunications offerings. Particular attention is devoted to the ongoing integration of developed and acquired systems and applications into a consolidated suite of EDI product offerings and supporting services for the markets served by the Company. In the Company's 1995, 1996 and 1997 fiscal years, research and development expenditures totaled $2,051,000, $2,132,000 and $3,278,000, respectively, representing approximately 13%, 7% 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. 47 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 48 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. To date, the Company has expended approximately $160,000 in addressing Year 2000 problems. The Company estimates that it will incur approximately $860,000 in additional costs relating to its Year 2000 compliance program; however, there can be no assurance that such amount will be sufficient to cover all costs relating to Year 2000 issues. The Company believes that the majority of all transactions being processed by it are running on Year 2000 compliant systems. However, the Company believes that some systems with which its own computers interact (for example, some payor and practice management systems) are not yet Year 2000 compliant, and that the failure of these systems to be made Year 2000 compliant in a timely manner may adversely affect some of the Company's operations. In addition, certain systems operated by MEDE AMERICA are not yet Year 2000 compliant. The applications running on these systems are expected to be discontinued, migrated to other systems or corrected before 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." However, there can be no assurance that the Company's systems will achieve Year 2000 compliance in a timely manner, if at all. See "Risk Factors -- Year 2000 Compliance." EMPLOYEES As of June 30, 1998, the Company employed 364 people, including 112 in operations, 75 in sales, 12 in marketing, 57 in client services, 65 in research and development, 15 in finance, 18 in administration 49 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:
ESTIMATED MONTHLY TRANSACTION OWNED/LEASE FACILITY PERSONNEL TRANSACTION TYPE CAPACITY EXPIRATION DATE - ------------------------------ ----------- ------------------------------ ------------- ---------------------- Ohio (Primary Medical and 152 Eligibility 2,000,000 Owned Pharmacy Data Center) Real-Time Benefit Management 6,000,000 Switching 48,000,000 New York (Secondary Medical 33 Eligibility Enrollment 2,000,000 January 2003 and Pharmacy Data Center) 25,000 Georgia (Dental Data Center) 56 Dental Claims 1,600,000 January 2001 Corporate Headquarters, 115 Real-Time Benefit Management 2,000,000 Various dates between Sales & Development January 1999 and Feb- Offices (5 sites) and ruary 2003. PBM Processing
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. 50 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION - ---------------------------------- ----- ----------------------------------- Thomas E. McInerney(2) ........... 56 Chairman of the Board of Directors Thomas P. Staudt ................. 45 President and Chief Executive Officer, Director Richard P. Bankosky .............. 55 Chief Financial Officer, Treasurer and Secretary James T. Stinton ................. 48 Chief Information Officer William M. McManus ............... 43 Senior Vice President and General Manager -- Medical and Pharmacy Roger L. Primeau ................. 55 Senior Vice President and General Manager -- Dental Anthony J. de Nicola(1) .......... 33 Director Timothy M. Murray(1)(2) .......... 45 Director
- ---------- (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. 51 JAMES T. STINTON has been Chief Information Officer of the Company since October 1995. He served as Release Manager at Charles Schwab & Company from April 1992 to September 1995. In that position he was responsible for the development, coordination, testing and implementation for the Microsoft NT and UNIX Client Server software. Prior to joining Charles Schwab & Company, he was POS Systems Architect and Vice President at Wells Fargo Bank from February 1982 to April 1992. Mr. Stinton holds a degree from ONC Business Studies, Coventry Technical College, Coventry, England, and a graduate certificate from Consumer Banking Association, Retail Banking Management, McIntire Business School of the University of Virginia. WILLIAM M. MCMANUS has been Senior Vice President and General Manager -- Pharmacy and Medical of the Company since May 1997 and Senior Vice President and General Manager -- Pharmacy since February 1996. From April 1994 through February 1996 he was head of pharmacy system sales for National Data Corporation. In that position he had overall responsibility for sales, marketing and product management programs. Prior to April 1994, Mr. McManus held senior level positions at OmniSYS, Inc., Healthcare Computer Corporation, PDX, Inc., and the computer division of Foxmeyer Corporation. Mr. McManus holds a B.S. degree in Health and Physical Education from the University of South Carolina and completed postgraduate courses in education and pharmacy at the University of South Carolina. ROGER L. PRIMEAU has been Senior Vice President and General Manager -- Dental of the Company since October 1996. From August 1989 through June 1996 he was Vice President, Administration and Customer Relations of National Electronic Information Corporation ("NEIC"). Prior to joining NEIC, Mr. Primeau worked at Columbia Life Insurance Co. and Aetna Life & Casualty in a variety of management positions. Mr. Primeau holds a B.S. degree in Biology from Holy Cross College. ANTHONY J. DE NICOLA has been a director of the Company since March 1995 and has been a general partner of WCAS since April 1994. Prior to joining WCAS, Mr. de Nicola was an associate at William Blair & Company, L.L.C., an investment banking firm with which he had been affiliated since 1990. Previously, Mr. de Nicola worked in the Mergers and Acquisitions Department of Goldman Sachs & Co. and held positions at McKinsey & Company and IBM. Mr. de Nicola holds a B.A. degree from DePauw University and an M.B.A. from Harvard Business School. He is a director of SEER Technologies, Inc. and several private companies. TIMOTHY M. MURRAY has been a director of the Company since March 1995 and is a principal of William Blair & Company, L.L.C., an investment banking firm with which he has been associated since 1979. He has also been the managing partner of William Blair Leveraged Capital Fund since its formation in 1988 and is a Managing Director of WBCP. Mr. Murray holds a B.A. degree from Duke University and an M.B.A. from the University of Chicago. He is a director of Daisytek International Corporation and several private companies. THE BOARD OF DIRECTORS COMMITTEES OF THE BOARD OF DIRECTORS The only standing committees of the Board of Directors of the Company are the Audit Committee and the Compensation Committee. The Audit Committee reviews the results and scope of audits and other services provided by the Company's independent public accountants. Its members are Messrs. de Nicola and Murray. In May 1998, the Board of Directors constituted a Compensation Committee composed of Messrs. McInerney and Murray which will be responsible for making recommendations concerning salaries and incentive compensation for executive officers of the Company. Prior to May 1998, the Board of Directors had sole responsibility for establishing executive officer compensation. Thomas E. Staudt, the Company's President and Chief Executive Officer, participated in the deliberations of the Board concerning executive compensation. COMPENSATION OF DIRECTORS Prior to the Offering, the directors of the Company received no compensation in respect of their service on the Board of Directors. Following the Offering, under the "New Stock Plan" (as defined in, and described more fully under, "-- Employee Benefit Plans"), each director who is not an employee of 52 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 $1,000 for each Board of Directors or committee meeting attended, and will receive annually a non-qualified stock option to purchase up to 1,000 shares of Common Stock at the fair market value of the Common Stock on the date of grant. Directors are entitled to reimbursement for out-of-pocket expenses incurred while attending meetings of the Board of Directors or committee meetings. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and each of the four other most highly paid executive officers of the Company (the "Named Executive Officers") in the 1997 fiscal year: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------- --------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#)(2) COMPENSATION($) - --------------------------------------- ----------------- ------------- ----------------- --------------- ---------------- Thomas P. Staudt ...................... 180,000 50,000 -- 220,414 -- President and Chief Executive Officer Richard P. Bankosky ................... 135,000 20,000 -- 29,461 -- Chief Financial Officer, Treasurer and Secretary William M. McManus .................... 122,072 20,000 68,558 27,279 -- Senior Vice President and General Manager -- Pharmacy and Medical Roger L. Primeau ...................... 85,000 (3) 12,000 -- 18,113 -- Senior Vice President and General Manager -- Dental James T. Stinton ...................... 152,500 20,000 -- 34,917 -- Chief Information Officer ............
- ---------- (1) Bonuses are granted under a bonus formula annually established by the Board of Directors, based upon the performance (measured by EBITDA) of the Company (or certain operating divisions thereof). Unless a specified percentage of the EBITDA target is achieved, no bonus is paid. EBITDA targets are adjusted to reflect accounting changes, acquisitions and other significant, one-time events. (2) Total number granted through June 30, 1997 (exercised and unexercised). (3) Mr. Primeau's employment commenced in October 1996. 53 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding grants of options to purchase Common Stock in fiscal 1997 to each of the Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(1) -------------------------------------------------------------- ------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION GRANTED(#) FISCAL YEAR(2) ($/SHARE) DATE 5%($) 10%($) -------------------- ----------------- ----------- ----------- --------- --------- Thomas P. Staudt ............ 2,182 4.27% 5.73 2/14/07 7,863 19,926 Richard P. Bankosky ......... 2,182 4.27% 5.73 2/14/07 7,863 19,926 William M. McManus .......... 5,455 10.68% 5.73 (3) 19,657 49,816 Roger L. Primeau ............ 18,112 35.47% (4) (5) 65,268 165,401 James T. Stinton ............ 2,182 4.27% 5.73 2/14/07 7,863 19,926
- ---------- (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 51,059 shares in fiscal year 1997. (3) Of such options, 2,182 expire February 14, 2007 and 3,273 expire June 9, 2007. (4) Of such options, 16,367 are at an exercise price of $4.58 and 1,745 are at an exercise price of $5.73. (5) Of such options, 16,367 expire September 16, 2006 and 1,745 expire February 14, 2007. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT JUNE 30, 1997(#) JUNE 30, 1997($) ------------------------------- ------------------------------ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------- --------------- ------------- -------------- Thomas P. Staudt ............ 65,469 133,120 $300,000 $612,500 Richard P. Bankosky ......... 5,455 24,005 25,000 112,500 William M. McManus .......... 7,637 19,641 38,750 92,500 Roger L. Primeau ............ 0 18,112 0 85,000 James T. Stinton ............ 6,546 28,370 30,000 132,500
SEVERANCE AGREEMENTS The Company maintains severance agreements with each of its executive officers providing for salary continuation for a period of six months (twelve months in the case of Mr. Staudt) if the executive is terminated for any reason other than malfeasance, misconduct or moral turpitude. NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY AGREEMENTS Each executive officer and certain other employees of the Company have entered into a Non-Competition, Non-Solicitation and Confidentiality Agreement with the Company, the terms of which are as follows. For a term of 12 months following the cessation of such employee's employment with the Company, the employee will neither compete with the Company in the United States nor solicit any customer or employee of the Company. In addition, the employee will not disclose any trade secrets (as defined in the agreement) and, for a term of 12 months following the cessation of his or her employment by the Company, will not disclose any confidential information (as defined in the agreement). 54 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 June 30, 1998, options to purchase up to an aggregate 483,041 shares of Common Stock were outstanding, of which 212,758 options were exercisable. The weighted average exercise price for all options granted under the Stock Plan is $4.84 per share. Following the Offering, the Board of Directors has provided that no additional grants or awards will be made under the Stock Plan. Under the MEDE AMERICA Corporation and its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan (the "New Stock Plan"), a variety of awards, including incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), "non-qualified" stock options, restricted stock awards and other stock-based awards, may be granted to officers, employees, directors, consultants and advisors of the Company and its subsidiaries. An aggregate, 1,500,000 shares of Common Stock are currently reserved for issuance under the New Stock Plan. The Board of Directors will initially administer the New Stock Plan, but may delegate such responsibility to a committee of the Board (the "Plan Administrator"). The terms and conditions of individual awards made to employees and consultants and, except as described below, non-employee directors, may vary, subject to the following guidelines: (i) the exercise price of options may not be less than 85% of the fair market value of the Common Stock on the date of grant provided, however, that neither (a) the exercise price of incentive stock options nor (b) the exercise price of non-qualified stock options intended to qualify as "performance-based compensation" within the meaning of the Code may be less than 100% of the fair market value of the Common Stock on the date of grant (or, in the case of incentive stock options granted to a stockholder owning in excess of 10% of the total combined voting power of all classes of Company stock, 110% of the fair market value); (ii) the maximum number of shares of Common Stock which may be the subject of awards granted to any employee under the New Stock Plan during any calendar year may not exceed 300,000; (iii) the term of incentive stock options may not exceed ten years from the date of grant; and (iv) no awards may be granted after June 30, 2008. Except as described below with respect to non-employee directors, the Plan Administrator determines, within the guidelines set forth above, the amount of each award, the conditions and limitations applicable to the exercise of an option, the exercise price therefor and the form of payment that may be used to exercise the award, which may include cash, check, shares of Common Stock and promissory notes. Each non-employee director automatically receives non-qualified stock options to purchase up to 1,000 shares of Common Stock upon his or her initial election to the Board of Directors and upon each anniversary thereof upon which he or she is still serving as a director. The exercise price for each such option is the fair market value on the date of grant. Non-employee director options vest six months after grant and the exercise period may not exceed ten years, provided that, subject to certain exceptions in the event of death or disability, no non-employee director options may be exercised more than 90 days after such director ceases to serve as a director. The Board of Directors may grant restricted and unrestricted share awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or a part of such shares at their purchase price from the recipient in the event that conditions specified by the Plan Administrator are not satisfied prior to the end of the applicable restricted period. Shares of restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered during the applicable restricted period. The Plan Administrator may, in its sole discretion, grant or sell (at a purchase price per share equal to at least 85% of the fair market value) shares of Common Stock free of any restrictions under the New Stock Plan. In the event of a merger or sale of all or substantially all the assets of 55 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 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% of the fair market value of the Common Stock on the day the offering commences and 85% of the fair market value of the Common Stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the Offering. In fiscal 1998, the Company has granted options to purchase an aggregate 37,095 shares of Common Stock to the Named Executive Officers, as follows: 12,001 shares for Mr. McManus, 8,729 shares for Mr. Staudt and 5,455 shares for each of Messrs. Bankosky, Stinton and Primeau. Such options have an exercise price of $5.73 per share of Common Stock. In addition, on [July ], 1998, the Board the Directors determined to grant options to purchase an aggregate 400,000 shares of Common Stock under the New Stock Plan to certain employees of the Company (including the Named Executive Officers) contingent upon consummation of the Offering. Such options, which include both incentive and non-qualified stock options, will have an exercise price equal to the price to the public in the Offering and generally will vest ratably over four years from the date of grant except that the initial installment of options to be granted to certain executive officers, including the Named Executive Officers, will vest immediately upon consummation of the Offering. The grants to be received by each of the Named Executive Officers are as follows: 160,000 shares for Mr. Staudt, 40,000 shares for each of Messrs. Bankosky and McManus, 16,000 shares for Mr. Primeau and 30, 000 shares for Mr. Stinton. 56 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 1,772,354 shares of Common Stock and 171,889 shares of Preferred Stock to investment funds and individuals affiliated with WCAS, and an aggregate 866,504 shares of Common Stock and 28,987 shares of Preferred Stock to investment funds affiliated with WBCP. In October 1995, WCAS V and Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), each advanced the Company $1.75 million as bridge financing for the Company's acquisition of EC&F and Premier. The loan bore interest at the rate of 10% per annum and matured on December 31, 1995. The Company repaid the loan in December 1995. On December 18, 1995, the Company issued to its four principal stockholders, WCAS V, WCAS VI, William Blair Capital Partners V, L.P. ("Blair V"), and William Blair Leveraged Capital Fund, Limited Partnership ("Blair LCF"), warrants to purchase an aggregate 52,532 shares of Common Stock at an exercise price of $4.58 per share in connection with their agreement to guarantee the Company's obligations under the Credit Facility. On January 10, 1997, the Company increased the amount of available borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS VI, Blair V and Blair LCF, each agreed to guarantee payment of a portion of the additional debt to be incurred under the increased credit line. In consideration for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 18,330 shares of Common Stock. The warrants have a ten-year term and the exercise price thereunder is $5.73 per share. On October 31, 1997, the Company increased the amount of available borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS VI, Blair V and Blair LCF each agreed to guarantee payment of a portion of the additional debt to be incurred under the increased credit line. In consideration for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 34,200 shares of Common Stock. The warrants have a ten year term and the exercise price thereunder is $5.73 per share. On February 14, 1997 the Company issued a 10% Senior Subordinated Note due February 14, 2002 in the principal amount of $25,000,000, plus an aggregate 370,993 shares of Common Stock, to WCAS Capital Partners II, L.P. ("WCAS CP II"), for an aggregate purchase price of $25,000,000. WCAS CP II is an affiliate of each of WCAS V and WCAS VI, and Thomas McInerney and Anthony de Nicola, both directors of the Company, are general partners of the sole WCAS CP II general partner. The Company intends to use a portion of the proceeds of the Offering to repay in full the Credit Facility and the 10% Senior Subordinated Note. See "Use of Proceeds." The Company does not anticipate further borrowing from or seeking further loan guarantees from any of the entities referred to above. In connection with the Offering, the terms of the Preferred Stock will be 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 Common Stock purchase warrants agreed to exercise all such warrants by the net issuance exercise method for an aggregate shares of Common Stock. WCAS V, WCAS VI, Blair 57 V and Blair LCF are the owners of an aggregate 193,100 shares of Preferred Stock, and warrants to purchase 52,532 and 52,533 shares of Common Stock at exercise prices of $4.58 and $5.73 per share, respectively. Blair V and Blair LCF, and Timothy Murray, a director of the Company, are each affiliates of William Blair & Company, L.L.C., an underwriter of the Offering. See "Underwriting." PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of June 30, 1998, and as adjusted to reflect the sale of Common Stock offered hereby, by (i) each person (or group of affiliated persons) known by the Company to own beneficially more than five percent of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. The numbers of shares set forth below (i) give effect to the Recapitalization and the Reverse Stock Split, (ii) assume an Offering price of $14.00 per share of Common Stock, and (iii) assume a sale of 3,600,000 shares of Common Stock in the Offering. Unless otherwise indicated, the address for each stockholder is c/o the Company, 90 Merrick Avenue, Suite 501, East Meadow, New York 11554.
SHARES BENEFICIALLY OWNED(1) -------------------------------------- PERCENTAGE OWNED(2) ------------------------ BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING - ------------------------------------------------- ----------- ---------- ----------- Welsh, Carson, Anderson & Stowe (3) ............. 5,754,393 72.10% 49.69% 320 Park Avenue, 25th Floor New York, NY 10019 William Blair & Co., L.L.C. (4) ................. 918,465 11.51% 7.93% 222 West Adams Street Chicago, Illinois 60606 Mellon Bank, as Trustee (5) ..................... 617,852 7.74% 5.33% 767 Fifth Avenue, 26th Floor New York, NY 10153 Thomas P. Staudt (6) ............................ 166,211 2.05% 1.42% Richard P. Bankosky ............................. 11,346 - - James T. Stinton (7) ............................ 13,529 - - William M. McManus (8) .......................... 16,147 - - Roger L. Primeau (9) ............................ 6,982 - - Thomas E. McInerney (10) ........................ 5,622,136 70.44% 48.55% 320 Park Avenue, 25th Floor New York, NY 10019 Anthony J. de Nicola (11) ....................... 5,598,277 70.14% 48.34% 320 Park Avenue, 25th Floor New York, NY 10019 Timothy M. Murray (12) .......................... 915,319 11.47% 7.90% 222 West Adams Street Chicago, Illinois 60606 All current directors and executive officers as a 6,762,026 83.15% 57.63% group (10 persons) .............................
- ---------- - Represents beneficial ownership of less than 1% of the Common Stock. 58 (1) Gives effect to the Recapitalization and the Reverse Stock Split. Unless otherwise indicated, the entities and individuals identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws, where applicable. (2) The percentages shown are based on 7,981,204 shares of Common Stock outstanding on June 30, 1998, plus, as to each entity or group listed unless otherwise noted, the number of shares of Common Stock deemed to be owned by such holder pursuant to Rule 13d-3 under the Exchange Act as of such date, assuming exercise of options held by such holder that are exercisable within 60 days of the date of this Prospectus. (3) Includes 2,571,773 shares of Common Stock held by WCAS V, 2,587,939 shares of Common Stock held by WCAS VI, 62,233 shares of Common Stock held by WCAS Information Partners L.P. ("WCAS Info."), 370,993 shares of Common Stock held by WCAS CP II, and 161,455 shares of Common Stock held by individual partners of WCAS. Such partners are also partners of the sole general partner of each of the foregoing limited partnerships. The respective general partners of WCAS V, WCAS VI, WCAS Info. and WCAS CP II are WCAS V Partners, L.P., WCAS VI Partners, L.P., WCAS INFO Partners and WCAS CP II Partners. The individual partners of each of these partnerships include some or all of Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A. Minicucci, Anthony J. de Nicola, Paul B. Queally 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 601,489 shares of Common Stock held by Blair V, 313,830 shares of Common Stock held by Blair LCF and 3,146 shares of Common Stock held by an individual affiliated with WBCP. Timothy M. Murray, a partner of WBCP, is also a director of the Company and may be deemed to be a beneficial owner of the Company's Common Stock owned by WBCP. (5) Includes 308,926 shares of Common Stock held by Mellon Bank as Trustee for the General Motors Salaried Employees Pension Trust and 308,926 shares of Common Stock held by Mellon Bank as Trustee for the General Motors Hourly Rate Employees Pension Fund. (6) Includes options to purchase up to 109,551 shares of Common Stock. (7) Includes options to purchase up to 13,529 shares of Common Stock. (8) Includes options to purchase up to 16,147 shares of Common Stock. (9) Includes options to purchase up to 6,982 shares of Common Stock. (10) Includes 2,571,773 shares of Common Stock held by WCAS V, 2,587,939 shares of Common Stock held by WCAS VI, 62,233 shares of Common Stock held by WCAS Info. and 370,993 shares of Common Stock held by WCAS CP II. Mr. McInerney disclaims beneficial ownership of such shares. (11) Includes 2,571,773 shares of Common Stock held by WCAS V, 2,587,939 shares of Common Stock held by WCAS VI, 62,233 shares of Common Stock held by WCAS Info. and 370,993 shares of Common Stock held by WCAS CP II. Mr. de Nicola disclaims beneficial ownership of such shares. (12) Includes 601,489 shares of Common Stock held by Blair V and 313,830 shares of Common Stock held by Blair LCF. Mr. Murray disclaims beneficial ownership of such shares. 59 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 30,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock. Upon completion of this Offering, and after giving effect to the Recapitalization and the Reverse Stock Split, there will be 11,581,204 shares of Common Stock (12,107,304 shares if the Underwriters' over-allotment option is exercised) and no shares of Preferred Stock outstanding. As of June 30, 1998, before giving effect to the Recapitalization and the Reverse Stock Split there were 26,049,938 shares of Common Stock outstanding and 239,956 shares of Preferred Stock outstanding, held of record by 127 stockholders. In addition, as of May 29, 1998, before giving effect to the Recapitalization and the Reverse Stock Split there were outstanding options to purchase 2,213,600 shares of Common Stock and warrants to purchase 481,440 shares of Common Stock. Pursuant to the Recapitalization, all such warrants will be exercised (for an aggregate 66,375 post Reverse Stock Split shares), and all shares of Preferred Stock will be converted into an aggregate 2,229,982 shares of Common Stock (based on the aggregate liquidation preference of the Preferred Stock as of June 30, 1998, after giving effect to the Reverse Stock Split and assuming no exercise of the Underwriters' over-allotment option) prior to the consummation of the Offering. 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 2,229,982 shares of Common Stock. The Board of Directors is authorized, subject to certain limitations prescribed by Delaware law, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock, $.01 par value, in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series. The Company believes that the power to issue Preferred Stock will provide flexibility in connection with possible corporate transactions. The issuance of Preferred Stock, however, could adversely affect the voting power of holders of Common Stock and restrict their rights to receive payments upon liquidation. It could also have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any shares of Preferred Stock. WARRANTS As of June 30, 1998, there were outstanding warrants to purchase 66,375 shares of Common Stock (on a "net exercise" basis) held by four investors. These warrants will be exercised in full upon the closing of this Offering. 60 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 sixty days nor more than ninety days prior to the anniversary of the immediately preceding annual meeting. The notice by a stockholder must contain, among other things, certain information about the stockholder delivering the notice and a description of the proposed business to be brought before the meeting. Certain of the provisions of the Amended and Restated Certificate of Incorporation and Bylaws discussed above could make more difficult or discourage a proxy contest or other change in the management of the Company or the acquisition or attempted acquisition of control by a holder of a substantial block of the Company's stock. It is possible that such provisions could make it more difficult to accomplish, or could deter, transactions which stockholders may otherwise consider to be in their best interests. As permitted by the DGCL, the Amended and Restated Certificate of Incorporation provides that Directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as Directors, except for liability (i) for any breach of their duty of loyalty to the Company and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 or successor provisions of the DGCL or (iv) for any transaction from which the Director derives an improper personal benefit. The Amended and Restated Certificate of Incorporation and Bylaws provide that the Company shall indemnify its Directors and officers to the fullest extent permitted by Delaware law (except in some circumstances, with respect to suits initiated by the Director or officer) and advance expenses to such Directors or officers to defend any action for which rights of indemnification are provided. In addition, the Amended and Restated Certificate of Incorporation and Bylaws also permit the Company to grant such rights to its employees and agents. The Bylaws also provide that the Company may enter into indemnification agreements with its Directors and officers and purchase insurance on behalf of any person whom it is required or permitted to indemnify. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as Directors, officers and employees. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services. 61 SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering there has been no market for the Common Stock of the Company. The Company can make no prediction as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. See "Risk Factors -- Shares Eligible for Future Sale." Upon completion of this Offering, the Company expects to have 11,581,204 shares of Common Stock outstanding (excluding 483,041 shares reserved for issuance upon the exercise of outstanding stock options) (12,121,204 shares of Common Stock outstanding if the Underwriters' over-allotment option is exercised in full). Of these shares, the 3,600,000 shares offered hereby will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act, which will be subject to the resale limitations imposed by Rule 144, as described below. All of the remaining 7,981,204 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, 590,768 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 7,343,585 additional restricted securities will be eligible for sale in the public market in accordance with Rule 144 or 701 under the Securities Act beginning 90 days after the date of this Prospectus. Taking into consideration the effect of the lock-up agreements described below and the provisions of Rules 144 and 144(k), restricted shares will be eligible for sale in the public market immediately after this Offering, restricted shares (excluding shares issuable upon the exercise of outstanding stock options) will be eligible for sale beginning 90 days after the date of this Prospectus, and the remaining restricted shares will be eligible for sale upon the expiration of the lock-up agreements 180 days after the date of this Prospectus, subject to the provisions of Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are required to be aggregated) whose restricted securities have been outstanding for at least one year, including a person who may be deemed an "affiliate" of the Company, may only sell a number of shares within any three-month period which does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock (approximately 115,673 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. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, shares of Common Stock and options to purchase shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this Prospectus without the prior written consent of Smith Barney Inc. Upon expiration of the lock-up agreements, all shares of Common Stock currently outstanding will be immediately eligible for resale, subject to the requirements of Rule 144. The Company is unable to predict the effect that sales may have on the then prevailing market price of the Common Stock. See "Management -- Employee Benefit Plans" and "Description of Capital Stock." 62 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 - ----------------------------------------------- ----------------- Smith Barney Inc. .......................... William Blair & Company, L.L.C. ............ Volpe Brown Whelan & Company, LLC .......... ------------ 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 Smith Barney Inc., William Blair & Company, L.L.C. and Volpe Brown Whelan & Company, LLC are acting as representatives (the "Representatives"), propose initially to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain other dealers. After the initial public offering, the public offering price and such concessions may be changed by the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 540,000 additional shares of Common Stock at the public offering price set forth on the cover page hereof less underwriting discounts and commissions. The Underwriters may exercise such option to purchase additional shares solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares in such table. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company and its executive officers and directors and certain other holders of Common Stock and securities convertible into or exercisable or exchangeable for Common Stock have agreed that for a period of 180 days after the date of this Prospectus they will not, without the prior written consent of Smith Barney Inc., sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, 63 pledge or otherwise dispose of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock except in certain limited circumstances. See "Shares Eligible for Future Sale." In connection with this Offering and in accordance with applicable law and industry practice, the Underwriters may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of a security. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits Smith Barney Inc., as managing underwriter, to reclaim a selling concession from a syndicate member in connection with the Offering when shares of Common Stock originally sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. The Underwriters are not required to engage in any of these activities. Any such activities, if commenced, may be discontinued at any time. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company and the Representatives. Among the factors considered in determining the initial public offering price were the history of, and the prospects for, the Company's business and the industry in which it competes, an assessment of the Company's management, its past and present operations, the past and present results of operations of the Company and the trend of such results of operations, the prospects for earnings of the Company, the present state of the Company's development, the general condition of the securities market at the time of this Offering and the market prices of similar securities of comparable companies at the time of this Offering. William Blair & Company, L.L.C., one of the Representatives of the Underwriters, is affiliated with Blair V and Blair LCF, two of the Company's principal stockholders and, by virtue of such affiliation, is, prior to the Offering, an "affiliate" of the Company within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, the Offering is being made in conformity with certain applicable provisions of Rule 2720. Smith Barney Inc., another Underwriter of the Offering (the "Independent Underwriter"), will act as a "qualified independent underwriter," as defined in Rule 2720, in connection with the Offering. The Independent Underwriter, in its role as qualified independent underwriter, has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. The Independent Underwriter will not receive any additional fees for serving as a qualified independent underwriter in connection with the Offering. The price of shares of Common Stock sold to the public will be no higher than that recommended by the Independent Underwriter. Timothy M. Murray, a director of the Company, is a managing director of WBCP and a principal of William Blair & Company, L.L.C. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Reboul, MacMurray, Hewitt, Maynard & Kristol and for the Underwriters by Dewey Ballantine LLP, New York, New York. EXPERTS The consolidated financial statements of the Company as of June 30, 1996 and 1997 and March 31, 1998, and for each of the three years in the period ended June 30, 1997, and for the nine months ended March 31, 1998, included in this Prospectus, and the related financial statement schedule included else- 64 where 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. 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. 65 INDEX TO FINANCIAL STATEMENTS
PAGE ----- MEDE AMERICA CORPORATION: Independent Auditors' Report ............................................................ F-2 Consolidated Balance Sheets as of June 30, 1996 and 1997 and March 31, 1998 ............. F-3 Consolidated Statements of Operations for the Years Ended June 30, 1995, 1996 and 1997 and the Nine Months Ended March 31, 1997 (Unaudited) and 1998 ......................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30, 1995, 1996 and 1997 and the Nine Months Ended March 31, 1998 .......................... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1996 and 1997 and the Nine Months Ended March 31, 1997 (Unaudited) and 1998 ......................... F-6 Notes to Consolidated Financial Statements .............................................. F-7 THE STOCKTON GROUP, INC.: Independent Auditors' Report ............................................................ F-21 Statements of Income for the Year Ended June 30, 1997 and the Three Months Ended September 30, 1997 (Unaudited) ........................................................ F-22 Notes to Financial Statement ............................................................ F-23
F-1 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, 1996 and 1997 and March 31, 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, 1997 and the nine months ended March 31, 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, 1996 and 1997 and March 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 and the nine months ended March 31, 1998 in conformity with generally accepted accounting principles. Jericho, New York May 8, 1998 (July 17, 1998 as to Note 13) The accompanying consolidated financial statements include the effects of a reverse stock split of the Company's common stock anticipated to be approved by the Company's Board of Directors prior to the consummation of this public offering. The above opinion is in the form which will be signed by Deloitte & Touche LLP upon consummation of the reverse stock split, which is described in Note 13 of the notes to consolidated financial statements and assuming that, from May 8, 1998 to the date of such reverse stock split, no other events will have occurred that would affect the accompanying consolidated financial statements and notes thereto. DELOITTE & TOUCHE LLP Jericho, New York July 17, 1998 F-2 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1997 AND MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' JUNE 30, EQUITY --------------------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 ------------ ------------ ----------- -------------- (UNAUDITED) (NOTE 1.O.) ASSETS CURRENT ASSETS: Cash and cash equivalents ...................................... $ 2,639 $ 1,919 $ 1,455 Accounts receivable, less allowance for doubtful accounts of $1,400, $1,716, and $958, respectively........................ 5,989 6,318 7,463 Formulary receivables .......................................... 74 405 1,502 Inventory ...................................................... 136 172 240 Prepaid expenses and other current assets ...................... 661 486 489 --------- --------- --------- Total current assets ......................................... 9,499 9,300 11,149 PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6) ................... 5,601 5,517 4,944 GOODWILL -- Net (Notes 1 and 2) ................................. 23,059 25,177 32,408 OTHER INTANGIBLE ASSETS -- Net (Notes 1 and 4) .................. 4,340 5,014 5,247 OTHER ASSETS .................................................... 532 451 431 --------- --------- --------- TOTAL ........................................................... $ 43,031 $ 45,459 $ 54,179 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Accounts payable ............................................... $ 2,567 $ 2,134 $ 2,753 Accrued expenses and other current liabilities (Notes 5 and 10) .......................................................... 9,739 9,195 4,880 Current portion of long-term debt (Note 6) ..................... 1,400 538 240 --------- --------- --------- Total current liabilities .................................... 13,706 11,867 7,873 --------- --------- --------- LONG-TERM DEBT (Note 6) ......................................... 10,201 24,623 40,259 --------- --------- --------- OTHER LONG-TERM LIABILITIES (Note 10) ........................... 1,173 215 761 --------- --------- --------- REDEEMABLE CUMULATIVE PREFERRED STOCK: $.01 par value; 250 shares authorized; 240 shares issued and outstanding (aggregate liquidation value of $23,996 plus ac- crued dividends) (Note 9) .................................... 26,423 28,823 30,623 $ -- --------- --------- --------- --------- COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' (DEFICIT) EQUITY: Common stock, $.01 par value; 6,329 shares authorized; 5,280, 5,671, and 5,680 shares issued and outstanding, respectively 53 57 57 79 Additional paid-in capital ..................................... 27,850 27,713 26,069 56,670 Accumulated (deficit) equity ................................... (36,375) (47,839) (51,463) (51,463) --------- --------- --------- --------- Total stockholders' (deficit) equity ......................... (8,472) (20,069) (25,337) $ 5,286 --------- --------- --------- --------- TOTAL ........................................................... $ 43,031 $ 45,459 $ 54,179 ========= ========= =========
See notes to consolidated financial statements. F-3 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ------------------------------------------ --------------------------- 1995 1996 1997 1997 1998 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) REVENUES .......................................... $ 16,246 $ 31,768 $ 35,279 $ 24,964 $ 30,189 --------- --------- --------- -------- -------- OPERATING EXPENSES: Operations ....................................... 9,753 19,174 16,817 12,104 12,485 Sales, marketing and client services ............. 3,615 7,064 8,769 6,143 7,769 Research and development (Note 1) ................ 2,051 2,132 3,278 2,455 2,886 General and administrative ....................... 3,119 6,059 5,263 3,340 3,307 Depreciation and amortization .................... 2,995 5,176 5,293 3,502 4,846 Contingent consideration paid to former owners of acquired businesses (Note 2) ................... -- 538 2,301 990 -- Write-down of intangible assets (Note 1) ......... 8,191 9,965 -- -- -- Acquired in-process research and development (Note 2) ....................................... -- -- 4,354 4,354 -- Spin-off expense (Note 10) ....................... 2,864 -- -- -- -- --------- --------- --------- -------- -------- Total operating expenses ......................... 32,588 50,108 46,075 32,888 31,293 --------- --------- --------- -------- -------- LOSS FROM OPERATIONS .............................. (16,342) (18,340) (10,796) (7,924) (1,104) OTHER (INCOME) EXPENSE (Note 12) .................. -- 313 (893) (885) 13 INTEREST EXPENSE, Net ............................. 189 584 1,504 779 2,470 --------- --------- --------- -------- -------- LOSS BEFORE PROVISION FOR INCOME TAXES ............................................ (16,531) (19,237) (11,407) (7,818) (3,587) PROVISION FOR INCOME TAXES (Note 7) ............... 70 93 57 43 37 --------- --------- --------- -------- -------- NET LOSS .......................................... (16,601) (19,330) (11,464) (7,861) (3,624) PREFERRED STOCK DIVIDENDS ......................... (27) (2,400) (2,400) (1,800) (1,800) --------- --------- --------- -------- -------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ..................................... $ (16,628) $ (21,730) $ (13,864) $ (9,661) $ (5,424) ========= ========= ========= ======== ======== BASIC NET LOSS PER COMMON SHARE ................... $ (3.17) $ (4.14) $ (2.56) $ (1.81) $ (0.96) ========= ========= ========= ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC ............................. 5,238 5,245 5,425 5,345 5,677 ========= ========= ========= ======== ========
See notes to consolidated financial statements. F-4 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ----------------- PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT) -------- -------- ------------ ------------- ----------------- BALANCE, JULY 1, 1994 (Note 1) ........................ -- $-- $ 23,540 $ (444) $ 23,096 Net loss ............................................. -- -- -- (16,601) (16,601) Preferred stock dividends ............................ -- -- (27) -- (27) Capital contribution by stockholders and shares issued in connection with MEDE OHIO acquisition, and capital reorganization (Note 8) .................... 5,237 52 3,952 -- 4,004 Capital contribution of intercompany debt owed to CES resulting from the Spin-off (Note 10) .............. -- -- 2,470 -- 2,470 ----- --- -------- --------- --------- BALANCE, JUNE 30, 1995 ................................ 5,237 52 29,935 (17,045) 12,942 Net loss ............................................. -- -- -- (19,330) (19,330) Preferred stock dividends ............................ -- -- (2,400) -- (2,400) Issuance of warrants ................................. -- -- 121 -- 121 Exercise of stock options ............................ 43 1 194 -- 195 ----- --- -------- --------- --------- BALANCE, JUNE 30, 1996 ................................ 5,280 53 27,850 (36,375) (8,472) Net loss ............................................. -- -- -- (11,464) (11,464) Preferred stock dividends ............................ -- -- (2,400) -- (2,400) Issuance of common stock ............................. 371 4 2,121 -- 2,125 Issuance of warrants ................................. -- -- 52 -- 52 Exercise of stock options ............................ 20 -- 90 -- 90 ----- --- -------- --------- --------- BALANCE, JUNE 30, 1997 ................................ 5,671 57 27,713 (47,839) (20,069) Net loss ............................................. -- -- -- (3,624) (3,624) Preferred stock dividends ............................ -- -- (1,800) -- (1,800) Issuance of warrants ................................. -- -- 98 -- 98 Exercise of stock options ............................ 9 -- 40 -- 40 Compensation relating to grant of options ............ -- -- 18 -- 18 ----- --- -------- --------- --------- BALANCE, MARCH 31, 1998 ............................... 5,680 $57 $ 26,069 $ (51,463) $ (25,337) ===== === ======== ========= =========
See notes to consolidated financial statements. F-5 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND 1998 (IN THOUSANDS)
YEAR ENDED JUNE 30, ---------------------------------------------- 1995 1996 1997 --------------- ------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ..................................................... $(16,601) $ (19,330) $ (11,464) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................... 2,995 5,176 5,418 Provision for doubtful accounts ............................. 518 406 316 Write-down of intangible assets ............................. 8,191 9,965 -- Acquired in-process research and development ................ -- -- 4,354 (Gain) loss on sale of assets ............................... -- 313 (8) Non-cash compensation expense ............................... -- -- -- Changes in operating assets and liabilities net of effects of businesses acquired: Accounts receivable ........................................ 648 977 (861) Formularly receivables ..................................... -- (74) (331) Inventory .................................................. (66) 262 (45) Prepaid expenses and other current assets .................. (85) (179) 175 Other assets ............................................... 74 243 13 Accounts payable and accrued expenses and other cur- rent liabilities ......................................... (589) 997 (629) Other long-term liabilities ................................ 1,354 (409) (958) -------- --------- ----------- Net cash used in operating activities .................... (3,561) (1,653) (4,020) -------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired .................. (21,566) (3,648) (11,450) Purchases of property and equipment .......................... (508) (1,271) (1,477) Additions to goodwill and other intangible assets ............ -- -- (143) Proceeds from sale of property and equipment ................. -- -- 461 Proceeds from sale of net assets of Premier .................. -- -- 388 -------- --------- ----------- Net cash used in investing activities .................... (22,074) (4,919) (12,221) -------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Due to stockholders .......................................... 4,484 (4,484) -- Issuance of Senior Subordinated Note ......................... -- -- 22,875 Issuance of preferred stock .................................. 23,996 -- -- Issuance of common stock ..................................... 4,004 -- 2,125 Proceeds from intercompany debt due to CES ................... 1,297 -- -- Net proceeds (repayments) under Credit Facility .............. -- 8,250 (8,250) Principal repayments of debt ................................. (1) (2,852) (801) Principal repayments of capital lease obligations ............ (346) (452) (518) Exercise of stock options .................................... -- 195 90 ---------- --------- ----------- Net cash provided by financing activities ................ 33,434 657 15,521 ---------- --------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................................. 7,799 (5,915) (720) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................................................... 755 8,554 2,639 ---------- --------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 8,554 $ 2,639 $ 1,919 ========== ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................................... $ 246 $ 394 $ 1,541 ========== ========= =========== Income taxes ................................................ $ 348 $ 69 $ 111 ========== ========= =========== Non-cash investing and financing activities: Assets acquired under capital leases or by incurring debt..... $ 848 $ 205 $ 129 ========== ========= =========== Issuance of warrants ......................................... $ -- $ 121 $ 52 ========== ========= ===========
NINE MONTHS ENDED MARCH 31, ----------------------------- 1997 1998 -------------- -------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ..................................................... $ (7,861) $ (3,624) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................... 3,543 5,096 Provision for doubtful accounts ............................. 195 265 Write-down of intangible assets ............................. -- -- Acquired in-process research and development ................ 4,354 -- (Gain) loss on sale of assets ............................... (8) 13 Non-cash compensation expense ............................... -- 18 Changes in operating assets and liabilities net of effects of businesses acquired: Accounts receivable ........................................ 17 (1,410) Formularly receivables ..................................... (105) (1,097) Inventory .................................................. 9 (68) Prepaid expenses and other current assets .................. 94 (3) Other assets ............................................... 84 118 Accounts payable and accrued expenses and other cur- rent liabilities ......................................... (2,368) (3,696) Other long-term liabilities ................................ (945) 546 ---------- ---------- Net cash used in operating activities .................... (2,991) (3,842) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired .................. (11,450) (10,674) Purchases of property and equipment .......................... (703) (646) Additions to goodwill and other intangible assets ............ (83) (492) Proceeds from sale of property and equipment ................. 218 182 Proceeds from sale of net assets of Premier .................. 388 -- ---------- ---------- Net cash used in investing activities .................... (11,630) (11,630) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Due to stockholders .......................................... -- -- Issuance of Senior Subordinated Note ......................... 22,875 -- Issuance of preferred stock .................................. -- -- Issuance of common stock ..................................... 2,125 -- Proceeds from intercompany debt due to CES ................... -- -- Net proceeds (repayments) under Credit Facility .............. (8,250) 15,925 Principal repayments of debt ................................. (636) (508) Principal repayments of capital lease obligations ............ (336) (449) Exercise of stock options .................................... 40 40 ---------- ---------- Net cash provided by financing activities ................ 15,818 15,008 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................................. 1,197 (464) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................................................... 2,639 1,919 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 3,836 $ 1,455 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................................... $ 368 $ 1,734 ========== ========== Income taxes ................................................ $ 34 $ 95 ========== ========== Non-cash investing and financing activities: Assets acquired under capital leases or by incurring debt..... $ 14 $ 120 ========== ========== Issuance of warrants ......................................... $ 52 $ 98 ========== ==========
See notes to consolidated financial statements. F-6 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED MARCH 31, 1997 AND 1998 (Information as it relates to the nine months ended March 31, 1997 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 and EC&F were merged into MEDE America Corporation. The Company has instituted certain cost reduction programs and anticipates continuing improvements in its operations. The Company anticipates that these changes, among others, should bring the Company to profitability which, when coupled with its revolving credit facility, will enable the Company to satisfy its short-term cash flow and working capital requirements. 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, if the IPO (as herein defined) is consummated as proposed, such stockholders may not provide continued support (see Note 13). 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 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. These receivables have a 7-12 month collection cycle. 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 $1,858,000 $3,306,000 and $4,816,000 as of June 30, 1996 and 1997 and March 31, 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 nine months ended March 31, 1998, the Company capitalized $319,000 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, 1995, the Company wrote-off goodwill totaling $8,191,000 related to the acquisitions of MPC and Wellmark. Such write-off was required as a result of losses incurred by MPC and Wellmark, the absence of new business generated by MPC and Wellmark (which the Company's management attributed to obsolete technology), projected operating and cash flow losses for MPC and Wellmark and as a result of the June 1995 acquisition of Latpon (as hereinafter defined) whose software technology was utilized to replace the systems used by MPC and Wellmark to provide services to clients. Also, 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 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) m. Income Taxes -- The Company accounts for income taxes under SFAS No. 109, "Accounting For Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. n. Use of Estimates in the Preparation of Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. o. Pro Forma Stockholders' Equity -- Pro forma stockholders' equity as of March 31, 1998 reflects the conversion of 239,956 shares of preferred stock plus $6,627,000 of accrued preferred stock dividends at the assumed initial public offering ("IPO") price of $14.00 per share. See Note 13. p. Unaudited Interim Financial Statements -- In the opinion of management, the unaudited consolidated financial statements for the nine months ended March 31, 1997 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 operation for interim periods are not necessarily indicative of the results to be expected for the entire year. q. Reclassifications -- Certain amounts in prior years' financial statements have been reclassified to conform with the 1998 presentation. 2. ACQUISITIONS a. MEDE OHIO -- In March 1995, the majority stockholder of the Company acquired all of the outstanding shares of MEDE OHIO for a cash purchase price of approximately $22,593,000, including transaction expenses. The majority stockholder subsequently merged MEDE OHIO into the Company (the "Merger") and contributed an additional $1,279,000 as part of the capital reorganization described in Note 8a. The Merger was recorded using the purchase method of accounting. The purchase price paid by the Company for MEDE OHIO to its majority stockholder was equal to the purchase price paid by its majority stockholder. Therefore, the purchase accounting adjustments relating to the acquisition of MEDE OHIO are based upon the estimated fair values of acquired assets and liabilities upon their acquisition by the majority stockholder of the Company in March 1995. Purchased software and technology and client lists were valued at $892,000 and $2,527,000, respectively. Purchased software and technology generally is being amortized over three years and purchased client lists are being amortized over five years (see Note 1). MEDE OHIO is a developer of electronic systems which provide EDI services relating to insurance claims for prescription and other medical services. b. Latpon -- In June 1995, the Company purchased certain assets of Latpon Health Systems, Incorporated ("Latpon") for a cash purchase price of approximately $2,470,000, plus the assumption of approximately $963,000 of liabilities (primarily long-term debt). Purchased software and technology and client lists were valued at $850,000 and $143,000, respectively, and generally are being amortized over five years. Latpon provides electronic claims processing for hospital and hospital-based physician groups, as well as business office services that electronically and manually manage business office administration. c. 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 ob- F-9 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) tained from the Company's majority stockholder. Such loans were subsequently repaid with borrowings under the Company's Credit Facility. 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. 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. d. TCS -- In February 1997, the Company purchased certain assets of Time-Share Computer Systems, Inc. ("TCS") for $11,465,000, including transaction expenses. Purchased research and development, which had not reached technological feasibility and had no alternative future use amounted to $4,354,000 and was charged to operations at the acquisition date. Purchased software and technology was valued at $2,619,000 and generally is being amortized over three years. TCS provides data processing and information management services to healthcare providers and pharmacies through integrated electronic data interchange systems. The acquisition was financed by a portion of the proceeds from the Senior Subordinated Note and Share Purchase Agreement (as hereinafter defined) (Note 6). e. 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. No accrual has been made for this contingent liability as of March 31, 1998. Such contingent consideration will be treated as additional purchase price and will, therefore, be added to goodwill when and if it becomes accruable. Purchased software and technology and client lists were valued at $968,000 and $742,000, 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 revolving 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: MEDE OHIO -- $22,395,000; Latpon -- $1,298,000; EC&F and Premier -- $3,586,000; TCS -- $4,092,000 and Stockton -- $8,704,000. 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. F-10 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following unaudited pro forma information for the year ended June 30, 1997 and the nine months ended March 31, 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.
YEAR ENDED NINE MONTHS ENDED JUNE 30, 1997 MARCH 31, 1998 --------------- ------------------ (IN THOUSANDS) Revenues .................................... $ 41,824 $ 31,835 ========= ======== Loss from operations ........................ $ (11,253) $ (515) ========= ======== Net loss .................................... $ (13,604) $ (3,320) ========= ======== Net loss applicable to common stock ......... $ (16,004) $ (5,120) ========= ======== Basic net loss per share .................... $ (2.95) $ (0.90) ========= ========
3. PROPERTY AND EQUIPMENT
JUNE 30, USEFUL LIVES ------------------- MARCH 31, (IN YEARS) 1996 1997 1998 -------------- -------- -------- ---------- (IN THOUSANDS) Land .......................................... $ 489 $ 210 $ 104 Building and improvements ..................... 20-25 2,452 2,190 2,156 Furniture and fixtures ........................ 5 897 1,150 1,229 Computer equipment ............................ 3-5 4,077 5,696 6,442 ------ ------ ------ 7,915 9,246 9,931 Less accumulated depreciation and amortization. 2,314 3,729 4,987 ------ ------ ------ Property and equipment -- net ................. $5,601 $5,517 $4,944 ====== ====== ======
4. OTHER INTANGIBLE ASSETS Other intangible assets consist of the following:
JUNE 30, --------------------- MARCH 31, 1996 1997 1998 --------- --------- ---------- (IN THOUSANDS) Purchased client lists .................... $2,989 $2,989 $3,732 Less, accumulated amortization ............ 925 1,518 2,016 ------ ------ ------ 2,064 1,471 1,716 ------ ------ ------ Purchased software and technology ......... 3,727 6,494 7,544 Less, accumulated amortization ............ 1,451 2,951 4,332 ------ ------ ------ 2,276 3,543 3,212 ------ ------ ------ Software development costs ................ -- -- 319 ------ ------ ------ Other intangible assets -- net ............ $4,340 $5,014 $5,247 ====== ====== ======
F-11 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
JUNE 30, --------------------- MARCH 31, 1996 1997 1998 --------- --------- ---------- (IN THOUSANDS) Accrued wages and related employee benefits ......... $1,020 $1,010 $1,554 Rebate liability .................................... 2,926 488 47 Pharmacy claims liability ........................... 91 576 798 Accrued professional fees ........................... 496 795 109 Deferred revenue .................................... 933 749 822 Accrued reorganization costs (Note 10) .............. 1,273 1,008 -- Due to former owners of acquired business ........... 538 2,216 -- Accrued litigation settlement ....................... -- 860 145 Accrued interest .................................... 22 5 717 Other ............................................... 2,440 1,488 688 ------ ------ ------ Total ............................................... $9,739 $9,195 $4,880 ====== ====== ======
6. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, ----------------------- MARCH 31, 1996 1997 1998 ---------- ---------- ---------- (IN THOUSANDS) Senior subordinated note less unamortized discount of $2,000,000 at June 30, 1997 and $1,750,000 at March 31, 1998 (a).................... $ -- $23,000 $23,250 Credit Facility (b) ................................................... 8,250 -- 15,925 Obligations under capital leases (c) .................................. 1,158 769 440 Loan payable relating to an acquisition, collateralized by $261,000 of certificates of deposits at March 31, 1998 due in quarterly payments of $15,000 through February 2002, interest at 6.7 percent........................................................ 392 342 291 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 .............................................................. 241 180 131 Notes payable to former shareholders of EC&F, repaid in 1998 .......... 117 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 .............................................................. 730 592 462 Note payable to bank, repaid in 1997 .................................. 296 -- -- Note payable to bank, repaid in 1998 .................................. 173 173 -- Other ................................................................. 244 10 -- ------- ------- ------- 11,601 25,161 40,499 Less current portion .................................................. 1,400 538 240 ------- ------- ------- Total ................................................................. $10,201 $24,623 $40,259 ======= ======= =======
- ---------- F-12 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (a) On February 14, 1997, the Company entered into an agreement with an affiliate of certain shareholders of the Company under which the Company issued a $25,000,000 senior subordinated note (the "Senior Subordinated Note") and 370,993 shares of its common stock valued at $2,125,000 (representing the estimated fair value of the Common Stock) for total consideration of $25,000,000 (the "Senior Subordinated Note and Share Purchase Agreement"). The $2,125,000 relating to the shares of common stock was recorded as a discount on the Senior Subordinated Note and is being amortized over the term of the Senior Subordinated Note. The Senior Subordinated Note bears interest at the rate of 10% per annum, payable quarterly. One half of the principal sum is due on February 14, 2001, and the second half is due on February 14, 2002. The terms of the Senior Subordinated Note and Share Purchase Agreement place restrictions on the consolidation, merger, or sale of the Company, indebtedness, and the payment of any cash dividends. (b) The revolving line of credit from a bank (the "Credit Facility") , as currently amended on October 30, 1997, provides for maximum borrowings of $20,000,000 and expires on October 31, 1999. Borrowings under the agreement bear interest at either the bank's base rate, as defined, plus .25% or an offshore rate, as defined, plus 1.25%. The weighted average interest rate on outstanding borrowings at March 31, 1998 was 7.07%. 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 and 1997 and the nine months ended March 31, 1998, respectively. All warrants issued were valued using the Black-Scholes Option Pricing Model. The aggregate fair value of these warrants is recorded in other assets as deferred financing costs and is being amortized over the life of the agreement. The terms of the agreement, among other matters, require the Company to maintain certain leverage and interest coverage ratios and place restrictions on additional investments, indebtedness and the payment of any cash dividends. (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 $1,980,000, $2,110,000, and $2,247,000 as of June 30, 1996 and 1997 and March 31, 1998, respectively, and the related accumulated amortization was $994,000, $1,524,000, and $1,848,000, respectively. Maturities of long-term debt as of March 31, 1998 are as follows:
DISCOUNT YEAR ENDING JUNE 30, GROSS ON NOTE NET - -------------------------------------------------------- --------- --------- --------- (IN THOUSANDS) 1998 (three months from April 1, 1998 to June 30, 1998). $ 180 $ 92 $ 88 1999 ................................................... 580 394 186 2000 ................................................... 16,354 435 15,919 2001 ................................................... 12,591 481 12,110 2002 ................................................... 12,544 348 12,196 ------- ------ ------- Total .................................................. $42,249 $1,750 $40,499 ======= ====== =======
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, 1995, 1996 and 1997 and the nine months ended March 31, 1997 and 1998 consists entirely of current state income taxes. F-13 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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:
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ------------------------------------------ --------------------------- 1995 1996 1997 1997 1998 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) U.S. Federal statutory rate ................... $ (5,621) $ (6,541) $ (3,878) $ (2,658) $ (1,220) Increases (reductions) due to: Nondeductible expenses ....................... 1,169 3,674 293 220 183 State taxes .................................. 70 93 57 43 37 Net operating losses not producing current tax benefits ................................... 4,452 2,867 3,585 2,438 1,037 -------- -------- -------- -------- -------- Total ........................................ $ 70 $ 93 $ 57 $ 43 $ 37 ======== ======== ======== ======== ========
The net deferred tax asset is comprised of the following:
JUNE 30, --------------------------- MARCH 31, 1996 1997 1998 ------------ ------------ ------------ (IN THOUSANDS) Accounts receivable .................................... $ 607 $ 685 $ 375 Inventory .............................................. 2 -- -- Property and equipment ................................. (45) (61) 197 Goodwill ............................................... 2,024 3,540 3,619 Other intangible assets ................................ (163) 366 410 Accrued expenses and other current liabilities ......... 2,026 1,264 666 Net operating loss carryforwards ....................... 10,121 12,656 13,861 --------- --------- --------- 14,572 18,450 19,128 Less valuation allowance ............................... (14,572) (18,450) (19,128) --------- --------- --------- Total .................................................. $ -- $ -- $ -- ========= ========= =========
The valuation allowance increased during the years ended June 30, 1996 and 1997 and the nine months ended March 31, 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 March 31, 1998, the Company had Federal net operating loss carryforwards of approximately $34,650,000. 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. Capital Reorganization -- In connection with the acquisition and subsequent merger of MEDE OHIO into the Company (Note 2), the capital structure of the Company was adjusted such that each existing common stockholder of the Company had the right to receive, in exchange for each common share held, either (i) a cash payment of one dollar (the "MEDE Cash Consideration"), or (ii) a unit consisting of one-half of one share of MEDE America Corporation newly issued common stock and five one-thousandths of a share of MEDE America Corporation newly issued preferred stock ("MEDE Unit"), together with cash in lieu of fractional interests. F-14 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Merger agreement required that a minimum of $5,000,000 of additional capital be contributed to the Company through the issuance of additional MedE Units ("Additional MEDE Units"). Stockholders who elected to receive the MEDE Units were eligible to purchase, through a subscription agreement, Additional MEDE Units up to the number that would maintain their pre-merger ownership percentage. The majority stockholder of the Company guaranteed, by adjusting the number of additional units they would purchase, that the excess of cash received from the sale of Additional MEDE Units over the MEDE Cash Consideration would yield the minimum of $5,000,000 of additional capital. As a result of the Merger and the related capital reorganization, the Company issued 5,237,456 shares of newly issued common stock and 239,956 shares of newly issued preferred stock (Note 9). The Company distributed $4,484 of MEDE Cash Consideration during July 1995. b. 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, 1995, 1996 and 1997 and the nine months ended March 31, 1998:
WEIGHTED NUMBER EXERCISE AVERAGE OF PRICE EXERCISE SHARES RANGE PRICE ------------ --------------- ----------- Balance July 1, 1994 ............ -- $ -- $ -- Options granted ............... 480,316 $ 4.58 $ 4.58 ------- ------------ ------- Balance June 30, 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 ............. (8,598) $ 4.58-$5.73 $ 4.64 Canceled/lapsed ............... (15,057) $ 4.58-$5.73 $ 4.62 ------- ------------ ------- Balance, March 31, 1998 ......... 488,497 $ 4.58-$5.73 $ 4.83 ======= ============ =======
F-15 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) During March 1998, the Company granted 47,565 options at an exercise price of $5.73 per share. Based upon an independent valuation, the Company later learned that the value of the Company's stock at the date of grant was $6.09. As a result, the Company recorded compensation expense of $18,000 relating to the granting of these options. Significant option groups outstanding at March 31, 1998 and related weighted average price and life information were as follows:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ---------------- ------------- -------------- ---------- ------------- --------- $ 4.58 381,260 7.5 $ 4.58 201,394 $ 4.58 $ 5.73 107,237 9.6 $ 5.73 10,689 $ 5.73 ------- ------- 488,497 7.9 $ 4.83 212,083 $ 4.64 ======= =======
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 and 1997 and the nine months ended March 31, 1998 would have been as follows:
NINE MONTHS YEAR ENDED JUNE 30, ENDED ----------------------------- MARCH 31, 1996 1997 1998 ------------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss -- as reported ......................... $ (19,330) $ (11,464) $ (3,624) Net loss -- pro forma ........................... (19,345) (11,518) (3,678) Basic net loss per share -- as reported ......... (4.14) (2.56) (0.96) Basic net loss per share -- pro forma ........... (4.15) (2.57) (0.96)
The weighted average fair value of the options granted for the years ended June 30, 1996 and 1997, and for the nine months ended March 31, 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 and 1997, and for the nine months ended March 31, 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. F-16 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) c. Net income (loss) per share -- In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." Basic income per share is determined by using the weighted average number of shares of common stock outstanding during each period. Diluted income per share further assumes the issuance of common shares for all dilutive outstanding stock options and warrants as calculated using the treasury stock method. Diluted earnings per share is not shown for any of the periods presented because the effect of including outstanding options and warrants would be antidilutive. The calculation for the years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997 and 1998 was as follows:
YEAR ENDED JUNE 30, ----------------------------------------------------------------------------------------------------- 1995 1996 1997 ---------------------------------- ---------------------------------- ----------------------------- PER-SHARE PER-SHARE PER-SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT LOSS SHARES AMOUNT ------------- -------- ----------- ------------- -------- ----------- --------- --------- --------- (IN THOUSANDS) Net loss ..................... $ (16,601) $ (19,330) $ (11,464) Less: Preferred dividends .... (27) (2,400) (2,400) --------- ----- --------- --------- Basic net loss per share ..... $ (16,628) 5,238 $(3.17) $ (21,730) 5,245 $(4.14) $ (13,864) 5,425 $(2.56) ========= ===== ====== ========= ===== ====== ========= ===== ======
NINE MONTHS ENDED MARCH 31, ---------------------------------------------------------------------------- 1997 1998 ------------------------------------- ------------------------------------ PER-SHARE PER-SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT ------------ -------- ----------- ------------ -------- ---------- (IN THOUSANDS) Net loss .......................... $ (7,861) $ (3,624) Less: Preferred dividends ......... (1,800) (1,800) -------- -------- Basic net loss per share .......... $ (9,661) 5,345 $(1.81) $ (5,424) 5,677 $(0.96) ======== ===== ====== ======== ===== ======
9. REDEEMABLE CUMULATIVE PREFERRED STOCK As of June 30, 1996 and 1997 and March 31, 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 13). 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 March 31, 1998, cumulative undeclared and unpaid dividends on this preferred stock totaled $6,627,000. 10. SPIN-OFF TRANSACTIONS a. Spin-Off Expenses -- As a result of the Spin-off (Note 1), the Company recorded a charge amounting to $2,864,000. Such charge represented amounts to be paid to former stockholders of MEDE (who remained as executives of MEDE) pursuant to contractual agreements which required such payments to be made upon a change in control. The net present value of remaining payments totaled $1,420,000 and $1,005,000 as of June 30, 1996 and 1997, respectively, of which $500,000 and $1,005,000 were included in accrued reorganization costs as of June 30, 1996 and 1997, respectively, and $920,000 was included in other long-term liabilities as of June 30, 1996. b. Capital Contribution of Intercompany Debt to CES -- On March 9, 1995, the date of the Spin-off, Wellmark and MPC owed CES $2,247,000 and $492,000, respectively. Such balances were forgiven concurrent with the Spin-off. In addition, the Company assumed approximately $269,000 of liabilities relating to CES employees. The net amount was recorded as a contribution of capital to the Company at the Spin-off date. F-17 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. 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):
YEAR ENDING JUNE 30, - ------------------- 1998 (three months from April 1, 1998 to June 30, 1998). $ 225 1999 ................................................... 909 2000 ................................................... 914 2001 ................................................... 809 2002 ................................................... 571 Thereafter ............................................. 381 ------ Total minimum lease payments ........................... $3,809 ======
Rent expense for the years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997 and 1998 was $951,000, $853,000, $1,093,000, $800,000 and $837,000, respectively. b. Litigation -- The Company is engaged in various litigation in the ordinary course of business. Management, based upon the advice of legal counsel, is of the opinion that the amounts which may be awarded or assessed in connection with these matters, if any, will not have a material effect on the consolidated financial position or results of operations. c. Employment Contracts -- The Company has employment contracts with certain of its employees with annual enumeration ranging from $95,000 to $110,000. Future minimum payments under these contracts are as follows (in thousands):
YEAR ENDING JUNE 30, - ------------------- 1998 (three months from April 1, 1998 to June 30, 1998). $ 51 1999 ................................................... 205 2000 ................................................... 80 ---- $336 ====
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 $130,000, $197,000, $227,000, $169,000 and $148,000 for employer contributions to the Plans/New Plan for the years ended June 30, 1995, 1996, and 1997 and the nine months ended March 31, 1997 and 1998, respectively. F-18 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) e. Service Agreements -- The Company has entered into service agreements with telecommunications providers which require the Company to utilize certain minimum monthly amounts of the services of such providers. These agreements expire through November 2001. The Company was in compliance with the terms of these agreements as of March 31, 1998. The minimum monthly amounts under these agreements are as follows (in thousands):
YEAR ENDING JUNE 30, - -------------------- 1998 (three months from April 1, 1998 to June 30, 1998). $ 477 1999 ................................................... 1,795 2000 ................................................... 1,497 2001 ................................................... 1,429 2002 ................................................... 543 ------- Total .................................................. $ 5,741 =======
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. SUBSEQUENT EVENTS a. Proposed Public Offering -- In 1998, the Company determined to work towards an IPO of the Company's common stock on a firm commitment basis. The proposed IPO contemplates that a total of 3,600,000 shares of common stock will be offered at a price between $13.00 and $15.00 per share. The net proceeds of the IPO will be used to retire all outstanding balances under its Senior Subordinated Note and its Credit Facility plus any related accrued interest (Note 6) and for other general corporate purposes including working capital. b. Reverse Stock Split and Increase in Authorized Common Stock and Preferred Stock -- In conjunction with the proposed IPO, the Company intends to authorize a reverse stock split of all issued and outstanding common shares at the rate of 1 for 4.5823, which will decrease the number of issued and outstanding shares as of March 31, 1998 from approximately 26,025,000 to approximately 5,680,000. This intended stock split has been retroactively reflected in the accompanying financial statements for all periods presented. The Company also intends to increase the number of shares of authorized common stock to 30,000,000 and the number of shares of authorized preferred stock to 5,000,000. c. Recapitalization -- In conjunction with the proposed IPO, the Company contemplates a recapitalization of its capital stock (the "Recapitalization"). The Recapitalization involves the conversion of all outstanding preferred stock into common stock (based upon liquidation value as defined in Note 9) and the exercise of all outstanding warrants (Note 6). However, cash realized by the Company upon any exercise of the underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into common stock. To effect the conversion of preferred stock, the Company must first amend the preferred stock agreement to allow convertibility. The preferred stock conversion will be effected based upon the IPO price per share. Assuming an IPO price of $14.00 per share and no exercise of the underwriters' overallotment, the preferred stock will be converted into approximately 2,187,000 shares of common stock. The warrants will be converted, in a cashless exercise, into approximately 66,000 shares of common stock. d. Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has approved the 1998 Employee Stock Purchase Plan (the "Purchase Plan"). Employees of the Company, including direc- F-19 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) tors of the Company who are employees, are eligible to participate in quarterly plan offerings in which payroll deductions may be used to purchase shares of common stock. The purchase price of such shares is the lower of 85 percent of the fair market value of the common stock on the day the offering commences and 85 percent of the fair market value of the common stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the IPO. e. New Stock Option and Restricted Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has approved the 1998 Stock Option and Restricted Stock Purchase Plan (the "New Stock Plan"). The New Stock Plan permits the granting of any or all of the following types of awards: incentive stock options; nonqualified stock options; restricted stock; or other stock-based awards, to officers, employees, directors, consultants and advisors of the Company. To date, no options have been granted under the New Stock Plan, however, the Board determined to grant options to purchase an aggregate 400,000 shares of common stock pursuant to the New Stock Plan to certain employees of the Company (including certain executive officers) contingent upon consummation of the IPO. Such options, which include both incentive and non-qualified stock options, will have an exercise price equal to the price to the public in the IPO and generally will vest ratably over four years from the date of grant except that the initial installment of options to be granted to certain executive officers will vest immediately upon consummation of the IPO. f. Revolving Line of Credit -- During July 1998, the Company received a letter from the lender under the Credit Facility committing to provide an amended credit facility with total available credit of $15.0 million. This facility would be comprised of a $7.5 million term loan to be used for acquisitions and a $7.5 million revolving credit loan to be used for working capital purposes, each with a maximum term of two years from October 31, 1998. Interest for the term and revolver loans is computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based rate. Such borrowing rates are at the option of the Company for any particular period during which borrowings exist. F-20 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 THE STOCKTON GROUP, INC. STATEMENTS OF INCOME YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
YEAR ENDED THREE MONTHS ENDED JUNE 30, 1997 SEPTEMBER 30, 1997 --------------- ------------------- (UNAUDITED) 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 ============ ==========
See notes to financial statement. F-22 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 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 ====================================== ====================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY 3,600,000 SHARES ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF [LOGO] THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY MEDE AMERICA DATE SUBSEQUENT TO THE DATE HEREOF. CORPORATION --------------------------------- TABLE OF CONTENTS PAGE ---- Prospectus Summary .............. 3 COMMON STOCK Risk Factors .................... 9 Use Of Proceeds ................. 18 Dividend Policy ................. 18 Capitalization .................. 19 Dilution ........................ 20 Unaudited Pro Forma Consolidated Financial Information ........ 21 -------------------------- Selected Financial Data ......... 28 Management's Discussion And PROSPECTUS Analysis Of Financial Condition And Results Of -------------------------- Operations ................... 30 Business ........................ 41 Management ...................... 52 Certain Transactions ............ 57 Principal Stockholders .......... 58 Description Of Capital Stock .... 60 Shares Eligible For Future Sale . 62 Underwriting .................... 63 Legal Matters ................... 64 Experts ......................... 64 Additional Information .......... 65 SALOMON SMITH BARNEY Index To Financial Statements ... F-1 ---------------------------------- WILLIAM BLAIR & COMPANY UNTIL _____ , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL VOLPE BROWN WHELAN & COMPANY 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 JULY , 1998 ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================== ====================================== 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: SEC Registration Fee ......................... $ 18,320 NASD Filing Fee .............................. 6,710 Nasdaq Listing Fees .......................... * Legal Fees and Expenses ...................... * Blue Sky Fees and Expenses ................... 10,000 Accounting Fees and Expenses ................. * Printing and Engraving ....................... * Transfer Agent and Register Fees and Expenses. * Miscellaneous ................................ $ * --------- Total ........................................ $950,000 =========
- ---------- * 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 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: (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. (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 May 29, 1998, options to purchase up to an aggregate 3,349,000 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 2,389,600 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 350,400 shares of Common Stock upon the exercise of such options. II-2 The securities issued in the foregoing transactions in paragraphs (a) and (b) above were offered and sold in reliance upon exemptions from Securities Act registration set forth in Section 4(2) of the Securities Act, or any regulations promulgated thereunder, relating to sales by an issuer not involving a public offering. No underwriters were involved in the foregoing sales of securities. The sale and issuance of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - --------- ----------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement. 2.1+ -- Asset Purchase Agreement among MEDE AMERICA Corporation, General Computer Corporation, Time-Share Computer Systems, et al, dated as of February 3, 1997. 2.2+ -- Asset Purchase Agreement among MEDE AMERICA Corporation, General Computer Corporation, The Stockton Group, et al, dated as of October 20, 1997. 3.1+ -- Certificate of Incorporation of the Registrant as amended. 3.2 -- Form of Registrant's Amended and Restated Certificate of Incorporation. 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. 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.
II-3
EXHIBIT NUMBER DESCRIPTION - ---------- ---------------------------------------------------------------- 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 Enterprises, LLC and Electronic Claims & Funding, Inc. 10.6 -- Commitment Letter dated July 15, 1998 from Bank of America National Trust & Savings Association to MEDE AMERICA Corporation, regarding amendment to Credit Facility. 10.7 -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8 -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted, Stock Purchase Plan. 21.1 + -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1 + -- Power of Attorney. 27.1 + -- Financial Data Schedule.
- ---------- * To be filed by amendment. + 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-4 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 June 3, 1998. MEDE AMERICA CORPORATION By: THOMAS P. STAUDT ------------------------------ Thomas P. Staudt President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.
SIGNATURES TITLE DATE - --------------------------- --------------------------------------- -------------- THOMAS P. STAUDT President and Chief Executive July 17, 1998 - ------------------------- Officer (Principal executive officer); Thomas P. Staudt Director THOMAS P. STAUDT Chief Financial Officer (Principal July 17, 1998 - ------------------------- financial and accounting officer) Richard P. Bankosky THOMAS P. STAUDT Director July 17, 1998 - ------------------------- Thomas E. McInerney THOMAS P. STAUDT Director July 17, 1998 - ------------------------- Anthony J. de Nicola THOMAS P. STAUDT Director July 17, 1998 - ------------------------- Timothy M. Murray
II-5 SCHEDULE II MEDE AMERICA CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
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) Year ended June 30, 1995 - Allowance for bad debts ......... $ 868 $518 $-- $ -- (1) $1,386 ====== ==== === == ====== 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 ====== ==== === ======== ====== Nine months ended March 31, 1998 - Allowance for bad debts ......... $1,716 $265 $ $ 1,023 (1) $ 958 ====== ==== === ======== ======
- ---------- (1) Amounts written off. S-1 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------- ----------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement. 2.1+ -- Asset Purchase Agreement among MEDE AMERICA Corporation, General Computer Corporation, Time-Share Computer Systems, et al, dated as of February 3, 1997. 2.2+ -- Asset Purchase Agreement among MEDE AMERICA Corporation, General Computer Corporation, The Stockton Group, et al, dated as of October 20, 1997. 3.1+ -- Certificate of Incorporation of the Registrant as amended. 3.2 -- Form of Registrant's Amended and Restated Certificate of Incorporation. 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. 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 Enterprises, LLC and Electronic Claims & Funding, Inc. 10.6 -- Commitment Letter dated July 15, 1998 from Bank of America National Trust & Savings Association to MEDE AMERICA Corporation, regarding amendment to Credit Facility. 10.7 -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8 -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted, Stock Purchase Plan. 21.1 + -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1+ -- Power of Attorney. 27.1+ -- Financial Data Schedule.
- ---------- * To be filed by amendment. + Previously filed. EX-1.1 2 EXHIBIT 1.1 MedE America Corporation 3,600,000 Shares Common Stock ($.01 par value) Underwriting Agreement New York, New York , 1998 Smith Barney Inc. William Blair & Company, L.L.C. Volpe Brown Whelan & Company, LLC As Representatives of the several Underwriters, c/o 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, 3,600,000 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 540,000 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. 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 may have 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, 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; 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 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 2 qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification; (d) All the outstanding shares of capital stock of the Subsidiaries has 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; (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. (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 3 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. (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. 4 (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 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"). (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. (p) Deloitte and Touche LLP, who have certified certain financial statements of the Company and its consolidated Subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Prospectus, 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 5 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. (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. 6 (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. (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. 7 (ab) MedE America of Ohio, an Ohio corporation, 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") necessary for 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," (a) there are no rights of third parties to any such Intellectual Property; (b) there is no material infringement by third parties of any such Intellectual Property; (c) there is no pending or threatened action, suit, proceeding or claim 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; (d) there is no pending or 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 threatened action, suit, proceeding or claim 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 or licensed to the Company or that interferes with the issued or pending claims of 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 Company and the Subsidiaries are implementing a comprehensive, detailed program to analyze and address the risk that the 8 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 reasonably believes that such risk will be remedied on a timely basis without material expense and will not have a Material Adverse Effect; and the Company believes, after due inquiry, that each supplier, vendor, customer or financial service organization used or serviced by the Company and the Subsidiaries has remedied or will remedy on a timely basis the Year 2000 Problem, except to the extent that a failure to remedy by any such supplier, vendor, customer or financial service organization would not have a Material Adverse Effect. The Company is in compliance with the Commissions staff legal bulletin No. 5 dated January 12, 1998 related 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. 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 540,000 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 9 Closing Date) shall be made at 10:00 AM, New York City time, on , 1998, 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 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 shall be 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. 10 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 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 11 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, for a period of 180 days following the Execution Time, offer, sell or contract to sell, or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock; provided, however, that the Company may issue and sell Common Stock pursuant to any employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the Execution Time and the Company may issue Common Stock issuable upon the conversion of securities or the exercise of warrants outstanding at the Execution Time. (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 12 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. 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 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. (ii) all the outstanding shares of capital stock of each of the Subsidiaries have been duly and validly authorized and issued and are 13 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 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 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--Intellectual Property" fairly summarize the 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 14 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 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 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 their properties; and 15 (x) 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. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the State of Delaware 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: (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. 16 (e) The Representatives shall have received letters addressed to you dated the date hereof and the Closing date from Deloitte and Touche LLP and Carver Moquist Alagna, LLC, 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 stockholder of the Company addressed to the Representatives. (i) The Company shall have provided evidence to the Underwriters, in form and substance satisfactory to the Representatives and for the Underwriters, 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) [Amended Credit Facility] (k) The Company shall have provided evidence to the Underwriters, in form and substance satisfactory to the Representatives and for the Underwriters, 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." 17 (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. 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 18 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. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) 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. (c) The Company hereby confirms that at its request Smith Barney Inc. 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. 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 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, 19 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. (d) 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) or (c) 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) or (c) 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 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 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 20 unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (e) In the event that the indemnity provided in paragraph (a) or (b) 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 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. 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 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. 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 (e), 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 (e). 21 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 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. 22 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, , Attention: General Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to [FACSIMILE NUMBER] and confirmed to it at , 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. 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. 23 "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 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 Smith Barney Inc. or Salomon Brothers Inc to the extent that either such party is a signatory to this Agreement. 24 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: 25 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Smith Barney Inc. William Blair & Company, L.L.C. Volpe Brown Whelan & Company, LLC By: Smith Barney Inc. By: _________________________ Name: Title: For themselves and the other several Underwriters named in Schedule I to the foregoing Agreement. SCHEDULE I Number of Underwritten Securities To be Underwriters Purchased ------------ ---------------------- Smith Barney Inc.................................... William Blair & Company, L.L.C...................... Volpe Brown Whelan & Company, LLC................... --------------- Total............................. ================ [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. 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: A-2 EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MEDE AMERICA CORPORATION ------------------------ FIRST: The name of the Corporation is MEDE AMERICA CORPORATION. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is Corporation Service Company. THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 35,000,000 shares, consisting of 5,000,000 shares of Preferred Stock, $.01 par value ("Preferred Stock"), of which 250,000 shares are hereby designated as Series A Preferred Stock, $.01 par value ("Series A Preferred Stock"), and 30,000, 000 shares of Common Stock, $.01 par value ("Common Stock"). Effective immediately upon the filing of this Amended and Restated Certificate of Incorporation in the office of the Secretary of State of the State of Delaware, the outstanding shares of capital stock of the Corporation shall be and hereby are combined and reclassified as follows: each shares of Preferred Stock shall be reclassified as and converted into one share of Series A Preferred Stock, and each 4.5823 shares of Common Stock shall be reclassified as and converted into one share of Common Stock; provided, however, that fractional shares of Common Stock will not be issued in connection with such combination and reclassification, and each holder of a fractional share of Common Stock shall receive in lieu thereof a cash payment from the Corporation, the fair value of which shall be determined by the Board of Directors in good faith within 90 days after the filing of this Amended and Restated Certificate of Incorporation. Certificates representing shares combined and reclassified as provided in this Amended and Restated Certificate of Incorporation are hereby canceled, and, upon presentation of the canceled certificates to the Corporation, the holders thereof shall be entitled to receive new certificates representing the shares resulting from such combination and reclassification. The Board of Directors is authorized to provide for the issuance of the shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifi cations, limitations or restrictions thereof. The authority of the Board of Directors with respect to the Preferred Stock shall include, but not be limited to, determination of the following: 1. The number of shares constituting that series and the distinctive designation of that series; 2. The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on share of that series; 3. Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; 4. Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; 5. Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; 6. Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; 7. The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and 8. Any other relative rights, preferences and limitations of that series. All cross-references in each subdivision of this Article FOURTH refer to other para graphs in such subdivision unless otherwise indicated. The following is a statement of the designations, 2 and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of stock of the Corporation: I. SERIES A PREFERRED STOCK Except as otherwise expressly provided herein, all shares of Series A Preferred Stock shall be identical and shall entitle the holders thereof to the same rights and privileges. 1. Cumulative Dividends. (i) The holders of Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available for such purpose, cash dividends at the rate of $10.00 per share per annum, and no more. In the event such dividends are declared, the dividend payment dates with respect thereto shall be the immediately succeeding September 30. (ii) In no event, so long as any Series A Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any Common Stock, other than a dividend or distribu tion payable in shares of Common Stock, nor, without the written consent of the holders of 66-2/3% of the outstanding Series A Preferred Stock, shall any shares of Common Stock be purchased or redeemed by the Corporation, nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Common Stock, unless in each instance cumulative dividends accrued and unpaid on all outstanding shares of the Series A Preferred Stock for all past dividend periods shall have been paid in full. 2. Redemption. 2A. Mandatory Redemptions. The Series A Preferred Stock shall be redeemed in full in two equal installments on September 30, 2001 and September 30, 2002, at the Redemption Price (as defined below). 2B. Optional Redemptions. The Series A Preferred Stock may be redeemed in whole at any time or in part from time to time, at the option of the Corporation, at the Redemption Price. 2C. Redemption Date; Redemption Price. Any date on which the Corporation elects or is required to redeem Series A Preferred Stock under this paragraph 2 shall be referred to as a "Redemption Date." The per share "Redemption Price" of the Series A 3 Preferred Stock to be redeemed on a Redemption Date shall be the sum of (x) $100.00 per share, plus (y) any accrued but unpaid dividends thereon to the date of such redemption. 2D. Notice of Redemption. Not less than 30 days before any Redemption Date, written notice shall be given by mail, postage prepaid to the holders of record of the Series A Preferred Stock to be redeemed, addressed to each such stockholder at his or its post office address as shown by the records of the Corporation, specifying the number of shares to be redeemed, the subparagraph or subparagraphs of this paragraph 2 pursuant to which such redemption shall be made, the Redemption Price and the place at which and the date, which date shall not be a day on which banks in the City of New York are required or authorized to close, on which the shares of Series A Preferred Stock will be redeemed. If such notice of redemption shall have been duly given and if on or before such Redemption Date the funds necessary for redemption shall have been set aside so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares of Series A Preferred Stock to be redeemed shall not have been surrendered for cancellation, after the close of business on such Redemption Date, such shares shall no longer be deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect to such shares shall forthwith after the close of business on the Redemption Date, cease, except only the right of the holders thereof to receive the Redemption Price for such shares, without interest. 2E. Redeemed or Otherwise Acquired Shares to be Retired. Any shares of Series A Preferred Stock redeemed pursuant to this paragraph 2 or otherwise acquired by the Corporation in any manner whatsoever shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized Series A Preferred Stock accordingly. 2F. Shares to be Redeemed, Purchased or Retired. In case of the redemption, purchase or retirement, for any reason, of only a part of the outstanding shares of the Series A Preferred Stock on a Redemption Date, all shares of Series A Preferred Stock to be redeemed, purchased or retired shall be selected pro rata, and there shall be so redeemed, purchased or retired from each registered holder in whole shares, as nearly as practicable to the nearest share, the proportion of all the shares to be redeemed, purchased or retired which the number of shares held of record by such holder bears to the total number of shares of Series A Preferred Stock at the time outstanding. 3. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or the sale of all or substantially all the assets of the Corporation (each such event being referred to as a "Liquidation"), a holder of the shares of Series A Preferred Stock shall be entitled, before any distribution or payment is made upon any Common Stock, to receive out of the assets of the Corporation (x) $100.00 per share, plus (y) any accrued but unpaid dividends thereon to the date of 4 such redemption, for each share of Series A Preferred Stock held by such holder. If upon such Liquidation, the assets to be distributed among the holders of Series A Preferred Stock shall be insufficient to permit payment to the holders of Series A Preferred Stock of that amount distributable as aforesaid, then the entire assets of the Corporation to be dis tributed shall be distributed ratably among the holders of Series A Preferred Stock. Upon any such Liquidation, after the holders of the Series A Preferred Stock shall have been paid in full the amounts to which they shall be entitled, the holders of the Common Stock will share the remaining net assets of the Corporation. Written notice of such Liquida tion, stating a payment date, the aggregate amount of the payments to which such holder of Series A Preferred Stock is entitled and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than 30 days prior to the payment date stated therein, to the holders of record of the Series A Preferred Stock, such notice to be addressed to each stockholder at its post office address as shown by the records of the Corporation. Neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the reduction of the capital stock of the Corpora tion, shall be deemed to be a Liquidation. 4. Voting Rights. Except as otherwise provided by law or this Certificate of Incorporation, the holders of Series A Preferred Stock shall not be entitled to vote on matters presented to the stockholders of the Corporation. 5. Restrictions. At any time when shares of Series A Preferred Stock are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by this Certificate of Incorporation, and in addition to any other vote required by law, without the prior consent of the holders of 66-2/3% of the outstanding Series A Preferred Stock, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which meeting the holders of the shares of Series A Preferred Stock shall vote together as a class: (i) The Corporation will not create or authorize the creation of any additional class of shares unless the same ranks junior to the Series A Preferred Stock both as to dividends and as to the distribution of assets on Liquidation, or increase the authorized amount of the Series A Preferred Stock, or increase the authorized amount of any additional class of shares unless the same ranks junior to the Series A Preferred Stock both as to dividends and as to the distribution of assets on Liquidation, or create or authorize any obligations or securities convert ible into or exchangeable for shares of Series A Preferred Stock or into shares of any other class unless the same ranks junior to the Series A Preferred Stock both as to dividends and as to the distribution of assets on Liquidation, whether any such creation or authorization or increase shall be by means of amendment of the Certificate of Incorporation, merger, consolidation, recapitalization or otherwise. 5 (ii) The Corporation will not amend, alter or repeal the Corporation's Certificate of Incorporation or By-laws in any manner, or file any directors' reso lutions pursuant to Section 151(g) of the Delaware General Corporation Law containing any provision, in either case which affects the respective preferences, voting power, qualifications, special or relative rights or privileges of the Series A Preferred Stock or the Common Stock or which in any manner adversely affects the Series A Preferred Stock or the Common Stock or the holders thereof. 6. Conversion. The shares of Series A Preferred Stock shall be convertible as follows: 6A. In the event that, at any time while any of the Series A Preferred Stock shall be outstanding, the Corporation shall complete a firm commitment initial public offering of shares of Common Stock registered under the Securities Act of 1933, as amended, in which the net proceeds paid by the public to the Corporation are at least $20,000,000, then all outstanding shares of Series A Preferred Stock shall, automatically and without further action on the part of the holders of the Series A Preferred Stock, be converted into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by dividing the aggregate Liquidation Payments that would then be payable in respect of the Series A Preferred Stock by the price to the public in such initial public offering. Such conversion shall be effective simultaneously with the closing of such public offering; provided, however, that certificates evidencing the shares of Common Stock issuable upon such conversion shall not be issued except on surrender of the certificates for the shares of the Series A Preferred Stock so converted. 6B. Fractional Shares; Dividends. No fractional shares may be issued upon conversion of the Series A Preferred Stock into Common Stock. If any fractional interest in a share of Common Stock would, except for the provisions of the preceding sentence, be deliverable upon any such conversion, the Corporation, in lieu of delivering the fractional share thereof, shall pay to the holder surrendering the Series A Preferred Stock for conversion an amount in cash equal to the current market price of such fractional interest as determined in good faith by the Board of Directors of the Corporation. No cash dividends shall be paid in respect of the Series A Preferred Stock upon such conversion. 6C. Stock to be Reserved. Prior to the consummation of an initial public offering of its Common Stock, the Corporation will reserve and keep available out of its authorized Common Stock or its treasury shares, solely for the purpose of issue upon the conversion of the Series A Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series A Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. The Corporation will take all such action as may be necessary to assure that all such shares of Common 6 Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Corporation may be listed. 6E. Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of the Series A Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series A Preferred Stock which is being converted. II. COMMON STOCK All shares of Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges: 1. Dividends. When and as dividends are declared upon the Common Stock, whether payable in cash, in property or in shares of stock of the Corporation, the holders of Common Stock shall be entitled to share equally, share for share, in such dividends. 2. Voting Rights. Each holder of Common Stock shall be entitled to one vote per share. FIFTH: The name and mailing address of the sole incorporator of the Corporation are as follows: Revital D. Havazelet 45 Rockefeller Plaza New York, N.Y. 10111 SIXTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the Corporation is expressly authorized and empowered to make, alter or repeal the By-laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any By-law made by the Board of Directors. SEVENTH: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained in this Amended and Restated Certificate of Incorporation; and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, 7 directors or any other persons whomsoever by and pursuant to this Amended and Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article. EIGHTH: No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. NINTH: Every person now or hereafter serving as a director or officer of the Corporation and every such director or officer serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation in accordance with and to the fullest extent permitted by law for the defense of, or in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, arising out of or in connection with such service. Expenses incurred by any person so entitled to indemnification in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of such director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by Thomas P. Staudt, its President and Chief Executive Officer, this day of July, 1998. -------------------------------- Thomas P. Staudt President and Chief Executive Officer 8 EX-3.3 4 EXHIBIT 3.3 EXHIBIT 3.3 - -------------------------------------------------------------------------------- BY-LAWS OF MEDE AMERICA CORPORATION ---------- Incorporated under the Laws of the State of Delaware --------- Adopted as of February 13, 1995 Amended as of May 24, 1996 and July , 1998 ================================================================================ TABLE OF CONTENTS Page ARTICLE I Offices......................................................1 ARTICLE II Meetings of Stockholders.....................................1 Section 1 Place of Meetings............................................1 Section 2 Annual Meeting...............................................1 Section 3 Special Meetings.............................................2 Section 4 Notice of Meetings...........................................2 Section 5 List of Stockholders.........................................2 Section 6 Quorum.......................................................3 Section 7 Voting.......................................................3 Section 8 Proxies......................................................3 Section 9 Action Without a Meeting.....................................3 ARTICLE III Board of Directors...........................................4 Section 1 Powers.......................................................4 Section 2 Election and Term............................................4 Section 3 Number.......................................................4 Section 4 Notification of Nominations..................................4 Section 5 Quorum and Manner of Acting..................................5 Section 6 Organization Meeting.........................................5 Section 7 Regular Meetings.............................................5 Section 8 Special Meetings; Notice.....................................5 Section 9 Removal of Directors.........................................5 Section 10 Resignations.................................................6 Section 11 Vacancies....................................................6 Section 12 Compensation of Directors....................................6 Section 13 Action Without a Meeting.....................................6 Section 14 Telephonic Participation in Meetings.........................6 Section 15 Committees...................................................6 ARTICLE IV Officers.....................................................7 Section 1 Principal Officers...........................................7 Section 2 Election and Term of Office..................................7 Section 3 Other Officers...............................................7 Section 4 Removal......................................................7 Section 5 Resignations.................................................7 i Page ---- Section 6 Vacancies.....................................................7 Section 7 Chairman of the Board.........................................7 Section 8 President.....................................................7 Section 9 Vice President................................................8 Section 10 Treasurer.....................................................8 Section 11 Secretary.....................................................8 Section 12 Salaries......................................................8 ARTICLE V Indemnification...............................................8 Section 1 Right of Indemnification......................................8 Section 2 Expenses......................................................8 Section 3 Agreements....................................................9 Section 4 Other Rights of Indemnification...............................9 Section 5 Indemnification of Employees and Agents.......................9 Section 6 Insurance.....................................................9 ARTICLE VI Shares and Their Transfer.....................................9 Section 1 Certificate for Stock.........................................9 Section 2 Stock Certificate Signature...................................9 Section 3 Stock Ledger..................................................9 Section 4 Cancellation.................................................10 Section 5 Registrations of Transfers of Stock..........................10 Section 6 Regulations..................................................10 Section 7 Lost, Stolen, Destroyed or Mutilated Certificates............10 Section 8 Record Dates.................................................10 ARTICLE VII Miscellaneous Provisions.....................................11 Section 1 Corporate Seal...............................................11 Section 2 Voting of Stocks Owned by the Corporation....................11 Section 3 Dividends....................................................11 ARTICLE VIII Amendments...................................................11 ii BY-LAWS OF MEDE AMERICA CORPORATION (a Delaware corporation) ---------- ARTICLE I OFFICES The registered office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle. The Corporation may establish or discontinue, from time to time, such other offices within or without the State of Delaware as may be deemed proper for the conduct of the Corporation's business. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of stock-holders shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors, or as shall be specified in the respective notices, or waivers of notice, thereof. Section 2. Annual Meeting. (a) The annual meeting of stockholders for the election of Directors and the transaction of other business shall be held on such date and at such place as may be designated by the Board of Directors. At each annual meeting the stockholders entitled to vote shall elect a Board of Directors and may transact such other proper business as may come before the meeting. (b) To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Chairman of the meeting or the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Chairman of the meeting or the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation, not more than 90 days or less than 60 days in advance of the anniversary date of the immediately preceding annual meeting. Any such notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, and in the event that such business includes a proposal to amend either the Certificate of Incorporation or By-laws of the Corporation, the language of the proposed amendment; (ii) the name and address of the stockholder proposing such business; (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business; (iv) any material interest of the stockholder in such business; and (v) if the stockholder intends to solicit proxies in support of such stockholder's proposal, a representation to that effect. No business shall be conducted at an annual meeting of stockholders except in accordance with this Section 2(b), and the Chairman of the meeting may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or if the stockholder solicits proxies in support of such stockholder's proposal without such stockholder having made the representation required by clause (v) of the preceding sentence. Section 3. Special Meetings. Except as otherwise required by law, special meetings of the stockholders for any purpose or purposes may be called only by the Chairman of the Board, the President, or a majority of the entire Board of Directors. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. Section 4. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Notice shall not be required to be given to any stockholder who shall waive such notice in writing, whether prior to or after such meeting, or who shall attend such meeting in person or by proxy unless such attendance is for the express purpose of objecting, at the beginning of such meeting, to the transactions of any business because the meeting is not lawfully called or convened. Section 5. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the stock ledger (or a transfer agent or similar entity appointed to perform such duty) to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in his name. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be kept and produced at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present. The original or duplicate ledger shall be the only evidence as to who are 2 the stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such meeting. Section 6. Quorum. At each meeting of the stockholders, the holders of record of a majority of the issued and outstanding stock of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, except where otherwise provided by law, the Certificate of Incorporation or these By-laws. In the absence of a quorum, any officer entitled to preside at, or act as Secretary of, such meeting shall have the power to adjourn the meeting from time to time until a quorum shall be constituted. Section 7. Voting. Every stockholder of record who is entitled to vote shall at every meeting of the stockholders be entitled to one vote for each share of stock held by him on the record date; except, however, that shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall neither be entitled to vote nor counted for quorum pur poses. Nothing in this Section shall be construed as limiting the right of the Corporation to vote its own stock held by it in a fiduciary capacity. At all meetings of the stockholders, a quorum being present, all matters shall be decided by majority vote of the shares of stock entitled to vote held by stockholders present in person or by proxy, except as otherwise required by law or the Certificate of Incorporation. Unless demanded by a stockholder of the Corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat or so directed by the chairman of the meeting or required by law, the vote thereat on any question need not be by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or in his name by his proxy, if there be such proxy, and shall state the number of shares voted by him and the number of votes to which each share is entitled. Section 8. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. A proxy acting for any stockholder shall be duly appointed by an instrument in writing subscribed by such stockholder. No proxy shall be valid after the expiration of three years from the date thereof unless the proxy provides for a longer period. Section 9. Action Without a Meeting. Any action required to be taken at any annual or special meeting of stockholders or any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 3 ARTICLE III BOARD OF DIRECTORS Section 1. Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Section 2. Election and Term. Except as otherwise provided by law, Directors shall be elected at the annual meeting of stockholders and shall hold office until the next annual meeting of stockholders and until their successors are elected and qualify, or until they sooner die, resign or are removed. At each annual meeting of stockholders, at which a quorum is present, the persons receiving a plurality of the votes cast shall be the Directors. Acceptance of the office of Director may be expressed orally or in writing, and attendance at the organization meeting shall constitute such acceptance. Section 3. Number. The number of Directors shall be such number as shall be determined from time to time by the Board of Directors but shall not be less than three nor more than eleven and initially shall be two. Section 4. Notification of Nominations. Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Any stockholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation (i) with respect to an election to be held at an annual meeting of stockholders, not more than 120 days or less than 90 days in advance of the anniversary date of the immediately preceding annual meeting, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corpora tion entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; (e) the consent of each nominee to serve as a director of the corporation if so elected; and (f) if the stockholder intends to solicit proxies in support of such stockholder's nominee(s), a representation to that effect. The Chairman of the meeting may refuse to acknowledge the nomina tion of any person which was not made in accordance with the foregoing procedure or if the stock holder nominating such person(s) solicits proxies in support of such stockholder's nominee(s) without such stockholder having made the representation required by clause (f) of the preceding sentence. 4 Section 5. Quorum and Manner of Acting. Unless otherwise provided by law, the presence of 50% of the whole Board of Directors (or any committee thereof) shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At all meetings of Directors, a quorum being present, all matters shall be decided by the affirmative vote of a majority of the Directors present, except as otherwise required by law. The Board of Directors (or any committee thereof) may hold its meetings at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine or as shall be specified in the respective notices, or waivers of notice, thereof. Section 6. Organization Meeting. Immediately after each annual meeting of stockhold ers for the election of Directors the Board of Directors shall meet at the place of the annual meeting of stockholders for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given. If such meeting is held at any other time or place, notice thereof must be given as hereinafter provided for special meetings of the Board of Directors, subject to the execution of a waiver of the notice thereof signed by, or the attendance at such meeting of, all Directors who may not have received such notice. Section 7. Regular Meetings. Regular meetings of the Board of Directors will be held quarterly, as regularly scheduled, and may be held at such place, within or without the State of Delaware, as shall from time to time be determined by the Board of Directors. After there has been such determination, and notice thereof has been once given to each member of the Board of Directors as hereinafter provided for special meetings, regular meetings may be held without further notice being given. Section 8. Special Meetings; Notice. Special meetings of the Board of Directors (or any committee thereof) shall be held whenever called by the Chairman of the Board, if any, the President or by a majority of the Directors. Notice of each such meeting shall be mailed to each Director, addressed to him at his residence or usual place of business, at least five days before the date on which the meeting is to be held, or shall be sent to him at such place by telegraph, cable, radio or wireless, or be delivered personally or by telephone, not later than the day before the day on which such meeting is to be held; provided, however, that any such notice relating to a meeting of a committee of the Board of Directors need only be sent to each Director serving on such committee. Each such notice shall state the time and place of the meeting and, as may be required, the purposes thereof. Notice of any meeting of the Board of Directors (or any committee thereof) need not be given to any Director if he shall sign a written waiver thereof either before or after the time stated therein for such meeting, or if he shall be present at the meeting. Unless limited by law, the Company's Certificate of Incorpora tion, these By-laws or the terms of the notice thereof, any and all business may be transacted at any meeting without the notice thereof having specifically identified the matters to be acted upon. Section 9. Removal of Directors. Any Director or the entire Board of Directors may be removed, with or without cause, at any time, by action of the holders of record of the majority of the issued and outstanding stock of the Corporation (a) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (b) by a consent in writing in the manner contemplated in Section 9 of Article II, and the vacancy or vacancies in the Board of Directors caused 5 by any such removal may be filled by action of such a majority at such meeting or at any subsequent meeting or by consent. Section 10. Resignations. Any Director of the Corporation may resign at any time by giving written notice to the Chairman of the Board, if any, the President, the Vice President or the Secretary of the Corporation. The resignation of any Director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 11. Vacancies. Any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors shall be filled by the Board of Directors, or if not so filled, by the stockholders at the next annual meeting thereof or at a special meeting called for that purpose in accordance with Article II, Section 3 of these By-laws. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of such director and until such director's successor shall have been elected and qualified. Section 12. Compensation of Directors. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board, a specific sum fixed by the Board plus expenses may be allowed for attendance at each regular or special meeting of the Board or any committee thereof; provided, however, that nothing herein contained shall be construed to preclude any Director from serving the Corporation or any parent or subsidiary corporation thereof in any other capacity and receiving compensation in such capacity. Section 13. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors (or any committee thereof) may be taken without a meeting if a written consent thereto is signed by all members of the Board (or such committee), and such written consent is filed with the minutes or proceedings of the Board. Section 14. Telephonic Participation in Meetings. Members of the Board of Directors (or any committee thereof) may participate in a meeting of the Board (or such committee) by means of conference telephone or similar communications equipment by means of which all persons participat ing in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. Section 15. Committees. The Board of Directors may appoint such committees of the Board of Directors as it may deem appropriate, and such committees shall exercise the authority delegated to them. The membership of any such committee shall consist of such Directors as the Board of Directors may deem advisable from time to time to serve. The Board of Directors may fill in any vacancies on any committee as they occur. Each committee shall meet as often as its business may require. 6 ARTICLE IV OFFICERS Section 1. Principal Officers. The Board of Directors shall elect a President, a Secretary and a Treasurer, and may in addition elect a Chairman of the Board, one or more Vice Presi dents and such other officers as it deems fit; the President, the Secretary, the Treasurer, the Chairman of the Board, if any, and the Vice Presidents, if any, being the principal officers of the Corporation. One person may hold, and perform the duties of, any two or more of said offices. Section 2. Election and Term of Office. The principal officers of the Corporation shall be elected annually by the Board of Directors at the organization meeting thereof. Each such officer shall hold office until his successor shall have been elected and shall qualify, or until his earlier death, resignation or removal. Section 3. Other Officers. In addition, the Board may elect, or the Chairman of the Board, if any, or the President may appoint, such other officers as they deem fit. Any such other officers chosen by the Board of Directors shall be subordinate officers and shall hold office for such period, have such authority and perform such duties as the Board of Directors, the Chairman of the Board, if any, or the President may from time to time determine. Section 4. Removal. Any officer may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at any regular meeting of the Board, or at any special meeting of the Board called for that purpose, at which a quorum is present. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Chairman of the Board, if any, the President, the Secretary or the Board of Directors. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term in the manner prescribed in these By-laws for election or appointment to such office for such term. Section 7. Chairman of the Board. The Chairman of the Board of Directors if one be elected, shall preside, if present, at all meetings of the Board of Directors and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 8. President. The President shall be the chief executive officer of the Corpora tion and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of the Chairman of the Board of Directors, at all meetings of the Board of Directors, and shall have general supervision, direction and control of the business of the Corporation. Except as the Board of Directors shall authorize the execution thereof in some other 7 manner, he shall execute bonds, mortgages, and other contracts on behalf of the Corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary or the Treasurer. Section 9. Vice President. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the directors. Section 10. Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation. He shall exhibit at all reasonable times his books of account and records to any of the Directors of the Corporation upon application during business hours at the office of the Corporation where such books and records shall be kept; when requested by the Board of Directors, he shall render a statement of the condition of the finances of the Corporation at any meeting of the Board or at the annual meeting of stockholders; he shall receive, and give receipt for, moneys due and payable to the Corporation from any source whatsoever; in general, he shall perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board of Directors, the President or the Board of Directors. The Treasurer shall give such bond, if any, for the faithful discharge of his duties as the Board of Directors may require. Section 11. Secretary. The Secretary, if present, shall act as secretary at all meetings of the Board of Directors and of the stockholders and keep the minutes thereof in a book or books to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given and served; he shall have charge of the stock records of the Corporation; he shall see that all reports, statements and other documents required by law are properly kept and filed; and in general he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or the Board of Directors. Section 12. Salaries. The salaries of the principal officers shall be fixed from time to time by the Board of Directors, and the salaries of any other officers may be fixed by the President. ARTICLE V INDEMNIFICATION Section 1. Right of Indemnification. Every person now or hereafter serving as a director or officer of the Corporation and every such director or officer serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation in accordance with and to the fullest extent permitted by law for the defense of, or in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. Section 2. Expenses. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking 8 by or on behalf of such director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article V. Section 3. Agreements. The Company is authorized to enter into indemnification agreements with any of its directors or officers subject to the provisions of this Article V. Section 4. Other Rights of Indemnification. The right of indemnification herein provided shall not be deemed exclusive of any other rights to which any such director or officer may now or hereafter be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. Section 5. Indemnification of Employees and Agents. The rights of indemnification provided to directors and officers in this Article V may be applicable, at the discretion of the Company, to its employees and agents. Section 6. Insurance. The Company is authorized to purchase insurance on behalf of any person whom it is required or permitted to indemnify according to this Article V. ARTICLE VI SHARES AND THEIR TRANSFER Section 1. Certificate for Stock. Every stockholder of the Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors shall prescribe, certifying the number of shares of the capital stock of the Corporation owned by him. No certificate shall be issued for partly paid shares. Section 2. Stock Certificate Signature. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed by the President or any Vice President and the Secretary or Treasurer of the Corporation and its seal shall be affixed thereto. If such certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or, (2) by a registrar other than the Corporation or its employee, the signatures of such officers of the Corporation may be facsimiles. In case any officer of the Corporation who has signed, or whose facsimile signature has been placed upon, any such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 3. Stock Ledger. A record shall be kept by the Secretary or by any other officer, employee or agent designated by the Board of Directors of the name of each person, firm or corporation holding capital stock of the Corporation, the number of shares represented by, and the respective dates of, each certificate for such capital stock, and in case of cancellation of any such certificate, the respective dates of cancellation. 9 Section 4. Cancellation. Every certificate surrendered to the Corporation for exchange or registration of transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except, subject to Section 7 of this Article VI, in cases provided for by applicable law. Section 5. Registrations of Transfers of Stock. Registrations of transfers of shares of the capital stock of the Corporation shall be made on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer clerk or a transfer agent appointed as in Section 6 of this Article VI provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. Section 6. Regulations. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with the Certificate of Incorporation or these By- laws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any principal officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. Section 7. Lost, Stolen, Destroyed or Mutilated Certificates. Before any certificates for stock of the Corporation shall be issued in exchange for certificates which shall become mutilated or shall be lost, stolen or destroyed, proper evidence of such loss, theft, mutilation or destruction shall be procured for the Board of Directors, if it so requires. Section 8. Record Dates. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a date as a record date for any such determination of stockholders. Such record date shall not be more than sixty or less than ten days before the date of such meeting, or more than sixty days prior to any other action. If a record date is not fixed by the Board of Directors as aforesaid, (i) the date for determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice is given, or if no notice is given, the day next preceding the day on which the meeting is held, and (ii) the record date for determining stockholders for any purpose other than that specified in clause (i) shall be the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. 10 ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Corporate Seal. The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that it was incorporated in the State of Delaware in the year 1995. The Secretary shall be the custodian of the seal. The Board of Directors may authorize a duplicate seal to be kept and used by any other officer. Section 2. Voting of Stocks Owned by the Corporation. The Board of Directors may authorize any person on behalf of the Corporation to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except the Corporation) in which the Corporation may hold stock. Section 3. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the Board of Directors shall deem conducive to the interests of the Corporation. ARTICLE VIII AMENDMENTS These By-laws of the Corporation may be altered, amended or repealed by the Board of Directors at (a) any regular or special meeting of the Board of Directors, provided, however, that the Board of Directors may alter, amend or repeal the provisions of these By-laws relating to the number of Directors only if all the members of the Board of Directors consent thereto in writing, or (b) by the affirmative vote of the holders of record of a majority of the issued and outstanding stock of the Corporation (i) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (ii) by a consent in writing in the manner contemplated in Section 9 of Article II, provided, however, that notice of the proposed alteration, amendment or repeal is contained in the notice of such meeting. By-laws, whether made or altered by the stockholders or by the Board of Directors, shall be subject to alteration or repeal by the stockholders as in this Article VIII above provided. 11 EX-10.1 5 EXHIBIT 10.1 MEDE AMERICA CORPORATION AND ITS SUBSIDIARIES STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN Section 1. Purpose. The purpose of the MedE America Corporation and its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Plan") is to promote the interests of MedE America Corporation, a Delaware corporation (the "Company"), and any Subsidiary thereof and the interests of the Company's stockholders by providing an opportunity to selected employees, officers and directors of the Company or any Subsidiary thereof as of the date of the adoption of the Plan or at any time thereafter to purchase Common Stock of the Company. By encouraging such stock ownership, the Company seeks to attract, retain and motivate such employees and other persons and to encourage such employees and other persons to devote their best efforts to the business and financial success of the Company. It is intended that this purpose will be effected by the granting of "non-qualified stock options" and/or "incentive stock options" to acquire the Common Stock of the Company and/or by the granting of rights to purchase the Common Stock of the Company on a "restricted stock" basis. Under the Plan, the Committee shall have the authority (in its sole discretion) to grant "incentive stock options" within the meaning of Section 422(b) of the Code, "non-qualified stock options" as described in Treasury Regulation Section 1.83-7 or any successor regulation thereto, or "restricted stock" awards. Section 2. Definitions. For purposes of the Plan, the following terms used herein shall have the following meanings, unless a different meaning is clearly required by the context: 2.1. "Award" shall mean an award of the right to purchase Common Stock granted under the provisions of Section 7 of the Plan. 2.2. "Board of Directors" shall mean the Board of Directors of the Company. 2.3. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4. "Committee" shall mean the committee of the Board of Directors referred to in Section 5 hereof; provided, that if no such committee is appointed by the Board of Directors, the Board of Directors shall have all of the authority and obligations of the Committee under the Plan. 2.5. "Common Stock" shall mean the Common Stock, $.01 par value, of the Company. 2.6. "Employee" shall mean (i) with respect to an ISO, any person, including, without limitation, an officer or director of the Company, who, at the time an ISO is granted to such person hereunder, is employed on a full-time basis by the Company or any Parent or Subsidiary of the Company, and (ii) with respect to a Non-Qualified Option and/or an Award, any person employed by, or performing services for, the Company or any Parent or Subsidiary of the Company, including, without limitation, directors and officers. 2.7. "ISO" shall mean an Option granted to a Participant pursuant to the Plan that constitutes and shall be treated as an "incentive stock option" as defined in Section 422(b) of the Code. 2.8. "Non-Qualified Option" shall mean an Option granted to a Participant pursuant to the Plan that is intended to be, and qualifies as, a "non-qualified stock option" as described in Treasury Regulation Section 1.83-7 or any successor regulation thereto and that shall not constitute or be treated as an ISO. 2.9. "Option" shall mean any ISO or Non-Qualified Option granted to an Employee pursuant to the Plan. 2.10. "Participant" shall mean any Employee to whom an Award and/or an Option is granted under the Plan. 2.11. "Parent" of the Company shall have the meaning set forth in Section 424(e) of the Code. 2.12. "Subsidiary" of the Company shall have the meaning set forth in Section 424(f) of the Code. Section 3. Eligibility. Awards and/or Options may be granted to any Employee. The Committee shall have the sole authority to select the persons to whom Awards and/or Options are to be granted hereunder, and to determine whether a person is to be granted a Non-Qualified Option, an ISO or an Award or any combination thereof. No person shall have any right to participate in the Plan. Any person selected by the Committee for participation during any one period will not by virtue of such participation have the right to be selected as a Participant for any other period. Section 4. Common Stock Subject to the Plan. 4.1. Number of Shares. The total number of shares of Common Stock for which Options and/or Awards may be granted under 2 the Plan shall not exceed in the aggregate Three Million One Thousand Four Hundred (3,501,400) shares of Common Stock (subject to adjustment as provided in Section 8 hereof). 4.2. Reissuance. The shares of Common Stock that may be subject to Options and/or Awards granted under the Plan may be either authorized and unissued shares or shares reacquired at any time and now or hereafter held as treasury stock as the Committee may determine. In the event that any outstanding Option expires or is terminated for any reason, the shares allocable to the unexercised portion of such Option may again be subject to an Option and/or Award granted under the Plan. If any shares of Common Stock issued or sold pursuant to an Award or the exercise of an Option shall have been repurchased by the Company, then such shares may again be subject to an Option and/or Award granted under the Plan. 4.3. Special ISO Limitations. (a) The aggregate fair market value (determined as of the date an ISO is granted) of the shares of Common Stock with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans of the Company or any Parent or Subsidiary of the Company) shall not exceed $100,000. (b) No ISO shall be granted to an Employee who, at the time the ISO is granted, owns (actually or constructively under the provisions of Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, unless (i) the option price is at least 110% of the fair market value (determined as of the time the ISO is granted) of the shares of Common Stock subject to the ISO and (ii) the ISO by its terms is not exercisable more than five years from the date it is granted. 4.4. Limitations Not Applicable to Non-Qualified Options or Awards. Notwithstanding any other provision of the Plan, the provisions of Sections 4.3(a) and (b) shall not apply, nor shall be construed to apply, to any Non-Qualified Option or Award granted under the Plan. Section 5. Administration of the Plan. 5.1. Administration. The Plan shall be administered by a committee of the Board of Directors (the "Committee") established by the Board of Directors and consisting of no less than three persons. All members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended 3 (the "Exchange Act"). The Committee shall be appointed from time to time by, and shall serve at the pleasure of, the Board of Directors. 5.2. Grant of Options/Awards. (a) Options. The Committee shall have the sole authority and discretion under the Plan (i) to select the Employees who are to be granted Options hereunder; (ii) to designate whether any Option to be granted hereunder is to be an ISO or a Non-Qualified Option; (iii) to establish the number of shares of Common Stock that may be subject to each Option; (iv) to determine the time and the conditions subject to which Options may be exercised in whole or in part; (v) to determine the amount (not less than the par value per share) and the form of the consideration that may be used to purchase shares of Common Stock upon exercise of any Option (including, without limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a Participant may be used by the Participant to exercise an Option); (vi) to impose restrictions and/or conditions with respect to shares of Common Stock acquired upon exercise of an Option; (vii) to determine the circumstances under which shares of Common Stock acquired upon exercise of any Option may be subject to repurchase by the Company; (viii) to determine the circumstances and conditions subject to which shares acquired upon exercise of an Option may be sold or otherwise transferred, including, without limitation, the circumstances and conditions subject to which a proposed sale of shares of Common Stock acquired upon exercise of an Option may be subject to the Company's right of first refusal (as well as the terms and conditions of any such right of first refusal); (ix) to establish a vesting provision for any Option relating to the time when (or the circumstances under which) the Option may be exercised by a Participant, including, without limitation, vesting provisions that may be contingent upon (A) the Company's meeting specified financial goals, (B) a change of control of the Company or (C) the occurrence of other specified events; (x) to accelerate the time when outstanding Options may be exercised, provided, however, that any ISOs shall be deemed "accelerated" within the meaning of Section 424(h) of the Code; and (xi) to establish any other terms, restrictions and/or conditions applicable to any Option not inconsistent with the provisions of the Plan. Notwithstanding anything in the Plan to the contrary, in no event shall any Option granted to any director or officer of the Company who is subject to Section 16 of the Exchange Act become exercisable, in whole or in part, prior to the date that is six months after the date such Option is granted to such director or officer. (b) Awards. The Committee shall have the sole authority and discretion under the Plan (i) to select the 4 Employees who are to be granted Awards hereunder; (ii) to determine the amount to be paid by a Participant to acquire shares of Common Stock pursuant to an Award, which amount may be equal to, more than, or less than 100% of the fair market value of such shares on the date the Award is granted (but in no event less than the par value of such shares); (iii) to determine the time or times and the conditions subject to which Awards may be made; (iv) to determine the time or times and the conditions subject to which the shares of Common Stock subject to an Award are to become vested and no longer subject to repurchase by the Company; (v) to establish transfer restrictions and the terms and conditions on which any such transfer restrictions with respect to shares of Common Stock acquired pursuant to an Award shall lapse; (vi) to establish vesting provisions with respect to any shares of Common Stock subject to an Award, including, without limitation, vesting provisions which may be contingent upon (A) the Company's meeting specified financial goals, (B) a change of control of the Company or (C) the occurrence of other specified events; (vii) to determine the circumstances under which shares of Common Stock acquired pursuant to an Award may be subject to repurchase by the Company; (viii) to determine the circumstances and conditions subject to which any shares of Common Stock acquired pursuant to an Award may be sold or otherwise transferred, including, without limitation, the circumstances and conditions subject to which a proposed sale of shares of Common Stock acquired pursuant to an Award may be subject to the Company's right of first refusal (as well as the terms and conditions of any such right of first refusal); (ix) to determine the form of consideration that may be used to purchase shares of Common Stock pursuant to an Award (including, without limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a Participant may be used by the Participant to purchase the Common Stock subject to an Award); (x) to accelerate the time at which any or all restrictions imposed with respect to any shares of Common Stock subject to an Award will lapse; and (xi) to establish any other terms, restrictions and/or conditions applicable to any Award not inconsistent with the provisions of the Plan. 5.3. Interpretation. The Committee shall be authorized to interpret the Plan and may, from time to time, adopt such rules and regulations, not inconsistent with the provisions of the Plan, as it may deem advisable to carry out the purposes of the Plan. 5.4. Finality. The interpretation and construction by the Committee of any provision of the Plan, any Option and/or Award granted hereunder or any agreement evidencing any such Option and/or Award shall be final and conclusive upon all parties. 5 5.5. Expenses, Etc. All expenses and liabilities incurred by the Committee in the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants or other persons in connection with the administration of the Plan. The Company, and its officers and directors, shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Committee shall be liable for any action, determination or interpretation taken or made in good faith with respect to the Plan or any Option and/or Award granted hereunder. Section 6. Terms and Conditions of Options. 6.1. ISOs. The terms and conditions of each ISO granted under the Plan shall be specified by the Committee and shall be set forth in an ISO agreement between the Company and the Participant in such form as the Committee shall approve. The terms and conditions of each ISO shall be such that each ISO issued hereunder shall constitute and shall be treated as an "incentive stock option" as defined in Section 422(b) of the Code. The terms and conditions of any ISO granted hereunder need not be identical to those of any other ISO granted hereunder. The terms and conditions of each ISO shall include the following: (a) The option price shall be fixed by the Committee but shall in no event be less than 100% (or 110% in the case of an Employee referred to in Section 4.3(b) hereof) of the fair market value of the shares of Common Stock subject to the ISO on the date the ISO is granted. For purposes of the Plan, the fair market value per share of Common Stock as of any day shall mean the average of the closing prices of sales of shares of Common Stock on all national securities exchanges on which the Common Stock may at the time be listed or, if there shall have been no sales on any such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock shall not be so listed, the average of the representative bid and asked prices quoted in the NASDAQ system as of 3:30 p.m., New York time, on such day, or, if on any day the Common Stock shall not be quoted in the NASDAQ system, the average of the high and low bid and asked prices on such day in the over-the-counter market as reported by National Quotation Bureau Incorporated, or any similar successor organization. If at any time the Common Stock is not listed on any national securities exchange or quoted in the NASDAQ system or the over-the-counter market, the fair market value of the shares of Common Stock subject to an Option on the date the ISO is granted shall be the fair market value thereof determined in good faith by the Board of Directors. 6 (b) ISOs, by their terms, shall not be transferable otherwise than by will or the laws of descent and distribution, and, during a Participant's lifetime, an ISO shall be exercisable only by the Participant. (c) The Committee shall fix the term of all ISOs granted pursuant to the Plan (including, without limitation, the date on which such ISO shall expire and terminate); provided, however, that such term shall in no event exceed ten years from the date on which such ISO is granted (or, in the case of an ISO granted to an Employee referred to in Section 4.3(b) hereof, such term shall in no event exceed five years from the date on which such ISO is granted). Each ISO shall be exercisable in such amount or amounts, under such conditions and at such times or intervals or in such installments as shall be determined by the Committee in its sole discretion; provided, however, that in no event shall any ISO granted to any director or officer of the Company who is subject to Section 16 of the Exchange Act become exercisable, in whole or in part, prior to the date that is six months after the date such ISO is granted to such director or officer. (d) To the extent that the Company or any Parent or Subsidiary of the Company is required to withhold any Federal, state or local taxes in respect of any compensation income realized by any Participant as a result of any "disqualifying disposition" of any shares of Common Stock acquired upon exercise of an ISO granted hereunder, the Company shall deduct from any payments of any kind otherwise due to such Participant the aggregate amount of such Federal, state or local taxes required to be so withheld or, if such payments are insufficient to satisfy such Federal, state or local taxes, such Participant will be required to pay to the Company, or make other arrangements satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes. All matters with respect to the total amount of taxes to be withheld in respect of any such compensation income shall be determined by the Board of Directors, in its sole discretion. (e) In the sole discretion of the Committee the terms and conditions of any ISO may (but need not) include any of the following provisions: (i) In the event a Participant shall cease to be employed by the Company or any Parent or Subsidiary of the Company on a full-time basis for any reason other than as a result of his death or "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any ISO held by such Participant at that time may only be exercised within one month after the date on which the Participant ceased to be so employed, and only to the extent 7 that the Participant could have otherwise exercised such ISO as of the date on which he ceased to be so employed. (ii) In the event a Participant shall cease to be employed by the Company or any Parent or Subsidiary of the Company on a full-time basis by reason of his "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any ISO held by such Participant at that time may only be exercised within one year after the date on which the Participant ceased to be so employed, and only to the extent that the Participant could have otherwise exercised such ISO as of the date on which he ceased to be so employed. (iii) In the event a Participant shall die while in the employ of the Company or a Parent or Subsidiary of the Company (or within a period of one month after ceasing to be an Employee for any reason other than his "disability" (within the meaning of Section 22(e)(3) of the Code) or within a period of one year after ceasing to be an Employee by reason of such "disability"), the unexercised portion of any ISO held by such Participant at the time of his death may only be exercised within one year after the date of such Participant's death, and only to the extent that the Participant could have otherwise exercised such ISO at the time of his death. In such event, such ISO may be exercised by the executor or administrator of the Participant's estate or by any person or persons who shall have acquired the ISO directly from the Participant by bequest or inheritance. 6.2. Non-Qualified Options. The terms and conditions of each Non-Qualified Option granted under the Plan shall be specified by the Committee, in its sole discretion, and shall be set forth in a written option agreement between the Company and the Participant in such form as the Committee shall approve. The terms and conditions of each Non-Qualified Option will be such (and each Non-Qualified Option Agreement shall expressly so state) that each Non-Qualified Option issued hereunder shall not constitute nor be treated as an "incentive stock option" as defined in Section 422(b) of the Code, but will be a "non-qualified stock option" for Federal, state and local income tax purposes. The terms and conditions of any Non-Qualified Option granted hereunder need not be identical to those of any other Non-Qualified Option granted hereunder. The terms and conditions of each Non-Qualified Option Agreement shall include the following: (a) The option (exercise) price shall be fixed by the Committee and may be equal to, more than or less than 100% of the fair market value of the shares of Common Stock subject to the 8 Non-Qualified Option on the date such Non-Qualified Option is granted. (b) The Committee shall fix the term of all NonQualified Options granted pursuant to the Plan (including, without limitation, the date on which such Non-Qualified Option shall expire and terminate). Such term may be more than ten years from the date on which such Non-Qualified Option is granted. Each Non-Qualified Option shall be exercisable in such amount or amounts, under such conditions (including, without limitation, provisions governing the rights to exercise such NonQualified Option), and at such times or intervals or in such installments as shall be determined by the Committee in its sole discretion; provided, however, that in no event shall any NonQualified Option granted to any director or officer of the Company who is subject to Section 16 of the Exchange Act become exercisable, in whole or in part, prior to the date that is six months after the date such Non-Qualified Option is granted to such director or officer. (c) Non-Qualified Options shall not be transferable otherwise than by will or the laws of descent and distribution, and during a Participant's lifetime a Non-Qualified Option shall be exercisable only by the Participant. (d) To the extent that the Company is required to withhold any Federal, state or local taxes in respect of any compensation income realized by any Participant in respect of a Non-Qualified Option granted hereunder or in respect of any shares of Common Stock acquired upon exercise of a Non-Qualified Option, the Company shall deduct from any payments of any kind otherwise due to such Participant the aggregate amount of such Federal, state or local taxes required to be so withheld or, if such payments are insufficient to satisfy such Federal, state or local taxes, or if no such payments are due or to become due to such Participant, then, such Participant will be required to pay to the Company, or make other arrangements satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes. All matters with respect to the total amount of taxes to be withheld in respect of any such compensation income shall be determined by the Board of Directors, in its sole discretion. 7. Terms and Conditions of Awards. The terms and conditions of each Award granted under the Plan shall be specified by the Committee, in its sole discretion, and shall be set forth in a written agreement between the Participant and the Company, in such form as the Committee shall approve. The terms and provisions of any Award granted hereunder need not be identical to those of any other Award granted hereunder. 9 The terms and conditions of each Award shall include the following: (a) The amount to be paid by a Participant to acquire the shares of Common Stock pursuant to an Award shall be fixed by the Committee and may be equal to, more than or less than 100% of the fair market value of the shares of Common Stock subject to the Award on the date the Award is granted (but in no event less than the par value of such shares). (b) Each Award shall contain such vesting provisions, such transfer restrictions and such other restrictions and conditions as the Committee, in its sole discretion, may determine, including, without limitation, the circumstances under which the Company shall have the right and option to repurchase shares of Common Stock acquired pursuant to an Award. (c) Stock certificates representing Common Stock acquired pursuant to an Award shall bear a legend referring to any restrictions imposed on such Stock and such other matters as the Committee may determine. (d) To the extent that the Company is required to withhold any Federal, state or local taxes in respect of any compensation income realized by the Participant in respect of an Award granted hereunder, in respect of any shares acquired pursuant to an Award, or in respect of the vesting of any such shares of Common Stock, then the Company shall deduct from any payments of any kind otherwise due to such Participant the aggregate amount of such Federal, state or local taxes required to be so withheld, or if such payments are insufficient to satisfy such Federal, state or local taxes, or if no such payments are due or to become due to such Participant, then such Participant will be required to pay to the Company, or make other arrangements satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes. All matters with respect to the total amount of taxes to be withheld in respect of any such compensation income shall be determined by the Committee, in its sole discretion. Section 8. Adjustments. (a) In the event that, after the adoption of the Plan by the Board of Directors, the outstanding shares of the Company's Common Stock shall be increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another entity through reorganization, merger or consolidation, recapitalization, reclassification, stock split, split-up, combination or exchange of shares or declaration of any dividends payable in Common Stock, the Board of Directors shall appropriately adjust (i) the number of shares of Common Stock (and the option price per share) subject to the 10 unexercised portion of any outstanding Option (to the nearest possible full share); provided, however, that the limitations of Section 424 of the Code shall apply with respect to adjustments made to ISOs, (ii) the number of shares of Common Stock to be acquired pursuant to an Award which have not become vested, and (iii) the number of shares of Common Stock for which Options and/or Awards may be granted under the Plan, as set forth in Section 4.1 hereof, and such adjustments shall be effective and binding for all purposes of the Plan. (b) If any capital reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with another entity, or the sale of all or substantially all its assets to another entity, shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, subject to Section 8(c) below, each holder of an Option shall thereafter have the right to purchase, upon the exercise of the Option in accordance with the terms and conditions specified in the option agreement governing such Option and in lieu of the shares of Common Stock immediately theretofore receivable upon the exercise of such Option, such shares of stock, securities or assets (including, without limitation, cash) as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger or sale not taken place. (c) Notwithstanding Section 8(b) hereof (but only if expressly provided in any option agreement), in the event of (i) any offer to holders of the Company's Common Stock generally relating to the acquisition of all or substantially all of their shares, including, without limitation, through purchase, merger or otherwise, or (ii) any proposed transaction generally relating to the acquisition of substantially all of the assets or business of the Company (herein sometimes referred to as an "Acquisition"), the Board of Directors may, in its sole discretion, cancel any outstanding Options (provided, however, that the limitations of Section 424 of the Code shall apply with respect to adjustments made to ISO's) and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Board of Directors acting in good faith) equal to the product of (A) the number of shares of Common Stock (the "Option Shares") that, as of the date of the consummation of such Acquisition, the holder of such Option had become entitled to purchase (and had not purchased) multiplied by (B) the amount, if any, by which (1) the formula or fixed price per share paid to holders of shares of Common Stock pursuant to such Acquisition exceeds (2) the option price applicable to such Option Shares. 11 Section 9. Effect of the Plan on Employment Relationship. Neither the Plan nor any Option and/or Award granted hereunder to a Participant shall be construed as conferring upon such Participant any right to continue in the employ of (or otherwise provide services to) the Company or any Subsidiary or Parent thereof, or limit in any respect the right of the Company or any Subsidiary or Parent thereof to terminate such Participant's employment or other relationship with the Company or any Subsidiary or Parent, as the case may be, at any time. Section 10. Amendment of the Plan. The Board of Directors may amend the Plan from time to time as it deems desirable; provided, however, that, without the approval of the holders of a majority of the outstanding capital stock of the Company entitled to vote thereon or consent thereto, the Board of Directors may not amend the Plan (i) to increase (except for increases due to adjustments in accordance with Section 8 hereof) the aggregate number of shares of Common Stock for which Options and/or Awards may be granted hereunder, (ii) to decrease the minimum exercise price specified by the Plan in respect of ISOs or (iii) to change the class of Employees eligible to receive ISOs under the Plan. Section 11. Termination of the Plan. The Board of Directors may terminate the Plan at any time. Unless the Plan shall theretofore have been terminated by the Board of Directors, the Plan shall terminate ten years after the date of its initial adoption by the Board of Directors. No Option and/or Award may be granted hereunder after termination of the Plan. The termination or amendment of the Plan shall not alter or impair any rights or obligations under any Option and/or Award theretofore granted under the Plan. Section 12. Effective Date of the Plan. The Plan shall be effective as of March 22, 1995, the date on which the Plan was adopted by the Board of Directors of the Company. * * * * * 12 EX-10.3 6 EXHIBIT 10.3 EXHIBIT 10.3 FORM OF INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT, made this ___ day of July, 1998, by and between MedE America Corporation, a Delaware corporation (the "Corporation"), and ___________________________("Indemnitee"). RECITALS WHEREAS, Indemnitee is currently serving as, or is assuming the position of, a director and/or officer of the Corporation and/or, at the Corporation's request, a director, officer, employee and/or agent of another Corporation, partnership, joint venture, trust or other enterprise, and the Corporation wishes Indemnitee to continue in such capacity(ies); WHEREAS, the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") and the By-laws of the Corporation (the "By-laws") each provide that the Corporation shall indemnify, to the fullest extent permitted by law, certain persons, including directors and officers of the Corporation, against specified expenses and losses arising out of certain threatened, pending or completed actions, suits or proceedings; WHEREAS, Section 145(f) of the Delaware General Corporation Law (the "DGCL") expressly recognizes that the indemnification provided by Section 145 of the DGCL shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office; WHEREAS, in recognition of Indemnitee's need for protection against personal liability in order to induce Indemnitee to serve or continue to serve the Corporation in an effective manner as a director and/or officer of the Corporation and/or, at the Corporation's request, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and, in the case of directors and officers, to supplement or replace the Corporation's directors' and officers' liability insurance coverage, and to provide Indemnitee with specific contractual assurance that the protection promised by the Certificate of Incorporation and By-laws will be available to Indemnitee, the Corporation, with the prior approval of its stockholders, wishes to provide Indemnitee with the benefits contemplated by this Agreement; WHEREAS, as a result of the provision of such benefits, Indemnitee has indicated that he is willing to serve, or continue to serve, as a director and/or officer of the Corporation and/or, at the Corporation's request, as a director, officer, employee and/or agent of another corporation, partnership, joint venture, trust or other enterprise; NOW, THEREFORE, , in consideration of the premises and mutual covenants herein contained, the Corporation and Indemnitee hereby agrees as follows: 1. Definitions. (a) "Expenses" means, for the purposes of this Agreement, all direct and indirect costs of any type or nature whatsoever (including, without limitation, any fees and disbursements of Indemnitee's counsel, accountants another experts and other out-of-pocket costs) actually and reasonably incurred by Indemnitee in connection with the investigation, preparation, defense or appeal of a Proceeding; provided, however, that Expenses shall not include judgments, fines, penalties or amounts paid in settlement of a Proceeding unless such matters may be indemnified under applicable provisions of the DGCL. (b) "Proceeding" means, for the purposes of this Agreement, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including actions, suits or proceedings brought by or in the right of the Corporation), in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Corporation, by reason of any action taken by him or of any inaction on his part while acting as such director or officer or by reason of the fact that he is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director and/or officer of the foreign or domestic corporation which was a predecessor corporation to the Corporation or of another enterprise at the request of such predecessor corporation, whether or not he is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. 2. Indemnification. (a) Third Party Proceedings. To the fullest extent permitted by law, the Corporation shall indemnify Indemnitee against Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement (if the settlement is approved in advance by the Corporation)) incurred by Indemnitee in connection with a Proceeding (other than a Proceeding by or in the right of the Corporation) if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner that Indemnitee reasonably believed to be in, or not opposed to, the best interests of 2 the Corporation, or, with respect to any criminal Proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. Notwithstanding the foregoing, no indemnification shall be made in any criminal proceeding where Indemnitee has been adjudged guilty unless a disinterested majority of the directors determines that Indemnitee did not receive, participate in or share in any pecuniary benefit to the detriment of the Corporation and, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses or liabilities. (b) Proceedings by or in the Right of the Corporation. To the fullest extent permitted by law, the Corporation shall indemnify Indemnitee against Expenses incurred by Indemnitee in connection with the defense or settlement of a Proceeding by or in the right of the Corporation to procure a judgment in its favor if Indemnitee acted in good faith and in a manner Indemnitee reason ably believed to be in, or not opposed to, the best interests of the Corporation. Notwithstanding the foregoing, no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation in the performance of Indemnitee's duty to the Corporation unless and only to the extent that the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses. (c) Scope. Notwithstanding any other provision of this Agreement other than Section 3, the Corporation shall indemnify Indemnitee to the fullest extent permitted by law, notwith standing that such indemnification is not specifically authorized by other provisions of this Agreement, the Certificate of Incorporation, the By-laws or statute. 3. Limitations on Indemnification. Any other provision herein to the contrary notwithstanding, the Corporation shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under Section 102(b)(7) of the DGCL; or (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the DGCL, but such indemnification or advancement of Expenses may be provided by the Corporation in specific cases if a majority of the disinterested directors has approved the initiation or bringing of such proceeding or claim; or (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or 3 (d) Insured Claims. To indemnify Indemnitee for Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines or penalties, and amounts paid in settlement) which have been paid directly to or on behalf of Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Corporation or another policy of insurance maintained by the Corporation or Indemnitee; or (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 4. Determination of Right to Indemnification. Upon receipt of a written claim addressed to the Board of Directors for indemnification pursuant to Section 2 of this Agreement, the Corporation shall determine by any of the methods set forth in Section 145(d) of the DGCL whether Indemnitee has met the applicable standards of conduct that make it permissible under applicable law to indemnify Indemnitee. If a claim under Section 2 of this Agreement is not paid in full by the Corporation within ninety days after such written claim has been received by the Corporation, Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, unless such action is dismissed by the court as frivolous or brought in bad faith, Indemnitee shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to make a determination prior to the commencement of such action that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct under applicable law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has not met the applicable standard of conduct. The court in which such action is brought shall determine whether Indemnitee or the Corporation shall have the burden of proof concerning whether Indemnitee has or has not met the applicable standard of conduct. 5. Advancement and Repayment of Expenses. The Expenses incurred by Indemnitee in defending and investigating any Proceeding shall be paid by the Corporation prior to the final disposition of such Proceeding within thirty days after receiving from Indemnitee copies of invoices presented to Indemnitee for such Expenses and an undertaking by or on behalf of Indemnitee to the Corporation to repay such amount to the extent it is ultimately determined that Indemnitee is not entitled to indemnification. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in a proceeding brought by the Corporation directly, in its own right (as distinguished from an action brought derivatively or by any receiver or trustee), the Corporation shall not be required to make the advances called for hereby if a majority of the disinterested directors determines that (i) it does not appear that Indemnitee has met the standards of conduct that made it permissible under applicable law to indemnify Indemnitee and (ii) the advancement of Expenses would not be in the best interests of the Corporation and its stockholders. 4 6. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification or advancement by the Corporation of some or a portion of any Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a Proceeding, but is not entitled to indemnification or advancement of the total amount thereof, the Corporation shall nevertheless indemnify or pay advancements to Indemnitee for the portion of such Expenses or liabilities to which Indemnitee is entitled. 7. Notice to Corporation by Indemnitee. Indemnitee shall notify the Corporation in writing of any matter with respect to which Indemnitee intends to seek indemnification hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof; provided that any delay in so notifying Corporation shall not constitute a waiver by Indemnitee of his rights hereunder. The written notification to the Corporation shall be addressed to the Board of Directors and shall include a description of the nature of the Proceeding and the facts underlying the Proceeding and be accompanied by copies of any documents filed with the court, if any, in which the Proceeding is pending. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 8. Defense of Claim. In the event that the Corporation shall be obligated under Section 5 hereof to pay the Expenses of any Proceeding against Indemnitee, the Corporation, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding; provided that (i) Indemnitee shall have the right to employ his or her own counsel in any such Proceeding at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Corporation, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of such defense or (C) the Corporation shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee's counsel shall be paid by the Corporation. 9. Attorneys' Fees. If any legal action is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to recover, in addition to other amounts to which the prevailing party may be entitled, actual attorneys' fees and court costs as may be awarded by the court. 10. Continuation of Obligations. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, fiduciary, employee or agent of another corporation, partnership, joint venture, trust or other 5 enterprise, and shall continue thereafter so long as Indemnitee shall be subject to any possible proceeding by reason of the fact that Indemnitee served in any capacity referred to herein. 11. Successors and Assigns. This Agreement establishes contract rights that shall be binding upon, and shall inure to the benefit of, the successors, assigns, heirs and legal representatives of the parties hereto. 12. Non-exclusivity. (a) The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed to be exclusive of another rights that Indemnitee may have under any provision of law, the Certificate of Incorporation or By-laws, the vote of the Corporation's stockholders or disinterested directors, other agreements or otherwise, both as to action in his official capacity and action in another capacity while occupying his position as a director or officer of the Corporation. (b) In the event of any changes after the date of this Agreement in any applicable law, statute, or rule that expand the right of Delaware corporation to indemnify its directors and officers, Indemnitee's rights and the Corporation's obligations under this Agreement shall be expanded to the fullest extent permitted by such changes. In the event of any changes in any applicable law, statute or rule that narrow the right of a Delaware corporation to indemnify a director and officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 13. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee that occurred prior to such date if Indemnitee was a director or officer of the Corporation or its predecessor, or was serving at the request of the Corporation or its predecessor as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. 14. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Corporation to do or omit to do any act or thing in violation of applicable law. The Corporation's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to the fullest extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 15. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. To the extent permitted by applicable law, the 6 parties hereby waive any provisions of law that render any provision of this Agreement unenforceable in any respect. 16. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand or by nationally recognized overnight courier and receipted for by the party addressed, on the date of such receipt, or (ii) if delivered by facsimile transmission to the recipient followed by a copy sent by mail, on the date of such transmission, or (iii) if mailed by certified or registered mail with postage prepaid to the following address, on the third business day after the mailing date: If to the Corporation: MedE America Corporation 90 Merrick Avenue, Suite 501 East Meadow, New York 11554 Facsimile: 516-542-4508 Attn.: General Counsel If to Indemnitee: or to such other address as either party shall have notified the other party in accordance with this Section 16. 17. Mutual Acknowledgment. Both the Corporation and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Corporation from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation's right under public policy to indemnify Indemnitee. 18. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. MEDE AMERICA CORPORATION By ---------------------------- ---------------------------- Indemnitee 8 EX-10.5 7 EXHIBIT 10.5 LEASE AGREEMENT THIS LEASE AGREEMENT (hereinafter called the "Lease") is made and entered into this 10th day of July, 1995, by and between Rand Realty CO (hereinafter called "Landlord"); and Electronic Claims & Funding, Inc. (hereinafter called "Tenant"). 1. PREMISES. Landlord does hereby rent and lease to Tenant and Tenant does hereby rent and lease from Landlord for general office use reasonable and customary for a project such as the Property (as defined below) only and for no other purposes whatsoever, the space described below consisting of 6,400 rentable square feet of space known as Suite 200 hereinafter referred to as (the "Premises") as described and shown on the floor plan attached hereto marked Exhibit "A-1" and located on the Property as described and shown on Exhibit "A" attached hereto and made a part hereof (the "Property") together with the non-exclusive right to use the common area and parking areas on the Property (as the same may from time to time be changed by Landlord) in common with all other tenants of the Property with any other parties permitted by Landlord to use such areas. 2. LEASE TERM. Tenant shall have and hold the Premises for a term ("Term") commencing on August 1, 1995 (the "Commencement Date") and shall terminate at noon on the last day of January 31, 2001 (the "Expiration Date") sixty-six (66) full calendar months following the Commencement Date, unless sooner terminated or extended as hereinafter provided. 3. RENT. Tenant shall pay to Landlord, at 4637 Buford Highway, Atlanta, GA 30341 or at such other place as Landlord shall designate in writing to Tenant; the ("Base Rent") as set forth in Exhibit "D", due on the first day of each calendar month, in advance, without abatement, demand, deduction or offset whatsoever. One full monthly installment of Base Rent shall be due and payable on the date of execution of this Lease by Tenant for the first month's Base Rent and a like monthly installment of Base Rent shall be due and payable on or before the first day of each calendar month following the Commencement Date during the Term hereof; provided, that if the Commencement Date should be a date other than the first day of a calendar month, Tenant shall pay, on or before the Commencement Date, a prorated monthly Based Rent installment for the period from the Commencement Date to the end of the Base Rent due for the first full calendar month of the Term. Tenant shall pay, as additional rent ("Additional Rent"), all other sums due from Tenant under this Lease (the term "Rent", as used herein, means all Base Rent and Additional Rent payable hereunder from Tenant to Landlord). 4. RENT ADJUSTMENT. The rent shall be adjusted pursuant to Special Stipulation 1 which shall be incorporated herein by this reference. 5. LATE CHARGE INTEREST. Other remedies for non-payment of Rent notwithstanding, if either the monthly payment of Base Rent or Tenant's monthly payment of the estimated Tenant's Share of Common Area Maintenance Cost is not received by Landlord on or before the fifth (5th) day of the month for which the Base Rent or such estimated Tenant's Share payment is due, or if any other payment due Landlord by Tenant is not received by Landlord on or before the fifth (5th) day following the date such payment is due as herein provided or the date on which Tenant was invoiced, a late charge of fifteen percent (15%) percent of such past due amount shall be due and payable by Tenant to Landlord as Additional Rent as compensation for Landlord's administrative expenses in handling such late payments. In addition, interest at a rate equal to the lower of the then current prime rate of NationsBank of Georgia, N.A., plus three percent (3%) or the highest rate permitted by applicable law, from the fifth (5th) day after the date such payment was due until such payment is received by Landlord, shall be due and payable as Additional Rent in addition to such amounts owed under this Lease. 6. PARTIAL PAYMENT. No payment by Tenant or acceptance by Landlord of an amount less than the Rent herein stipulated shall be deemed a waiver of any other Rent due. No partial payment or endorsement on any check or any letter accompanying such payment of Rent shall be deemed an accord and satisfaction, but Landlord may accept such payment without prejudice to Landlord's right to collect the balance of any Rent due under the terms of this Lease or any late charge assessed against Tenant hereunder. 7. CONSTRUCTION OF THIS AGREEMENT. No failure of Landlord to exercise any power given Landlord hereunder, or to insist upon strict compliance by Tenant of his obligations, hereunder, and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Landlord's right to demand exact compliance with the terms hereof. Time is of the essence of this Lease. 8. USE OF THE PREMISES. "Tenant shall use and occupy the Premises for the purpose described in Paragraph 1 above and for no other purpose whatsoever. The Premises shall not be used for an illegal purpose, nor in violation of any valid regulation of any governmental body, nor in any manner to create any nuisance or trespass nor in any manner to violate the insurance or increase the rate of the insurance on the Property or any of the buildings located on the Property. 9. DEFINITIONS. "Landlord", as used in this Lease, shall include first party, its representatives, assigns and successors in title to the Premises. "Tenant" shall include second party, its heirs and representatives, and, if this Lease shall be validly assigned or sublet, shall also included Tenant's assignees or subtenants as to the Premises or portion thereof, covered by such assignment or sublease. "Landlord" and "Tenant" include male and female, singular and plural, corporation (and if a corporation, its officers, employees, agents or attorneys), partnership or individual, as may fit the particular parties. 10. REPAIRS BY LANDLORD. Tenant, by taking possession of the Premises, shall accept and shall be held to have accepted the Premises and the leasehold improvements therein, as suitable for the use intended by this Lease. Landlord shall be responsible for repair of the building's roof, foundation, exterior walls, common areas and structural portions, provided such repairs are not necessary due to the act or omission of Tenant, Tenant's invitees or anyone in the employ or control of Tenant or by Tenants failure to repair the Premises as required by Paragraph 11 below. Tenant shall promptly notify Landlord in writing of the need for any such repairs which Tenant believes need to be made and Landlord shall repair any such items (which Landlord is obligated to repair) within a reasonable time thereafter. 11. REPAIRS BY TENANT. Tenant shall be solely responsible for any and all costs and expenses necessary to repair or restore any damage or injury to all or any part of the Premises caused by Tenant or Tenant's agent, employees, invitees, licenses, visitors or contractors, including but not limited to any repairs or replacements necessitated by (i) the construction or installation of improvements to the Premises by or on behalf of Tenant, or (ii) the moving of any property into or out of the Premises. Landlord or its contractor shall make all such repairs and replacements and the costs of such repair or replacements shall be charged to Tenant as Additional Rent and shall become due and payable by Tenant with the monthly installment of Base Rent next due hereunder. Landlord shall be obligated to make any such repairs until Tenant notifies Landlord in writing of the need for such repairs. Tenant accepts the Premises in their present condition and as suited for the uses intended by Tenant. Tenant shall, throughout the initial term of this Lease, and any extension or renewal thereof, at its expense, maintain in good order and repair the Premises, including the building, heating and air conditioning equipment (including but not limited to replacement of parts, compressors, air handling units and heating units) and other improvements located thereon, except those repairs expressly required to be made by Landlord hereunder. 12. ALTERATIONS AND IMPROVEMENTS. Tenant shall not make or allow to be made any alterations, physical additions or improvements in or to the Premises without first obtaining in writing Landlord's written consent for such alterations or additions, which shall not be unreasonably withheld. Any alterations, physical additions or improvements shall at once become the property of Landlord; provided, however, that Landlord, at its option, may require Tenant to remove any leasehold improvements, physical additions or improvements in the Premises in order to restore the Premises to the condition which existed prior to Landlord leasing the Premises to Tenant. All costs of alterations, additions or improvements to which Landlord consents shall be borne by Tenant. Landlord shall, under no circumstances during the Term of this Lease, be required by to carry any insurance on nor shall Landlord be liable for any damage or loss to said alterations, additions or improvements or to any leasehold improvements made by Landlord for the benefit of Tenant; and provided further, that under no circumstances shall Landlord be required to pay, during the Term of this Lease and any extensions or renewals thereof, any ad valorem or Property tax on such alterations, additions or improvements. Tenant hereby covenants to pay all such taxes when they become due. In the event any alterations, additions improvements, or repairs are to be performed by contractors or workmen other than Landlord's contractors or workmen, such contractors or workmen must first be approved in writing by Landlord. During the construction of any such alterations, additions or improvements, Tenant shall carry insurance in types and amounts and with carriers reasonably acceptable to Landlord. Tenant shall comply with all reasonable rules and regulations adopted by Landlord for construction in the Building. Tenant shall keep the Building and the Property and Landlord's interest therein free from any liens arising from any work performed, materials furnished or obligations incurred by or on behalf of Tenant. Notice is hereby given that neither Landlord nor any mortgagee or lessor of Landlord shall be liable for any labor or materials furnished to Tenant. If any lien is filed for such work or materials, such lien shall encumber only Tenant's interest in leasehold improvements in the Premises. Within ten (10) days after Tenant learns of the filing of any such lien, Tenant shall either discharge or cancel such lien of record or post a bond sufficient under the laws of the State of Georgia to cover double the amount of the lien claim plus any penalties, interest, attorney's fees, court costs and other legal expenses in connection with such lien. If Tenant fails to so discharge or bond such lien within ten (10) calendar days after written demand from Landlord, Landlord shall have the right, at Landlord's option, to pay the full amount of such lien without inquiry into the validity thereof and Landlord shall be promptly reimbursed upon demand by Tenant for all amounts so paid by Landlord including expenses, interest and attorney's fees. 13. COMMON AREA MAINTENANCE COST. (a) Tenant agrees to reimburse Landlord, upon taking occupancy of Premises, as Additional Rent hereunder, throughout the Term, including any extensions or renewals thereof, for Tenant's Share (as defined below) of the annual Common Area Maintenance Costs (as defined in subparagraph (b) below which is estimated to be .52 cents per square foot for 1995) of the Building and related common and areas, including the parking areas. The Common Area Maintenance Cost per square foot of the Building shall be determined by dividing the total Common Area Maintenance Costs incurred for the calendar year in question and dividing it by the total number of rentable square feet in the buildings located on the Property as described in Exhibit "A", but in no event shall Landlord be reimbursed for more than the total Common Area Maintenance Cost actually incurred during the year in question. Tenant's pro rata share of the Common Area Maintenance Cost shall be determined by multiplying such amount by the number of rentable square feet contained with- in the Premises (hereinafter called "Tenant's Share"). Landlord and Tenant hereby conclusively agree that, for purposes of this Paragraph 13, the gross square footage of the Premises is 7,000 gross square feet and the gross square feet of the Property is 39,763, square feet and Tenant's Share shall be determined based on such amounts. For purposes of calculation, the gross area leased to Tenant shall be 17.60% of the entire Property. If the size of the Property or the Premises is changed, the parties hereby agree to recalculate Tenant's Share following such change. (b) Common Area Maintenance Cost shall be all those expenses of operating, servicing, managing, repairing and maintaining the Property in a first-class manner deemed by Landlord reasonable and appropriate and in the best interest of the tenants of the Property. Common Area Maintenance Cost shall include, without limitation the following: (i) the wages and salaries of all employees engaged in the operation and maintenance of the Property; (ii) materials used in the operations and maintenance of the Property (iii) the cost of maintenance and service agreements on landscaping, grounds maintenance, trash and snow removal, and other similar services or agreements; (iv) management expense, including, without limitation, management fees and expenses whether paid to Landlord, if Landlord manages the Property or to a third party management company; (v) the costs, including interest, amortized over its useful life, of any capital improvement made to the Property to comply with any governmental law or regulation that was not applicable to the Property at the time of its construction, designed to improve the operating efficiency of any system within the building or it is made or acquired to maintain the first-class nature of the Property; (vi) common area utility cost. (c) As soon as practicable after December 31 of each year during the Term of this Lease, Landlord shall furnish to Tenant an itemized statement of such Common Area Maintenance Cost per rentable square foot within the Property for the calendar year then ended. Tenant may have access to Landlord's records, during normal business hours and at the place where Landlord keeps such records, in order to audit or otherwise verify such expenses. (i) On or before January 1 of each calendar year thereafter, Landlord shall provide Tenant a written estimate of Tenants Share of annual Common Area Maintenance Cost for the upcoming calendar year. Beginning with the first month of each calendar year, Tenant shall pay to Landlord, together with monthly payment of Base Rent as provided in Paragraph 3 hereinabove as Additional Rent hereunder, an amount equal to one-twelfth (1/12th) of the estimated Tenant's Share (as shown in Landlord's statement) of Common Area Maintenance Cost. In the event at the end of any calendar year, Tenant has paid to Landlord an amount in excess of Tenant's Share of any actual Common Area Maintenance Cost for such calendar year, Landlord shall apply any such amount to any amount then owing to Landlord hereunder, and if none, to the next due installment or installments of Rent due hereunder and in tthe event at the end of any calendar year Tenant has paid to Landlord less than Tenant's Share of any actual Common Area Maintenance Cost for such calendar year, Tenant shall pay to Landlord any such deficiency within thirty (30) days after Tenant receives the annual statement referred to above. (ii) For the calendar year in which the Commencement Date occurs, the provisions of this paragraph shall apply, but Tenant's Share for such year shall be subject to a pro rata adjustment based upon the number of full and partial calendar months of said calendar year between the Commencement Date and December 31 of such calendar year. Landlord shall deliver to Tenant, on or before the Commencement Date, the estimated Tenant's Share for the calendar year in which the Commencement Date occurs and Tenant shall pay an equal monthly installment of such estimated amount along with Tenant's monthly payment of Base Rent. For the calendar year in which this Lease expires, and is not extended or renewed, the provisions of this paragraph shall apply, but Tenant's Share for such year shall be subject to a pro rata adjustment based upon the number of full and partial calendar months of said calendar year prior to the expiration of the Term of this Lease and shall be computed as soon as possible after December 31 of the calendar year in which such expiration occurs. If the prorated Tenant's Share for the final calendar year differs from the estimated monthly payments made by Tenant as required herein, Tenant shall pay to Landlord, or Landlord shall pay to Tenant, as the case may be, within thirty (30) days after Landlord's delivery of the applicable Operating Expense statement the amount by which Tenant's Share (as prorated) differs from the estimated payments made by Tenant. (d) TAX AND INSURANCE. Upon taking occupancy of Premises, Tenant shall pay monthly as Additional Rent during the term of this Lease, and any extension or renewal thereof, Tenant's Share of taxes (including; but not limited to ad valorem taxes, special assessments and any other governmental charges) on the Premises as calculated in Sub Paragraph 13(a). Based upon the estimated taxation payable for 1995 which is $22,600.00, Tenant shall be liable for a monthly amount of Tenant's Share of taxation in the amount $331.46. If such taxes for the year in which the Lease terminates are not ascertainable before payment of the last month's rental, then the amount of such taxes assessed against the Property for the previous tax year shall be used as a basis for determining the pro rata share, if any, to be paid by Tenant for that portion of the last Lease year. Tenant shall further pay monthly its Tenant's Share of the cost of fire and extended coverage insurance including any and all public liability insurance on the building during the term of this Lease. Based upon the estimated insurance payable for 1995 which is approximately $1,192.89, Tenant shall be liable for a monthly amount of Tenant's Share of insurance in the amount of $17.50. 14. LANDLORD'S FAILURE TO GIVE POSSESSION. Landlord shall not be liable for damages to Tenant for failure to deliver possession of the Premises to Tenant if such failure is caused by no fault of Landlord, by the failure of Tenant to complete any construction or remodeling of the Premises, by Tenant's delay in delivering or commenting on construction documents by Tenant's request to use non-Property standard materials or by the failure of any previous tenant to vacate the Premises. 15. ACCEPTANCE AND WAIVER. Landlord shall not be liable to the Tenant, its agents or employees, for any damage caused to any of them due to the Property or any of the buildings located thereon or any part or appurtenances thereof being improperly constructed or being or becoming out of repair, or arising from the leaking of gas, water, sewer or stream pipes, or from electricity, but Tenant, by moving into the Premises and taking possession thereof, shall accept, and shall be held to have accepted the Premises as suitable for the purposes for which the same are leased, and shall accept and shall be held to have accepted the Property and every appurtenances thereof, and Tenant by said act waives any and all defects therein except for latent defects that were known to Landlord at the time of entering into the Lease; provided, however, that this paragraph shall not apply to any damages or injury caused by or resulting from the negligence a willful misconduct of Landlord. 16. SIGNS. Tenant shall not paint or place signs, placards or other advertisement of any character upon the windows or inside walls of the Premises except with the consent of Landlord, which shall not be unreasonably withheld, and Tenant shall place no signs upon the outside walls, common areas or the roof of the Premises and shall place no items in the Premises which shall visibly detract from the Property or the common areas. 17. CARDING. Landlord may card the Premises "For Rent" or with any other appropriate sign at any time within one hundred eight (180) days prior to the expiration, cancellation or termination of this Lease for any reason and during such one hundred eighty (180) day period may exhibit the Premises to prospective tenants. 18. REMOVAL OF FIXTURE. If not in default hereunder, Tenant may, prior to the expiration of the Term of this Lease, or any extension thereof, remove any fixtures and equipment which it has placed in the Premises which can be removed without significant damage to the Premises, provided Tenant repairs all damages to the Premises caused by such removal. 19. ENTERING PREMISES. Landlord may enter the Premises upon reasonable prior oral notice (except in emergencies when no notice shall be required) at reasonable hours provided that Landlord shall use all reasonable efforts not to unreasonably interrupt Tenant's business operations: (1) to make repairs, if any which Landlord under the terms hereof must make to the Premises or adjacent premises, or repairs on the building; (b) to inspect the Premises to see that Tenant is complying with all of the terms and conditions hereof and with the rules and regulations for the Property; (c) to remove from the Premises any articles or signs kept or exhibited there in violation of the terms hereof; and (d) to exercise any other right or perform any other obligation that Landlord has under this Lease. Landlord shall be allowed to take all material into and upon the Premises that may be required to make any repairs, improvements and additions, or any alterations, without in any way being deemed or held guilty of trespass or any eviction of Tenant. The Rent reserved herein shall in no circumstances be abated while said repairs, alterations or additions are being made and Tenant shall not be entitled to maintain a set-off or counterclaim for damages against Landlord by reason of loss from interruption to the business of Tenant because of the prosecution of any such work. All such repairs, decorations, additions and improvements shall be done during ordinary business hours, or, if any such work is at the request of Tenant to be done during any other hours, the Tenant shall pay all overtime and other extra costs. 20. UTILITY BILLS. Tenant shall pay all utility bills, including, but not limited to water, sewer, gas, electricity, fuel, light and heat bills for the Premises or for Tenant's share of such charges for the Building, as applicable, and Tenant shall pay all charges for garbage collection or other sanitary services. 21. GENERAL LIABILITY OF TENANT. Tenant shall indemnify and save harmless Landlord against all claims for damages to persons or property by reason of the use or occupancy of the Premises, and all expenses incurred by Landlord because of Tenant's use and occupancy, including attorney's fees and court costs. Tenant shall be liable for and shall hold Landlord harmless in connection with damage or injury to Landlord, the Premises and the Property and persons of Landlord's other tenants, or anyone else if due to act or neglect of Tenant, its agents, employees, invitees or of anyone in Tenant's control. 22. INSURANCE AND WAIVER OF SUBROGATION (a) Tenant shall keep in force at Tenant's expense as long as this Lease remains in effect and during such other times as Tenant occupies the Premises or any part thereof, commercial general liability insurance covering the Premises and Tenant's use thereof, such coverage to be in amount of at least $1,000,000.00 per occurrence, on an occurrence basis with aggregate annual limits (applicable only to the Premises and not any other location) of not less than $5,000,000.00 and, if necessary, with a contractual liability endorsement for the indemnity in Paragraph 21 of this Lease. Tenant shall also keep in force "all risks" casualty coverage and water damage insurance covering Tenant's personal property, including, but not limited to inventory, trade fixtures, floor coverings, furniture and all other property of Tenant whether removable or not at the termination of this Lease, including leasehold betterments and improvements. All such insurance on leasehold betterments and improvements shall be in amounts sufficient to cover the full replacement cost of any repair or reconstruction from any such hazard during the entire Term of this Lease. All commercial general liability policies shall list Landlord and any holder of a deed to secure debt, mortgage or other security interest encumbering the Property as an additional insured as their respective interests may appear and the "all risks" casualty coverage and water damage insurance policies shall name Landlord and any holder of a to secure debt, mortgage or other security interest encumbering the Property as loss payees. All policies hereunder shall require that the insurer give Landlord thirty (30) days prior written notice before any such policies are canceled. Tenant shall deliver to Landlord certificates evidencing that such insurance is in place and all premiums have been paid and shall deliver copies of the policies to Landlord. (b) Tenant shall not do or suffer to be done, or keep or suffer to be kept, anything in, upon or about the Premises which will contravene Landlord's policies insuring against loss or damage by fire or other hazards, or Landlord's commercial general liability policies, or which will prevent Landlord from securing such policies in companies acceptable to Landlord: If anything done, permitted to be done or suffered to be done by Tenant or kept in upon and about the Premises which shall cause the rate of fire or other insurance on the Premises to be increased beyond the minimum rate from time to time applicable to the Premises for the permitted use or permitted uses made thereof, Tenant shall pay, as Additional Rent hereunder, the amount of any such increase promptly upon demand by Landlord and shall cease such action until such payment is made. All insurance required to be carried by Tenant must be carried by companies licensed in Georgia which are reasonably acceptable to Landlord (c) Tenant hereby waives any rights of action against Landlord for loss or damage to its improvements, fixtures and personal property if such damage is covered by the type of "all risks" casualty insurance required to be carried hereunder. Tenant shall cause its policy to contain a waiver of subrogation provision. 23. GOVERNMENTAL REQUIREMENTS. Tenant shall, at its own expense, promptly comply with all requirements of any legally constituted governmental or public authority made necessary by reason Of TENANT'S occupancy of the Premises. 24. ABANDONMENT OF PREMISES. Tenant agrees not to abandon or vacate the Premises during the Term or the Lease and to use said Premises for the purpose herein leased and no other Until Expiration Date. 25. ASSIGNMENT AND SUBLETTING. Tenant may not, without THe prior written consent or Landlord, which consent shall not be unreasonably witheld, assign this Lease or any interest hereunder, or sublet the Premises or any part thereof or permit the use of the Premises by any party other than Tenant. In the event that Tenant is a corporation or some other entity other than an individual, any transfer of a majority or controlling interest in Tenant shall he considered an assignment for purposes of this paragraph. Consent to one assignment or sublease shall not destroy or waive this provision, and all later assignments and subleases shall likewise be made only upon the prior written consent of Landlord. In the event of any sublease or assignment to which Landlord consents, Tenant shall pay to Landlord fifty percent (50%) of all consideration in excess of the Rent due hereunder which Tenant receives from such assignee or subleasee. Such amount shall be payable within five (5) days of the date Tenant receives each payment from such assignee or subleasee. Subtenants or assignees shall become liable to Landlord for all obligations or Tenant hereunder but Tenant shall remain directly liable to Landlord for all Tenant's obligations under this lease. 26. DEFAULT. If Tenant shall default lot the payment of Rent herein reserved when due and fail to cure such default within five (5) days after written notice or such default is given to Tenant by Landlord but Landlord shall be required to provide only one (1) such written notice in any calendar year and any late payment or Rent thereafter shall be an immediate default without any notice or right to cure, or if Tenant shall be in default in performing any of the terms or provisions of this Lease other than the provisions requiring the payment of Rent, and fails to cure such default within fifteen (15) days after notice of such default is given to Tenant by Landlord; or if Tenant vacates or abandons the Premises; or if Tenant is adjudicated a bankrupt; or if a permanent receiver is appointed for Tenant's Property and such receiver is not removed within sixty (60) days after written notice from Landlord to Tenant to obtain such removal; or if, whether voluntarily or involuntarily, Tenant takes advantage of any debtor relief proceedings under any present or future law, whereby the rent or any part thereof, is, or is proposed to be, reduced or payment thereof deferred; or if Tenant's effects should be levied upon or attached under process against Tenant, not satisfied or dissolved within fifteen (15) days after written notice from Landlord to Tenant to obtain satisfaction thereof; or, if Tenant is an individual, in the event of the death of the individual and the failure of the executor, adiministrator personal representative of the estate of the decreased individual to have assigned the Lease within three (3) months after the death to an assignee approved by Landlord; then, and in any of said events, Landlord, at its option, may exercise any or all of the remedies set forth in Paragraph 27 below. 27. Remedies. Upon the occurrence of any default set forth in Paragraph 26 above which is not cured by Tenant within the applicable cure period, if any, provided therein, Landlord may exercise all or any of the following remedies: (i) terminate this Lease by giving Tenant written notice of the termination, in which event this Lease shall terminate on the date specified in such notice and all rights of Tenant under this lease shall expire and terminate as of such date, Tenant shall remain liable for all obligations under this Lease up to the date of such termination and Tenant shall surrender the Premises to Landlord on the date specified in such notice, and if Tenant fails to so surrender Landlord shall have the right, without notice, to enter upon and take possession of the Premises and to expel and remove Tenant and its effects without being liable for prosecution or any claim of damages therefor; (ii) terminate this Lease as provided in the immediately proceeding subsection and recover from Tenant all damages Landlord may incur by reason of Tenant's default, including without limitation, the then present value of (a) the total rent which would have been payable hereunder by Tenant for the period beginning with the day following the date of such termination and ending with the Expiration Date of the Term as originally scheduled hereunder, minus (b) the aggregate reasonable rental value of the Premises for the same period, plus (c) the costs of recovering the Premises, and all other expenses incurred by Landlord due to Tenant's default, including without limitation, reasonable attorney's fees, plus (d) the unpaid Rent earned as of the date of termination plus interest, all of which sum shall be immediately due and payable by Tenant to landlord; (iii) without terminating this lease, declare immediately due and payable the present value (using a discount rate of 9%) of all Rent due under this Lease for the entire remaining scheduled Term of this Lease, together with the costs of recovering the Premises and all other expenses incurred by Landlord in connection with Tenant's default, plus the unpaid Rent earned as of the date of termination, plus interest thereon: Landlord and Tenant acknowledging that such payment shall not be deemed a penalty but shall merely constitute payment of liquid damages, it being acknowledged by both parties that Landlord's actual damages, in the event of such default, would be extremely difficult, if not impossible, to ascertain; provided, however, that upon making any such payment, Tenant shall be entitled to receive an amount from Landlord equal to all rents received by Landlord from other tenants of the Premises during the remaining scheduled Term of the Lease, provided that Tenant shall in no event be entitled to receive in excess of the entire amount actually paid by Tenant to Landlord hereunder less all costs, expenses and attorneys' fees of Landlord in connection with any re-letting; (iv) without terminating this Lease, and without notice to Tenant, Landlord may in its own name, but as agent for Tenant enter into and take possession of the Premises and re-let the Premises, or a portion thereof, as agent of Tenant, upon any terms and conditions as Landlord may deem necessary or desirable (Landlord shall have no obligation to attempt to re-let the Premises or any part thereof. Upon any such re-letting, all rentals received by Landlord from such re-letting shall be applied first to the costs incurred by Landlord in accomplishing any such re-letting and thereafter shall be applied to the Rent owed by Tenant to Landlord during the remainder of the Term of this Lease.); (v) allow the Premises to remain unoccupied and collect Rent from Tenant as it becomes due or (vi) pursue such other remedies as are available at law or in equity. 28. DESTRUCTION OR DAMAGE. If the Premises are destroyed or damaged by storm, fire, earthquake, or other casualty, Landlord shall notify Tenant in writing, within ninety (90) days following such casualty, whether Landlord reasonably deems that restoration can be accomplished within one (1) year after the casualty occurs. If Landlord notifies Tenant that such restoration cannot be accomplished within such period, or if substantial damage occurs during the last year of the Term, this Lease shall terminate as of the date of such destruction or damage and Rent shall be accounted for between Landlord and Tenant as of that date. If Landlord deems that restoration can be accomplished within such period and the casualty does not occur during the last year of the Term, Rent shall abate in such proportion as the use of the Premises has been destroyed, Tenant shall pay to Landlord all insurance proceeds covering the Premises, and Landlord shall, to the extent of available insurance proceeds, restore the Property And Premises to substantially the same condition as before the damage occurred as soon as practicable, whereupon full Rent shall recommence. Notwithstanding anything thereinabove to the contrary, if any such casualty causes material damage and is not covered by Landlord's insurance, or if Landlord's mortgagee does not make the insurance proceeds available to Landlord for restoration, Landlord shall have the right to terminate this Lease at the time Landlord provides Tenant the notice required above. 29. EMINENT DOMAIN. If the whole of the Premises, or such portion of either as will make it economically unfeasible for Landlord to operate the Property or will make the Premises unusable in the reasonable judgment of Landlord for the purposes herein leased, is condemned or taken by any legally constituted authority for any public use or purpose, then in either of said events, the Term hereby granted shall cease from that time when possession thereof is taken by the condemning authorities, and Rent shall be accounted for as between Landlord and Tenant as of that date. Landlord shall notify Tenant of such determination within ninety (90) days of the date title vests in the condemning authority. If such taking occurs and Landlord does not terminate this Lease, this Lease shall continue in full force and effect and the Rent shall be reduced pro rata in proportion to the amount of the Premises so taken. Tenant shall have no right or claim to any part of any award made to or received by Landlord for such condemnation or taking, and all awards for such condemnation or taking shall be made solely to Landlord. 30. SERVICE OF PROCESS. Except as otherwise provided by law, Tenant hereby appoints its agent to receive the service of all dispossessory or distraint proceedings and notices thereunder, the person in charge of or occupying the Premises at the time of such proceeding or notice; and if no person be in charge or occupying the Premises, then such service of notice may be made by attaching the same to the front entrance of the Premises. 31. MORTGAGEE'S RIGHTS. Tenant agrees that this Lease shall be subject and subordinate (i) to any loan deeds, mortgages, deeds to secure debt or any other security interests now on the Premises and to all advances already made, or which may be hereunder made on account of said loan deeds, mortgages, deeds to secure debt or any other security interests to the full extent of all debts and charges secured thereby and to all renewals or extensions of any part thereof, and to any loan deed which now exists of which any owner of the Premises may hereafter, at any time, elect to place on the Premises; (ii) to any Assignment of Landlord's interest in Lease covering the Lease which now exists or which any owner of the premises may hereafter, at any time elect to place on the Lease; and (iii) to any Uniform Commercial Code Financing Statement covering the personal property rights of Landlord or any Owner of the Premises which now exists or any owner of the Premises may hereafter, at any time, elect to place on thee foregoing personal property (all of the foregoing instruments set forth in (i), (ii), and (iii) or above being hereafter collectively referred to as "Security Documents"). Tenant agrees upon request of the holder of any Security Documents ("Holder") to hereafter execute such paper or papers which the counsel for Landlord or Holder may deem necessary to evidence the subordination of the Lease to the Security Documents, in default of Tenant so doing, Landlord or Holder is hereby empowered to execute such paper or papers in the name of Tenant evidencing such subordination, as the act and deed of Tenant shall thereafter remain bound pursuant to the terms of this Lease as if a new and identical Lease between such Purchaser, as landlord, and Tenant, as tenant, had been entered into for the reminder of the Term hereof and Tenant shall attorn to the Purchaser upon such foreclosure sale and shall recognize such Purchaser as the Landlord under the Lease. Such attornment shall be effective and self-operative without the execution of any further instrument on the part of any of the parties hereto. Tenant agrees, however, to execute and deliver at any time and from time to time, upon the request of Landlord or of Holder, any instrument or certificate that may the necessary or appropriate in any such Foreclosure proceeding or otherwise to evidence such attornment. Tenant hereby acknowledges that if the interest of Landlord hereunder is covered by an Assignment to Landlord's Interest in Lease, Tenant shall pay all Rent due and payable under the Lease directly to the holder of the Assignment to Landlord's Interest in Lease upon notification of the exercise of the rights thereunder by the Holder thereof. 32. Tenant's Estoppel: Attornment. Tenant shall from time to time, upon not less than ten (10) days prior written request by Landlord, execute, acknowledge and deliver to Landlord a written statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), the dates to which the Rent has been paid, that Tenant is not in default hereunder and has no offsets or defenses against Landlord under this Lease, whether or not to the best of Tenants knowledge Landlord is in default hereunder (and if so, specifying the nature of the default) and any other information reasonably requested by Landlord, it being intended that any such statement delivered pursuant to this paragraph may be relied upon by a prospective purchaser of Landlord's interest or by a mortgagee of Landlord's interest or assignee of any security deed upon Landlord's interest in the Premises. In the event of any sale of the Property by Landlord, Tenant shall attorn to the purchaser as Landlord hereunder. Such attornment shall be effective and self-operative without the execution of any further instrument on the part of any of the parties hereto. Tenant agrees, however, to executive and deliver at any time and from time to time, upon the request of the Landlord or of such purchaser any instrument on certificate that may be necessary to appropriate to evidence such attornment. 33. Attorney Fees. If any Rent owing under this Lease is collected by or through an Attorney at Law, Tenant agrees to pay fifteen percent (15%) thereof as attorney's fees. 34. Parking. Landlord hereby agrees to maintain parking spaces on the Property in a ratio equal to or greater than three (3) spaces per one thousand rentable feet of the buildings on the Property. Tenant shall have no rights to any specific parking spaces granted under this Lease; however, Tenant and its employees shall be entitled to use the parking facilities located on the Property in common with and on the same basis as the other tenants of the Property. Landlord reserves the right to relocate, and to make alterations or additions to such parking facilities at any time or to enter into cross-easements to allow the use of such parking facilitated by the occupant of other portions of the project of which the buildings on the Property are a part of by adjoining land owners and their licenses and invites. 35. Storage. If landlord makes available to Tenant any storage space outside the Premises anything stored therein shall be wholly at the risk of Tenant, and Landlord shall have no responsibility of any character in respect thereto. 36. Waste. (a) All normal trash and waste (i.e. waste that does not require special handling pursuant to subparagraph (b) below) shall be disposed of through the Tenant's janitorial service. (b) Tenant shall not bring any hazardous waste or substances (as defined by CERCLA, RCRA or any other applicable government authority) into the Premises. Tenant hereby indemnifies and holds harmless Landlord, its successors and assigns (including the holders of any deeds to secure debt, mortgages or other security interest encumbering the Property) from and against any loss, claims, demands, damage or injury Landlord may suffer or sustain as a result of Tenant's failure to comply with the provisions of this subparagraph (b). 37. Surrender of Premises. Whenever under the terms hereof Landlord is entitled to possession of the Premises, Tenant at once shall surrender the Premises and the keys thereto to Landlord in the same condition as on the Commencement Date hereof, natural wear and tear and damage by casualty (unless caused by Tenant) and condemnation only excepted, Tenant shall remove all of its property therefrom and Landlord may forthwith re-enter the Premises and repossess itself thereof and remove all persons and effects therefrom, using such force as may be necessary without being guilty of forcible entry, detainer, trespass or other tort. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the Term of this Lease. If the last day of the Term of this Lease or any renewal falls on Sunday or a legal holiday, this Lease shall expire on the business day immediately preceding. 38. Cleaning Premises. Upon vacating the Premises, Tenant agrees to clean the Premises thoroughly or to pay Landlord for the cleaning necessary to restore the Premises to their condition when Tenant's possession commenced, natural wear and tear and damage by casualty (unless caused by Tenant) and condemnation only excepted, regardless of whether any security deposit has been forfeited. 39. No Estate in Land. This contract shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord; Tenant has only a usufruct, not subject to levy or sale, and not assignable by Tenant except with Landlord's consent. 40. Cumulative rights. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative but not restrictive to those given by law. 41. Paragraph Titles; Severability. The paragraph titles used herein are not to be considered a substantive part of this Lease, but merely descriptive aids to identify the paragraph to which they refer. Use of the masculine gender includes the feminine and neuter, and vice versa, where necessary to impart contextual continuity. If any paragraph or provision herein is held invalid by a court of competent jurisdiction, all other paragraphs or severable provisions of this Lease shall not be affected thereby, but shall remain in full force and effect. 42. Damage or Theft of Personal Property. All personal property brought into the Premises shall be at the risk of the Tenant only and Landlord shall not be liable for theft thereof or any damage thereto occasioned by any acts of co-tenants, or other occupants of the Property or any of the buildings located thereon, or any other person, except, with respect to damage to the Premises, as may be occasioned by the negligent or willful act of the Landlord, its employees and agents. 43. Holding Over. In the event Tenant remains in possession of the Premises after the expiration of the Term hereof, or of any renewal term, with Landlord's acquiescence and without any express written agreement of the parties, Tenant shall be a tenant at will and such tenancy shall be subject to all the provisions hereof, except that the monthly rental shall be at double the monthly Base Rent payable hereunder upon such expiration of the Term hereof, or of any renewal term, as the same would be adjusted pursuant to the provisions of Paragraph 4 hereof. There shall be no renewal of this Lease by operation of law or otherwise. Nothing in this Paragraph shall be construed as a consent by Landlord after the expiration of the Term hereof, or any renewal term. 44. Security Deposit. Tenant shall pay Landlord the sum of Five thousand five hundred Dollars ($5,500.00) (hereinafter referred to as "Security Deposit") which shall be held by the Landlord during the Term of this Lease, or any renewal thereof. Under no circumstances will Tenant be entitled to any interest on the Security Deposit. The Security Deposit may be used by Landlord, at its discretion, to apply to any amount owing to Landlord hereunder, or to pay the expenses of repairing any damage to the Premises, or to cure any default of Tenant hereunder. If Landlord uses all or any portion of the Security Deposit as permitted therein, Tenant shall, within ten (10) days of written demand by Landlord, pay to Landlord the amount necessary to fully restore the Security Deposit to its original amount. If there are no payments to be made from the Security Deposit as set out in this paragraph, or if there is any balance of the Security Deposit remaining after all payments have been made, the Security Deposit, or such balance thereof remaining, will be refunded to the Tenant within thirty (30) days after fulfillment by Tenant of all obligations hereunder. In no event shall Tenant be entitled to apply the Security Deposit to any Rent due hereunder. Upon sale or conveyance of the Property, Landlord may transfer or assign the Security Deposit to any new owner of the Premises, and upon such transfer all liability of Landlord for the Security Deposit shall terminate. Landlord shall be entitled to commingle the Security Deposit with its other funds. 45. Leasehold Improvements. Landlord hereby agrees to construct leasehold improvements in the Premises, at a cost not to exceed $25,600.00, in accordance with those plans and specifications ("Plans and Specifications") attached hereto as Exhibit "C" and incorporated herein by reference ("Tenant's Work"). Tenant's Work shall be constructed by a contractor chosen by Landlord and acceptable to Tenant and shall be constructed in a good and workmanlike manner. Tenant shall accept or reject contractor in a timely manner. Tenant shall not be entitled to make any changes to the Plans and Specifications without the prior written consent of Landlord, which consent may be withheld in Landlord's sole and absolute discretion unless Tenant first agrees, in writing, to pay all increases and costs resulting from any such change order and agrees that the determination of substantial completion of the Tenant's Work shall be accelerated by the number of days of delay caused by such change order. Landlord shall provide Tenant with up to $20,000.00 for additional Leasehold Improvements on July 1, 1998. Said monies shall be provided after Tenant submits to Landlord receipts for all materials, lien wavers signed by all contractors, governmental permits and a certificate of occupancy. This $20,000.00 shall applied to and be provided for Suite 200 only and shall not be payable by Landlord if Tenant should purchase the Property on or before June 30, 1998. 46. Rules and Regulations. The Rules and regulations in regard to the Property, annexed hereto as Exhibit "B", and all reasonable rules and regulations, which Landlord may hereafter, from time to time, adopt and promulgate for the government and management of said Property, are hereby made a part of this Lease and shall, during the said term, be in all things observed and performed by Tenant, his agents, employees and invites. 47. Quiet Enjoyment. Tenant, upon payment in full of the required Rent and full performance of the terms, conditions, covenants and agreement contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises during the Term hereof. Landlord shall not be responsible for the acts or omissions of any other tenant or third party that may interfere with Tenant's use and enjoyment of the Premises. 48. Entire Agreement. This Lease contains the entire agreement of the parties and no representations, inducement, promises, or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. 49. Limitation of Liability. Landlord's obligations and liability with respect to this Lease shall be limited solely to Landlord's interest in the Property, as such interest is constituted from time to time, and neither Landlord nor any partner of landlord, or any officer, director, shareholder, or partner of any partner of Landlord, shall have any personal liability whatsoever with respect to this Lease. 50. Submission of Agreement. Submission of this Lease to Tenant for signature does not constitute a reservation of space or an option to acquire a right of entry. This Lease is not binding or effective until execution by and delivery to both Landlord and Tenant. 51. Corporate Authority. If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby personally represent and warrant that Tenant is a duly organized and validly existing corporation, that Tenant is qualified to do business in the State of Georgia, that Tenant has full right, power and authority to enter into this Lease, and that each person signing on behalf of Tenant is authorized to do so. In the event any such representation and warranty is false, all persons who execute this Lease shall be individually, jointly and severally, liable as Tenant. Upon Landlord's request. Tenant shall provide Landlord with evidence reasonably satisfactory to tenant confirming the foregoing representations and warranties. 52. Notices. All notices, consents demands, requests, or other communications required or permitted hereunder shall be deemed given, whether actually received or not, when dispatched for hand delivery or delivery by air express courier (with signed receipts) to the other party at the address set forth below, or on the second business day after deposit in the United States Mail, postage prepaid, certified, return receipt requested to the address set forth below, except for notice of change of address which shall be deemed given only upon actual receipt. Any time period for response to a notice shall begin to run only when the notice is actually received, when delivery is refused or when delivery cannot be accomplished because the party to whom the notice has been sent can no longer be found at the correct notice address. The addresses of the parties for notices are as follows: Landlord's Address for Notice: Tenant's Address for Notices: Rand Realty Co. Electronic Claims & Funding, Inc. 1786 Resurgens Plaza Suite 200 945 E. Paces Ferry Rd., N.E. 2865 Amwiler Road Atlanta, GA 30326 Atlanta, GA 30360 Attn: Mr. Stanley Levitt 53. Special Stipulations. Special Stipulations numbered 1 though 9 are attached hereto as Exhibit "D" and made a part hereof and if the Special Stipulations conflict with the above provisions, the Special Stipulations shall control. IN WITNESS WHEREOF, the parties herein have hereunto set their hands and seals, the day and year first above written. LANDORD: Rand Realty Co TENANT: Electronic Claims & Funding, Inc. - ----------------------------------- ------------------------------------- BY: /s/ Harriet Rand BY: /s/ TITLE: President TITLE: President (CORPORATE SEAL) (CORPORATE SEAL) WITNESS: /s/ ATTESTED TO: BY: /s/ Barbara B. Hughes ITS: Vice President (Corporate Secretary) (CORPORATE RESOLUTION ATTACHED) CORPORATE RESOLUTION Name of Corporation: Electronic Claims and Funding, Inc. a Georgia Corporation I, the undersigned, hereby certify that I am an officer of the above named Corporation; that the following is a true copy of the resolution duly adopted by the Board of Directors of this Corporation at a meeting duly held on 5 day of July, 1995, at which a quorum was present, and that such resolution has not been rescinded or modified and is now in full force and effect. Resolved, that Thomas W. Hughes has the authority to enter into this Lease Agreement for Electronic Claims and Funding, Inc. In Witness Whereof, I have hereunto subscribed my name and affixed the sale of this Corporation, this 7 day of July, 1995. /s/ James E. Hunding - ---------------- Title: Chairman of Board/Secretary (Affix Corporate Seal) AMENDMENT TO LEASE THIS AMENDMENT TO LEASE, made this 3rd day of January, 1997, between T & J Enterprises, LLC as "Lessor", as successors in interest to 2865 Amwiler Road, and Electronic Claims & Funding, Inc., as "Lessee." W I T N E S S E T H WHEREAS, by Lease Agreement dated the 1st of August, 1995 (the "Lease"), Lessor did lease to Lessee a certain Premises (the "Demised Premises") in the office building known as 2865 Amwiler Road located in Gwinnett County, Georgia; and WHEREAS, "Lessee" and "Lessor" desire to amend said Lease as follows: NOW THEREFORE, in consideration of the Premises and the sum of ten and 00/100 dollars ($10.00) and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, it is mutually agreed as follows: 1. The Premises is hereby increased from 6,400 rentable square feet to 9,600 rentable square feet. 2. The monthly rent as stipulated in Exhibit "D" of the Lease is now based upon 9,600 rentable square feet. The commencement date for this Amendment is January 1, 1997. The monthly rent beginning January 1, 1997, is $6,776.00 and shall escalate as described in Exhibit "D" which is four percent (4%) per lease year. The common area maintenance fee paid monthly is also now based upon 9,600 rentable square feet. 3. Tenant hereby accepts the premises in "as is" condition without further obligation from the Landlord. 4. All other terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, "Lessor" and "Lessee" have caused this Third Amendment to be duly authorized, executed and delivered as of the day and year first above written.ove written. Lessor: Lessee: T & J ENTERPRISES, LLC ELECTRONIC CLAIMS & FUNDING, INC. By: /s/ By: /s/ Roger L. Primeall Its: /s/ Its: EXHIBIT E2 FIRST RIGHT REFUSAL AREA AMENDMENT PAGE 1 THIS AMENDMENT TO LEASE AGREEMENT, is made into this ____ day of _______ 19__, by and between RAND REALTY CO. ("Landlord") and ELECTRONIC CLAIMS & FUNDING, INC. ("Tenant") WITHNESSETH WHEREAS, Landlord and Tenant have heretofore entered into that certain Lease Agreement, attached hereto and incorporated herein by this reference regarding certain real property in Land Lot 250 of the 6th District of Gwinnett County, Georgia (the "Lease") covering the lease of Property described as: 2865 Amwiler Road, Atlanta, Georgia. WHEREAS, Landlord and Tenant desire to amend the Lease, NOW THEREFORE, for and in consideration of the sum of ONE AND NO/100THS ($1.00) DOLLAR and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by Landlord and Tenant, Landlord and Tenant hereby agree as follows: 1. Tenant desires to lease the additional space by approximately 6528 gross square feet which represents 16.42% of the total gross square footage of the entire building for purposes of Tenant's pro rata charge of common area maintenance charge, tax charge and insurance charge, base rental and any other charge as set forth in the Lease. 2. Upon the execution of this amendment, Tenant shall pay to Landlord as additional monthly Base Rental pursuant to Special Stipulation 2 in Exhibit "D" of the Lease. Provided, however, in no event will the monthly Base Rental be less than the rate as stipulated on a square footage bases in Exhibit D 1. In terms of which the minimum base rental shall be: If Right to Exercise in period 8/1/95 to 6/30/95; $4,428.16 per month or $53.137.92 per annum which is calculated at $8.14 per square foot per annum for base rental. This Right of First Refusal to rent additional space will escalate at the same rate and at the same time intervals as set out in Paragraph 1 of Special Stipulations in Exhibit "D". 3. Landlord will spend up to a maximum of $26, 112..00 of Leasehold improvement money as provided for in Paragraph 45 of Lease if Tenant executes this Amendment no later than June 30, 1997. 4. Tenant shall tender an additional security deposit equal to the first full months Base Rental. 5. Lease Guaranty - The obligations of Tenant under this Lease shall be unconditionally guaranteed by Video Enterprises Corporation d/b/a Entre Computer Center, who agrees to execute the Lease Guaranty attached by Exhibit "G" hereto. 6. Assignment - Provided that Lease Guaranteed in terms of Paragraph 5 hereof, Lease can be assigned to any entity in which effectively is 100% owned and controlled by James Hindy and Thomas Hughes. Except as expressly amended hereby, the Lease shall otherwise remain in full force and effect as originally executed and previous amendments. This Amendment shall bind and inure to the benefit of the parties hereto, their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, the Landlord and Tenant have signed, scaled and delivered this Agreement on the day, month, and year first above written. LANDLORD: RAND REALTY CO. TENANT: ELECTRONIC CLAIMS & FUNDING, INC. By: By: ----------------------------------- ------------------------------------ Title: Title: -------------------------------- --------------------------------- EXHIBIT E3 FIRST RIGHT REFUSAL AREA AMENDMENT PAGE 1 THIS AMENDMENT TO LEASE AGREEMENT, is made and entered into this *_______ day of _______ 19__, by and between RAND REALTY CO. (Landlord") and ELECTRONIC CLAIMS & FUNDING, INC. ("Tenant") WITNESSETH WHEREAS, Landlord and Tenant have heretofore entered into that certain Lease Agreement, attached hereto and incorporated herein by this reference regarding certain real property in Land Lot 250 of the 6th District of Gwinnett County, Georgia (the "Lease") covering the lease of Property described as: 2865 Amwiler Road, Atlanta, Georgia. WHEREAS, Landlord and Tenant desire to amend the Lease, NOW, THEREFORE, for and in consideration of the sum of ONE AND NO/1OOTHS ($1.00) DOLLAR and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by Landlord and Tenant, Landlord and Tenant hereby agree as follows: 1. Tenant desires to lease the additional space as shown on the floor plan on page two of this amendment. This additional space will increase Tenants space by approximately 12,428 gross square feet which represents 31.26% of the total gross square footage of the entire building for purposes of Tenant's pro rata charge of common area maintenance charge, tax charge and insurance charge, base rental and any other charge as set forth in the Lease. 2. Upon the execution of this amendment, Tenant shall pay to Landlord as additional monthly Base Rental pursuant to Special Stipulation 2 in Exhibit "D" of the Lease. Provided, however, in no event will the monthly Base Rental be less than the rate as stipulated on a square footage bases in Exhibit D 1 . In terms of which the minimum base rental shall be: If Right to Exercise in period 8/1/95 to 6/30/96; $8,430.32 per month or $101,163.92 per annum which is calculated at $8.14 per square foot per annum for base rental. This Right of First Refusal to rent additional space will escalate at the same rate and at the same time intervals as set out in Paragraph 1 of Special Stipulations in Exhibit "D". 3. Landlord will spend up to a maximum of $49,712.00 of Leasehold improvement money as provided for in Paragraph 45 of Lease if Tenant executes this Amendment no later than June 30, 1997. 4. Tenant shall tender an additional security deposit equal to the first full months Base Rental. 5. Lease Guaranty - The obligations of Tenant under this Lease shall be unconditionally guaranteed by Video Enterprises Corporation d/b/a Entre Computer Center, who agrees to execute the Lease Guaranty attached by Exhibit "G" hereto. 6. Assignment - Provided that Lease Guaranteed in terms of Paragraph 5 hereof, Lease can be assigned to any entity in which effectively is 100% owned and controlled by James Hindy and Thomas Hughes. Except as expressly amended hereby, the Lease shall otherwise remain in full force and effect as originally executed and previous amendments. This Amendment shall bind and inure to the benefit of the parties hereto, their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, the Landlord and Tenant have signed, sealed and delivered this Agreement on the day, month, and year first above written. LANDLORD: RAND REALTY CO. TENANT: ELECTRONIC CLAIMS & FUNDING, INC. By: By: ----------------------------------- ------------------------------------ Title: Title: -------------------------------- --------------------------------- EX-10.6 8 EXHIBIT 10.6 EXHIBIT 10.6 CONFIDENTIAL July 15, 1998 MEDE AMERICA CORPORATION ------------------------ $15,000,000 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: Bank of America National Trust and Savings Association ("Bank of America") is pleased to advise you that it is willing, subject 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 $15,000,000 of senior secured credit facilities (the "Senior Facilities"). It is agreed that Bank of America 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 in the Term Sheet, Bank of America's commitment to provide financing hereunder is subject to, among other conditions, (i) the negotiation and execution of a definitive credit agreement (the "Credit Agreement") and other related documentation satisfactory to the Lenders; (ii) there being no material adverse change in the reasonable opinion of Bank of America 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; (iii) there be no competing offering, placement, or arrangement of any debt securities or bank financing 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 Bank of America, 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 relate 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 Bank of America, 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. MedE America Corporation July 15, 1998 Page 2 In addition, the Borrower hereby agrees to reimburse Bank of America 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 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 changes 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). The terms contained in this letter and the Term Sheet are confidential and, except for disclosure to your board of directors, officers and employees, to professional advisors retained by you in connection with this transaction, or as may be required by law, may not be disclosed in whole or in part to any other person or entity without our prior written consent. 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. Bank of America's commitment hereunder shall remain in effect until 5:00 p.m. Chicago time, on July 31, 1998 when, if not so accepted, Bank of America's commitment hereunder will terminate. This commitment will expire on September 1, 1998 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, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: --------------------------- Title: Vice President ACCEPTED AND AGREED TO: MEDE AMERICA CORPORATION THIS_____DAY OF JULY, 1998 By: --------------------------- Title: ------------------------ Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- SUMMARY OF TERMS AND CONDITIONS1 MEDE AMERICA CORPORATION $15,000,000 SENIOR SECURED CREDIT FACILITIES BORROWER: MEDE AMERICA CORPORATION ("MedE" or the "Borrower"). GUARANTORS: All material operating subsidiaries and holding companies of the Borrower. ADMINISTRATIVE AGENT: Bank of America National Trust and Savings Association (in such capacity "Bank of America" or "Administrative Agent") FACILITIES: Senior Secured Credit Facilities (the "Senior Facilities") up to $15,000,000 consist- ing of: (1) $7,500,000 2 -- year senior secured non-amortizing revolving credit facility (the "Revolver"). (2) $7,500,000 2 -- year senior secured term loan ("Term Loan A"). LENDERS: Bank of America. PURPOSE: The Revolver will be used for working capital and general corporate purposes. The Term Loan A will be used to finance future acquisitions including related fees and expenses. AVAILABILITY: The Revolver will be available on a revolving basis after the closing of the Senior Facilities ("Closing Date") and prior to the maturity thereof. - --------- 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. Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- Term Loan A may be drawn at any time up to the expiry date, and once repaid may not be reborrowed. Availability under the Term Loan A will be subject to (i) Bank of America's prior written approval of acquisition target in a parallel line of business, (ii) proforma covenant compliance and (iii) both MedE and the acquisition target having Y2K compliant systems. COVENANTS: The Company shall be at all times compliant with the following covenants. (i) Debt/EBITDA Maximum 2.0x. (ii) Interest Coverage Minimum 3.0x. MATURITY DATE: Two year anniversary of the Closing Date, but no later than October 31, 1998. MANDATORY PREPAYMENTS/ COMMITMENT REDUCTIONS: Mandatory prepayments of Term Loan A will be made from: (1) 100% of the net cash proceeds of permitted asset sales (subject to a basket and reinvestment rights to be negotiated), (2) 100% of the net cash proceeds from any debt offering, (3) 75% of the net cash proceeds received from the issuance of equity securities and capital contributions, exclusive of the August 1998 IPO. (4) 100% of the net cash proceeds from insurance recovery and condemnation events, subject to certain reinvestment rights to be agreed upon, and (5) 100% of annual excess cash flow (to be defined), provided that so long as no default or event of default exists under the Senior Facilities, such percentage shall be reduced on a basis to be determined based upon the achievement of certain Leverage Ratios to be determined. Each such prepayment of the Term Loan A shall be applied pro rata to the remaining scheduled amortization payments of Term Loan A. In addition, (x) loans under the Revolver will have to be prepaid or cash collateralized, as appropriate, if at any time the outstanding amount thereof ex- ceeds the total commitments for the Revolver and (y) all Term Loan A shall be required to be repaid, and the Revolver 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 assets of the Company and its subsidiaries. (2) Stock of all subsidiaries. PAGE 2 Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- BORROWING At the Borrower's option, interest on borrowings shall accrue OPTIONS: 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 Bank of America to prime international banks in the off-shore dollar market at 11:00 a.m. New York time three 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 Bank of America 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: With respect to Eurodollar Loans, the Eurodollar Rate plus the Applicable Euro- dollar Margin described below. With respect to Base Rate Loans, the Base Rate plus the Applicable Base Rate Margin described below. All amounts outstanding under the Senior Facilities shall bear interest, at the Borrower's option, as follows: A. With respect to the Revolver: (i) at the Base Rate plus 0.25% per ammum; or (ii) at the Eurodollar Rate plus 1.25% annum; B. With respect to Term Loan A: (i) at the Base Rate plus 0.25% per annum; or (ii) at the Eurodollar Rate plus 1.25% per annum Interest on Base Rate borrowings are to accrue base on a 365 (6)-day year and actual days elapsed. Interest on Eurodollar 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 base of Eurodollar Loans, the earlier of the end of each applicable interest period or quarterly in arrears. PAGE 3 Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- COMMITMENT FEE: Commitment Fee equal to 0.50% per annum times the total amount of the Senior Facilities. Commitment Fees shall be payable quarterly in arrears. DEFAULT RATE: 2.00% above the rate otherwise applicable rate of Senior Facilities. REVOLVER 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 Loans 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. Voluntary prepayments of Term Loan A shall be applied to the outstanding Term Loan A and shall be applied to reduce the scheduled amortization payments of each such tranche of Term Loan A. TERMINATION OR VOLUNTARY REDUCTION OF THE FACILITIES:The Borrower may irrevocably reduce the commitments under the Revolver in amounts of at least $1,000,000 at any time on three business days advance notice. DOCUMENTATION: The Senior Facilities 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 making advances, affirmative and negative covenants 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 breach, corporate authority, approvals, PAGE 4 Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- ERISA, taxes, Investment Company Act, credit agreements and other material agreements, investments, compliance with laws and regulations, disclosure, assets, solvency, labor matters, environmental matters, proprietary rights, real property, insurance and Year 2000 compliance. CONDITIONS TO THE CLOSING DATE: 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; o Repayment and cancellation of existing bank credit facilities and other indebtedness; o All documents and agreements signed and delivered; o No Event of Default or incipient default; o All representations and warranties are true as of the date of each advance; o Satisfactory completion of legal due diligence. 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 to perform their obligations under the Senior Facilities; o No material adverse litigation CONDITIONS TO EACH ADVANCE (INCLUDING INITIAL ADVANCE) o No default of event of default under the Senior Facilities. o Continued accuracy in all material respects of the representations and warranties. o Advances under the Term Loan A will be subject to: (i) Bank of America's prior written approval of acquisition target in a parallel line of business, (ii) proforma covenant compliance and (iii) both MedE and the acquisition target having Y2K compliant systems. AFFIRMATIVE COVENANTS: Standard for the Administrative Agent's similar financing 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. PAGE 5 Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- FINANCIAL COVENANTS: Usual and customary for transactions of this type including but not limited to: 1. Maximum Leverage Ratio of 2.0x 2. Minimum Interest Coverage Ratio of 3.0x NEGATIVE COVENANTS: Standard for the Administrative Agent's similar financing and such others as the Administrative Agent deems appropriate in the context of the proposed Transaction, including, but not limited to: o Year 2000 Compliance required by 8/1/99 o Change of control (i.e. Facilities must be reconfirmed in the event that an entity other than WCAS and its affiliates assumes a controlling interest in the Company.) 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, acquisitions, dissolutions, etc. o Restrictions on assets dispositions. o Restrictions on sale-leaseback transactions. o Loan proceeds not to be used in violation of Regulation U. o Restrictions on transactions with affiliates. o Restrictions on the payment of management fees. EVENTS OF DEFAULT: Standard for the Administrative Agent's similar financing and such others as the Agent deems appropriate in the context of the proposed Transaction. INCREASED COSTS/ CHANGE OF CIRCUMSTANCE/ CAPITAL ADEQUACY/ 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. PAGE 6 Confidential MEDE AMERICA CORPORATION - -------------------------------------------------------------------------------- EXPENSES: The Borrower will pay all costs and expenses incurred at any time by the Administrative Agent (including, without duplication, reasonable attorney's 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 Facilities, regardless of whether the Facilities close. 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). DOCUMENTATION: 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. This Summary of Terms and Conditions (the "Term Sheet") does not attempt to describe all of the terms and conditions that would pertain to the Facilities, nor do its terms suggest the specific phrasing of documentation clauses. Instead, it is intended to outline certain points of business understanding around which the Facilities will be structured. The closing of any financial transaction relating to the Facilities would be subject to definitive loan documentation mutually acceptable to the Borrower and the Administrative Agent and would include various conditions precedent, including without limitations the conditions set forth above. PAGE 7 EX-10.7 9 EXHIBIT 10.7 EXHIBIT 10.7 NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY AGREEMENT THIS AGREEMENT is made this ____ day of __________, 1998, by and between MEDE AMERICA CORPORATION (the "Company") and _________________ ("Employee"). In consideration of the employment of the Employee and the salary and other remuneration and benefits paid by the Company to the Employee while employed by the Company, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties agree: 1. NON-COMPETITION (a) The Employee agrees that the Company is engaged in the highly-competitive business of providing Healthcare Electronic Data Interchange ("EDI") services. The Employee agrees that due to the Employee's unique position with the Company, which encompasses, among other things, strategic planning, business development, promotion of shareholder interests, maintenance of positive investor relations, and the supervision of personnel related to these functions, engaging in any business which is directly or indirectly competitive with the Company will cause the Company great and irreparable harm. (b) The Employee agrees that the Employee's work for the Company has brought and will continue to bring the Employee into close contact with many of the Company's customers, trade secrets and confidential and proprietary information. The Employee further agrees that the covenants contained in paragraph 1(d) of this Agreement are reasonable and necessary to protect the Company's legitimate business interests in its customer relationships, trade secrets and proprietary and confidential information (c) The Employee agrees that while employed by the Company, the Employee will faithfully devote the Employee's best efforts and entire time to advance the interests of the Company and will not directly or indirectly, on the Employee's own behalf or another's behalf, engage in any manner in any business relating to the provision of Healthcare EDI services, other than as an employee of the Company. 1 (d) The Employee agrees that for twelve (12) months after the cessation of the Employee's employment with the Company, the Employee shall not, directly or indirectly, on the Employee's own behalf or another's behalf, engage in or perform, strategic planning, business development, promotion of shareholder interests, maintenance of positive investor relations, and the supervision of personnel related to these functions in a Healthcare EDI organization, anywhere within the United States. The provisions of this subparagraph apply, but are not limited to, the performance of the above-described services for Envoy/NEIC, Inc. as an employee, officer, director, partner or consultant. 2. NON-S0LICITATION OF CUSTOMERS (a) The Employee agrees that while employed by the Company, the Employee has had and will continue to have contact with and become aware of the Company's customers and the representatives of those customers, their names and addresses, specific customer needs and requirements, and leads and references to prospective customers. The Employee further agrees that loss of such customers will cause the Company great and irreparable harm. (b) The Employee agrees that, for twelve (12) months after the cessation of employment, the Employee will not directly or indirectly solicit, contact, call upon, communicate with or attempt to communicate with any customer, former customer or prospective customer of the Company for the purpose of providing Healthcare EDI services. This restriction shall apply only to any customer, former customer or prospective customer of the Company with whom the Employee had contact during the Employee's employment with the Company. For the purposes of this paragraph, "contact" means interaction between the Employee and the customer, former customer or prospective customer which takes place to initiate, develop or further the business relationship, or performing services for the customer, former customer or prospective customer on behalf of the Company. 3. NON-SOLICITATION OF EMPLOYEES The Employee agrees that, for as long as the Employee is employed by the Company and for twelve (12) months after the cessation of the Employee's employment, the Employee will not recruit, hire or attempt to recruit or hire, directly or by assisting others, any other employee of the 2 Company with whom the Employee had contact during the Employee's employment with the Company. For the purposes of this paragraph, "contact" means any interaction whatsoever between the Employee and the other employee. 4. TRADE SECRETS AND CONFIDENTIAL INFORMATION (a) The Company's involvement in the business of Healthcare EDI services has required and continues to require the expenditure of substantial amounts of money and the use of skills developed over a long period of time. As a result of these investments of money, skill and time, the Company has developed and will continue to develop certain valuable trade secrets and confidential information that are peculiar to the Company's business, the disclosure of which would cause the Company great and irreparable harm. (b) The term "Trade Secrets" means any scientific or technical information, design, process, procedure, formula or improvement that is valuable and not generally known to the Company's competitors. To the fullest extent consistent with the foregoing and otherwise lawful, Trade Secrets shall include, without limitation, information and documentation pertaining to the design, specifications, capacity, testing, installation, implementation and customizing techniques and procedures concerning the Company's present and future products and services. (c) The term "Confidential Information" means any data or information and documentation, other than Trade Secrets, which is valuable to the Company and not generally known to the public, including, but not limited to: i. Financial information, earnings, assets, debts, prices, fee structures, volumes of purchases or sales, or other financial data, whether relating to the Company generally or to particular products, services, geographic areas or time periods; ii. Supply and service information, including, but not limited to, information concerning the goods and services utilized or purchased by the Company, the names and addresses of suppliers, terms of supplier service contracts or of particular transactions, or related information about potential suppliers, to the extent that such information is not generally known to the public, and to the extent that the combination of suppliers or use of particular suppliers, though 3 generally known or available, yields advantages to the Company the details of which are not generally known; iii. Marketing information, including, but not limited to, details about ongoing or proposed marketing programs or agreements by or on behalf of the Company, marketing forecasts, results of marketing efforts or information about impending transactions; iv. Personnel information, including, but not limited to, employees' compensation or other terms of employment, actual or proposed promotions, hiring, resignations, disciplinary actions, terminations or reasons therefor, training methods, performance or other employee information; and, v. Customer information, including, but not limited to, any compilations of past, existing or prospective customers or customer representatives, customer proposals or agreements between customers and the Company, status of customer accounts or credit, customer preferences or related information about actual or prospective customers. 5. NON-DISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION The Employee agrees, except as specifically required in the performance of the Employee's duties for the Company, that the Employee will not, during the course of employment by the Company and for so long thereafter as the pertinent information or documentation remain Trade Secrets, directly or indirectly use, disclose or disseminate to any other person, organization or entity or otherwise employ any Trade Secrets. The Employee further agrees, except as specifically required in the performance of the Employee's duties for the Company, that the Employee will not, during the course of employment by the Company and for twelve (12) months after the cessation of that employment, disclose or disseminate to any other person, organization or entity or otherwise employ any Confidential Information. The obligations set forth herein shall not apply to any Trade Secrets or Confidential Information which shall have become generally known to competitors of the Company through no act or omission of the Employee. 4 6. RETURN OF PROPERTY The Employee agrees to deliver to the Company upon the cessation of employment, and at any other time upon the Company's request, (i) all memoranda, notes, records, computer programs, computer files, computer equipment, drawings or other documentation, whether made or compiled by the Employee alone or with others or made available to the Employee while employed by the Company, pertaining to Trade Secrets, Confidential Information, and (ii) all Trade Secrets, Confidential Information of the Company in the Employee's possession. 9. WAIVER OF BREACH The Company's waiver of a breach of any provision of this Agreement by the Employee does not waive any subsequent breach by the Employee, nor does the Company's failure to take action against any other employee for similar breaches operate as a waiver by the Company of a breach. 11. SEVERABILITY If any provision in this Agreement is determined to be in violation of any law, rule or regulation or otherwise enforceable, such determination shall not affect the validity of any other provision of this Agreement, but such other provisions shall remain in full force and effect. Each provision, paragraph and subparagraph of this Agreement is severable from every other provision, paragraph and subparagraph and constitutes a separate and distinct covenant. 12. SUCCESSORS This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Employee, the Employee's heirs, executors and administrators. 13. INJUNCTIVE RELIEF The Employee understands, acknowledges and agrees that in the event of a breach or threatened breach of any of the covenants and promises contained in this Agreement, the Company will suffer irreparable injury for which there is no adequate remedy at law, and the Company will therefore be entitled to injunctive relief from the courts enjoining said breach or threatened breach 5 pending arbitration, as provided in paragraph 14 of this Agreement. The Employee further acknowledges that the Company also shall have the right to seek a remedy at law as well as or in lieu of equitable relief in the event of any such breach. 16. ENTIRE AGREEMENT AND MODIFICATION This Agreement supersedes any and all prior understandings and agreements between the parties concerning restrictions on competition, solicitation of customers and employees and confidentiality. This Agreement may not be altered or amended except in conformity with Paragraphs 10 and 11, above, or in writing, signed by the Employee and a representative of the Company with actual authority to effect such alteration or amendment. 17. CHOICE OF LAW The parties agree that this Agreement is to be governed by and construed under New York law, without regard to the conflicts or choice of law provisions of New York. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the date first above mentioned. MEDE AMERICA CORPORATION By: ----------------------------- --------------------------------- [MedE Representative] Employee --------------------------------- Witness 6 EX-10.8 10 EXHIBIT 10.8 EXHIBIT 10.8 MEDE AMERICA CORPORATION AND ITS SUBSIDIARIES 1998 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN Section 1. Purpose. The purpose of the MEDE AMERICA Corporation and its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan (the "Plan") is to promote the interests of MEDE AMERICA Corporation, a Delaware corporation (the "Company"), and any Subsidiary thereof and the interests of the Company's stockholders by providing an opportunity to selected Employees, Consultants and Non-Employee Directors of the Company to purchase Common Stock of the Company, thereby enhancing the Company's ability to attract, retain, motivate and encourage such persons to devote their best efforts to the business and financial success of the Company. It is intended that this purpose will be effected by awards of Non-Qualified Stock Options, Incentive Stock Options, Restricted Stock and/or Unrestricted Stock. Section 2. Definitions. For purposes of the Plan, the following terms used herein have the following meanings, unless a different meaning is clearly required by the context: 2.1. "Administrator" means the Board of Directors or any Committees that shall be administering the Plan in accordance with Section 4 hereof. 2.2. "Annual Option" means a Non-Qualified Stock Option granted to a Non- Employee Director on the next business day following each annual meeting of stockholders at which such Non-Employee Director is elected as a Director, other than the annual meeting of stockholders at which such Non-Employee Director is initially elected a Director. 2.3. "Applicable Laws" means the legal requirements relating to the administration of stock option plans under state corporate laws, federal and state securities laws and the Code. 2.4. "Award" means any award of an Option or Stock under the Plan. 2.5. "Board of Directors" means the Board of Directors of the Company. 2.6. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.7. "Committee" means any committee appointed by the Board of Directors in accordance with Section 4 of the Plan. 2.8. "Common Stock" means the Common Stock, $.01 par value, of the Company. 2.9. "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary of the Company to render services and who is compensated for such services; provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. 2.10. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Administrator, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 2.11. "Director Option" means an Initial Option or an Annual Option.. 2.12. "Director" means any member of the Board of Directors. 2.13. "Employee" means any person, including without limitation, an officer of the Company, who, is employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall constitute "employment" by the Company. 2.14. "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; or 2 (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. 2.15. "Incentive Stock Option" means an Option granted to a Participant pursuant to Section 6 (including Section 6.7 thereof) which is intended to meet the requirements of Section 422 of the Code or any successor provision. 2.16. "Initial Option" means a Non-Qualified Stock Option granted pursuant to Section 6.8 to a Non-Employee Director on the first business day following his or her initial election to the Board of Directors. 2.17. "Non-Employee Director" means a 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. 2.18. "Non-Qualified Stock Option" means an Option granted to a Participant pursuant to Section 6 that is not intended to be an Incentive Stock Option. 2.19. "Option" means any Incentive Stock Option or Non-Qualified Stock Option. 2.20. "Parent" of the Company shall have the meaning set forth in Section 424(e) of the Code. 2.21. "Participant" means any Employee, Consultant or Non-Employee Director to whom an Award is granted under the Plan. 2.22. "Restricted Period" means the period of time selected by the Administrator during which shares subject to an Award of Restricted Stock may be repurchased by or forfeited to the Company. 2.23. "Reporting Person" means a Participant that is subject to Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2.24. "Restricted Stock" means shares of Common Stock awarded to a Participant under Section 7. 2.25. "Stock" means shares of Restricted Stock or Unrestricted Stock. 2.26. "Subsidiary" of the Company shall have the meaning set forth in Section 424(f) of the Code. 2.27. "Unrestricted Stock" means shares of Common Stock awarded to a Participant under Section 7 free of any restrictions under the Plan. 3 Section 3. Common Stock Subject to the Plan. 3.1. Number of Shares. The total number of shares of Common Stock for which Awards may be granted under the Plan shall not exceed in the aggregate [1,500,000 (###)] shares of Common Stock (subject to adjustment as provided in Section 3.3 hereof). The Company, during the term of this Plan, will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan. 3.2. Reissuance. The shares of Common Stock that may be subject to Awards under the Plan may be either authorized and unissued shares or shares reacquired at any time and now or hereafter held as treasury stock as the Administrator may determine. In the event that any outstanding Option expires, is terminated, forfeited or becomes unexercisable for any reason without having been exercised in full, the shares allocable to the unexercised portion of such Option may again be subject to an Award under the Plan, subject, in the case of Incentive Stock Options, to any limitation required by the Code. If any shares of Common Stock issued or sold pursuant to a Stock award or the exercise of an Option shall have been repurchased by the Company, then such shares shall not again be available for future grant or award under the Plan. 3.3. Stock Dividends, Etc.. In the event that the Administrator, in its sole discretion, determines that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or other similar transaction affects the Common Stock such that an adjustment is required in order to preserve or prevent enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator, subject, in the case of Incentive Stock Options, to any limitation required under the Code, may equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards and (iii) the award, exercise or conversion price with respect to any of the foregoing, and if considered appropriate, the Administrator may cause the number of shares subject to any Award always to be a whole number. The Administrator may make Awards under the Plan in substitution for stock and stock based awards held by employees of another corporation who concurrently become employees of the Company as a result of a merger or consolidation of the employing company with the Company or a Parent or Subsidiary of the Company or the acquisition by the Company or a Parent or Subsidiary of the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Administrator deems appropriate under the circumstances. 4 Section 4. Administration of the Plan. 4.1. Procedure. (a) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Participants. (b) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee consisting of two or more Non-Employee Directors. (c) Rule 16b-3. To the extent that the Administrator determines it to be desirable to qualify transactions hereunder as exempt under Rule 16b-3 of the Exchange Act, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (d) Other Administration. Other than as provided above, the Plan shall be administered by (i) the Board of Directors or (ii) a Committee, which committee shall be constituted to satisfy Applicable Laws. 4.2. Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific powers delegated by the Board of Directors to such Committee, the Administrator shall have the authority, in its discretion: (a) to determine the Fair Market Value of the Common Stock, in accordance with Section 2.14 of the Plan; (b) to select the Employees and Consultants to whom Awards may be granted hereunder; (c) to determine whether and to what extent awards of Options and Stock, or any combination thereof, are granted hereunder; (d) to determine the number of shares of Common Stock to be covered by each Award made hereunder; (e) to determine the amount (not less than par value per share) and the form of the consideration that may be used to purchase shares of Common Stock pursuant to any Stock award or upon exercise of any Option (including, without limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a Participant may be used by the Participant to exercise an Option); 5 (f) to approve forms of agreements for use under the Plan; (g) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder, including without limitation, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting, acceleration or waiver of forfeiture restrictions and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (h) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (i) to construe and interpret the terms of the Plan: (j) to prescribe, amend and rescind rules and regulations relating to the Plan; (k) to modify or amend the terms of any Award; (l) to accelerate vesting periods with respect to outstanding Options and the end of Restricted Periods with respect to Stock Awards; provided, however, that any Incentive Stock Options may only be"accelerated" in accordance with Section 424(h) of the Code; (m) to authorize any person to execute on behalf of the Company any instrument required to effect any Award granted by the Administrator; and (n) to exercise all other powers granted to the Administrator under the Plan and make all other determinations deemed necessary or advisable for administering the Plan. 4.3. Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Options or Stock awarded under the Plan . 4.4. Expenses, Etc. All expenses and liabilities incurred by the Administrator in the administration of the Plan shall be borne by the Company. The Administrator may employ attorneys, consultants, accountants or other persons in connection with the administration of the Plan. The Company, and its officers and directors, shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Administrator shall be liable for any action, determination or interpretation taken or made in good faith with respect to the Plan or any Award granted thereunder. 6 Section 5. Eligibility. Awards may be granted to any Employee, Consultant or Non-Employee Director. The Administrator shall have the sole authority to select the Employees and Consultants to whom discretionary Awards are to be granted hereunder, and to determine whether a person is to be granted a Non-Qualified Stock Option, an Incentive Stock Option, Restricted Stock or Unrestricted Stock, or any combination thereof. Non-Employee Directors shall only be eligible to receive grants of Non-Qualified Stock Options pursuant to Section 6.8 of the Plan. No person other than an Employee, Consultant or Non-Employee Director shall have any right to participate in the Plan. Any person selected by the Administrator for participation during any one period will not by virtue of such participation have the right to be selected as a Participant for any other period. The maximum number of shares of Common Stock which may be the subject of Awards granted to any one employee under the Plan during any calendar year shall be 300,000 shares. For this purpose, the grant of a new Award in substitution for outstanding Awards shall be deemed to constitute a new grant, separate from the original grant that is to be canceled. Incentive Stock Options may be granted only to persons eligible to receive Incentive Stock Options under the Code. Section 6. Options. 6.1. Subject to the provisions of the Plan, the Administrator may award Incentive Stock Options and Non-Qualified Stock Options, and determine the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422 of the Code, or any successor provision, and any regulations thereunder. 6.2. Exercise Price. The Administrator shall establish the exercise price of each Option at the time such Option is awarded. Such price shall not be less than 85% of the Fair Market Value of the Common Stock on the date of grant; provided that (i) in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value of the Common Stock at the time of grant and (ii) in the case of a Non-Qualified Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price shall not be less than 100% of the Fair Market Value at the time of grant. 6.3. Vesting. Each Option shall be exercisable at such times and subject to such terms and conditions as the Administrator may specify in the applicable Option agreement or thereafter. The Administrator may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. 6.4. Payment. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or check in an amount equal to the exercise price of such Options or, to the extent permitted by the Administrator at or after the award of the Option, by 7 (a) delivery of shares of Common Stock owned by the optionee, valued at their Fair Market Value on the date of such option exercise, (b) delivery of a promissory note of the optionee to the Company on terms determined by the Administrator, (c) delivery of an irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or delivery of irrevocable instructions to a broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price, (d) payment of such other lawful consideration as the Administrator may determine or (e) any combination of the foregoing. In the event an optionee pays some or all of the exercise price of an Option by delivery of shares of Common Stock pursuant to clause(a) above, the Administrator may provide for the automatic award of an Option for up to the number of shares so delivered. 6.5. Transferability. Each Option granted under the Plan shall provide that neither it nor any interest therein may be transferred, assigned, pledged or hypothecated, by the optionee or by operation of law otherwise than by will, the laws of descent and distribution or a "qualified domestic relations order" (as defined in the Code), and shall be exercised during the lifetime of the optionee only by the optionee or a transferree pursuant to such a "qualified domestic relations order". No Option or interest therein may be or be made subject to execution, attachment or similar process. 6.6. Cancellation and New Grant of Options. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the canceled Options or (ii) the amendment of the terms of any and all outstanding Options under the Plan to provide an option exercise price per share which is higher or lower than the then current exercise price per share of such outstanding Options. 6.7. Incentive Stock Options. Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. The exercise period shall not exceed ten years from the date of grant. (b) If any Employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rule of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: 8 (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and (ii) The Option exercise period shall not exceed five years from the date of grant. (c) For so long as the Code shall so provide, options granted to any Employee under the Plan (and any other incentive stock option plans of the Company or its Subsidiaries) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such Options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value (determined as of the respective date or dates of grant) of more than $100,000. (d) No Incentive Stock Option may be exercised unless, at the time of such exercise, the Participant is, and has been continuously since the date of grant of his or her Option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised (to the extent exercisable on the date the Participant ceased to be an Employee of the Company or a Parent or Subsidiary) within the period of three months after the date the Participant ceases to be an employee of the Company or such Parent or Subsidiary (or within such lesser period as may be specified in the applicable option agreement); provided, that the agreement with respect to such Option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a Non-Qualified Stock Option under the Plan; (ii) if the Participant dies while in the employ of the Company, or within three months after the Participant ceases to be an Employee, the Incentive Stock Option (to the extent otherwise exercisable on the date of death) may be exercised by the Participant's Designated Beneficiary within the period of one year after the date of death (or within such lesser period as may be specified in the applicable Option agreement); and (iii) if the Participant becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while in the employ of the Company, the Incentive Stock Option may be exercised (to the extent otherwise exercisable on the date of death) within the period of one year after the date of such disability (or within such lesser period as may be specified in the Option agreement). In the event of the Participant's death during this one-year period, the Incentive Stock Option may be exercised by the Participant's Designated Beneficiary within the period of one year from the date the Participant became disabled or within such lesser period as may be specified in the applicable Option agreement. 9 For all purposes of the Plan and any Option granted hereunder, (i) "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Treasury Regulations under the Code (or any successor regulations) and (ii) any Option may provide that if such Option shall be assumed or a new Option substituted therefor in a transaction to which Section 424(a) of the Code applies, employment by such assuming or substituting corporation shall be considered for all purposes of such Option to be employment by the Company. Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 6.8. Non-Employee Director Options. Director Options shall be automatic and subject to the following additional terms and conditions: (a) All Director Options shall be Non-Qualified Stock Options. (b) Each Non-Employee Director shall be granted an Initial Option to purchase 1,000 shares of Common Stock on the date of his or her initial election to the Board of Directors, and an Annual Option to purchase 1,000 shares of Common Stock on the next business day following each annual meeting of stockholders. (c) The exercise price of each Director Option will be 100% of the Fair Market Value at the time of grant. (d) Director Options shall become exercisable six months after the time of grant. The exercise period shall not exceed ten years from the date of grant, provided that subject to the provisions of Section 6.8(e), no Director Option may be exercised more than 90 days after the optionee ceases to serve as a director of the Company. (e) if a Non-Employee Director dies or becomes disabled becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while a director of the Company, the Option may be exercised (to the extent otherwise exercisable on the date of disability or death), by such disabled director or, in the case of death, by the director's Designated Beneficiary, in each case within the period of one year after the date of disability or death (or within such lesser period as may be specified in the applicable Option agreement). Section 7. Restricted And Unrestricted Stock. 7.1. General. The Board of Directors may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their purchase price (or to require forfeiture of such shares if purchased at no cost) from the recipient in the event that conditions specified by the Administrator in the applicable Award are not satisfied prior to the end of the applicable Restricted Period or Restricted Periods established by the Administrator for such Award. Conditions for repurchase (or forfeiture) may be 10 based on continuing employment or service or achievement of pre-established performance or other goals and objectives. 7.2. Restricted Stock. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Administrator, during the applicable Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Board of Directors may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and, unless otherwise determined by the Board of Directors, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the Restricted Period, the Company (or such designee) shall deliver such certificates to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary. 7.3. Unrestricted Stock. The Administrator may, in its sole discretion, grant (or sell at a purchase price determined by the Board of Directors, which shall not be lower than 85% of Fair Market Value on the date of sale) Unrestricted Stock to Participants. 7.4. Payment. The purchase price for each share of Restricted Stock and Unrestricted Stock shall be determined by the Administrator and may not be less than the par value of the Common Stock. Such purchase price may be paid in the form of past services or such other lawful consideration as is determined by the Board of Directors. 7.5. Certificates. Stock certificates representing Shares of Restricted Stock or Unrestricted Stock shall bear a legend referring to any restrictions imposed thereon and such other matters as the Administrator may determine. 7.6. Acceleration. The Administrator may at any time accelerate the expiration of the Restricted Period applicable to all, or any particular, outstanding shares of Restricted Stock. Section 8. General Provisions Applicable to Awards. 8.1. Applicability of Rule 16b-3. Those provisions of the Plan which make an express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, or any successor provision, and then only with respect to Reporting Persons. 8.2. Documentation. Each Award under the Plan shall be evidenced by an instrument delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Administrator considers necessary or advisable. Such instruments may be in the form of agreements to be executed by both the Company and the Participant, or certificates, letters or 11 similar documents, acceptance of which will evidence agreement to the terms thereof and of this Plan. 8.3. Administrator Discretion. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Administrator need not treat Participants uniformly. 8.4. Termination of Status. Subject to the provisions of Section 6, the Administrator shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other termination of employment or other status of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may exercise rights under such Award. 8.5. Mergers, Etc. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity (an "Acquisition"), the Board of Directors or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions as to outstanding Awards: (i) provide that such Awards shall be assumed, or substantially equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) on such terms as the Board of Directors determines to be appropriate; (ii) upon written notice to Participants, provide that all unexercised Options will terminate immediately prior to the consummation of such transaction unless exercised by the Participant within a specified period following the date of such notice; (iii) in the event of an Acquisition under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Acquisition (the "Acquisition Price"), make or provide for a cash payment to Participants equal to the difference between (A) the Acquisition Price times the number of shares of Common Stock subject to outstanding Options (to the extent then exercisable at prices not in excess of the Acquisition Price) and (B) the aggregate exercise price of all such outstanding Options in exchange for the termination of such Options; and (iv) provide that all or any outstanding Awards shall become exercisable or realizable in full prior to the effective date of such Acquisition. 8.6. Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board of Directors may, in the exercise of its sole discretion in such instances, declare that any Award shall terminate as of a date fixed by the Board of Directors and give each Participant the right to exercise his or her Option as to all or any of the shares subject thereto, including shares as to which the Option would not otherwise be exercisable, or may accelerate the termination of the Restricted Period of any Stock Award. 12 8.7. Withholding. The Participant shall pay to the Company, or make provision satisfactory to the Administrator for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Administrator's discretion, and subject to such conditions as the Administrator may establish, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. 8.8. Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Administrator considers necessary or advisable to achieve the purposes of the Plan or comply with applicable laws. 8.9. Amendment of Award. The Board of Directors may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Non-Qualified Stock Option; provided that the Participant's consent to such action shall be required unless the Board of Directors determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 8.10. Conditions on Delivery of Common Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan (i) until all conditions of the Award have been satisfied or removed; (ii) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with; (iii) if the outstanding Common Stock is at the time listed on any stock exchange or admitted for trading on an automatic quotation system, until the shares to be delivered have been listed or authorized to be listed or quoted on such exchange or quotation system upon official notice of notice of issuance; and (iv) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Common Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as the Company may consider appropriate to avoid violation of such act and may require that the certificates evidencing such Common Stock bear an appropriate legend restricting transfer. Section 9. Miscellaneous 9.1. No Right To Employment or Other Status. The grant of an Award shall not be construed as giving a Participant the right to continued employment or service for the Company. The Company expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. 13 9.2. No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the record holder thereof. 9.3. Exclusion from Benefit Computations. No amounts payable upon exercise of Awards granted under the Plan shall be considered salary, wages or compensation to Participants for purposes of determining the amount or nature of benefits that Participants are entitled to under any insurance, retirement or other benefit plans or programs of the Company. 9.4. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 9.5. Grants Exceeding Allotted Shares. If the shares of Common Stock covered by an Award exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Award shall be void with respect to such excess stock, unless such additional shareholder approval is obtained in a timely manner. 9.6. Effective Date and Term. (i) Effective Date. The Plan shall become effective on July , 1998, the date of its adoption by the Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months after the date of the Board of Director's adoption of the Plan, no Options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter under the Plan. Amendments to the Plan not requiring stockholder approval shall become effective when adopted by the Board of Directors; amendments requiring stockholder approval shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months of the Board of Director's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such Option to a particular optionee. Subject to the limitations set forth in this Section 9(d), Awards may be made under the Plan at any time after the effective date and before the date fixed for termination of the Plan. 14 (ii) Termination. The Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to Awards under the Plan, or (iii) by action of the Board of Directors. No Award may be granted hereunder after termination of the Plan. The termination or amendment of the Plan shall not alter or impair any rights or obligations under theretofore granted under the Plan. 9.7. Amendment of Plan. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time; provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any applicable tax or regulatory requirement. Prior to any such approval, Awards may be made under the Plan expressly subject to such approval. 9.8. Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the State of Delaware. ***************************** 15 EX-23.1 11 EXHIBIT 23.1 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. 1 to Registration Statement No. 333-55977 of MEDE America Corporation on Form S-1 of our report dated May 8, 1998 (June 17, 1998 as to Note 13) relating to the consolidated financial statements of MEDE America Corporation as of June 30, 1996 and 1997 and March 31, 1998 and for each of the three years in the period ended June 30, 1997 and the nine months ended March 31, 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. Jericho, New York July 17, 1998 EX-23.2 12 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT MEDE America Corporation East Meadow, New York We consent to the use in Amendment No. 1 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 July 17, 1998 -----END PRIVACY-ENHANCED MESSAGE-----