-----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, PMaIdNs3zF97b85SVhij7sLQ8Ocqzol2RJ5sq4nMkUdhNoU03oqgSOR4XdzrC4rO 2iRlx1hxq1qWaPuV+sTgrw== 0001005150-98-000716.txt : 19980723 0001005150-98-000716.hdr.sgml : 19980723 ACCESSION NUMBER: 0001005150-98-000716 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980722 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: 98669947 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 22, 1998 REGISTRATION NO. 333 - 55977 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 2 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 22, 1998 PROSPECTUS 3,600,000 SHARES [GRAPHIC OMITTED] MEDE AMERICA CORPORATION COMMON STOCK ------------------ All of the shares of Common Stock offered hereby (the "Offering") are being sold by MEDE AMERICA Corporation ("MEDE AMERICA" or the "Company"). Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company intends to apply to have the Company's Common Stock approved for quotation on the Nasdaq National Market under the symbol "MEDE." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERE HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI- TIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMIS- SION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================ 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. 3 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 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 (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic Warrant (as defined herein) and (ii) 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 "Recent Developments" and "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%. On July 17, 1998, the Company entered into a Transaction Processing Agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, MSO; and PPMs. Under the Processing Agreement, the Company will undertake certain software development obligations, and from July 1, 1999 it will be the exclusive processor (subject to certain exceptions) for Medic's subscribers for medical reimbursement claims submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to certain revenues to be paid by payors as well as certain fees to be paid by Medic. The Processing Agreement sets forth detailed performance criteria and development and implementation timetables. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter. Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998 the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. The Medic Warrant contains customary weighted average antidilution provisions. The Company and certain of its principal stockholders have agreed that following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by 5 Medic and its affilates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. RISK FACTORS Prospective purchasers should consider all of the information contained in this Prospectus before making an investment in shares of Common Stock. In particular, prospective purchasers should consider the factors set forth herein under "Risk Factors." 6 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) 7 (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. 8 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, (ii) assumes no exercise of the Medic Warrant and (iii) has been adjusted to give effect to a one-for-4.5823 reverse stock split of all outstanding Common Stock (the "Reverse Stock Split"). The Company's Preferred Stock, $.01 par value ("Preferred Stock"), provides for conversion of the aggregate liquidation value of the Preferred Stock, including accrued but unpaid dividends, into Common Stock at the initial public offering price per share. However, cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into Common Stock. Except as otherwise noted herein, each reference in this Prospectus to Common Stock issuable upon conversion of all of the Preferred Stock assumes a conversion price of $14.00. Based on an aggregate liquidation preference of the Preferred Stock of $31,220,578 (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. The Medic Warrant to purchase 1,250,000 shares of Common Stock at the price to the public in the Offering will remain outstanding after the Offering. Such conversion of the Preferred Stock, and exercise of warrants, are referred to herein as the "Recapitalization". See "Capitalization," "Description of Common Stock," "Principal Stockholders" and "Underwriting." 9 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- 10 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 11 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 12 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- 13 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- 14 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 15 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." 16 RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS This Prospectus contains certain statements that are "forward-looking statements," which include, among other things, the discussions of the Company's business strategy and expectations concerning developments in the healthcare EDI industry, the Company's market position, future operations, transaction growth, margins and profitability, and liquidity and capital resources. Investors in the Common Stock offered hereby are cautioned that such forward-looking statement involves risks and uncertainties, and that although the Company believes that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved. 17 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. 18 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." 19 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 (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic Warrant and (ii) 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 "Prospectus Summary -- Recent Developments" and "Management-Employee Benefit Plans." Includes 66,375 shares of Common Stock issuable upon exercise of the Common Stock purchase warrants as contemplated by the Recapitalization. See "Description of Capital Stock." 20 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." 21 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. 22 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
23 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
24 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. 25 (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. 26 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 ========= ============ =========
27 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. 28 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)
29
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. 30 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. 31 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 4/94(1) Medical Eligibility Verification, -- -- MedE America, Inc. Enrollment - -------------------------------------------------------------------------------------------------------------- MPC 5/94(1) Medical Hospital Claims, Data Entry 1/97 Physician Billing Physician Billing 12/96 Physician Billing 8/97 - -------------------------------------------------------------------------------------------------------------- Wellmark 5/94(1) Medical Hospital Claims, -- -- Physician Billing - -------------------------------------------------------------------------------------------------------------- COMPANIES ACQUIRED BY MEDE AMERICA - -------------------------------------------------------------------------------------------------------------- MEDE OHIO 3/95 Pharmacy Switching, PBM, Practice Management 2/96 Third Party Billing Software Practice Management 12/97 Software - -------------------------------------------------------------------------------------------------------------- Latpon 6/95 Medical Hospital Claims Physician Billing 3/96 - -------------------------------------------------------------------------------------------------------------- EC&F/Premier 10/95 Dental Dental Claims, Practice Practice Management 3/97 Management Software Software - -------------------------------------------------------------------------------------------------------------- TCS 2/97 Pharmacy/ PBM, Switching, -- -- Medical Eligibility Verification - -------------------------------------------------------------------------------------------------------------- Stockton 11/97 Pharmacy PBM -- -- ==============================================================================================================
(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. 32 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 33 $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 34 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. 35 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. 36 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. 37 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. 38 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 approval for acquisitions. Borrowings under the Amended Credit Facility will not be guaranteed by any third 39 party, but will be secured by substantially all the Company's assets, including the stock of the Company's subsidiaries. The Amended Credit Facility will contain restrictions on the payment of dividends on the Common Stock. See "Dividend Policy." It is anticipated that the Amended Credit Facility will take effect upon the consummation of the Offering. As of 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 40 Year 2000 compliance and that it has sufficient resources to implement its plan. The Company expects that the combined amount of budgeted expenses for Year 2000 compliance plus the ongoing product development and development expenditures will increase as a percent of revenue in future periods. However, there can be no assurance that expenditures required to achieve compliance with Year 2000 requirements will not exceed those amounts. See "Risk Factors -- Year 2000 Compliance" and "Business -- Year 2000 Compliance." IMPACT OF INFLATION Inflation has not had a material impact on the Company's historical operations or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS Recent pronouncements of the Financial Accounting Standards Board, which are not required to be adopted at this date, include SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These pronouncements are not expected to have a material impact on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is not required to be adopted at this date. The Company is currently evaluating the impact of this statement on its financial statements. NET OPERATING LOSSES As of 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." 41 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 42 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- 43 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. 44 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: 45 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. ====================================================================================================================================
46
- ------------------------------------------------------------------------------------------------------------------------------------ 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 management. o Reduces administrative expenses. - ------------------------------------------------------------------------------------------------------------------------------------ PHARMACY PRACTICE MANAGEMENT SYSTEMS (PPM) Solution Plus -- o Facilitates dispensing, inventory and o Expands drug pricing and coverage Pharmacy pricing of products for hospital, outpa- capabilities. tient and clinic pharmacies. o Improves cash flow. o Provides on-line claims adjudication. o Improves efficiency of pharmacy management and operations. - ------------------------------------------------------------------------------------------------------------------------------------ OTHER PRODUCTS AND SERVICES Link -- o Connects physicians to pharmacies for the o Reduces costs related to manual genera- Medical and Pharmacy transmission of prescriptions and related tion and transmission of prescriptions. information and approvals. o Increases accuracy and transmission speed of prescriptions. Formulary o Administers and manages formulary pro- o Reduces drug costs and increases PBM Management -- grams for PBMs. revenue through manufacturer incentives, Pharmacy o Promotes the usage by healthcare plans of o Promotes compliance with payor formu- designated drug products. laries. Patient Statements -- o Facilitates patient statement billing. o Reduces costs and improves patient All Markets relations. Credit/Debit Card and o Assists patients in making co-payments or o Reduces bad debt and enhances patient Check Guarantee -- paying other out-of-pocket charges. convenience. All Markets Additional EDI o Processes data relating to referrals, en- o Reduces practice expense and improves Transactions -- counters and benefit pre-certifications. efficiency and patient relations. All Markets - ------------------------------------------------------------------------------------------------------------------------------------
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, 47 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. 48 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 49 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 50 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. 51 RECENT DEVELOPMENTS On July 17, 1998, the Company entered into a Transaction Processing Agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, MSOs and PPMs. Under the Processing Agreement, the Company will undertake certain software development obligations, and on July 1, 1999 it will be the exclusive processor (subject to certain exceptions) for Medic's subscribers for medical reimbursement claims submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to certain revenues to be paid by payors as well as certain fees to be paid by Medic. The Processing Agreement sets forth detailed performance criteria and development and implementation timetables. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter. Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998 the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. The Medic Warrant contains customary weighted average antidilution provisions. The Company and the principal stockholders associated with WCAS and WBCP have agreed that following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affilates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. 52 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) .......... 34 Director Timothy M. Murray(1)(2) .......... 46 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. 53 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 54 the Company or any parent, subsidiary or affiliate of the Company and is not (and is not affiliated with) a beneficial owner of 5% or more of the voting stock of the Company (a "non-employee director") will be paid an annual retainer of $7,500, plus $1,000 for each Board of Directors or committee meeting attended, and will receive annually a non-qualified stock option to purchase up to 1,000 shares of Common Stock at the fair market value of the Common Stock on the date of grant. Directors are entitled to reimbursement for out-of-pocket expenses incurred while attending meetings of the Board of Directors or committee meetings. DESIGNATED DIRECTOR The Company and the principal stockholders associated with WCAS and WBCP have agreed that, following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and each of the four other most highly paid executive officers of the Company (the "Named Executive Officers") in the 1997 fiscal year: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------- --------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#)(2) COMPENSATION($) - ------------------------------------- ----------------- ------------- ----------------- --------------- ---------------- Thomas P. Staudt ...................... 180,000 50,000 -- 220,414 -- President and Chief Executive Officer Richard P. Bankosky ................... 135,000 20,000 -- 29,461 -- Chief Financial Officer, Treasurer and Secretary William M. McManus .................... 122,072 20,000 68,558 27,279 -- Senior Vice President and General Manager -- Pharmacy and Medical Roger L. Primeau ...................... 85,000 (3) 12,000 -- 18,113 -- Senior Vice President and General Manager -- Dental James T. Stinton ...................... 152,500 20,000 -- 34,917 -- Chief Information Officer ............
- ---------- (1) Bonuses are granted under a bonus formula annually established by the Board of Directors, based upon the performance (measured by EBITDA) of the Company (or certain operating divisions thereof). Unless a specified percentage of the EBITDA target is achieved, no bonus is paid. EBITDA targets are adjusted to reflect accounting changes, acquisitions and other significant, one-time events. (2) Total number granted through June 30, 1997 (exercised and unexercised). (3) Mr. Primeau's employment commenced in October 1996. 55 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding grants of options to purchase Common Stock in fiscal 1997 to each of the Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(1) ---------------------------------------------------------------- ------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION GRANTED(#) FISCAL YEAR(2) ($/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). 56 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 57 the Company, the Board of Directors may, in its discretion, take any one or more of certain actions including accelerating all unvested or unrealizable awards, terminating all unexercised options and requiring the acquiring company to assume all outstanding awards. While the Company currently anticipates that most grants under the New Stock Plan will consist of stock options, the Company may also grant restricted stock awards, which entitle recipients to acquire shares of Common Stock subject to certain conditions. Options or other awards that are granted under the New Stock Plan but expire unexercised are available for future grants. Vesting of options under the New Stock Plan would be subject to acceleration at the discretion of the Board of Directors under certain circumstances. Under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan"), employees of the Company, including directors of the Company who are employees, are eligible to participate in semi-annual plan offerings in which payroll deductions may be used to purchase shares of Common Stock. The purchase price of such shares is the lower of 85% of the fair market value of the Common Stock on the day the offering commences and 85% of the fair market value of the Common Stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the Offering. 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. 58 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 issuance and sale of its 10% Senior Subordinated Note to WCAS CP II, the Company granted to WCAS CP II certain demand and "piggyback" registration rights pursuant to a Registration Rights Agreement, dated as of February 14, 1997 between the Company and WCAS CP II. On July 17, 1998 the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. The Company and the principal stockholders associated with WCAS and WBCP have agreed that, following the completion of the Offering and until the earlier of the termination of the 59 Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. 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 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
60
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. (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. 61 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 June 30, 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. On July 17, 1998, the Company issued to Medic a warrant to purchase 1,250,000 shares of the Company's Common Stock. See "Prospectus Summary -- Recent Developments." COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends as are declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock have the right to a ratable portion of assets remaining after the payment of all debts and other liabilities, subject to the liquidation preferences of the holders of any outstanding Preferred Stock. Holders of Common Stock have neither preemptive rights nor rights to convert their Common Stock into any other securities and are not subject to future calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the shares offered hereby upon issuance and sale will be, fully paid and non-assessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of Preferred Stock that the Company may designate and issue in the future. PREFERRED STOCK Upon the closing of this Offering and assuming no exercise of the Underwriters' over-allotment option, all of the outstanding shares of the Preferred Stock together with accrued but unpaid dividends thereon will be automatically converted at the public offering price into 2,229,982 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. 62 On July 17, 1998 the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. DELAWARE LAWS AND CERTAIN CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER MEASURES Upon the consummation of this Offering made hereby, the Company will be subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a "business combination" is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. All directors elected to the Company's Board of Directors serve until the next annual meeting of the stockholders and the election and qualification of their successors or their earlier death, resignation or removal. The Board of Directors is authorized to create new directorships and to fill such positions so created. The Board of Directors (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board of Directors occurring for any reason for the remainder of the term of the vacant directorship. The Company's Bylaws provide that, for nominations to the Board of Directors or for other business to be properly brought by a stockholder before an annual meeting of stockholders, the stockholder must first have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice generally must be delivered not less than 90 days nor more than 120 days prior to the anniversary of the immediately preceding annual meeting. The notice by a stockholder must contain, among other things, certain information about the stockholder delivering the notice and a description of the proposed business to be brought before the meeting. Certain of the provisions of the Amended and Restated Certificate of Incorporation and Bylaws discussed above could make more difficult or discourage a proxy contest or other change in the management of the Company or the acquisition or attempted acquisition of control by a holder of a substantial block of the Company's stock. It is possible that such provisions could make it more difficult to accomplish, or could deter, transactions which stockholders may otherwise consider to be in their best interests. As permitted by the DGCL, the Amended and Restated Certificate of Incorporation provides that Directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as Directors, except for liability (i) for any breach of their duty of loyalty to the Company and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 or successor provisions of the DGCL or (iv) for any transaction from which the Director derives an improper personal benefit. The Amended and Restated Certificate of Incorporation and Bylaws provide that the Company shall indemnify its Directors and officers to the fullest extent permitted by Delaware law (except in some circumstances, with respect to suits initiated by the Director or officer) and advance expenses to such Directors or officers to defend any action for which rights of indemnification are provided. In addition, the Amended and Restated Certificate of Incorporation and Bylaws also permit the Company to grant such rights to its employees and agents. The Bylaws also provide that the Company may enter into indemnification agreements with its Directors and officers and purchase insurance on behalf of any person whom it is required or permitted to indemnify. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as Directors, officers and employees. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services. 63 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 and 1,250,000 shares reserved for issuance upon the exercise of the Medic Warrant) (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. In addition, the Company has granted demand and piggyback registration rights to WCAS CP II with respect to 370,993 shares of Common Stock and to Medic with respect to 1,250,000 shares of Common Stock issuable upon the exercise of the Medic Warrant. All or part of such shares may be sold in the public market following the exercise of such rights subject to the lock-up arrangements described below with respect to WCAS CP II and to vesting and exercise requirements with respect to the Medic Warrant. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, shares of Common Stock and options to purchase shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this 64 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." 65 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, 66 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- 67 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. 68 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 22, 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 ---------------------------------- ---------------------------------- PER-SHARE PER-SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT ------------- -------- ----------- ------------- -------- ----------- (IN THOUSANDS) Net loss .......................... $ (16,601) $ (19,330) Less: Preferred dividends ......... (27) (2,400) --------- --------- Basic net loss per share .......... $ (16,628) 5,238 $(3.17) $ (21,730) 5,245 $(4.14) ========= ===== ====== ========= ===== ====== YEAR ENDED JUNE 30, --------------------------------- 1997 --------------------------------- PER-SHARE LOSS SHARES AMOUNT ------------- -------- ---------- (IN THOUSANDS) Net loss .......................... $ (11,464) Less: Preferred dividends ......... (2,400) --------- Basic net loss per share .......... $ (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. g. Transaction Processing Agreement -- On July 17, 1998, the Company entered into a Transaction Processing Agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, MSOs and PPMs. Under the Processing Agreement, the Company will undertake certain software development obligations, and on July 1, 1999 it will be the exclusive processor (subject to certain exceptions) for Medic's subscribers for medical reimbursement claims submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to certain revenues to be paid by payors as well as certain fees to be paid by Medic. The Processing Agreement sets forth detailed performance criteria and development and implementation timetables. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter. Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998 the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. The Medic Warrant contains customary weighted average antidilution provisions. The Company and the principal stockholders associated with WCAS and WBCP have agreed that following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affilates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. Medic has not yet named a designee. F-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 .................... 10 Use Of Proceeds ................. 19 Dividend Policy ................. 19 Capitalization .................. 20 Dilution ........................ 21 Unaudited Pro Forma Consolidated Financial Information ........ 22 -------------------------- Selected Financial Data ......... 29 Management's Discussion And PROSPECTUS Analysis Of Financial Condition And Results Of -------------------------- Operations ................... 31 Business ........................ 42 Management ...................... 53 Certain Transactions ............ 59 Principal Stockholders .......... 60 Description Of Capital Stock .... 62 Shares Eligible For Future Sale . 64 Underwriting .................... 66 Legal Matters ................... 67 Experts ......................... 67 Additional Information .......... 68 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. On July 17, 1998, the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. (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 II-2 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. 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. 4.6 -- Registration Rights Agreement, dated as of February 14, 1997 between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P. 4.7 -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA Corporation to Medic Computer Systems, Inc. 4.8 -- Registration Rights Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc.
II-3
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.9 -- Stockholders Agreement, dated as of July 17, 1998 among Medic Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital Partners V, L.P., WCAS Capital Partners II, L.P., and William Blair Leveraged Capital Fund Limited Partnership. 4.10 -- Investment Agreement, dated as of July 17, 1998 between MEDE AMERICA Corporation and Medic Computer Systems, Inc. 5.1* -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1+ -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan as amended. 10.2+ -- Credit Agreement between MEDE AMERICA Corporation and Bank of America Illinois dated as of December 18, 1995 as amended, with accompanying guarantees. 10.3+ -- Form of Indemnification Agreement between MEDE AMERICA Corporation and Directors thereof. 10.4 -- Agreement of Lease dated as of October 15, 1991 between HMCC Associates and MedE America, Inc. 10.5+ -- Lease Agreement dated as of July 10, 1995 as amended January 3, 1997 between T&J Enter- prises, LLC and Electronic Claims & Funding, Inc. 10.6+ -- Commitment Letter dated July 15, 1998 from Bank of America National Trust & Savings Association to MEDE AMERICA Corporation, regarding amendment to Credit Facility. 10.7+ -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8+ -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan. 10.9**-- Transaction Processing Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 10.10 -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan. 21.1+ -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1+ -- Power of Attorney. 27.1+ -- Financial Data Schedule.
- ---------- * To be filed by amendment. ** Confidential treatment requested. + Previously filed. (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under "Item 14-Indemnification of Directors and Officers" above, or otherwise, the Registrant has been advised that in 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. II-4 (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-5 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 July 22, 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 22, 1998 - ------------------------- Officer (Principal executive officer); Thomas P. Staudt Director THOMAS P. STAUDT Chief Financial Officer (Principal July 22, 1998 - ------------------------- financial and accounting officer) Richard P. Bankosky THOMAS P. STAUDT Director July 22, 1998 - ------------------------- Thomas E. McInerney THOMAS P. STAUDT Director July 22, 1998 - ------------------------- Anthony J. de Nicola THOMAS P. STAUDT Director July 22, 1998 - ------------------------- Timothy M. Murray
II-6 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. 4.6 -- Registration Rights Agreement, dated as of February 14, 1997 between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P. 4.7 -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA Corporation to Medic Computer Systems, Inc. 4.8 -- Registration Rights Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 4.9 -- Stockholders Agreement, dated as of July 17, 1998 among Medic Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital Partners V, L.P., WCAS Capital Partners II, L.P., and William Blair Leveraged Capital Fund Limited Partnership. 4.10 -- Investment Agreement, dated as of July 17, 1998 between MEDE AMERICA Corporation and Medic Computer Systems, Inc. 5.1* -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1+ -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan as amended. 10.2+ -- Credit Agreement between MEDE AMERICA Corporation and Bank of America Illinois dated as of December 18, 1995 as amended, with accompanying guarantees. 10.3+ -- Form of Indemnification Agreement between MEDE AMERICA Corporation and Directors thereof. 10.4 -- Agreement of Lease dated as of October 15, 1991 between HMCC Associates and MedE America, Inc. 10.5+ -- Lease Agreement dated as of July 10, 1995 as amended January 3, 1997 between T&J Enter- prises, LLC and Electronic Claims & Funding, Inc. 10.6+ -- Commitment Letter dated July 15, 1998 from Bank of America National Trust & Savings Association to MEDE AMERICA Corporation, regarding amendment to Credit Facility. 10.7+ -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8+ -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan. 10.9**-- Transaction Processing Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 10.10 -- MEDE AMERICA Ciroiratuib 1998 Employee Stock Purchase Plan. 21.1+ -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1+ -- Power of Attorney. 27.1+ -- Financial Data Schedule. - ---------- * To be filed by amendment. ** Confidential treatment requested. + Previously filed. EX-4.6 2 EXHIBIT 4.6 EXHIBIT 4.6 REGISTRATION RIGHTS AGREEMENT February 14, 1997 WCAS Capital Partners, II, L.P. c/o Walsh, Carson, Anderson & Stowe 320 Park Avenue, Suite 2500 New York, New York 10022 Dear Sirs: This will confirm that, in consideration of your commitment to purchase an aggregate 1,700,000 shares (the "Shares") of Common Stock (as defined herein), of MedE America Corporation, a Delaware corporation (the "Company"), pursuant to the Note and Share Purchase Agreement, dated the date hereof (the "Purchase Agreement"), between the Company and you ( the "Purchaser"), and as an inducement to you to consummate the transactions contemplated by the Purchase Agreement, the Company hereby covenants and agrees with you, and with each subsequent holder of Restricted Stock (as such term is defined herein), as follows: 1. Certain Definitions. As used herein, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any other Federal agency at the tie administering the Securities Act. "Common Stock" shall mean the Common Stock, $.01 par value, of the Company, as constituted as of the date of this Agreement. "Registration Expenses" shall mean the expenses so described in Section 8 hereof. "Restricted Stock" shall mean the Shares and any shares of capital stock of the Company issued in respect of such securities by way of stock split, stock dividend, combination or reclassification, or through merger, consolidation, reorganization or recapitalization. "Securities Act" shall mean the Securities Act of 1933 or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean the expenses so described in Section 8 hereof. 2. Restrictive Legend. Each certificate representing Restricted Stock and, except as otherwise provided in Section 3 hereof, each certificate issued upon exchange or transfer of any such securities shall be stamped or otherwise imprinted with a legend substantially in the following form: "THE SECURTITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR UNDDER APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER SUCH LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE." 3. Notice of Proposed Transfer. Prior to any proposed transfer of any Restricted Stock (other than under the circumstances described in Section 4, Section 5 or Section 5 hereof), the holder thereof shall give written notice to the Company or its transfer agent of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, except as provided below, shall be accompanied by an opinion of counsel reasonably satisfactory to the Company, to the effect that the proposed transfer may be effected without registration under the Securities Act, whereupon such holder shall be entitled to transfer such securities in accordance with the terms of its notice; provided, however, that, if such transfer is a private sale, such transferee agrees, in a writing delivered to the Company. To be bound by the terms hereof to the same extent as if an original party hereto. Such shares may be distributed by the Purchaser to its partners and may be sold in accordance with Rules 144 or 144A under the Securities Act without an opinion of counsel; provided that, in the case of a sale, the Company shall have received such information as the Company may request to provide it with reasonable assurance that the provisions of Rules 144 or 144A have been satisfied. Each certificate for shares of Restricted Stock transferred as above provided shall bear the legend set forth in Section 2, except that such certificate shall not hear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferees and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. 4. Required Registration. (a) At any time the holders of a majority of the outstanding Restricted Stock may 2 request the Company to register under the Securities Act all or any portion of the shares of Restricted Stock held by such holders for sale in the manner specified in such notice. Notwithstanding anything to the contrary contained herein, non request may be made under this Section 4 within 180 days after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the holders of Restricted Stock shall have been entitled to join pursuant to this Section 4, Section 5 or Section 6 hereof and in which there shall have been effectively registered all shares of Restricted Stock as to which registration shall have been so requested. (b) Promptly following receipt of any notice under this Section 4 from holders of Restricted Stock, the Company shall immediately notify any holders of Restricted Stock from whom notice has not been received and shall use its best efforts to register under the Securities Act for public sale in accordance with the method of disposition specified in such notice from requesting holders the number of shares of Restricted Stock specified in such notice (and in any notice received from other holders within 20 days after receipt of such notice from the Company). If such method of disposition shall be an underwritten public offering, the Company may designate the managing underwriter of such offering, subject to the approval of a majority in interest of the selling holders of Restricted Stock, which be obligated to register Restricted Stock pursuant to this Section 4, on one occasion only; provided that such obligation shall be deemed satisfied only when a registration statement covering all shares of Restricted Stock specified in the notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting holders, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, all such shares shall have been sold pursuant thereto. (c) The Company shall be entitled to include in any registration statement referred to in this Section 4, for sale in accordance with the method of disposition specified by the requesting holders, shares of Common Stock to be sold by the Company for its own account r for the account of any stockholder of the Company having registration rights with respect to such stock, except as and to the extent that, in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would materially adversely affect the marketing of the Restricted Stock to be sold. Except as provided in this paragraph (c), the Company will not file with the Commission any other registration statement with respect to its Common Stock (other than a registration 3 statement on Form S-4 or S-8), whether for its own account or that of other security holders, from the date of receipt of a notice from requesting holders pursuant to this Section 4 until the completion of the period of distribution of the registration contemplated thereby. (d) The Company may postpone the filing of any registration statement otherwise required to be prepared and filed by it under this Section 4 if, at the time it receives a request from the holders of Restricted Stock, the Board of Directors of the Company determines in its good faith judgment that such registration would adversely interfere with any material financing, acquisition, corporate reorganization or other material corporate transaction involving the Company that is pending or imminent at the time to the material detriment of the interests of the Company and its stockholders; provided, however, that, if the Board of Directors does not make a determination to utilize this right within 30 days of the date of receipt of such request, this right shall be deemed waived with respect to such request and the Company may exercise its right to postpone a registration statement to be filed under this Section 4 only once in any period of twelve consecutive months. The postponement will be for the minimum period reasonably required but in any event such postponement shall not exceed 90 days. The Company will promptly give the holders of Restricted Stock written notice of any such postponement and will use all reasonable best efforts to minimize the length of the postponement. If the Company shall so postpone the filing of a registration statement, the holders of Restricted Stock shall have the right to withdraw any request ynder this Section 4 by giving written notice of such postponement and, in the event of such withdrawal, the request that was withdrawn shall not be deemed to have been made. 5. Form S-3 Registration (a) If, at any time after the Company becomes eligible to register securities on Form S- 3, the Company shall receive from any holder or holders of Restricted Stock, a written request or requests that the Company effect a registration on Form S-3 with respect to Restricted Stock owned by such holder or holders, the reasonably anticipated aggregate price to the public of which would exceed $1,000,000, the Company (i) shall promptly give written notice of the proposed registration to all other holders of Restricted Stock and (ii) shall as soon as practicable, effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, to approve appropriate qualifications under applicable blue sky or other state securities laws and to comply with applicable regulations issued under the Securities Act and any other government 4 requirements or regulations as would permit or facilitate the requested sale and distribution) of all or such portion of such holder's and holders' Restricted Stock as are specified in such requrest, together with all or such portion of the Restricted Stock of any holder or holders joining in such request as are specified in a written request given within 20 days after receipt of such written notice from the Company; provided that the Company shall not be obligated to effect any such registration pursuant to this Section 5 more than once in any 180-day period. 6. Incidental Registration. If the Company at any time proposes to register any of its equity securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Form S-4 or S-8 or another form not available for registering Restricted Stock for sale to the public), each such time it will give written notice to all holders of Restricted Stock of its intention so to do. Upon the written request of any such holder, given within 20 days after any such notice, to register any of its Restricted Stock (which request shall state the intended method of disposition thereof), the Company will use its best efforts to cause the Restricted Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the holder (in accordance with its written request) of such Restricted Stock. In the event that any registration pursuant to this Section 6 shall be, in whole or in part, an underwritten public offering of Common Stock, any request by a holder pursuant to this Section 6 to register Restricted Stock shall specify that either (i) such Restricted Stock is to be included in the underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters undet such registration or (ii) such Restricted Stock is to be sold in the open market without any underwriting. The number of shares of Restricted Stock to be included in such an underwriting may be reduced (pro rata among the holders if Restricted Stock requesting that their shares of Restricted Stock be registered pursuant to this Section 6, based upon the number of share of stock which they desire to include in such registration), if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities ti be sold by the Company; provided, however, that, if any shares are to be included in such underwriting for the account of any person other than the Company or the holders of Restricted Stock, the number of shares to be included by any such person shall be reduced first. Notwithstanding anything to the contrary contained in this Section 6, in the event that there is a firm commitment underwritten offering 5 of securities of the Company pursuant to a registration covering Restricted Stock and a selling holder of Restricted Stock does not elect to sell his Restricted Stock to the underwriters of the Company's securities in connection with such offering, such holder shall refrain from selling such Restricted Stock so registered pursuant to this section 6 during the period of distribution of the Company's securities by such underwriters and the period in which the underwriting syndicate participates in the after market; provided, however, that such holder shall, in any event, be entitled to sell its Restricted Stock in connection with such registration commencing on the 90th day after the effective date of such registration statement. 7. Registration Procedures. If and whenever the Company is required by the provisions of Section 4, Section 5 or Section 6 hereof to use its best efforts to effect the registration of any shares of Restricted Stock under the Securities Act the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4 hereof, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided): ( b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and as comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (c) furnish to each seller and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons my reasonably request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such registration statement; (d) use it best efforts to register or qualify the Restricted Stock covered by such registration statement under the securities or blue sky laws of such jurisdictions 6 as the sellers of Restricted Stock or, in the case of an underwritten public offering, the managing underwriter shall reasonably request; (e) immediately notify each seller under such registration statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing: (f) use its best efforts (if the offering is underwritten to furnish, at the request of any seller, on the date that Restricted Stock is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus, and each amendment or supplement thereof, comply ad to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder (except that such counsel need not express any opinion as to financial statements or other financial data contained herein) and (C) to such other effects as may reasonably be requested by counsel, for the underwriters or by such selller or its counsel, based on their customary practices, and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwritiers and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the related prospectus, or any amendment or supplement thereof, comply as to form in all materials respects with the applicable accounting requirements of the Securities Act and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the data of such letter) with respect to the registration in respect of which such letter is being 7 given as such underwriters or such seller may reasonably request, based on their customary practices: (g) Make available for inspection by each seller, any underwriter participanting in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement: and (h) use its best efforts to list the shares of Restricted Stock so registered upon the principal national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such registration. For purposes of paragraphs (a) and (b) above and of Section 4 (d) hereof, the period of distribution of Restricted Stock in a firm commitment underwritten public offering shall extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Restricted Stock in any other registration shall extend until the earlier of the sale of all Restricted Stock covered thereby abd one year after the effective date thereof. In connection with each registration hereunder, the selling holders of Restricted Stock will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as shall be reasonably necessary in order to assure compliance with Federal and applicable state securities laws. No such selling holder of Restricted Stock shall be required to make any representation in any underwriting agreement other than a representation as to the ownership of the shares to be registered by such selling holder in the offering. In connection eith each registration pursuant to Sections 4, 5 and 6 hereof covering an underwritten public offering, the Company agrees to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between major underwriters and companies of the Company's size and investment stature; provided that such agreement shall not contain any such provision applicable to the Company that is inconsistent with the provisions hereof. 8 8. Expenses. All expenses incurred by the Company in complying with Sectiond 4, 5 and 6 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of its counsel and of independent public accountants for the Company, reasonable fes and disbursements of one counsel chosen to represent all selling holders of Restricted Stock, fees of the National Association of Securities Dealers, Inc., transfer taxes, and fees of transfer agents and registrars, but excluding any Selling Expenses, are herein called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Restricted Stock are herein called "Selling Expenses." The Company will pay all Registration Expenses in connection with each registration statement filed pursuant hereto. All Selling Expenses in connection with any registration statement filed pursuant to Section 4, Section 5 or Section 6 hereof shall be borne by participating sellers in proportion to the number of shares sold by each, or by such persons other than the Company (except to the extent the Company shall be a seller) as they may agree. 9. Indemnification. In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Section 4, Section 5 or Section 6 hereof, the Company will indemnify and hold harmless each seller of such Restricted Stock thereunder and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any and all losses, claims, damages or liabilities, joint or several, to which such seller or underwriter or controlling person may become subject under the Securities Act 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 any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Section 4, Section 5 or Section 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, 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 will reimburse each such seller, each such underwriter and each such controlling person 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 if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or mission or 9 alleged omission so made in conformity with information furnished by such seller, such underwriter or such controlling person in writing specifically for use in such registration statement or prospectus; and provided further, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in (i) any preliminary prospectus if such seller, underwriter or controlling person failed to send or deliver a copy of the final prospectus prior to or concurrently with the delivery of written confirmation of the sale of Restricted Stock and the final prospectus would have completely corrected such untrue statement or omission or (ii) the prospectus if such untrue statement or alleged untrue statement ot omission or alleged omission is completely corrected in an amendment or supplement to the prospectus and if, having previously been furnished by or on behalf of the Company with copies of the prospectus, as so amended or supplemented, such seller, underwriter or controlling person thereafter fails to deliver such prospectus, as so amended or supplemented, prior to or concurrently with the delivery of written confirmation of the sale of Restricted Stock to the person asserting such loss, claim, damage, liability or expense. In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Section 4, Section 5 or Section 6 hereof, each seller of such Restricted Stock thereunder, severally and not jointly, will indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against any and all losses, claims, damages or liabilities, joint or several, to which the Company or such officer or director or underwriter or controlling person may become subject under the Securities Act 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 any material fact contained in the registration statement of any material fact contained in the registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Section 4, Section 5 or Section 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, 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 will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, 10 damage, liability or action; provided, however, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with information pertaining to such seller furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus; and provided further, however, that (x) the liability of each seller hereunder shall be limited to the proceeds received by such seller from the sale of Restricted Stock covered by such registration statement and (y) the seller will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in (i) any preliminary prospectus if the Company, such officer, director or underwriter or controlling person failed to send or deliver a copy of the final prospectus prior to or concurrently with the delivery of written confirmation of the sale of Restricted Stock (or, with respect to the company, shares of Common Stock included in such registration) and the final prospectus would have completely corrected such untrue statement or omission or (ii) the prospectus if such alleged omission is completely corrected in an amendment or supplement to the prospectus and if the Company, such officer, director, underwriter or controlling person fails to deliver such prospectus, as so amended or supplemented, prior to or concurrently with the delivery of written confirmation of the sale of Restricted Stock (or, the case of the Company, shares of Common Stock included in such registration) to the person asserting such loss, claim, damage, liability or expense. Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under this Section 9. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not undertake the defense thereof, the indemnifying party shall not be leable to such indemnified party under this Section 9 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if the defendants in 11 any such action include both the indemnified party and the indemnifying party and counsel to the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. The indemnifying party shall not be liable to indemnify any indemnified party for any settlement of any such action effected without the indemnifying party's consent. Furthermore, the indemnifying party shall not, except with the approval of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to each indemnified party of a release from all liability in respect to such claim or litigation without any payment or consideration provided by each such indemnified party. If the indemnification provided for in this Section 9 is unavailable to an indemnified party under the first or second paragraphs hereof in respect of any losses, claims, damages or liabilities referred therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the sellers of Restricted Stock and any other sellers participating in the registration statement on the other from the sale of shares pursuant to the registered offering of securities as to which indemnity is sought or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the sellers of Restricted Stock and any other sellers participating in the registration statement on the other in connection with the statement or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the sellers of Restricted Stock and any other sellers participating in the registration statement on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses), if any, to the 12 Company bear to the total net proceeds from the offering (before deducting expenses) to the sellers of the Restricted Stock and any other sellers participating in the registration statement. The relative fault of the Company on the hand and of the sellers of Restricted Stock and any other sellers participating in the registration statement on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the sellers of Restricted Stock or other sellers participating in the registration statement and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the sellers of Restricted Stock agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the sellers of Restricted Stock were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no seller of Restricted Stock shall be required to contribute any amount in excess of the proceeds received by such seller from the sale of Restricted Stock covered by the registration statement filed pursuant hereto. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 10. Changes in Common Stock. If, any as often as, there are any changes in the Common Stock by way of stock split, stock dividend, combination r reclassification, or through merger, consolidation, reorganization or recapitalization (including any three-party transaction in which the holders of Common Stock receive securities of the parent or affiliate of a merging or acquiring entity), or by any other means, appropriate adjustment shall be made in the provisions hereof, as may be required, so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed. 11. Availability of Rule 144. So long as there is Restricted Stock outstanding, the Company will file the reports required to be filed by it under the Securities Act and the 13 Securities Exchange Act of 1934 and the rules and regulations adopted by the Commission thereunder, to the extent required form time to time to enable any holder of Restricted Stock to sell such Restricted Stock without registration under the Securities Act within the limitations of the exemption provided by Rule 144 under the Securities Act or any similar rule or regulation allowing such holders to sell without registration under the Securities Act, as such Rule may be amended from time to time; provided; however, that so long as there is Restricted Stock outstanding, the Company shall continue to file such reports as outstanding, the Company shall continue to file such reports as may be required to satisfy the requirements of Rule 144(c) even if not required to do so pursuant to the Securities Exchange Act of 1934. 12. Subsequent Registration Rights Agreements. After the date hereof, so long as there is any Restricted Stock outstanding, the Company shall not enter into any registration rights agreement that would materially adversely affect the rights of the holder or holders of such Restricted Stock under this Agreement without the consent of holders of 66 2/3% of the Restricted Stock then outstanding. 13. Miscellaneous. (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind the inure to the benefits of the respective successors , assigns and transferees of the parties hereto whether so expressed or not. Without limiting the generality of the foregoing, the registration rights conferred herein on the holders of Restricted Stock shall inure to the benefit of any and all subsequent holders from time to time of the Restricted Stock. (b) All notices, requests, consents and other communications hereunder shall be in writing and shall be sent by telecopier, national overnight courier service or certified mail, return receipt requested, in each case with postage prepaid, addressed as follows: if to the Company, to it at its offices at 90 Merrick Avenue, Suite 501, East Meadow, New York 11554, attention: President; if to the Purchaser, to it at the address set forth in the Purchase Agreement; if to any subsequent holder of Restricted Stock, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder 14 of Restricted Stock) or to the holders of Restricted Stock (in the case of the Company). (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (d) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except in writing. (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Please indicate your acceptance of the foregoing by signing and returning the enclosed counterpart of this letter, whereupon this letter (herein sometimes called "this Agreement") shall be a binding agreement between the Company and you. Very truly yours, MEDE AMERICA CORPORATION By /s/ Thomas P. Staudt ------------------ Thomas P. Staudt President and Chief Executive Officer AGREED TO AND ACCEPTED as of the date first above written. WCAS CAPITAL PARTNERS II, L.P. By WCAS CP II Partners, General By /s/ ------------------------------ EX-4.7 3 EXHIBIT 4.7 EXHIBIT 4.7 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS (THE "STATE ACTS") , AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED (WHETHER OR NOT FOR CONSIDERATION) BY THE HOLDER EXCEPT BY REGISTRATION OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UPON THE ISSUANCE TO THE ISSUER OF A FAVORABLE OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE A VIOLATION OF THE 1933 ACT AND THE STATE ACTS. New York, N.Y. July 17, 1998 WARRANT to Purchase 1,250,000 Shares of Common Stock (par value $0.01 per share) of MEDE AMERICA CORPORATION at a price per share equal to the Warrant Price (as defined herein) MEDE AMERICA CORPORATION., a Delaware corporation (the "Issuer"), certifies that, for value received, MEDIC COMPUTER SYSTEMS, INC., a North Carolina corporation, or an affiliated entity (collectively, the "Investor"), is entitled to purchase, until the close of business on the Termination Date (as defined in Section 1) 1,250,000 shares of common stock, par value $0.01 per share, of the Issuer (the "Common Stock") at a price per share equal to the Warrant Price (as defined in Section 1); subject, however, to the provisions and upon the terms and conditions hereinafter set forth. 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Investment Agreement, dated as of July 17, 1998, between the Issuer and the Investor (the "Investment Agreement"). The following terms shall have the following meanings: "affiliate" shall have the meaning ascribed to it in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. "Average Market Price" shall mean the average of the daily reported closing sales prices, regular way, per share of the Common Stock on the Nasdaq National Market ("Nasdaq"), or if the Common Stock is not principally traded on Nasdaq, such other market on which the Common Stock is listed or principally traded, for the ten (10) days prior to the date of determination; provided that if the Common Stock is not traded on any market or exchange, the "Average Market Price" shall mean the fair market value of the Common Stock as determined by an independent investment banking firm mutually acceptable to the Issuer and the Investor, the costs of which determination shall be borne equally by the Issuer and the Investor. "Change of Control" shall have occurred when (a) any person or group of affiliated persons shall have acquired, directly or indirectly, beneficial ownership of thirty-five percent (35%) or more of the then outstanding voting shares or share equivalents of the Issuer, provided that none of such persons and no combination of such persons and their respective affiliates beneficially owns thirty-five percent (35%) or more of the outstanding voting shares or share equivalents of the Issuer as of the date of this Warrant; or (b) any person or group of affiliated persons[2] 2 commences a tender offer or an exchange offer for thirty-five percent (35%) or more of the outstanding voting shares or share equivalents. "Final Date" shall mean March 31, 1999. "IPO" shall mean an initial public offering by the Issuer of the Common Stock. "Processing Agreement" shall mean the Transaction Processing Agreement, dated the date hereof, between the Issuer and the Investor. "Termination Date" shall mean (a) in the event that the IPO has been completed by the Final Date, July 17, 2003, and (b) in the event that the IPO has not been completed by the Final Date, July 17, 2005; provided, that in the event that the Processing Agreement is terminated by the Issuer pursuant to clause (iv), (vi) or (viii) of Section 18(a) thereof, then notwithstanding anything to the contrary contained herein, the "Termination Date" shall be the date of termination of the Processing Agreement, and thereafter this Warrant shall be void and of no effect.. "Transaction" shall mean a merger, consolidation, sale of all or substantially all of the Issuer's assets, recapitalization of the Common Stock or other similar transaction, in each case if the previously outstanding Common Stock is acquired for cash or changed into or exchanged for different securities of the Issuer or changed into or exchanged for common stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of any of the foregoing. "Warrant Price" shall mean (a) in the event that the IPO has been completed by the Final Date, the price per share at which the Issuer's shares were sold to the public pursuant to such IPO, and (b) in the event that the IPO has not been completed by the Final Date, $8.00, subject in either case to the adjustments set forth in Section 6 hereof. 2. Exercisability of Warrant. (a) Subject to the terms and conditions set forth herein, this Warrant may be exercised (i) with respect to up to 50% of the shares 3 of Common Stock subject to this Warrant, at any time on or after July 17, 1999, and before the Termination Date, and (ii) with respect to the remaining shares of Common Stock subject to this Warrant, at any time on or after July 17, 2000, and before the Termination Date, by presentation and surrender of this Warrant as specified in Section 3 below. (b) Notwithstanding anything in this Warrant to the contrary, in the event of a Change of Control, this Warrant shall be immediately exercisable with respect to all of the shares of Common Stock subject to this Warrant, and shall be exercisable at any time before the Termination Date; provided that in the event of a Change of Control specified in clause (b) of the definition of "Change of Control," if the tender or exchange offer is not consummated, the Issuer and the Investor will take such action that is reasonably necessary (including, without limitation, refunding to the Investor an amount equal to the payment made pursuant to Section 3(a)(i)) to exchange the shares of Common Stock issued upon exercise of the Warrant pursuant to this Section 2(b) for a warrant identical to this Warrant. 3. Method of Exercise; Payment; Issuance of New Warrant. (a) This Warrant may be exercised by the Investor, in whole or in part, subject to the provisions of Section 2, by the surrender of this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) (the "Subscription Notice") duly executed by the Investor, to the Issuer at its principal office, and by (i) the payment to the Issuer of the then applicable Warrant Price of the Common Stock being purchased or (ii) notification of Cashless Exercise by the Investor as provided in Section 3(d) below. (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Issuer as provided in this Section 3, and at such time the Investor shall be deemed to have become the holder of record thereof. 4 (c) In the event of any exercise of the rights represented by this Warrant, certificates for the shares of Common Stock so purchased shall be delivered at the Issuer's expense (including the payment by the Issuer of any applicable issuance taxes) to the Investor within five (5) business days after the rights represented by this Warrant shall have been so exercised, and unless this Warrant has expired, a new Warrant of like tenor representing the number of shares of Common Stock, if any, with respect to which this Warrant shall not then have been exercised, shall also be issued to the Investor within such time. (d) Upon any exercise of this Warrant, the Investor may, at its option, instruct the Issuer, by appropriate designation in the Form of Subscription accompanying the surrender of this Warrant at the time of such exercise, to apply to the payment of the aggregate Warrant Price to be paid upon such exercise such number of shares of Common Stock otherwise issuable to the Investor upon such exercise as shall be specified in such Form of Subscription, in which case an amount equal to the excess of the aggregate Average Market Price of such specified number of shares of Common Stock on the date of such exercise over the portion of the aggregate Warrant Price to be paid upon such exercise which is attributable to such specified number of shares of Common Stock shall be deemed to have been paid to the Issuer and the number of shares of Common Stock issuable upon such exercise shall be reduced by such specified number (a "Cashless Exercise"). 4. Stock Fully Paid; Reservation of Shares. The Issuer covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all liens. The Issuer further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Issuer will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, at least the maximum number of shares of its Common Stock as are then issuable upon the exercise of the rights represented by this Warrant. The Issuer further agrees that it will not, by amendment of its Certificate of Incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Issuer. Without limiting the generality of the foregoing, the Issuer agrees that before taking any action that would cause an adjustment reducing the Warrant Price below the then par value of Common Stock issuable upon 5 exercise hereof, the Issuer will from time to time take all such action necessary in order that the Issuer may validly and legally issue fully paid and nonassessable shares of such Common Stock at the Warrant Price as so adjusted. 5. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares, the Issuer shall make a cash payment therefor upon the basis of the Average Market Price of the Common Stock. 6. Antidilution Provisions. The number and price of shares of Common Stock receivable upon the exercise of this Warrant is subject to adjustment upon the happening of certain events specified in this Section 6. The holder of this Warrant shall, upon exercise hereof, be entitled to receive the number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 6) be issuable upon such exercise by a fraction of which (A) the numerator is the Warrant Price specified in Section 1 (but without giving effect to any adjustments) and (B) the denominator is the Warrant Price in effect at the time of such exercise. The price to be paid for each such share of Common Stock by the Investor shall be the Warrant Price as adjusted pursuant to this Section 6, provided that the price paid by the holder for any shares of Common Stock upon exercise of this Warrant shall never be less than the par value per share of the Common Stock, and provided further that in no event will any adjustments made pursuant to this Section 6 cause any increase or decrease the aggregate price to be paid for all shares of Common Stock subject to this Warrant. The Warrant Price shall be subject to adjustment as follows: (a) Stock Dividends, Stock Splits, Etc. If the Issuer at any time or from time to time after the date hereof shall issue additional shares of Common Stock as a result of the declaration or payment of a dividend on the Common Stock payable in Common Stock, or as a distribution to holders of Common Stock, or as a result of a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), then, and in each such case, the Warrant Price then in effect shall be reduced, concurrently with the issuance of such shares, to a price (calculated to the nearest cent) determined by multiplying such Warrant Price by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance of additional shares of Common Stock, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issuance, provided that, for purposes of this Section 6(a), (x) additional shares of Common Stock shall be deemed to have been issued (A) in the case of any such dividend or distribution, immediately after the close of business on 6 and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issuance, provided that, for purposes of this Section 6(a), (x) additional shares of Common Stock shall be deemed to have been issued (A) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend or distribution or (B) in the case of any such subdivision, at the close of business on the date immediately prior to the day upon which such corporate action becomes effective, (y) immediately after any additional shares of Common Stock are deemed to have been issued, such additional shares of Common Stock shall be deemed to be outstanding, and (z) treasury shares shall be deemed not to be outstanding. (b) Extraordinary Dividends and Distributions. If the Issuer shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Issuer, cash (other than a cash distribution made as a dividend payable or to be payable at regularly scheduled intervals and payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the State of Delaware, but only to the extent that the aggregate of all such dividends paid or declared after the date hereof does not exceed the consolidated net income of the Issuer earned subsequent to the date hereof, as determined in accordance with generally accepted accounting principles, consistently applied) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Section 6(a) above) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Warrant Price shall be adjusted by subtracting from the Warrant Price then in effect the value of the assets or securities that the holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant shares of Common Stock issued in the name of the holder immediately prior to the record date for such distribution; provided that if, after giving effect to such adjustment, the Warrant Price would be less than the then par value of the Common Stock, the Issuer shall distribute such assets or securities to the holder as if the holder had exercised the Warrant and the shares of Common Stock had been issued in the name of the holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. 7 (c) Combinations, Etc. If the Issuer at any time or from time to time after the date hereof shall combine or consolidate the outstanding shares of Common Stock, by reclassification or otherwise, into a lesser number of shares of Common Stock, then, and in each such case, the Warrant Price then in effect shall be increased, concurrently with the effectiveness of such combination or consolidation, to a price (calculated to the nearest one cent) determined by multiplying such Warrant Price by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the effectiveness of such combination or consolidation and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such effectiveness, provided that, for purposes of this Section 6(c), (x) such combination or consolidation shall be deemed to have occurred at the close of business on the date immediately prior to the day upon which such combination or consolidation becomes effective and (y) treasury shares shall be deemed not to be outstanding. (d) Issuance of Additional Shares of Common Stock. In case the Issuer at any time or from time to time after the date hereof shall issue or sell additional shares of Common Stock ("Additional Shares") for a consideration per share less than 90% of the Average Market Price (or if the IPO has not occurred by the time of determination, less than the Warrant Price) in effect on the earlier of (i) the date on which the Issuer enters into a firm contract for the issuance and sale of such Additional Shares (unless such contract specifies that the sale price for such Additional Shares will be determined at a later date, then such later date shall apply to this clause (i)) or (ii) the date of actual issuance or sale of such Additional Shares, then, in each such case, the Warrant Price in effect immediately prior to such date shall be reduced, concurrently with such issuance or sale, to a price (calculated to the nearest one cent) determined by multiplying such Warrant Price by a fraction (x) the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received by the Issuer for the total number of such Additional Shares so issued or sold would purchase at such Average Market Price or Warrant Price, as the case may be, and (y) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale, provided that (a) treasury shares shall not be deemed to be outstanding for purposes of this Section 6(d) and (b) the shares of Common Stock then issuable pursuant to the terms of this Warrant shall be deemed to be outstanding immediately prior to and after such issue or sale. Notwithstanding anything contained herein to the contrary, no adjustment to the Warrant Price shall be 8 made pursuant to this Section 6(d) following the issuance of Additional Shares pursuant to (I) Section 6(a) hereof, (II) the exercise of any options or issuance of any shares under any options or purchase or other rights that are outstanding on or prior to the date hereof and that were issued pursuant to any of the Issuer's employee stock option, appreciation or purchase right plans, (III) the exercise of any options or purchase or other rights or the issuance of any shares under any options or rights that are granted after the date hereof, whether in accordance with the terms of any of the Issuer's employee stock option, appreciation or purchase right plans or otherwise, so long as the exercise price of any such option, warrant, subscription or purchase right is not less than the Average Market Price on the date that such grant is approved by the Issuer's Board of Directors or a duly authorized committee thereof or, if later, the date that such exercise price is established, (IV) the exercise of any other options, warrants or other subscription or purchase rights outstanding on or prior to the date hereof, including without limitation, this Warrant, (V) the exercise of any conversion or exchange rights outstanding on or prior to the date hereof issued by the Issuer, (VI) the exercise of any conversion or exchange rights issued by the Issuer after the date hereof, so long as the conversion or exchange price is not less than the Average Market Price on the date that such issuance is approved by the Board of Directors or a duly authorized committee thereof or, if later, the date that such conversion or exchange price is established or (VII) the issuance or sale of Additional Shares pursuant to a firmly underwritten public offering of such shares. (e) Accountants' Report as to Adjustments. In each case of any adjustment or readjustment in the Warrant Price, the Issuer at its expense will promptly compute such adjustment or readjustment in accordance with the terms hereof and, upon the reasonable request of the holder of this Warrant, cause independent public accountants of recognized national standing selected by the Issuer (which may be the regular auditors of the Issuer) to verify such computation and prepare a calculation setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (i) the number of shares of Common Stock outstanding or deemed to be outstanding and (ii) the Warrant Price in effect immediately prior to such adjustment or readjustment and as adjusted and readjusted (if required by Section 6) on account thereof. The Issuer will forthwith mail a copy of each such report to the holder of this Warrant. The Issuer will also keep copies of all such reports at its principal office, and will cause the same to be available for inspection at such office during normal business hours by any holder of this Warrant. 9 (f) No Dilution or Impairment. The Issuer will not, by amendment of its Certificate of Incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms hereof, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Investor against dilution, or to accord to the Investor the protections against dilution, as provided herein. Without limiting the generality of the foregoing, the Issuer (i) will not permit the par value of any shares of Common Stock receivable upon the exercise of any Warrant to be increased to an amount that exceeds the amount payable therefor upon such exercise, (ii) will take all such action as may be necessary or appropriate in order that the Issuer may validly and legally issue fully paid and nonassessable shares upon the exercise of this Warrant from time to time and (iii) will not take any action which results in any adjustment of the Warrant Price if the total number of shares of Common Stock issuable after such action upon the exercise of this Warrant would exceed the total number of shares of Common Stock then authorized by the Issuer's Certificate of Incorporation and available for the purpose of issue upon such exercise. (g) Additional Reductions. The Issuer may make such reductions in the Warrant Price, in addition to those required by Sections 6(a), (b), (c) and (d) hereof, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. 7. Preemptive Rights. If at any time after the date of this Warrant but prior to the IPO the Issuer shall propose to sell or issue for cash in a transaction, the principal purpose of which is to raise capital, any equity securities or options, warrants (other than the Warrant being issued on the date hereof), rights or other securities exercisable for or convertible into equity securities of the Issuer, the Issuer shall offer to sell or issue to the holder of this Warrant, on the same terms and condi tions as the proposed sale or issuance, the respective numbers of such securities which, if all such securities were purchased, would result in the holder of this Warrant and its affiliates holding that percentage of such securities equal to the percentage of Common Stock on a fully diluted basis owned by such holder and its affiliates immediately prior to such sale or issuance. In the event the Issuer proposes to issue two or more securities as a unit, the preemptive rights available under this Section 7 may only be 10 exercised to purchase such units. The Issuer shall deliver to the holder of this Warrant a written notice (a "Purchase Notice") of a proposed sale pursuant to this Section 7 no later than 10 days prior to the proposed closing thereof. Such notice shall make reference to the holders' rights hereunder and shall describe in reasonable detail (i) the total amount of equity securities to be sold and (ii) the terms and conditions of the purchase, including the consideration to be paid therefor. The holder of this Warrant shall exercise its right to participate in the purchase of equity securities pursuant to this Section 7 by delivering to the Issuer a written notice (a "Subscription Response") stating its election to do so and specifying the amount of equity securities it will purchase no later than 30 days after receipt of the Purchase Notice. Failure to provide a Subscription Response in such 30-day period shall be deemed to constitute an election by such holder not to participate, and the holder's right to elect to purchase equity securities in connection with the proposed sale shall terminate at the end of the thirtieth day. 8. Exercise of Warrant in the Event of a Consolidation, Merger, Sale of Assets, Reorganization, Etc. (a) In case at any time the Issuer shall be a party to any Transaction, then (i) upon the consummation thereof this Warrant shall become exercisable with respect to all shares of Common Stock covered hereby (whether or not it has otherwise become exercisable with respect to such shares pursuant to Section 2) and shall be deemed to have been exercised by the Investor without any act on the part of the Investor and without any obligation on the part of the Investor to pay the exercise price until presentation of this Warrant pursuant to clause (ii) below, and (ii) this Warrant shall represent the right of the Investor to receive (upon presentation of this Warrant on or within twenty (20) days after the date of such consummation together with payment of the aggregate exercise price payable at the time of such consummation in accordance with Section 3 for all shares of Common Stock issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock issuable upon exercise of this Warrant prior to such consummation, the cash, securities and other property to which the Investor would have been entitled upon the consummation of the Transaction if the Investor had exercised this Warrant immediately prior thereto. (b) The Issuer will not effect any Transaction unless, prior to the consummation thereof, each corporation or entity (other than the Issuer) which may be required to deliver any cash, securities or other property upon the exercise of this 11 Warrant as provided herein shall assume, by written instrument delivered to the Investor, the obligation to deliver to the Investor such cash, securities or other property as, in accordance with the foregoing provision, the Investor may be entitled to receive. 9. Notices of Corporate Action. In the event of any anticipated (i) taking by the Issuer of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution on such securities, or (ii) Transaction, or (iii) voluntary or involuntary dissolution, liquidation or winding-up of the Issuer, the Issuer will mail to the holder of this Warrant a notice specifying (A) the date or expected date on which any such record is to be taken for the purpose of such dividend or distribution or (B) the date or expected date on which any such Transaction, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for the securities or other property deliverable upon such Transaction, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified, in the case of any date referred to in the foregoing clause (A), and at least ten (10) days prior to the date therein specified, in the case of the date referred to in the foregoing clause (B). 10. Amendments and Waivers. Any term of this Warrant may be amended or modified or the observance of any term of this Warrant may be waived (either generally or in a particular instance) only with the written consent of the Issuer and the holder of this Warrant. 11. Successors and Assigns; Transfers. The provisions of this Warrant shall be binding upon and inure to the benefit of the original holder hereof, its successors and assigns by way of merger, consolidation or operation of law, and any affiliate of the Investor to whom this Warrant is transferred. This Warrant shall not be transferable by the Investor except to any affiliate of the original holder hereof, or otherwise by way of merger, consolidation or operation of law. 12. Exchange of Warrant. Upon surrender for exchange of this Warrant, properly endorsed, for registration of transfer or for exchange at the principal office of the Issuer, the Issuer at its expense will issue and deliver to or upon the order of the Investor a new Warrant or Warrants of like tenor, in the name of the Investor or, subject to Section 11 above, as the Investor (upon payment by the Investor of any 12 applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of this Warrant. 13. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Issuer of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, upon delivery of an indemnity bond in such reasonable amount as the Issuer may determine (or, in the case of any Warrant held by the original holder hereof or any affiliate thereof, of an affidavit of an authorized officer of such holder, setting forth the fact of such loss, theft or destruction, which shall be satisfactory evidence thereof and no further indemnity shall be required as a condition of the execution and delivery of a new Warrant), or, in the case of any such mutilation, upon the surrender of such Warrant for cancellation to the Issuer at its principal office, the Issuer at its expense will execute and deliver, in lieu thereof, a new Warrant, of like tenor. Any Warrant in lieu of which any such new Warrant has been so executed and delivered by the Issuer shall not be deemed to be an outstanding Warrant for any purpose. 14. Remedies. The Issuer stipulates that the remedies at law of the holder of this Warrant in the event of any default by the Issuer in the performance of or in compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise without the requirement of the posting of a bond. 15. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Issuer (except to the extent that shares of Common Stock are issued to such holder pursuant to this Warrant) or as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Issuer, whether such liabilities are asserted by the Issuer or by creditors or stockholders of the Issuer or otherwise. 16. Notices. All notices and other communications under this Warrant shall be in writing and shall be mailed by registered or certified mail, return receipt requested, or by facsimile transmission, addressed (a) if to the holder, at the registered address or the facsimile number of such holder as set forth in the register kept at the principal office of the Issuer, and (b) if to the Issuer, to the attention of the Secretary at 13 its principal office, or to its facsimile number, Attention: Secretary, provided that the exercise of any Warrant shall be effected in the manner provided in Section 2. 17. Legends. The shares of Common Stock issuable pursuant to the terms of this Warrant shall contain the legend set forth in Section 3.4(d) of the Investment Agreement. 18. Miscellaneous. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. DATED as of July 17, 1998. MEDE AMERICA CORPORATION By: -------------------------- Name: --------------------- Title: --------------------- 14 FORM OF SUBSCRIPTION [To be signed only upon exercise of the Warrant] TO MEDE AMERICA CORPORATION The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _________* shares of Common Stock of MEDE AMERICA CORPORATION and herewith makes payment of $______ therefor or elects a Cashless Exercise **, and requests that the certificates for such shares be issued in the name of, and delivered to, ________________________________, whose address is ________________________________________________________________. Dated: _________________ ----------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ----------------------------- (Address) - -------------------- * Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional shares of the Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions referred to in the Warrant, may be deliverable upon exercise. In the case of a partial exercise, a new Warrant or 15 Warrants will be issued and delivered, representing the unexercised portion of such Warrant, all as provided in the Warrant. ** Indicate here the election of a Cashless Exercise of the Warrant pursuant to _______. 16 FORM OF ASSIGNMENT [To be signed only upon transfer of the Warrant] For value received, the undersigned hereby sells, assigns and transfers unto _____________________________________ the rights represented by the within Warrant to purchase _______ shares of Common Stock of MEDE AMERICA CORP. to which the within Warrant relates, and appoints __________________________________ Attorney to transfer such rights on the books of MEDE AMERICA CORP. with full power of substitution in the premises. Dated: _________________ ------------------------------ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------ (Address) Signed in the presence of: - ------------------------------- 17 EX-4.8 4 EXHIBIT 4.8 EXHIBIT 4.8 ================================================================================ REGISTRATION RIGHTS AGREEMENT between MEDE AMERICA CORPORATION and MEDIC COMPUTER SYSTEMS, INC. Dated as of July 17, 1998 ================================================================================ TABLE OF CONTENTS (Not Part of Agreement)
Page 1. Background....................................................................1 2. Definitions...................................................................1 3. Registration..................................................................5 3.1 Demand Registration...................................................5 (a) Requests......................................................5 (b) Obligation to Effect Registration.............................5 (c) Shelf Registration............................................6 (d) Effective Registration Statement..............................6 (e) Pro Rata Allocation...........................................6 (f) Inclusion of Other Securities in Demand Registration..........6 3.2 Piggyback Registration................................................7 3.3 Registration Procedures...............................................9 3.4 Underwritten Offerings...............................................15 (a) Underwritten Offerings Exclusive.............................15 (b) Underwriting Agreement.......................................15 (c) Selection of Underwriters....................................15 3.5 Lock-Up Agreements...................................................16 3.6 Preparation; Reasonable Investigation................................16 3.7 Other Registrations..................................................17 3.8 Indemnification......................................................17 (a) Indemnification by the Issuer................................17 (b) Indemnification by the Seller................................18 (c) Notices of Claims, etc.......................................18 (d) Other Indemnification........................................19 (e) Other Remedies...............................................20 (f) Officers and Directors.......................................20 3.9 Expenses..............................................................20 4. Miscellaneous................................................................20 4.1 Rule 144; Legended Securities; etc...................................20 4.2 Amendments and Waivers...............................................21 4.4 Successors, Assigns and Transferees..................................21 4.5 Notices..............................................................22 4.6 No Inconsistent Agreements...........................................22
i 4.7 Enforcement of Agreement............................................22 4.8 Severability........................................................23 4.9. Headings............................................................23 4.10. Counterparts........................................................23 4.11. Governing Law.......................................................23 4.12 No Third Party Beneficiaries........................................23
ii ================================================================================ REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of July 17, 1998, among MEDE AMERICA CORPORATION, a Delaware corporation (the "Issuer"), and MEDIC COMPUTER SYSTEMS, INC. a North Carolina corporation (the "Investor"). 1. Background. (a) Concurrently with the execution and delivery of this Agreement, the Investor is receiving a Warrant (the "Warrant") to purchase an aggregate of 1,250,000 shares (the "Shares") of Common Stock of the Issuer, pursuant to an Investment Agreement dated the date hereof (the "Investment Agreement"). (b) This Agreement shall become effective with respect to any Registrable Securities upon the issuance or sale of Registrable Securities pursuant to the Warrant, provided that any holder of the Warrant may exercise its rights hereunder to demand or request registration of Registrable Securities prior to the exercise of such Warrant. This Agreement shall remain in effect upon the assignment or transfer of Registrable Securities by the Investor or a Holder to an Affiliate of the Investor or such Holder or to any successor, assign or transferee by merger or consolidation or otherwise by operation of law, in each case pursuant to Section 4.4. 2. Definitions. For purposes of this Agreement, the following terms have the following respective meanings: "Additional Shares" means shares of Common Stock acquired by the Investor other than by the exercise of the Warrant initially issued pursuant to the Investment Agreement, provided such shares of Common Stock are, at the time of such acquisition, "restricted securities" as such term is defined in Rule 144. "Affiliate" means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by or under common Control with such first Person. "Control" means the power to direct or cause the direction of management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. Any director, member of management or other employee of the Issuer or any of its Subsidiaries who would not otherwise be an Affiliate of the Investor shall not be deemed to be an Affiliate of the Investor. "Agreement" is defined in the first paragraph of this Agreement. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required to close. "Closing Date" means the date hereof. "Common Stock" means the common stock, par value $.01 per share, of the Issuer. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations thereunder which shall be in effect at the time. Any reference to a particular section thereof shall include a reference to the corresponding section, if any, of any such successor federal statute, and the rules and regulations thereunder. "Holder" means any holder of Registrable Securities or the Warrant, including an Affiliate of the Investor or a Holder (or to any successor, assign or transferee by merger or consolidation or otherwise by operation of law) that has received Registrable Securities pursuant to Section 4.4. "Investment Agreement" is defined in Section 1(a). "Investor" is defined in the first paragraph of this Agreement. "Issuer" is defined in the introduction to this Agreement. "Majority Holders" means, initially, the Investor, and subsequent to any transfer, shall mean Holders of a majority of the then outstanding Registrable Securities. "NASD" means the National Association of Securities Dealers, Inc. "Person" means any natural person, firm, partnership, association, corporation, company, trust, business trust, governmental entity or other entity. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other amendments and supplements to the prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such prospectus. 2 "Registrable Securities" means (a) the Shares, (b) the Additional Shares, (c) any securities issued or issuable with respect to any Shares or Additional Shares referred to in the foregoing clauses (a) and (b), (i) upon any conversion or exchange thereof, (ii) by way of stock dividend or other distribution, stock split or reverse stock split, or (iii) in connection with a combination of shares, recapitalization, merger, consolidation, exchange offer or other reorganization. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (A) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement, (B) such securities shall have been distributed to the public in reliance upon Rule 144, (C) subject to the provisions of Sec tion 4.1(b)(ii), such securities shall have been otherwise transferred, new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Issuer and subsequent disposition of such securities shall not require registration or qualification of such securities under the Securities Act or any similar state law then in force or (D) such securities shall have been acquired by the Issuer. In determining the number of Registrable Securities outstanding at any time or whether the Holders of the requisite number of Registrable Securities have taken any action hereunder and in calculating the number of Registrable Securities for all other purposes under this Agreement, the Warrant shall be deemed to have been exercised (to the fullest extent then determinable without a cashless exercise) and such calculation shall include the number of shares of Common Stock then deliverable upon the exercise of such Warrant (to the fullest extent then determinable without a cashless exercise). "Registration Expenses" All fees and expenses incident to the performance of or compliance with the provisions of this Agreement, whether or not any registration statement is filed or becomes effective, including, without limitation, all (i) registration and filing fees (including, without limitation, (A) fees with respect to filings required to be made with the NASD in connection with an underwritten offering, (B) fees and expenses of compliance with state securities or blue sky laws (including, without limitation, fees and disbursements of counsel for the underwriter or underwriters in connection with blue sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as provided in Section 3.3(e)), and (C) fees and other expenses associated with the listing of the Shares and any Additional Shares on the Nasdaq National Market and any other applicable exchange, (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses), (iii) fees and disbursements of all independent certified public accountants referred to in Section 3.3 (including, without limitation, the reasonable expenses of any special audit and "cold comfort" letters required by or incident to such performance), (iv) the fees and expenses of any "qualified independent 3 underwriter" or other independent appraiser participating in an offering pursuant to Rule 2720 of the NASD Rules of Conduct, (v) fees and expenses of all attorneys, advisers, appraisers and other persons retained by the Issuer or any Subsidiary of the Issuer, (vi) the expenses relating to printing, word processing and distributing all registration statements, underwriting agreements, securities sales agreements, indentures and any other documents necessary in order to comply with this Agreement and (vii) the reasonable out-of-pocket expenses of the Holders of the Registrable Securities being registered in such registration incurred in connection therewith including, without limitation, the reasonable fees and disbursements of not more than one counsel (together with appropriate local counsel) chosen by the Holders of a majority of the Registrable Securities to be included in such Registration Statement. "Registration Expenses" shall not include any underwriting discounts or commissions or any transfer taxes payable in respect of the sale of Registrable Securities by the Holders thereof. "Registration Statement" means any registration statement of the Issuer that covers any of the Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such registration statement, including post-effective amendments, in each case including the Prospectus, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" means Rule 144 (or any successor provision) under the Securities Act. "Rule 145" means Rule 145 (or any successor provision) under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations thereunder which shall be in effect at the time. Any reference to a particular section thereof shall include a reference to the corresponding section, if any, of any such successor federal statute, and the rules and regulations thereunder. "SEC" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act. "Shares" is defined in Section 1(a). "Special Registration" means the registration of shares of equity securities and/or options or other rights in respect thereof to be offered solely to 4 directors, members of management, employees, consultants or sales agents, distributors or similar representatives of the Issuer or its direct or indirect Subsidiaries, solely on Form S-8 or any successor form. "Subsidiary" means, with respect to any Person, any corporation or Person, a majority of the outstanding voting stock or other equity interests of which is owned, directly or indirectly, by that Person. "underwritten registration" or "underwritten offering" means a registration in which securities of the Issuer (including Registrable Securities) are sold to an underwriter for reoffering to the public. "Warrant" means the warrant issued pursuant to the Investment Agreement. 3. Registration. 3.1 Demand Registration. (a) Requests. Subject to the provisions of Section 3.7, at any time or from time to time after 180 days following the initial public offering of the Common Stock, the Majority Holders shall have the right to make written requests that the Issuer effect up to three registrations under the Securities Act of all or part of the Registrable Securities of the Holders making such request, which requests shall specify the intended method of disposition thereof by such Holders, including whether the registration requested is for an underwritten offering. The Issuer shall not be required to effect more than three registrations under this Section 3.1. Nothing in this Agreement shall prevent any Holder from making a request under this Section 3.1 prior to exercising the Warrant. (b) Obligation to Effect Registration. Within 10 days after receipt by the Issuer of any request for registration pursuant to Section 3.1(a), the Issuer shall promptly give written notice of such requested registration to all Holders, and there upon will use its best efforts to effect the registration under the Securities Act of (i) the Registrable Securities which the Issuer has been so requested to register pursuant to Section 3.1(a), and (ii) all other Registrable Securities which the Issuer has been requested to register by the Holders thereof by written request given to the Issuer within 10 days after the Issuer has given such written notice (which request shall 5 specify the intended method of disposition of such Registrable Securities), all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered. (c) Shelf Registration. If requested by Holders of a majority of the Registrable Securities as to which registration has been requested pursuant to this Section 3.1, and if the Issuer is eligible to file such Registration Statement on Form S- 3, the Registration Statement covering such Registrable Securities shall provide for the sale by the Holders thereof of the Registrable Securities from time to time on a delayed or a continuous basis under Rule 415 under the Securities Act. If more than one underwritten offering is requested under any particular shelf registration, each such additional underwritten offering shall constitute a separate "demand" registration for purposes of Section 3.1(a). (d) Effective Registration Statement. A registration requested pursuant to Section 3.1(a) shall not be deemed to have been effected unless it is declared effective by the SEC and remains effective for the period specified in Section 3.3(b). Notwithstanding the preceding sentence, a registration requested pursuant to Section 3.1(a) that does not become effective after the Issuer has filed a Registration Statement with respect thereto by reason of the refusal to proceed of the Holders of Registrable Securities requesting the registration, or by reason of a request by the Holders of a majority of the Registrable Securities for which registration is being requested that such registration be withdrawn, shall be deemed to have been effected by the Issuer at the request of such Holders. (e) Pro Rata Allocation. If the Holders of a majority of the Registrable Securities for which registration is being requested pursuant to Section 3.1(a) deter mine, based on consultation with the managing underwriters or, in an offering which is not underwritten, with an investment banker, that the number of securities to be sold in any such offering should be limited due to market conditions or otherwise, Holders of Registrable Securities proposing to sell their securities in such registration shall share pro rata in the number of securities being offered (as determined by the Holders holding a majority of the Registrable Securities for which registration is being re quested in consultation with the managing underwriters or investment banker, as the case may be) and registered for their account, such sharing to be based on the number of Registrable Securities as to which registration was requested by such Holders. (f) Inclusion of Other Securities in Demand Registration. (i) The Issuer may, subject to the remainder of this Section 3.1(f), elect to include in any Registration Statement made pursuant to Section 3.1(a), authorized 6 but unissued shares of Common Stock or shares of Common Stock held as treasury stock. (ii) Notwithstanding any other provision of this Section 3(f), the Issuer shall not register securities (other than Registrable Securities) for sale for the account of any Person (other than the Issuer and WCAS Capital Partners II, L.P. to the extent that it exercises its piggyback registration rights granted by the Issuer as of the date hereof) in any registration requested pursuant to Section 3.1(a) unless permitted to do so by the written consent of the Holders holding at least a majority of the Registrable Securities proposed to be sold in such registration. (iii) If any Registration Statement made pursuant to Section 3.1(a) involves an underwritten offering and the managing underwriter of such offering (or, in connection with an offering that is not underwritten, an investment banker) shall advise the Issuer that, in its view, the number of securities requested to be included in such registration exceeds the largest number that can be sold in an orderly manner in such offering within a price range acceptable to the selling Holders, the Issuer shall include in such registration. (A) first, all shares of Common Stock requested to be included in such registration by the selling Holders as provided in Section 3.1(e); and (B) second, to the extent that the number of securities to be registered pursuant to clause (A) is less than the largest number that can be sold in an orderly manner in such offering within a price range acceptable to the selling Holders, securities that the Issuer proposes to register; and (C) third, to the extent that the number of shares registered pursuant to clauses (A) and (B) is less than the largest number that can be sold in an orderly manner in such offering within a price range acceptable to the selling Holders, the securities requested to be included by any other holders (if permitted by the Holders or otherwise pursuant to Section 3.1(f)(ii)). The securities to be included in any such registration pursuant to clause (C) shall be allocated on a pro rata basis among all holders requesting that securities be included in such registration pursuant to such clause on the basis of the number of securities requested to be included by such holders. 3.2 Piggyback Registration. If the Issuer at any time proposes to register any Common Stock under the Securities Act (other than pursuant to a Registration Statement relating solely to the sale of securities to participants in a Issuer 7 stock plan, on Form S-4 with respect to any merger, consolidation or acquisition, pursuant to Section 3.1 or pursuant to a Special Registration), whether or not for sale for its own account, and the registration form to be used may be used for the registration of Registrable Securities, it shall each such time give prompt written notice to all Holders of Registrable Securities of its intention to do so and, upon the written request of any Holder of Registrable Securities given to the Issuer within 10 days after the Issuer has given any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of disposition thereof), the Issuer will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Issuer has been so requested to register by the Holders thereof, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that: (a) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the Registration Statement filed in connection with such registration, the Issuer shall determine for any reason not to register such securities, the Issuer may, at its election, give written notice of such determination to each Holder that was previously notified of such registration and, thereupon, shall not register any Registrable Securities in connection with such registration (but shall nevertheless pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any Holders to request that a registration be effected under Section 3.1; and (b) if the Issuer shall be advised in writing by the managing underwriters (or, in connection with an offering which is not underwritten, by an investment banker) that in their or its opinion the number of securities requested to be included in such registration (whether by the Issuer, pursuant to this Section 3.2 or pursuant to any other rights granted by the Issuer to a holder or holders of its securities to request or demand such registration or inclusion of any such securities in any such registration) exceeds the number of such securities which can be sold in such offering in an orderly manner within a price range that is acceptable to the Issuer, the Issuer shall include in such registration: (i) first, all shares requested to be registered by WCAS Capital Partners II pursuant to its demand registration rights granted by the Issuer as of the date hereof; and (ii) second, all shares of Common Stock that the Issuer proposes to register for its own account; and 8 (iii) third, to the extent that the number of shares registered pursuant to clauses (i) and (ii) is less than the largest number that can be sold in an orderly manner in such offering within a price range acceptable to the Issuer, (x) the Registrable Securities requested to be included by the Holders and (y) in the case of a registration initially requested or demanded by a holder or holders of securities other than the Registrable Securities (other than WCAS Capital Partners II), the securities requested or demanded to be registered by such other holders; and (iv) fourth, to the extent that the number of shares registered pursuant to clauses (i), (ii) and (iii) is less than the largest number that can be sold in an orderly manner in such offering within a price range acceptable to the Issuer, the securities requested to be included by any other holders, and the Issuer shall so provide in any registration agreement hereinafter entered into with respect to any of its securities. The securities to be included in any such registration pursuant to clause (iii) or (iv) shall be allocated on a pro rata basis among all holders requesting that securities be included in such registration pursuant to such clause on the basis of the number of securities requested to be included by such holders. No registration effected under this Section 3.2 shall relieve the Issuer from its obligation to effect registrations upon request under Section 3.1. The Issuer shall not be obligated to cause any "piggyback" registration to be underwritten. Nothing in this Agreement shall prevent any Holder from making a request under this Section 3.2 prior to exercising the Warrant. 3.3 Registration Procedures. If and whenever the Issuer is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3.1 and 3.2, the Issuer shall: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement with respect to such securities, make all required filings with the NASD and use best efforts to cause such Registration Statement to become effective at the earliest possible date; 9 (b) prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith and such other documents as may be necessary to keep such Registration Statement effective until the earlier of (i) 30 days after the effective date of such Registration Statement (360 days in the case of a shelf registration pursuant to Section 3.1(c)) or (ii) the consummation of the disposition by the Holders of all the Registrable Securities covered by such Registration Statement and otherwise comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement; (c) furnish to counsel (if any) selected by the Holders of a majority of the Registrable Securities covered by such Registration Statement and to counsel for the underwriters in any underwritten offering copies of all documents proposed to be filed with the SEC in connection with such registration a reasonable time prior to the proposed filing thereof and give reasonable consideration in good faith to any comments of such Holders, counsel and underwriters. The Issuer shall not file any Registration Statement or Prospectus or any amendments or supplements thereto pursuant to a registration under Section 3.1(a) if the Holders of a majority of the Registrable Securities covered by such Registration Statement, their counsel, or the underwriters, if any, shall reasonably object in writing; (d) furnish to each seller of Registrable Securities, without charge, such reasonable number of conformed copies of such Registration Statement and of each such amendment and supplement thereto (in each case, including all exhib its (including exhibits incorporated by reference), financial statements, schedules and all documents incorporated therein, deemed to be incorporated therein by reference or filed therewith, except that the Issuer shall not be obligated to furnish any seller of securities with more than two copies of such exhibits and documents), such number of copies of the Prospectus included in such Registration Statement (including each preliminary prospectus and any summary prospectus) in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the disposition of the securities owned by such seller; (e) use its best efforts to register or qualify and cooperate with the Holders of Registrable Securities, the underwriters and their respective counsels in connection with the registration or qualification (or exemption from such registration or qualification) of the securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as each seller shall request; provided, however, that where Registrable Securities 10 are offered other than through an underwritten offering, the Issuer agrees to cause its counsel to perform blue sky investigations and file registrations and qualifications required to be filed pursuant to this Section 3.3(e); keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be effective hereunder and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Issuer shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, subject itself to taxation in any jurisdiction wherein it is not so subject, or take any action which would subject it to general service of process in any jurisdiction wherein it is not so subject; (f) in connection with an underwritten public offering only, (i) furnish to each seller of Registrable Securities a signed coun terpart, addressed to the sellers, of an opinion of counsel for the Issuer experienced in securities law matters, dated the effective date of the Registration Statement, and (ii) if and to the extent permitted by applicable accounting standards, use its reasonable efforts to furnish to each seller of Registrable Securities, addressed to them, a "cold comfort" letter signed by the independent public accountants who have certified the Issuer's financial statements included in such Registration Statement, covering substantially the same matters with respect to such Registration Statement (and the Prospectus included therein), and with respect to events subsequent to the date of such financial statements, as are customarily covered in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Investors may reasonable request; (g) (i) notify each Holder of Registrable Securities subject to such Registration Statement if such Registration Statement, at the time it or any amendment thereto became effective, (x) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading upon discovery by the Issuer of such material misstatement or omission or (y) upon discovery by the Issuer of the happening of any event as a result of which the Issuer believes there would be such a material misstatement or omission, and, as promptly as practicable, prepare and file with the SEC a post-effective amendment to such 11 registration statement and use best efforts to cause such post-effective amend ment to become effective such that such registration statement, as so amended, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) notify each Holder of Registrable Securities subject to such Registration Statement, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, if the Prospectus in cluded in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading upon discovery by the Issuer of such material misstatement or omission or upon discovery by the Issuer of the happening of any event as a result of which the Issuer believes there would be such a material misstatement or omission, and, as promptly as is practicable, prepare and furnish to such Holder a reasonable number of copies of a sup plement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (h) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement of the Issuer complying with the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated under the Securities Act (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to an underwriter or to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to an underwriter or to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Issuer after the effective date of the relevant Registration Statement, which statements shall cover said 12-month periods; (i) promptly notify each Holder of any Registrable Securities covered by such Registration Statement, their counsel and the underwriters (i) when such Registration Statement, or any post-effective amendment to such Registration Statement, shall have become effective, or any amendment of or supplement to the Prospectus used in connection therewith shall have been filed, (ii) of any request by the SEC to amend such Registration Statement or to amend or 12 supplement such Prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation or threatening of any proceedings for any of such purposes, (iv) of the suspension of the qualification of such securities for offering or sale in any jurisdiction, or of the institution of any proceedings for any of such purposes and (v) if at any time when a Prospectus is to be required by the Securities Act to be delivered in connection with the sale of the Registrable Securities, the representations and warranties of the Issuer contained in any agreement (including the underwriting agreement contemplated in Section 3.4(b) below), to the knowledge of the Issuer, cease to be true and correct in any material respect; (j) use its best efforts to prevent the issuance of any order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Securities covered thereby for sale in any jurisdiction, and, if any such order is issued, to obtain the withdrawal of any such order at the earliest possible moment; (k) prior to the effective date of the Registration Statement, (i) provide the registrar for the Common Stock or such other Registrable Securities with printed certificates for such securities in a form eligible for deposit with DTC and (ii) provide a CUSIP number for such securities; (l) have the right, if the Board of Directors of the Issuer, in its good faith judgment, determines that any registration of shares of Common Stock should not be made or continued because (x) it would materially interfere with any material financing, acquisition, corporation reorganization, merger, or other transaction involving the Issuer or any of its Subsidiaries or (y) it would require the disclosure of material nonpublic information, which disclosure would have a material adverse effect on the Issuer's business (each a "Valid Business Reason"), (i) to postpone filing a Registration Statement until such Valid Business Reason no longer exists, but in no event for more than 90 days, and (ii) to cause any Registration Statement that has already been filed to be withdrawn and its effectiveness terminated or to postpone amending or supplementing such Registration Statement until such Valid Business Reason no longer exists, but in no event for more than 90 days (the "Postponement Period"); provided, however, that in no event shall the Issuer be permitted to postpone or withdraw a Registration Statement within 180 days after the expiration of the Postponement Period; and 13 (m) participate in marketing any Registrable Securities in connection with the registration of such securities under this Agreement (including, but not limited to, making available reasonably necessary personnel and participating in a road show) as would be customary for public offerings of this nature. The Issuer may require each Holder of any Registrable Securities as to which any registration is being effected to furnish to the Issuer such information regarding such Holder and the distribution of such securities as the Issuer may from time to time reasonably request in writing and as shall be required by law in connection therewith. Each such Holder agrees to furnish promptly to the Issuer all information required to be disclosed in order to make the information previously furnished to the Issuer by such Holder not materially misleading. The Issuer agrees not to file or make any amendment to any Registration Statement with respect to any Registrable Securities, or any amendment of or supple ment to the Prospectus used in connection therewith, which refers to any seller of any securities covered thereby by name, or otherwise identifies such seller as the holder of any securities of the Issuer, without the consent of such seller, such consent not to be unreasonably withheld, except that no such consent shall be required for any disclosure that is required by law. By the acquisition of Registrable Securities, each Holder shall be deemed to have agreed that upon receipt of any notice from the Issuer pursuant to Sec tion 3.3(g) or (l), such Holder will promptly discontinue such Holder's disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Holder shall have received, in the case of clause (i) of Section 3.3(g), notice from the Issuer that such Registration Statement has been amended, as contemplated by Section 3.3(g); in the case of clause (ii) of Section 3.3(g), copies of the supplemented or amended Prospectus contemplated by Section 3.3(g); or, in the case of Section 3.3(l), the time period specified has elapsed or such Holder has received notice from the Issuer that the Postponement Period has been terminated. If so directed by the Issuer, each Holder will deliver to the Issuer (at the Issuer's expense) all copies, other than permanent file copies, in such Holder's possession of the Prospectus covering such Registrable Securities at the time of receipt of such notice. In the event that the Issuer shall give any such notice, the period mentioned in Section 3.3(b) shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of any Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Sec tion 3.3(g). 14 3.4 Underwritten Offerings. The provisions of this Section 3.4 do not establish additional registration rights but instead set forth procedures applicable, in addition to those set forth in Sections 3.1 through 3.3, to any registration that is an underwritten offering. (a) Underwritten Offerings Exclusive. Whenever a registration requested pursuant to Section 3.1 is for an underwritten offering, only securities that are to be distributed by the underwriters may be included in the registration. (b) Underwriting Agreement. If requested by the underwriters for any underwritten offering by Holders pursuant to a registration requested under Section 3.1, the Issuer shall enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Holders of a majority of the Registrable Securities to be covered by such registration and to the underwriters and to contain such representations and warranties by the Issuer and such other terms and provisions as are customarily contained in agreements of this type, including, but not limited to, indemnities to the effect and to the extent provided in Section 3.8, provisions for the delivery of officers' certificates, opinions of counsel and accountants' "cold comfort" letters, and lock-up arrangements. The Holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the agreements on the part of, the Issuer to and for the benefit of such underwriters be made to and for the benefit of such Holders and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall also be conditions precedent to the obligations of such Holders. No such Holder shall be required by the Issuer to make any representa tions or warranties to, or agreements with, the Issuer or the underwriters other than as set forth in Section 3.8(d) and representations, warranties or agreements regarding such Holder and such Holder's intended method of distribution. (c) Selection of Underwriters. Whenever a registration requested pursuant to Section 3.1 is for an underwritten offering, the Issuer shall have the right to select one or more underwriters to administer the offering, subject to the consent of the Holders of a majority of the Registrable Securities to be registered pursuant to such offering, which shall not be unreasonably withheld. If the Issuer at any time proposes to register any of its securities under the Securities Act for sale for its own account and such securities are to be distributed by or through one or more underwriters, the Issuer shall have the right to select one or more underwriters to administer the offering, subject, in the event the Registrable Securities to be registered pursuant to such offering represent at least 10% of the total number of shares to be so registered (not including any over-allotment options), to the consent of the Holders of a majority of Registrable 15 Securities to be registered pursuant to such offering, which consent shall not be unreasonably withheld. In all cases in this Section 3.4(c), at least one of the underwriters chosen by the Issuer shall be an underwriter of nationally recognized standing. 3.5 Lock-Up Agreements. If and whenever the Issuer proposes to register any of its equity securities under the Securities Act, whether or not for its own account (other than pursuant to a Special Registration), or is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to Section 3.1 or 3.2, each of the Holders, if required by the managing underwriter in an underwritten offering, agrees by acquisition of such Registrable Securities not to effect (other than pursuant to such registration) any public sale or dis tribution, including, but not limited to, any sale pursuant to Rule 144, of any Regist rable Securities, any other equity securities of the Issuer or any securities convertible into or exchangeable or exercisable for any equity securities of the Issuer during the 10 days prior to, and for 90 days (or 180 days in the case of an initial public offering) after, the effective date of such registration, to the extent timely notified in writing by the Issuer or the managing underwriter, and the Issuer agrees to use its best efforts to cause each holder of any equity security, or of any security convertible into or exchangeable or exercisable for any equity security, of the Issuer purchased from the Issuer at any time other than in a public offering to enter into a similar agreement with the Issuer. If and whenever the Issuer is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to Sections 3.1 or 3.2, the Issuer, if required by the managing underwriter in an underwritten offering, shall not effect (other than pursuant to such registration or a Special Registration) any public sale or distribution of any other equity securities of the Issuer or any securities convertible into or exchangeable or exercisable for any equity securi ties of the Issuer during the 10 days prior to, and for 90 days (or 180 days in the case of an initial public offering) after, the effective date of such registration, to the extent timely notified in writing by the managing underwriter. In addition, in such circumstances, the Issuer shall use its best efforts to cause its directors and officers and all holders of 5% or more of its equity securities (other than the Holders) not to effect (other than pursuant to such registration) any public sale or distribution, including, but not limited to, any sale pursuant to Rule 144, of any equity securities of the Issuer or any securities convertible into or exchangeable or exercisable for any equity securities of the Issuer during the 10 days prior to, and for 90 days (or 180 days in the case of an initial public offering) after, the effective date of such registration, to the extent timely notified in writing by the managing underwriter 3.6 Preparation; Reasonable Investigation. In connection with the preparation and filing of each Registration Statement registering Registrable Securities 16 under the Securities Act, the Issuer shall give the Holders of such Registrable Securities so to be registered and their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such Registration Statement, each Prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and shall give each of them such access to all pertinent financial, corporate and other documents and properties of the Issuer and its Subsidiaries, and such opportunities to discuss the business of the Issuer with its officers, directors, employees and the independent public accountants who have issued audit reports on its financial statements as shall be necessary, in the opinion of such Holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 3.7 Other Registrations. If and whenever the Issuer is required to use its best efforts to effect the registration of any Registrable Securities under the Securi ties Act pursuant to Section 3.1 or 3.2, and if such registration shall not have been withdrawn or abandoned, the Issuer shall not be obligated to and shall not file any Registration Statement with respect to any of its securities (including Registrable Securities) under the Securities Act (other than a Special Registration), whether of its own accord or at the request or demand of any holder or holders of such securities, until a period of 90 days shall have elapsed from the effective date of such previous registration, provided that the Issuer shall not be prohibited from filing a registration statement by virtue of this Section 3.7 more than once in a 360 day period. 3.8 Indemnification. (a) Indemnification by the Issuer. In the event of any registration of any Registrable Securities under the Securities Act pursuant to Section 3.1 or 3.2, the Issuer shall indemnify and hold harmless the seller of such securities, its directors, officers, and employees, each other person who participates as an underwriter, broker or dealer in the offering or sale of such securities and each other person, if any, who controls such seller or any such participating person within the meaning of either Sec tion 15 of the Securities Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which such seller or any such director, officer, employee, participating person or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such securities were registered under the Securities Act, any Prospectus or preliminary prospectus included therein, or any amendment or supplement thereto, or (ii) any omission or alleged omission to state a material fact required to be stated in any such Registration Statement, Prospectus, preliminary 17 prospectus, amendment or supplement or necessary to make the statements therein not misleading; and the Issuer shall reimburse such seller and each such director, officer, employee, participating person and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding as such expenses are incurred; provided that the Issuer shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or omission made in any such Registration Statement, Prospectus, preliminary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Issuer by such seller or participating person expressly for use in the preparation thereof. (b) Indemnification by the Seller. In the event of any registration of any Registrable Securities under the Securities Act pursuant to Section 3.1 or 3.2, each of the prospective sellers of such securities, will indemnify and hold harmless the Issuer, each director of the Issuer, each officer of the Issuer who shall sign such Registration Statement, and each other person, if any, who controls the Issuer or any such participating person within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which the Issuer or any such director, officer, employee, participating person or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such securities were registered under the Securities Act, any Prospectus or preliminary prospectus included therein, or any amendment or supplement thereto, or any omission or alleged omission to state a material fact with respect to such seller required to be stated in any such Registration Statement, Prospectus, preliminary prospectus, amendment or supplement or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and in conformity with written information furnished to the Issuer by such seller expressly for use in the preparation of any such Registration Statement, Prospectus, preliminary prospectus, amendment or supplement; provided that the liability of each such seller shall be in proportion to and limited to the net amount received by such seller (after deducting any underwriting discount and expenses) from the sale of Registrable Securities pursuant to such Registration Statement. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim re ferred to in the preceding paragraphs of this Section 3.8, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party hereunder, 18 give prompt written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided therein shall not relieve the indemnifying party of its obligations under the preceding paragraphs of this Section 3.8 unless the failure to provide prompt written notice shall cause actual prejudice to the indemnifying party. In case any such action is brought against an indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to retain counsel reasonably satisfactory to such indemnified party to defend against such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel and the payment of such fees by the indemnifying party or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party has not retained counsel to defend such proceeding, in which case (under any of such clauses (i), (ii) or (iii)) it is understood that (x) the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties and (y) such firm shall be designated in writing by the Holders of a majority of the Registrable Securities included in such Registration Statement in the case of parties indemnified pursuant to Section 3.8(a) and by the Issuer in the case of parties indemnified pursuant to Section 3.8(b). No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of such indemnified party, which consent shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in the preceding paragraphs of this Section 3.8 (with appropriate modifications) shall be given by the Issuer and each seller of Registrable Securities with respect to any required registration or other qualification of such Registrable Securities under any federal or state law or regulation of governmental authority other than the Securities Act. 19 (e) Other Remedies. If for any reason the foregoing indemnity is unavailable, or is insufficient to hold harmless an indemnified party, other than by reason of the exceptions provided therein, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer or the Holders of Registrable Securities covered by the Registration Statement in question and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 3.8 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph of this Section 3.8 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No party shall be liable for contribution under this Section 3.8(e) except to the extent and under such circumstances as such party would have been liable to indemnify under this Section 3.8 if such indemnification were enforceable under applicable law. (f) Officers and Directors. As used in this Section 3.8, the terms "officers" and "directors" shall include the partners of Holders which are partnerships and the members of Holders which are limited liability companies. 3.9 Expenses. The Issuer shall pay all Registration Expenses in connection with each registration of Registrable Securities pursuant to this Section 3. 4. Miscellaneous. 4.1 Rule 144; Legended Securities; etc. (a) The Issuer shall file the reports required to be filed by it under the Securities Act and the Exchange Act and the 20 rules and regulations adopted by the SEC thereunder (or, if the Issuer is not required to file such reports, it shall, upon the request of any Holder, make publicly available such information as necessary to permit sales pursuant to Rule 144 or Rule 145), and shall take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such holder to sell shares of Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 or Rule 145. Upon the request of any Holder, the Issuer shall deliver to such Holder a written statement as to whether it has complied with such requirements. (b) The Issuer shall issue new certificates for Registrable Securities without a legend restricting further transfer if (i) such securities have been sold to the public pursuant to an effective Registration Statement under the Securities Act (other than Form S-8 if the Holder of such Registrable Securities is an Affiliate) or Rule 144, or (ii) (x) such issuance is otherwise permitted under the Securities Act, (y) the Holder of such shares has delivered to the Issuer an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Issuer, to such effect and (z) the Holder of such shares expressly requests the issuance of such certificates in writing. 4.2 Amendments and Waivers. This Agreement may be amended, modified or supplemented, and the Issuer may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Issuer shall have obtained the written consent to such amendment, action or omission to act, of the Holders of at least a majority of the Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities being sold by such Holders pursuant to such Registration Statement; provided, however, that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. No amendment, modification or dis charge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party or parties granting such waiver in any other respect or at any other time. 4.3 [Reserved] 4.4 Successors, Assigns and Transferees. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective 21 permitted successors, assigns and transferees. Any Holder may assign its rights hereunder to an Affiliate or to other successors, assigns and transferees by merger or consolidation or otherwise by operation of law of such Holder. This Agreement shall survive any transfer of Registrable Securities to and shall inure to the benefit of an Affiliate or such other successors, assigns and transferees by merger or consolidation or otherwise by operation of law of Investor or such Holder. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Issuer shall also be for the benefit of and enforceable by any subsequent Holder of Registrable Securities, subject to the provisions respecting the minimum numbers or percentages of shares of Regis trable Securities required in order to be entitled to certain rights, or take certain actions, contained herein, and subject to the provisions in the second preceding sentence. 4.5 Notices. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission (with a confirmatory copy sent by overnight courier), by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as indicated in Exhibit I. Any party may give any notice or other communication in connection herewith using any other means (including, but not limited to, messenger service, telex or ordinary mail), but no such notice or other communication shall be deemed to have been duly given unless and until it is actually received by the individual for whom it is intended. 4.6 No Inconsistent Agreements. The Issuer shall not hereafter enter into any agreement, or amend any existing agreement, with respect to its securities if such agreement would be inconsistent with the rights granted to the Holders by this Agreement. 4.7 Enforcement of Agreement. (a) The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any New York Court, this being in addition to any other remedy to which they are entitled at law or in equity. 22 (b) The prevailing party in any judicial action shall be entitled to receive from the other party reimbursement for the prevailing party's reasonable attorneys' fees and disbursements, and court costs. 4.8 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 4.9. Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever. 4.10. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, of the parties hereto. 4.11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its rules of conflict of laws. Each of the Issuer and the Investor hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States of America located in the State of New York (the "New York Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the New York Courts and agrees not to plead or claim in any New York Court that such litigation brought therein has been brought in an inconvenient forum. 4.12 No Third Party Beneficiaries. Except as provided in Section 3.8, nothing in this Agreement shall confer any rights upon any person or entity other than the parties hereto, each such party's respective successors and permitted assigns. 23 IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or caused this Agreement to be executed on its behalf as of the date first written above. MEDE AMERICA CORPORATION By: ----------------------------- Name: Title: MEDIC COMPUTER SYSTEMS, INC. By: ----------------------------- Name: Title: 24 EXHIBIT I Designated Addresses for Notices If to the Issuer: If to the Investor: Mede America Corporation Medic Computer Systems, Inc. 90 Merrick Avenue 8601 Six Forks Road Suite 501 Suite 300 East Meadow, New York 11554 Raleigh, North Carolina 27615 Telephone: (516) 542-4500 Telephone: (919) 847-8102 Facsimile: (516) 542-4508 Facsimile: (919) 847-7110 Attention: David M. Goldwin, Esq. Attention: Alan Winchester General Counsel With a copy to: With a copy to: Reboul, MacMurray, Hewitt, Maynard & Kristol Misys plc 45 Rockefeller Plaza Burleigh House New York, New York 10111 Chapel Oak Telephone: (212) 841-5700 Salford Priors, England Facsimile: (212) 841-5725 Worcs WR11 5SH Attention: Mark J. Tannenbaum, Esq. Tel: 011 44 1386 871-373 Fax: 011 44 1386 871-045 Attention: Ross Graham and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Telephone: (212) 909-6000 Facsimile: (212) 909-6836 Attention: Paul H.Wilson,Jr.,Esq. EX-4.9 5 EXHIBIT 4.9 EXHIBIT 4.9 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT, dated as of July 17, 1998, between MEDIC COMPUTER SYSTEMS, INC., a North Carolina corporation (together with its affiliates, the "Investor"), WELSH, CARSON, ANDERSON & STOWE V, L.P., a Delaware limited partnership ("WCAS V"), WELSH, CARSON, ANDERSON & STOWE VI, L.P., a Delaware limited partnership ("WCAS VI"), WCAS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("WCAS CP II"), WILLIAM BLAIR CAPITAL PARTNERS V, L.P., a Delaware limited partnership ("WBCP V"), and WILLIAM BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP, a Delaware limited partnership ("WBLCF") (WCAS V, WCAS VI, WCAS CP II, WBCP V and WBLCF each a "Stockholder" and together, the "Stockholders"). Capitalized terms are defined in the text or in Section 12. RECITALS WHEREAS, the Issuer desires that the Investor enter into an ongoing commercial relationship with the Issuer and that the Investor participate in the development of the Issuer's business on an ongoing basis. WHEREAS, the Issuer wishes to issue to the Investor, and the Investor wishes to accept, the Warrant. WHEREAS, the Stockholders are existing stockholders of the Issuer. WHEREAS, the Investor and each of the Stockholders desire to make certain arrangements among themselves and to declare their mutual intentions with respect to the matters set forth herein. NOW THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements hereinafter set forth, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Representations and Warranties of the Stockholders. Each of the Stockholders severally represents and warrants to the Investor as of the date hereof as follows: (a) Authority. Such Stockholder has the power and authority to execute, deliver and perform its obligations under, and to consummate the transactions contemplated by, this Agreement, and has taken all necessary action to authorize the execution, delivery and performance by such Stockholder of, and consummation by such Stockholder of the transactions contemplated by, this Agreement. This Agreement has been duly and validly executed and delivered by such Stockholder and constitutes the valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and other similar laws and to general principles of equity. (b) No Conflicts. Neither the execution, delivery nor performance by such Stockholder of this Agreement, nor compliance by such Stockholder with the terms and provisions hereof, nor the consummation by such Stockholder of the transactions contemplated herein, will (a) contravene any applicable provision of any law, statute, rule or regulation. or any applicable order, writ, injunction or decree of any court or governmental instrumentality, (b) conflict with or result in any material breach of any term, covenant, condition or other provision of, or constitute a material default under the terms of any contractual obligation to which such Stockholder is a party or by which it or any of its properties or assets are bound or to which they may be subject, or (c) violate or conflict with any provision of the constituent documents of such Stockholder. (c) The Subject Shares. Such Stockholder is the record and beneficial owner of the shares (the "Existing Shares") of common stock of the Issuer, par value $0.01 per share (the "Common Stock"), set forth opposite the name of such Stockholder on Schedule I hereto and, upon the consummation of the initial public offering of the Common Stock, will be the record and beneficial owner of the shares (the "Convertible Preferred Shares", and together with the Existing Shares, the "Shares") of Common Stock set forth opposite the name of such Stockholder on Schedule I hereto under the caption "Shares Underlying Convertible Preferred." Each Stockholder has (or in the case of the Convertible Preferred Shares, will have) good and marketable title to the Shares owned (or to be owned) by it, free and clear of any claims, liens, encumbrances and security interests whatsoever, and has (or will have) the sole right to vote such Shares, and none of such Shares is (or will be) subject to any voting trust or other agreement, arrangement or restrictions with respect to the voting of such Shares, except as contemplated by this Agreement. 2 2. Representations and Warranties of the Investor. The Investor represents and warrants to the Stockholders as of the date hereof as follows: (a) Authority. The Investor has the corporate power and authority to execute, deliver and perform its obligations under, and to consummate the transactions contemplated by, this Agreement, and has taken all necessary corporate action to authorize the execution, delivery and performance by the Investor of, and consummation by the Investor of the transactions contemplated by, this Agreement. This Agreement has been duly and validly executed and delivered by the Investor, and constitutes the valid and binding obligation of the Investor, enforceable against the Investor in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and other similar laws and to general principles of equity. (b) No Conflicts. Neither the execution, delivery nor performance by the Investor of this Agreement, nor compliance by the Investor with the terms and provisions hereof, nor the consummation by it of the transactions contemplated herein, will (a) contravene any applicable provision of any law, statute, rule or regulation. or any applicable order, writ, injunction or decree of any court or governmental instrumentality, (b) conflict with or result in any material breach of any term, covenant, condition or other provision of, or constitute a material default under the terms of any contractual obligation to which the Investor is a party or by which it or any of its properties or assets are bound or to which it may be subject, or (c) violate or conflict with any provision of the constituent documents of the Investor. 3. Board Designee. In the event that the Issuer has nominated an Investor Designee to the Board pursuant to Section 4.1 of the Investment Agreement, or a stockholder vote is otherwise required to elect an Investor Designee to the Board in accordance with the terms of Section 4.1 of the Investment Agreement, each Stockholder shall, and, if applicable, shall use its best efforts to cause its affiliates to, vote all Shares then held by it (and its affiliates) in favor of the election of such Investor Designee. Any vote cast in accordance with this Section 3 shall be cast in such manner as will insure that such vote is duly counted for purposes of determining whether a quorum is present and for purposes of determining the result of such vote. 3 4. Optional Participation in Stock Sales. (a) If any Stockholder or Stockholders (for purposes of this Section 4, the "Selling Stockholders") shall at any time desire to transfer any Shares, the Investor shall be permitted, subject to subsection (e) of this Section 4, to participate in such transfer on the same terms and conditions applicable to such Selling Stockholders, at a price per share equal to the quotient obtained by dividing (x) the total consideration that a purchaser provides to purchase all of the Subject Shares that it is purchasing by (y) the total number of Shares (the "Subject Shares") being sold by the Selling Stockholders and the Investor. The terms of such transfer shall provide that the liability of the Investor and the Selling Stockholders shall be several, and not joint, in proportion to the proceeds received by each, and limited in the aggregate to the proceeds received by the Investor and each Selling Stockholder, respectively, in the transfer. (b) The Selling Stockholders intending to transfer Shares shall deliver to the Investor a written notice (a "Transfer Notice") of a proposed transfer subject to this Section 4 no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the Investor's rights hereunder and shall describe in reasonable detail (i) the total number of Subject Shares to be transferred by the Selling Stockholders, (ii) the person to whom such Subject Shares are proposed to be transferred and (iii) the terms and conditions of the transfer, including the con sideration to be paid therefor. (c) The Investor shall exercise its right to participate in a transfer of Shares pursuant to this Section 4 by delivering to the Selling Stockholders a written notice (a "Participation Notice") stating its election to do so and specifying the number of Shares held by it to be transferred no later than 15 days after receipt of the Transfer Notice. Failure to provide a Participation Notice within such 15-day period shall be deemed to constitute an election by the Investor not to exercise its rights pursuant to this Section 4, and the Selling Stockholders shall have 60 days following the expiration of such 15-day period in which to sell or otherwise dispose of not more than the number of Subject Shares described in the Transfer Notice, on terms not more favorable to such Selling Stockholders than were set forth in the Transfer Notice. If, at the end of the 60- day period following the expiration of such 15-day period, such Selling Stockholders have not completed the proposed transfer, such Selling Stockholders may not transfer such Subject Shares without again fully complying with the provisions of this Section 4. At any closing pursuant to this Section 4, the Investor shall be required to deliver the certificate or certificates representing the 4 Shares to be transferred by it, duly endorsed for transfer, and shall be entitled to receive the net proceeds allocable to the sale thereof, after deduction of the Investor's proportionate share of the reasonable expenses of sale, which share shall not exceed an amount proportionate to the amount of such expenses allocated to the Selling Stockholders. (d) The Investor shall have the right to sell an aggregate number of Shares in the same proportion to the total number of Shares being transferred as (i) the total number of Shares then beneficially owned by the Investor or subject to issuance upon exercise of the Warrant bears to (ii) the total number of Shares then owned by the Investor and the Stockholders or issuable upon the immediate exercise of the Warrant then owned by the Investor. If the Investor in its capacity as Warrantholder elects to exercise its right under this Section 4 to sell Shares, it shall only be required to exercise its Warrant upon, and only upon, the actual sale or disposition of the Shares to the buyer of such Shares. (e) The obligations of each Stockholder and the rights of the Investor pursuant to this Section 4 shall not apply (i) in the event that a Stockholder that is a limited partnership transfers Shares to its limited partners, (ii) to any transfer of Shares by a Stockholder to an affiliate and (iii) to any transfer of Shares pursuant to a registered public offering or a public distribution under Rule 144 under the Securities Act. 5. Mandatory Participation in Stock Sales. (a) In the event that any Stockholder proposes to transfer Shares in an arms'-length transaction, the Stockholder intending to transfer Shares shall have the right, subject to subsection (d) of this Section 5, to require the participation by the Investor in such transfer, in the manner set forth in this Section 5, on the same terms and conditions applicable to such Stockholder. The terms of such sale shall provide that the liability of the Investor and such Stockholder (or Stockholders, as the case may be) shall be several, and not joint, in proportion to the proceeds received by each, and limited in the aggregate to the proceeds received by the Investor and each Stockholder, respectively, in the sale. (b) The relevant Stockholder shall exercise its rights pursuant to this Section 5 by delivering to the Investor a written notice of such proposed transfer no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the obligations of the Investor hereunder and shall describe in reasonable detail (i) the number of Shares to be transferred by such Stockholder 5 (or Stockholders, as the case may be), (ii) the person to whom or which such Shares are proposed to be transferred, (iii) the terms and conditions of the transfer, including the consideration to be paid therefor, and (iv) the proposed date, time and location of the closing of the transfer. The Investor shall thereupon be required to deliver at such closing the certificate or certificates representing the Shares to be transferred by it, duly endorsed for transfer, and shall be entitled to receive the net proceeds allocable to the sale thereof, after deduction of the Investor's proportionate share of the reasonable expenses of sale, which share shall not exceed an amount proportionate to the amount of such expenses allocated to the Stockholders selling Shares pursuant to this Section 5. (c) The Investor shall be obligated to sell in a transfer subject to this Section 5 an aggregate number of Shares equal to the product of (i) the total number of Shares then beneficially owned by the Investor or subject to issuance upon exercise of the Warrant multiplied by (ii) a fraction, the numerator of which equals the number of Shares being sold by the Stockholders and the denominator of which equals the total number of Shares then owned by the Stockholders. The foregoing obligation shall include requiring the Investor in its capacity as a Warrantholder to exercise the Warrant. Notwithstanding the foregoing, the Investor shall in no event be obligated under this Section 5 to sell Shares in excess of the number of Shares owned by the Investor plus the number of Shares for which the Warrant is then exercisable, taking into account the application of the cashless exercise provisions of the Warrant. (d) The obligations of the Investor and the rights of each Stockholder pursuant to this Section 5 shall not apply (i) in the event that a Stockholder that is a limited partnership transfers Shares to its limited partners, or to a Competitor, (ii) to any transfer of Shares by a Stockholder to an affiliate and (iii) to any transfer of Shares pursuant to a registered public offering or a public distribution under Rule 144 under the Securities Act. 6. Further Assurances. (a) Each Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other instruments as the Investor may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement. 6 (b) The obligations of the Issuer contained in Section 3.5 of the Registration Rights Agreement shall apply equally to the Stockholders, mutatis mutandis. (c) In the event that a Stockholder, on the one hand, or the Investor, on the other hand, intends to transfer a 5% or greater equity interest in the Issuer (in a single transaction or a series of transactions), the Stockholder intending to effect such transfer or the Investor, as the case may be, shall use its best efforts to notify the Investor or the Stockholders, as the case may be, of such proposed transfer as soon as practicable. 7. Limited Right to Repurchase Shares. In the event the Transaction Processing Agreement is terminated by the Issuer pursuant to clause (iv), (vi) or (viii) of Section 18(a) thereof, then the Issuer shall have the right, exercisable within 30 days after the date of such termination, to repurchase all (but not less than all) shares of Common Stock issued to the Investor upon any prior exercises of the Warrant, to the extent that the Investor continues to hold such shares of Common Stock as of the date of termination. The per share purchase price for any such shares shall be the Warrant Price (as defined in the Warrant) at which such shares were purchased by the Investor. Upon delivery by the Issuer of the aggregate purchase price for such shares to the Investor, (i) the Investor will promptly return the certificate or certificates evidencing such shares, duly endorsed for transfer and (ii) regardless of whether or not such certificates are so returned, such shares shall be deemed to be no longer issued and outstanding. 8. Termination. This Agreement, and all rights and obligations of the parties hereunder shall terminate on the earlier to occur of (a) the mutual written consent of each of the Stockholders and the Investor, and (b) the date on which the Investor and its affiliates collectively no longer own any Registrable Securities (as defined in the Registration Rights Agreement). Further, this Agreement, and all rights and obligations of the parties hereunder shall terminate (x) with respect to WCAS V, WCAS VI and WCAS CP II (the "Welsh Carson Group") on the date on which the Welsh Carson Group no longer owns at least twenty percent (20%) of the fully diluted equity of the Issuer that it held as of the date hereof, and (y) with respect to WBCP V and WBLCF (the "William Blair Group") on the date on which the William Blair Group no longer owns at least twenty percent (20%) of the fully diluted equity of the Issuer that it held as of the date hereof. 7 9. General Provisions. (a) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto. (b) Notice. All notices and other communications hereunder shall be in writing and shall be deemed given if hand delivered or sent by overnight courier (providing proof of delivery) to the Stockholders or the Investor at their respective addresses set forth below (or at such other address for a party as shall be specified by like notice): If to the Stockholders: If to the Investor: Welsh, Carson, Anderson & Stowe Medic Computer Systems, Inc. 320 Park Avenue 8601 Six Forks Road Suite 2500 Suite 300 New York, New York 10022-6815 Raleigh, North Carolina 27615 Telephone: (212) 893-9500 Facsimile: (212) 893-9575 Telephone: (919) 847-8102 Attention: Anthony de Nicola Facsimile: (919) 847-7110 Attention: Alan Winchester With a copy to: With a copy to: Reboul, MacMurray, Hewitt, Maynard & Kristol Misys plc 45 Rockefeller Plaza Burleigh House New York, New York 10111 Chapel Oak Telephone: (212) 841-5700 Salford Priors, England Facsimile: (212) 841-5725 Worcs WR11 5SH Attention: Mark J. Tannenbaum, Esq. Telephone: 011 44 1386 871-373 Facsimile: 011 44 1386 871-045 Attention: Ross Graham and: and: 8 William Blair & Company Debevoise & Plimpton 22 West Adams Street 875 Third Avenue Chicago, Illinois 60606 New York, New York 10022 Telephone: (312) 364-8250 Telephone: (212) 909-6000 Facsimile: (312) 236-1042 Facsimile: (212) 909-6836 Attention: Timothy M. Murray Attention: Paul H.Wilson,Jr.,Esq. (c) Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Wherever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". (d) Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart. (e) Entire Agreement; No Third-Party Beneficiaries. This Agreement (including the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. (f) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its rules of conflict of laws. Each of the Issuer and the Investor hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States of America located in the State of New York (the "New York Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the New York Courts and agrees not to plead or claim in any New York Court that such litigation brought therein has been brought in an inconvenient forum. 9 10. Assignability. The Investor may transfer its rights hereunder to any affiliate to which all or any portion of the Warrant has been transferred. 11. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any New York Court, this being in addition to any other remedy to which they are entitled at law or in equity. 12. Definitions "Competitor" means (a) any entity that engages in any line of business, or is affiliated with any entity that engages in any line of business, that is in competition with the Investor's core business or (b) any entity that has publicly announced its intention, or is affiliated with any entity that has publicly announced its intention, to engage in any line of business that is in competition with the Investor's core business. "Investment Agreement" means that the Investment Agreement, dated as of the date hereof, between the Issuer and the Investor. "Investor" is defined in the first paragraph of this Agreement. "Issuer" means MedE American Corporation, a Delaware Corporation. "New York Courts" is defined in Section 10(f). "Participation Notice" is defined in Section 4(c). "Registrable Securities" is defined in the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, between the Issuer and the Investor. "Securities Act" means the Securities Act of 1933, as amended. "Selling Stockholders" is defined in Section 4. "Shares" is defined in Section 1(c). 10 "Stockholders" is defined in the first paragraph of this Agreement. "Subject Shares" is defined in Section 4(a). "Transaction Processing Agreement" means the Transaction Processing Agreement between the Issuer and the Investor, dated as of the date hereof. "Transfer Notice" is defined in Section 4(b). "Warrant" means the warrant issued by the Issuer to purchase 1,250,000 Shares, identical to the form attached as Exhibit C to the Investment Agreement. "WBCP V" is defined in the first paragraph of this Agreement. "WBLCF V" is defined in the first paragraph of this Agreement. "WCAS V" is defined in the first paragraph of this Agreement. "WCAS VI" is defined in the first paragraph of this Agreement. "WCAS CP II" is defined in the first paragraph of this Agreement. 11 IN WITNESS WHEREOF, this Stockholders Agreement has been duly executed and delivered as of the day and year first written above. MEDIC COMPUTER SYSTEMS, INC. By: ------------------------------------- Name: Title: WELSH, CARSON, ANDERSON & STOWE V, L.P. By: WCAS V Partners, General Partner By: ------------------------------------- General Partner WELSH, CARSON, ANDERSON & STOWE VI, L.P. By: WCAS VI Partners, L.P., General Partner By: ------------------------------------- General Partner WCAS CAPITAL PARTNERS II, L.P. By: WCAS CP II Partners, L.P., General Partner By: ------------------------------------- General Partner 12 WILLIAM BLAIR CAPITAL PARTNERS V, L.P. By: William Blair Capital Partners, LLC, General Partner By: ------------------------------------- Timothy M. Murray WILLIAM BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP By: William Blair & Company, LLC, General Partner By: ------------------------------------- Timothy M. Murray Acknowledged and confirmed with respect to Section 7 hereof, MEDE AMERICA CORPORATION By: ----------------------------- Name: Title: 13 STOCKHOLDERS AGREEMENT - SCHEDULE I
Stockholder Pre-Split Common Post Split Shares - ----------- ---------------- ---------- ------ Common Underlying ------ ---------- Convertible ----------- Preferred --------- Welsh, Carson, Anderson & Stowe V 8,205,728 1,790,748 762,600 Welsh, Carson, Anderson & Stowe VI, L.P. 8,205,728 1,790,748 762,600 WCAS Capital Partners II, L.P. 1,700,000 370,993 William Blair Capital Partners V, L.P. 1,900,000 414,639 176,577 William Blair Leveraged Capital Fund Limited Partnership 998,662 217,939 92,805
NOTE: The Issuer expects to approve a one-for-4.5823 reverse stock split of its Common Stock. Accordingly, this Schedule reflects shares of Common Stock now owned by the Stockholders on a pre-split and post-split basis. The Shares underlying convertible preferred column reflects the post-split figures. 14 EX-4.10 6 EXHIBIT 4.10 EXHIBIT 4.10 INVESTMENT AGREEMENT INVESTMENT AGREEMENT, dated as of July 17, 1998, between MEDIC COMPUTER SYSTEMS, INC., a North Carolina corporation ("Medic"; and together with its affiliates, the "Investor"), and MEDE AMERICA CORPORATION, a Delaware corporation (the "Issuer"). Capitalized terms are defined in the text or in Section 6.7, and a cross-reference table of defined terms is provided immediately preceding the signature page hereto. RECITALS WHEREAS, the Issuer desires that the Investor enter into an ongoing commercial relationship with the Issuer and that the Investor participate in the development of the Issuer's business on an ongoing basis. WHEREAS, the Issuer wishes to issue to the Investor, and the Investor wishes to accept, the Warrant. NOW THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements hereinafter set forth, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I ISSUANCE OF WARRANTS; CLOSING 1.1. Investment. Upon the terms set forth in this Agreement, and in reliance upon the representations and warranties contained herein, the Issuer is issuing to the Investor, and the Investor is accepting from the Issuer, the Warrant (the "Issuance"). 1.2. Closing. Subject to the terms and conditions of this Agreement, the closing of the Issuance (the "Closing") is taking place concurrently with the execution and delivery hereof at the offices of Debevoise & Plimpton, 875 Third Avenue, New York, New York. The date on which the Closing is occurring is hereinafter referred to as the "Closing Date". 1.3. Deliveries at Closing. At the Closing, (a) the Investor is delivering to the Issuer the Registration Rights Agreement duly executed and any certificates or other instruments required by this Agreement, and (b) the Issuer is delivering to the Investor (i) a duly executed Warrant, registered in the name of the Investor, (ii) the Registration Rights Agreement duly executed and (iii) any other certificates or other instruments required by this Agreement. The Stockholders Agreement has been, or concurrently herewith is being, executed and delivered by the parties thereto. ARTICLE II REPRESENTATIONS OF THE ISSUER The Issuer hereby represents and warrants to the Investor as follows: 2.1. Corporate Organization. The Issuer is a duly incorporated and validly existing corporation in good standing under the laws of the State of Delaware. 2.2. Authorization; Validity. (a) The Issuer has the corporate power and authority to execute, deliver and perform its obligations under, and to consummate the transactions contemplated by, this Agreement and the Other Agreements, and has taken all necessary corporate action to authorize the execution, delivery and performance by the Issuer of, and consummation by the Issuer of the transactions contemplated by, this Agreement and the Other Agreements. This Agreement and the Other Agreements have been duly and validly executed and delivered by the Issuer, and this Agreement and the Other Agreements constitute valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and other similar laws and to general principles of equity, and, in the case of the Registration Rights Agreement, except as rights to indemnity or contribution thereunder may be limited by law or public policy. (b) The issuance, sale and delivery of the Warrant in accordance with this Agreement and the issuance, sale and delivery of Shares upon exercise of the Warrant have been duly authorized by all requisite corporate action on the part of the Issuer, and, when issued, sold and delivered in accordance with this Agreement or the Warrant, as applicable, will be duly and validly issued and, in the case of the Shares, fully paid and nonassessable, and such issuance, sale and delivery will not give rise to any preemptive rights on the part of any person. 2 2.3. No Violation. Neither the execution, delivery nor performance by the Issuer of this Agreement and the Other Agreements, nor compliance by the Issuer with the terms and provisions hereof and thereof, nor the consummation by the Issuer of the transactions contemplated herein or therein, will (a) contravene any applicable provision of any law, statute, rule or regulation. or any applicable order, writ, injunction or decree of any court or governmental instrumentality, (b) conflict with or result in any material breach of any term, covenant, condition or other provision of, or constitute a material default under the terms of any contractual obligation to which the Issuer is a party or by which it or any of its properties or assets are bound or to which it may be subject, or (c) violate or conflict with any provision of the constituent documents of the Issuer. 2.4. Registration Statement. The Registration Statement on Form S-1 of the Issuer (No. 333-55977) (the "Registration Statement") does not, in the form filed with the Securities and Exchange Commission (the "SEC") as of the date hereof, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, that no representation is being made hereby as to the disclosure in the Registration Statement regarding the transactions contemplated by this Agreement, the Other Agreements, the Stockholders Agreement or the Transaction Processing Agreement. ARTICLE III REPRESENTATIONS OF THE INVESTOR The Investor represents and warrants to the Issuer as follows: 3.1. Organization. The Investor is duly organized, validly existing and in good standing under the laws of the State of North Carolina. 3.2. Authorization; Validity. The Investor has full power and authority to execute, deliver and perform its obligations under, and to consummate the transactions contemplated by, this Agreement and the Registration Rights Agreement. The execution, delivery and performance by the Investor of this Agreement and the Registration Rights Agreement, and the consummation by the Investor of the transactions contemplated hereby and thereby have been duly authorized by the Investor. This Agreement and the Registration Rights Agreement have been duly and validly executed and delivered by the Investor, and this Agreement and the Registration Rights Agreement constitute valid and 3 binding obligations of the Investor, enforceable against the Investor in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and other similar laws and to general principles of equity, and, in the case of the Registration Rights Agreement, except as rights to indemnity or contribution thereunder may be limited by law or public policy. 3.3. No Violation. Neither the execution, delivery nor performance by the Investor of this Agreement or the Registration Rights Agreement, nor compliance by the Investor with the terms and provisions hereof and thereof, nor the consummation by the Investor of the transactions contemplated herein or therein, will (a) contravene any applicable provision of any law, statute, rule or regulation, or any applicable order, writ, injunction or decree of any court or governmental instrumentality, (b) conflict with or result in any material breach of any term, covenant, condition or other provision of, or constitute a material default under, the terms of any contractual obligation to which the Investor is a party or by which the Investor or any of its properties or assets are bound or to which the Investor may be subject, or (c) violate or conflict with any provision of the constituent documents of the Investor. 3.4. Investment Representations, Etc. (a) Purchase for Investment. The Warrant being acquired by the Investor pursuant to this Agreement and the Shares to be purchased by the Investor upon exercise of the Warrant is being and will be acquired for investment only and not with a view to any public distribution thereof in violation of any of the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the rules and regulations thereunder. (b) Securities Not Registered. The Investor understands that the Warrant and the Shares to be purchased upon exercise of the Warrant have not been registered under the Securities Act in reliance upon exemptions contained in the Securities Act and applicable regulations promulgated thereunder or interpretations thereof, and cannot be offered for sale, sold or otherwise transferred unless such sale or transfer is so registered or qualifies for exemption from registration under the Securities Act. (c) Sophistication. The Investor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Warrant and the Shares to be purchased upon exercise of the Warrant, and the Investor understands and is able to bear any economic risks associated with such investment (including the necessity of holding such 4 securities for an indefinite period of time, inasmuch as such securities have not been, and may not in the foreseeable future be, registered under the Securities Act), including the risk of the loss of the Investor's entire investment in the Warrant and the Shares to be purchased upon exercise of the Warrant. (d) Legends. The Investor understands and agrees that certificates representing the Warrant and the Shares to be purchased upon exercise of the Warrant will bear conspicuous legends in substantially the form set forth below (in addition to any other legend required by law): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS (THE "STATE ACTS"), AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED (WHETHER OR NOT FOR CONSIDERATION) BY THE HOLDER EXCEPT BY REGISTRATION OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE A VIOLATION OF THE 1933 ACT AND THE STATE ACTS. Notwithstanding the foregoing, the certificate(s) representing the Warrant or the Shares to be purchased upon exercise of the Warrant need not continue to bear such legend (and the Issuer agrees to cause such legend to be removed from such certificate(s) at the request of the holder thereof) if (i) the sale or other transfer of such securities referred to in such legend is in accordance with the provisions of Rule 144 under the Securities Act (or any other rule permitting public sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the effect that the Investor and any subsequent transferee (other than an affiliate of the Issuer) would be entitled to transfer such securities in a public sale without registration under the Securities Act. ARTICLE IV BOARD REPRESENTATION 4.1. Board Membership. The Board of Directors of the Issuer (the "Board") shall take such action as is necessary to appoint to the Board, effective as of the earlier of the closing of the initial public offering of common stock of the Issuer and 5 March 31, 1999 (such earlier date, the "Appointment Date"), one person designated by the Investor (the "Investor Designee"). From the Appointment Date through the Termination Date, (a) the Issuer shall, upon the written request of the Investor, nominate and recommend to the holders of the Issuer's voting securities for election to the Board, one Investor Designee and (b) the Investor may require that an Investor Designee who is a member of the Board be removed and replaced by another Investor Designee, in which case, (i) if any action to effect the foregoing is required on the part of the holders of the Issuer's voting securities, the Issuer shall take the actions set forth in clause (a) above, and (ii) in the case of the replacement of an Investor Designee in connection with his death, resignation or removal, the Issuer, by action of the Board, shall cause a replacement Investor Designee to be appointed to the Board to fill the vacancy caused by such death, resignation or removal. Notwithstanding the foregoing, the Issuer shall not be required to take any action that would result in more than one Investor Designee being elected to the Board at the same time. For purposes of this Agreement, the "Termination Date" shall mean the earlier to occur of (x) the date on which the Investor collectively own less than seventy-five percent (75%) (based on the number of Shares owned plus the number of Shares subject to the Warrant) of the number of Shares subject to the Warrant on the Closing Date (subject to anti-dilution adjustments) and (y) the termination of the Transaction Processing Agreement. 4.2. Observer and Monitoring Rights. From and after the Appointment Date and until the Termination Date, the Issuer will permit a representative designated by the Investor to attend as an observer any meeting from which the Investor Designee will be absent. The Issuer may require that any representative designated pursuant to this Section 4.2 execute a confidentiality agreement in customary form and reasonably acceptable to such representative with respect to confidential information of the Issuer made available to such representative pursuant to this Section 4.2, which agreement shall include an acknowledgment of such representative that in such capacity such representative may obtain material non-public information concerning the Issuer, and, accordingly, will be subject to any applicable restrictions pursuant to Rule 10b-5 under the Securities Exchange Act of 1934, as amended, in connection with such representative's possession of such information. The Investor acknowledges that the provisions of this Section 4.2 shall not be construed to provide the Investor with the right to participate in meetings of the Board or to exercise any control over the affairs of the Issuer. 6 ARTICLE V TERMINATION; AMENDMENT 5.1. Termination. This Agreement may be terminated at any time by mutual written consent of the Investor and the Issuer. 5.2. Effect of Termination. If this Agreement is terminated pursuant to Section 5.1 hereof, this Agreement, except for the provisions of Sections 5.2, 6.1, 6.4 and 6.5, shall terminate, without any liability on the part of any party or its directors, officers or stockholders. Nothing herein shall relieve any party to this Agreement of liability for breach of this Agreement or prejudice the ability of the non-breaching party to seek damages from any other party for any breach of this Agreement, including without limitation, attorneys' fees and the right to pursue any remedy at law or in equity. 5.3. Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of both of the parties. ARTICLE VII MISCELLANEOUS 6.1. Notices. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission (with a confirmatory copy sent by overnight courier), by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows: If to the Issuer: If to the Investor: Mede America Corporation Medic Computer Systems, Inc. 90 Merrick Avenue 8601 Six Forks Road Suite 501 Suite 300 East Meadow, New York 11554 Raleigh, North Carolina 27615 Telephone: (516) 542-4500 Telephone: (919) 847-8102 Facsimile: (516) 542-4508 Facsimile: (919) 847-7110 Attention: David M. Goldwin, Esq. Attention: Alan Winchester General Counsel With a copy to: With a copy to: 7 Reboul, MacMurray, Hewitt, Maynard & Kristol Misys plc 45 Rockefeller Plaza Burleigh House New York, New York 10111 Chapel Oak Telephone: (212) 841-5700 Salford Priors, England Facsimile: (212) 841-5725 Worcs WR11 5SH Attention: Mark J. Tannenbaum, Esq. Tel: 011 44 1386 871-373 Fax: 011 44 1386 871-045 Attention: Ross Graham and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Telephone: (212) 909-6000 Facsimile: (212) 909-6836 Attention: Paul H.Wilson, Jr., Esq. or to such other address as any party shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed. 6.2. Assignment; Binding Effect; Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto (whether by operation of law or otherwise) without the prior written consent of the other party provided that Medic may assign its rights hereunder to an affiliate, but nothing shall relieve the assignor from its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 6.3. Entire Agreement. This Agreement, the Registration Rights Agreement, the Warrant, and the Transaction Processing Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. 8 6.4. Fees and Expenses. Each party will bear its own legal and other expenses with respect to this Agreement and the transactions contemplated hereby. 6.5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its rules of conflict of laws. Each of the Issuer and the Investor hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States of America located in the State of New York (the "New York Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the New York Courts and agrees not to plead or claim in any New York Court that such litigation brought therein has been brought in an inconvenient forum. 6.6. Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever. 6.7. Interpretation; Certain Definitions. In this Agreement, unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." As used in this Agreement, the words "Subsidiary" and "affiliate" shall have the meanings ascribed thereto in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. The following terms shall have the following meanings ascribed to them: "Other Agreements" means the Warrant and the Registration Rights Agreements. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, between the Issuer and the Investor, in the form attached hereto as Exhibit A. "Share" means a share of common stock of the Issuer, $0.01 par value per share. "Stockholders Agreement" means the Stockholders Agreement between the Investor, Welsh, Carson, Anderson & Stowe V, L.P., Welsh Carson, 9 Anderson & Stowe VI, L.P., WCAS Capital Partners II, L.P., William Blair Capital Parners V, L.P. and William Blair Leveraged Capital Fund Limited Partnership, dated as of the date hereof, in the form attached hereto as Exhibit B. "Transaction Processing Agreement" means the Transaction Processing Agreement between the Issuer and the Investor, dated as of the date hereof. "Warrant" means the warrant issued by the Issuer to purchase 1,250,000 Shares, identical to the form attached hereto as Exhibit C. 6.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 6.9. Enforcement of Agreement. (a) The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any New York Court, this being in addition to any other remedy to which they are entitled at law or in equity. (b) The prevailing party in any judicial action shall be entitled to receive from the other party reimbursement for the prevailing party's reasonable attorneys' fees and disbursements, and court costs. 6.10. Issuer Acknowledgment. The Issuer hereby acknowledges that nothing in this Agreement, the Other Agreements, the Stockholders Agreement, the Transaction Processing Agreement or any other agreement contemplated hereby or thereby shall in any way restrict the right of the Investor from purchasing any securities of the Issuer from third parties, in the market, or otherwise. 6.11. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an 10 original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, of the parties hereto. 11 DEFINITIONS
Defined Term Section Reference ------------ ----------------- "Affiliate" Section 6.7 --------- "Appointment Date" Section 4.1 ---------------- "Board" Section 4.1 ----- "Closing" Section 1.2 ------- "Closing Date" Section 1.2 ------------ "Investor" First Paragraph -------- "Investor Designee" Section 4.1 ----------------- "Issuance" Section 1.1 -------- "Issuer" First Paragraph ------ "Medic" First Paragraph ----- "New York Courts" Section 6.5 --------------- "Registration Rights Agreement" Section 6.7 ----------------------------- "Registration Statement" Section 2.4 ---------------------- "Securities Act" Section 3.4 -------------- "SEC" Section 2.4 --- "Share" Section 6.7 ----- "Software Development Agreement" Section 6.7 ------------------------------ "Stockholder Agreement" Section 6.7 --------------------- "Termination Date" Section 4.1 ---------------- "Transaction Processing Agreement" Section 6.7 -------------------------------- "Warrant" Section 6.7 -------
12 IN WITNESS WHEREOF, this Investment Agreement has been duly executed and delivered as of the day and year first written above. MEDIC COMPUTER SYSTEMS, INC. By: ------------------------------ Name: Title: MEDE AMERICA CORPORATION By: ------------------------------ Name: Title: 13 EX-10.4 7 EXHIBIT 10.4 Exhibit 10.4 AGREEMENT OF LEASE, made as of this 15th day of October, 1991, between HMCC ASSOCIATES, a limited partnership, having its principal office at 255 Broadhollow Road, Suite 212 W, CS 5341, Melville, New York 11747-0983 (hereinafter referred to as "Landlord"), and MEDE AMERICA, INC., a corporation, having its principal place of business at 377 Oak Street, Garden City, NY 11530 (hereinafter referred to as "tenant"). WITNESSETH: Landlord and Tenant hereby covenant and agree as follows: SPACE 1. Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the space substantially as shown on the Rental Plan initialed by the parties and made part of hereof as Exhibit "1" ("Demised Premises" or "Premises") in the building known as Nassau West Omni, located at Earl Ovington Boulevard, Mitchel Field, New York (hereinafter referred to as the "Building") which the parties agreed contains 8,255 square feet in a Building containing 555,816 square feet which constitutes 1.48 per cent of the rentable area of the Building. TERM 2. The term "term" or "Demised Term" of this lease shall commence on February 1, 1992, hereinafter referred to as the "Term Commencement Date and shall terminate on January 31, 2003, hereinafter referred to as the "Expiration Date", unless the Term shall sooner terminate pursuant to any of the terms, covenants or conditions of this lease pursuant to law. If on the foregoing data specified for the Term Commencement Datethe Demised Premises shall not be "substantially completed" in accordance with Schedule A annexed hereto, then the Term Commencement Date shall be postponed until the date on which the Demised Premises shall be "substantially completed" and the Term of this lease shall be extended so that the Expiration Date shall be eleven (11) years after the last day of the month in which the Term Commencement Date occurs. "Substantially completed" as used herein is defined to mean the only items to be completed are those which do not interfere with the Tenant's occupancy substantially full enjoyment of the Demised Premises; but is Landlord shall be delayed in such "substantial completion" as a result of (i) Tenant's failure to furnish plans and specifications; (ii) Tenant's request for materials, finishes or installations other than Landlord's standard; (iii) Tenant's changes in said plans; (iv) the performance or completion of any work, labor or services by a party employed by Tenant; (v) Tenant's failure to approve final plans, working drawings or reflective ceiling plans (collectively "Tenant Delays"), the commencement of the term of said lease and the payment of rent thereunder shall be accelerated by the number of days of such delay. Tenant waives any right to rescind this lease under Section 223-a of the New York Real Property Law or any successor statute of similar import then in force and further waives the right to recover any damages which may result from Landlord's failure to deliver possession of the Premises on the Term Commencement Date. RENT 3. The annual rental rate ("Rent") is as follows: 2/1/92 During the first year of the term of this lease the Rent shall be $18,506.28, payable $1,542.19 in equal monthly installments. 2/1/93 During the second year the Rent shall be $279,519.76, payable $43,003.04 for the first month and $21,501.52 for each of the second through twelfth months. 2/1/94 During the third year the Rent shall be $267,230.28, payable $22,269.19 in equal monthly installments. 2/1/95 During the fourth year the Rent shall be $276,360.00, payable $23,030.00 in equal monthly installments. 2/1/96 During the fifth year the Rent shall be $285,654.24, payable $23,804.52 in equal monthly installments. 2/1/97 During the sixth year the Rent shall be $294,866.28, payable $24,572.19 in equal monthly installments. 2/1/98 During the seventh year the Rent shall be $304,078.20, payable $25,339.85 in equal monthly installments. 2/1/99 During the eighth year the Rent shall be $313,502.28, payable $26,107.52 in equal monthly installments. 2/1/00 During the ninth year the Rent shall be $322,502.28, payable $26,875.19 in equal monthly installments. 2/1/01 During the tenth year the Rent shall be $331, 714.20, payable $27,642.85 in equal monthly installments. 2/1/02 During the eleventh year the Rent shall be $319,424.72, payable $28,410.52 for each of the first through eleventh months and $6,909.00 for the twelfth month, which Tenant agrees to pay Landlord, without legal notice or demand, in lawful money of the United States which shall be legal tender in payment of the debts and dues, public and private, at the time of payment in advance on the first day of each calendar month during the Demised Term at the office of the Landlord, or at such other place as Landlord shall designate, except that Tenant shall pay the first monthly installment on the execution hereof. Tenant shall pay the rent as above and as hereinafter provided, without any set off or deduction whatsoever. Should the Term Commencement Date be a date other than the first day of a calendar month, the Tenant shall pay a pro rata portion of the rent on a per diem basis, based upon the second month of the Term from such date to the first day of the following month, and Landlord shall credit the excess amount paid toward the payment of rent for the next succeeding calendar month. USE 4. (A) The Tenant shall use and occupy the Demised Premises only for executive and administrative offices and training of personnel, furnishing of information, utilizing computerized support and communications networks, provided the same is in an office context, and for no other purpose. (B) Tenant shall not use or occupy, suffer or permit the Premises, or any part thereof, to be used in any manner which would in any way, in the reasonable judgement of Landlord, (i) violate any laws or regulations of public authorities; (ii) make void or voidable any insurance policy then in force with respect to the Building; (iii) impair the appearance, character or reputation of the Building; (iv) discharge objectionable fumes, vapors or odors into the Building, air-conditioning systems or Building flues or vents in such a manner as to offend other occupants. The provisions of this Section shall not be deemed to be limited in any way to or by the provisions of any other Section or any Rule or Regulation. (C) The emplacement of any equipment which will impose an evenly distributed floor in excess of 100 pounds per square foot shall be done only after written permission is received from the Landlord. Landlord represents that the floor load is 100 pounds per square foot. Such permission will be granted only after adequate proof if furnished by a professional engineer that such floor loading will not endanger the structure. Business machines and mechanical equipment in the Premises shall be placed and maintained by Tenant, at Tenant's expense, in such a manner as shall be sufficient in Landlord's judgement to absorb vibration and noise and prevent annoyance or inconvenience to Landlord or any other tenants or occupants of the Building. (D) Tenant will not at any time use or occupy the Demised Premises in violation of the certificate of occupancy (temporary or permanent) issued for the Building or portion thereof of which the Demised Premises form a part. LANDLORD ALTERATION 5. Landlord, at its expense, will perform the work and make the installations, as set forth in Schedule A annexed hereto, which is sometimes hereinafter referred to as the "Landlord's Initial Construction". SERVICES 6. (A) As long as Tenant is not in default under any material covenants of this lease, Landlord, during the hours of 8:00 A.M. to 7:00 P.M. on weekdays and on Saturdays from 8:00 A.M. to 1:00 P.M., excluding legal holidays, shall provide normal services to the "Common Area" of the Building. (B) Landlord shall provide to the Demised Premises, heat and air conditioning in the respective seasons and provide the Demised Premises with electricity for lighting and usual office equipment for a total of 60 hours per week, as selected by the Tenant (WORKING HOURS). For the purposes of computing the hours, all times selected by the tenant shall be rounded to the nearest half hour. (C) At any hours other than the aforementioned, such services will be provided at Tenant's expense in accordance with Schedule C. LANDLORD'S REPAIRS 7. Landlord, at its expense, will make all the repairs to and provide the maintenance for the Demised Premises (excluding painting and decorating) and for all public areas and facilities as set forth in Schedule B, except such repairs and maintenance as may be necessitated by the negligence, improper care or use of such premises and facilities by Tenant, its agents, employees, licensees or invitees, which will be made by Landlord at Tenant's expense, after notice of Tenant, with the right of Tenant to dispute. Landlord agrees that at it will diligently and expeditiously make all required repairs. WATER SUPPLY 8. Landlord, at its expense, shall furnish hot and cold or tempered water for lavatory purposes as per plan. PARKING FIELD 9. Tenant shall have the right to use thirty-two (32) parking spaces for the parking of automobiles of the Tenant, its employees and invitees, in the parking area reserved for tenants of the Building, four (4) of said spaces shall be marked "Reserved" for Tenant (hereinafter sometimes referred to as "Building Parking Area") in covered garage subject to the Rules and Regulations now or hereafter adopted by the Landlord. Tenant shall us its best efforts not to use nor permit any of its officers, agents or employees to use any parking space in excess of Tenant's allotted number of spaces therein. DIRECTORY 10. Landlord, will furnish in the lobby of the Building a directory which will contain listings requested by Tenant, not to exceed five (5) listings. The initial listings will be made at Landlord's expense and any subsequent changes by Tenant shall be made at Tenant's expense. Landlord's acceptance of any name for listing on the directory, will not be deemed, not will it substitute for Landlord's consent, as required by this lease, to any sublease, assignment or other occupancy of the Premises. TAXES AND OTHER CHARGES 11. (A) As used in and for the purposes of the Article 11, the following definitions shall apply: (i)"Taxes" shall be and amount of real estate taxes, assessments, special or otherwise, sewer rents, rates and charges, general, specific, ordinary or extraordinary, foreseen or unforseen levied on a calendar or fiscal basis against the Real Property. If at any time during the Term the method of taxation prevailing at the date hereof shall be altered so that in lieu of, or as in addition to, or as a substitute for, the whole or any part of the taxes, levies, impositions or charges now levied, assessed or imposed on all or any part of the Real Property and imposed on Landlord, or (c)a license fee measured by the rent payable by Tenant to Landlord, or (d) any other tax levy, taxes, levies, impositions, charges or license fee or any part thereof, so measured or based, shall be deemed to be Taxes. Excluded shall be ground lease rental increases, Landlord's inheritance tax, Landlord's income tax and Landlord's franchise tax. (ii) "Base Year Taxes" shall be the taxes actually paid by the Landlord in the first year that the Building is assessed as a fully completed Building. (iii) "Escalation Year" shall mean each calendar year which shall include any part of the Demised Term. (iv) "Real Property" shall be the land upon which the Building stands and any part or parts thereof utilized for parking and the Building and other facilities utilized for the purposes required in the operation of the Building. (B) The Tenant shall pay the Landlord increases in Taxes levied against the Real Property as follows: If the Taxes paid by the Landlord in any Escalation Year shall be increased above the Base Year Taxes, then the Tenant -5- shall pay to the Landlord, as additional rent for such Escalation Year, a sum equal to Tenant's percentage of the rentable area of the Building, as set forth in Paragraph 1 of this Lease multiplied by the amount of the said increase. (C) Landlord shall render to Tenant a statement containing a computation of additional rent due under this Article ("Landlord's Statement") for the preceding year. Within fifteen (15) days after the rendition of the Landlord's Statement which shows additional rent to be payable, Tenant shall pay to Landlord the amount of such additional rent. On the first day of each month following the rendition of each Landlord's Statement, Tenant shall pay to Landlord, on account of the potential additional rent, a sum equal to one-twelfth (1/12th) of the additional rent last paid by Tenant, which sum shall be subject to increase in Taxes effective prior thereto. (D) Landlord's failure to render a Landlord's Statement with respect to any Escalation Year shall not prejudice Landlord's right to render a Landlord's Statement with respect to any Escalation Year. The obligation of Landlord and Tenant under the provisions of this Article with respect to any additional rent for any Escalation Year shall survive the expiration date or any sooner termination of the Demised Term. TENANT'S REPAIRS 12. Tenant shall take good care of the Demised Premises and, subject to the provisions of Article 7 hereof, Landlord at the expense of Tenant shall make as and when needed as a result of misuse or neglect by Tenant or Tenant's servants, employees, agents or licensees, all repairs in and about Demised Premises necessary to preserve them in good order and condition to, at most, the condition at the commencement of the term. Except as provided in Article 24 hereof, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making any repairs, alterations, additions or improvements in or to any portion of the Building or of Demised Premises, or in or to the fixtures, appurtenances or equipment thereof, and no liability upon Landlord for failure of Landlord or others to make any repairs, alterations, additions or improvements in or to any portion of the Building or of the Demised Premises, or in or to the fixtures, appurtenances or equipment thereof. FIXTURES & INSTALLATIONS 13. All appurtenances, fixtures, improvements, additions and other property attached to or built into the Demised Premises, whether by Landlord or Tenant or others, and whether at Landlord's expense, or Tenant's expense, or the joint expense of Landlord and Tenant, shall be and remain the property of Landlord, except that any such fixtures, improvements, additions and other property installed at the sole expense of Tenant with respect to which Tenant -6- has not been granted any credit or allowance by Landlord, whether pursuant to Schedule A or otherwise, and which are removable without material damage to the said Premises may be removed by Tenant on condition that Tenant shall repair at its expense any damage to the Demised Premises or the Building resulting from such removal. All the outside walls of the Demised Premises including corridor walls and the outside entrance doors to the Demised Premises, any balconies, terraces or roofs adjacent to the Demised Premises, any balconies, terraces or roofs adjacent to the Demised Premises, and any space in the Demised Premises used for shafts, stacks, pipes, conduits, ducts or other building facilities, and the use thereof, as well as access thereto in and through the Demised Premises for the Purpose of operation, maintenance, decoration and repair, are expressly reserved to the Landlord, and Landlord does not convey any rights to Tenant therein. Notwithstanding the foregoing, Tenant shall enjoy full right of access to the Demised Premises through the public entrances, public corridors and public areas within the Building. ALTERATIONS 14. (A) After completion of the Demised Premises, Tenant shall make no alterations, construction, additions or improvements (hereinafter collectively referred to as "Improvements") in or to the Demised Premises without Landlord's prior written consent, which consent Landlord covenants shall not be unreasonably withheld or delayed, and then only by contractors or mechanics approved by Landlord and at such times and in such manner as Landlord may from time to time designate. Landlord's consent shall not be required for modular furniture, phone system or computer equipment installation. (B) All Improvements by Tenant shall at all times comply with (i) laws, rules, orders and regulations of governmental authorities having jurisdiction thereof, and (ii) rules and regulations of the Landlord attached as Schedule D. (C) Plans and specifications prepared by and at the expense of Tenant shall be submitted to Landlord for its prior written approval, which approval Landlord covenants it will not unreasonably withhold or delay; no installations or work shall be undertaken, started, or begun by Tenant, its agents, servants or employees, until Landlord has approved such plans and specifications; and no amendments or additions to such plans and specifications shall be made without the prior written consent of Landlord, which approval Landlord covenants will not unreasonably withhold or delay, and shall be subject to Landlord's supervisory fee charge of five (5%) percent of the cost thereof, said supervisory fee shall not be applicable to floor covering or decoration or computer equipment. Tenant agrees that it will not, either directly or indirectly, use any contractors and/or labor and/or materials if the use of such contractors and/or labor and/or materials would or will create any difficulty with other contractors and/or labor engaged by Tenant or Landlord or others in the construction, maintenance and/or operation of the Building or any part thereof. (D) Tenant's right to make Improvements shall be subject to the following additional requirements: (i) the Improvements will not results in a violation of, or require a change in, any Certificate of Occupancy applicable to the Premises in the Building; (ii) the outside appearance, character or use of the Building shall not be affected; (iii) no part of the Building outside of -7- the Premises shall be physically affected; and (iv) the proper functioning of any air-conditioning, elevator, plumbing, electrical, sanitary, mechanical and other service or utility system of the Building shall not be affected. (E) Tenant shall defend, indemnify and save harmless Landlord against any and all mechanics' and other liens filed in connection with its Improvements, repairs or installations, including the liens of any conditional sales of, or chattel mortgages upon, any materials, fixture or articles so installed in and constituting part of the Premises and against any loss, cost, liability, claim, damage and expense, including reasonable counsel fees, penalties and fines incurred in connection with any such lien, conditional sale or chattel mortgage or any action or proceeding brought thereon. Tenant, at its expense, shall procure the satisfaction or discharge of all such liens within twenty (20) days of the filing of such lien against the Premises or the Building. If Tenant shall fail to cause such lien to be discharged within the period aforesaid, then, in addition to any other right or remedy, Landlord, may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit or by bonding proceedings, and in any such event Landlord shall be entitled, if Landlord so elects, to compel the prosecution of an action for the foreclosure of such lien by the lienor and to pay the amount of the judgement in favor of the lienor with interest, costs and allowances. Any amount so paid by Landlord, and all costs and expenses incurred by Landlord in connection therewith, together with interest thereon at the maximum legal rate then prevailing from the respective dates of Landlord's making of the payments or incurring of the cost and expense, shall constitute Additional Rent and shall be paid on demand. REQUIREMENTS OF LAW 15. (A) Tenant, at Tenant's sole cost and expense shall comply with all statutes, laws, ordinances, orders, regulations and notices of Federal, State, County and Municipal authorities, and with all directions, pursuant to law, of all public officers, which shall impose any duty upon Landlord or Tenant with respect to the Demised Premises or the use or occupation thereof, except that Tenant shall not be required to make any structural alterations in order so to comply unless such alterations shall be necessitated or occasioned, in whole or in part by the acts, omissions, or negligence of Tenant or any person claiming through or under Tenant or any of their servants, employees, contractors, agents, visitors or licensees, or by the use or occupancy or manner of use or occupancy of Demised Premises by Tenant, or any such person. Tenant shall not be required to comply with any statute or law that requires Tenant to improve the Premises to a condition greater than at the commencement of the term. Landlord will comply with all order and laws relating to the Building, but unrelated to Tenant's use. -8- (B) The parties acknowledge that there are certain Federal, state and local laws, regulations and guidelines now in effect and that additional laws, regulations and guidelines may hereafter be enacted, relating to or affecting the Premises, the Building, and the land of which the Premises and the Building may be a part, concerning the impact on the environment of construction, land use, the maintenance and operation of structures and the conduct of business. Tenant will not cause, or permit to be caused, any act or practice, by negligence, omission, or otherwise, that would adversely affect the environment or do anything or permit anything to be done that would violate any of said laws, regulations, or guidelines. Any violation of the covenant shall be an Event of Default under this Lease. END OF TERM 16. (A) Upon the expiration or other termination of the Term of this lease, Tenant shall, at its own expense, quit and surrender to Landlord the Demised Premises, broom clean, in good order and condition, ordinary wear, tear and damage by fire or other insured casualty excepted, and Tenant shall remove all of its property and shall pay the cost of repair all damage to the Demised Premises or the Building occasioned by such removal. Any restoration required by Tenant shall not be to a condition greater than the original construction. Any property not removed from the Premises shall be deemed abandonment by Tenant and may be retained by Landlord, as its property, or disposed of in any manner deemed appropriate by the Landlord. Any air conditioning unit installed by Tenant may be removed by the Tenant at the end of the term, except for those items for which Tenant has received a credit from Landlord. Any expenses incurred by Landlord in removing or disposing of such Tenant's property shall be reimbursed to Landlord by Tenant on demand. Tenant expressly waives, for itself and for any person claiming through or under Tenant, any rights which Tenant or any such person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules of successor law of like import then in force, in connection with any holdover or summary proceeding which Landlord may institute to enforce the foregoing provisions of this Article. 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 hereof falls on Sunday or a legal holiday, this lease shall expire on the business day immediately preceding. Tenant's obligations under this Article 16 shall survive the Expiration Date or sooner termination of this lease. (B) If Tenant shall hold over after the end of the Term, such holding over shall be unlawful and in no manner constitute a renewal or an extension of the lease and no notice of any kind shall be required prior to any commencement of summary proceeding and Tenant hereby waives any such right. However, during such hold over time Tenant shall have all of the obligations of this lease, including payment of rent as a monthly rate equal to double the amount due during the first month of the last year of occupancy before the end of the expired term, plus any escalations or additional rent provided for in this lease. -9- QUIET ENJOYMENT 17. Landlord covenants and agrees with Tenant that upon Tenant paying the Rent and additional rent and observing and performing all the terms, covenants and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Demised Premises during the term of this lease without hindrance or molestation by anyone claiming by or through Landlord, subject, nevertheless, to the terms, covenants and conditions of this lease including, but not limited to Article 22. SIGNS 18. No signs or lettering of any nature may be put on or in any window now on the exterior of the Building or elsewhere within the Demised Premises such as will be visible from the street. No sign or lettering in the public corridors or on the doors are permitted except Landlords standard name plaque. RULES AND REGULATIONS 19. Tenant and Tenant's agents, employees, visitors and licensees shall faithfully observe and strictly comply with, and shall not permit violation of the Rules and Regulations set forth on Schedule D annexed hereto and made part hereof, and with such further reasonable Rules and Regulations as Landlord at any time may make and communicate in writing to Tenant which, in Landlord's judgement shall be necessary for the reputation, safety, care of appearance of the Building and the land allocated to it or the preservation of good order therein, or the operation or maintenance of the Building, and such land, its equipment, or the more useful occupancy of the comfort of the tenants or others in the Building. Landlord shall not be liable to Tenant for the violation of any said Rules and Regulations, or the breach of any covenant or condition in any lease by any other tenant in the Building. Landlord agrees to apply the Rules and Regulations in a nondiscriminating manner. RIGHT TO SUBLET OR ASSIGN 20. (A) The Tenant covenants that it shall not assign this lease nor sublet the Demised Premises or any part thereof without the prior written consent of Landlord in each instance, except on the conditions hereinafter stated. The Tenant may assign this Lease or sublet the Demised Premises with Landlord's written consent, which consent Landlord covenants will not be unreasonably withheld, or delay consent beyond fifteen (15) days, providing: (i) That such assignment or sublease is for a use which is in compliance with the then existing zoning regulations and the Certificate of Occupancy; -10- (ii) That at the time of such assignment or subletting, there is no default under the material terms of this lease on the Tenant's part; (iii) That in the event of an assignment, the assignee assume in writing the performance of all of the terms and obligations of the within lease; (iv) That a duplicate original of said assignment or sublease be delivered by registered mail to the Landlord at the address herein set forth within ten (10) days from the said assignment or sublease and within ninety (90) days of the date that Tenant first advises Landlord of the name and address of the proposed subtenant or assignee as required, pursuant to subparagraph (B) hereof; (v) Such assignment or subletting shall not, however, release the within Tenant from its liability for the full and faithful performance of all of the terms and conditions of this lease; (vi) If this lease be assigned, or if the Demised Premises or any part thereof be under let or occupied by anybody other than Tenant, Landlord may after default by Tenant collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved; (B) Notwithstanding anything contained in this Article 20 to the contrary, no assignment or underletting shall be made by Tenant in any event until Tenant has offered to terminate this lease as of the last day of any calendar month during the term hereof and to vacate and surrender the Demised Premises to Landlord on the date fixed in the notice served by Tenant upon Landlord (which date shall be prior to the date of such proposed assignment or the commencement date of such proposed lease). Simultaneously with said offer to terminate this lease, Tenant shall advise the Landlord, in writing, of the name and address of the proposed assignee or subtenant, a reasonably detailed statement of the proposed subtenant/assignee's business, reasonably detailed financial references, and all the terms, covenants, and conditions of the proposed sublease or assignment. Landlord shall, within fifteen (15) days either accept or reject Tenant's offer to terminate this lease. In the event Landlord rejects the offer to terminate, the provisions of Subsection (A) shall be applicable. (C) Tenant may, without the consent of Landlord, assign this lease to an affiliated (i.e. a corporation 20% or more of whose capital stock is owned by the same stockholders owning 20% of Tenant's capital stock or more), parent or subsidiary corporation of Tenant or to a corporation to which it sells or assigns all or substantially all of its assets or with which it may be consolidated or merged, provided such purchasing, consolidated, merged affiliated or subsidiary corporation shall, in writing assume and agree to perform all of the obligations of Tenant under this lease and it shall deliver such assumption with a copy of such assignment to Landlord within ten (10) days thereafter, and provided further that Tenant shall not be released or discharged from any liability under his lease by reason of such assignment. (D) Whenever Tenant shall claim under this Article or any other part of this lease that Landlord has unreasonably withheld or delayed its consent to some request of Tenant, provided the Landlord does not act in bad faith, Tenant shall have no claim for damages by reason of such alleged withholding or delay, -11- and Tenant's sole remedy thereof shall be a right to obtain specific performance or injunction but in no event with recovery of damages. LANDLORD'S ACCESS TO PREMISES 21. (A) Landlord or Landlord's agents shall have the right to enter and/or pass through the Demised Premises at all reasonable times on reasonable notice, except in an emergency, to examine the same, and to show them to ground lessors, prospective purchasers or lessees or mortgagees of the Building, and to make such repairs, improvements or additions as Landlord may deem necessary or desirable and Landlord shall be allowed to take all material into and upon and/or through said Demised Premises that may be required therefor. During the year prior to the expiration of the Term of this lease, or any renewal term, Landlord may exhibit the Demised Premises to prospective tenants or purchasers at all reasonable hours and without unreasonably interfering with Tenant's business. If Tenant shall not be personally present to open and permit an entry into said premises at any time, in an emergency, when for any reason an entry therein shall be necessary or permissible, Landlord or Landlord's agents may enter the same by a master key or forcibly, without rendering Landlord or such agent liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property). (B) Landlord shall also have the right at any time, to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building, provided, however, that Landlord shall make no change in the arrangement and/or location of entrances or passageways or other public parts of the Building which will adversely affect in any material manner Tenant's use and enjoyment of the Demised Premises. Landlord shall also have the right, at any time, to name the Building, including, but not limited to, appropriate signs and/or lettering on any or all entrances to the Building, and to change the name, number or designation by which the Building is commonly known. (C) Neither this lease nor any use by Tenant shall give Tenant any right or easement to the use of any door or passage or concourse connecting with any other building or to any public conveniences, and the use of such doors and passages and concourse and of such conveniences may be regulated and/or discontinued at any time and from time to time by Landlord without notice to Tenant, provided the same does not interfere with Tenant's access to Premises. (D) The reasonable exercise by Landlord or its agents of any right reserved to Landlord in this Article shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this lease, or impose any liability upon Landlord, or its agents, or upon any lessor under any ground or underlying lease, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise, provided the same does not substantially interfere with Tenant's use and occupancy of the Premises. -12- SUBORDINATION 22. (A) This lease and all rights of Tenant hereunder are, and shall be, subject and subordinate in all respects to all ground leases and/or underlying leases and to all first mortgages and building loan agreements which may now or hereafter be placed on or affect such leases and/or the Real Property of which the Demised Premises form a part, or any part or parts of such Real Property, and/or Landlord's interest or estate therein, and to each advance made and/or hereafter to be made under any such mortgages, and to all renewals, modifications, consolidations, replacements and extensions thereof and all substitutions therefor. This Section A shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall execute and deliver promptly any certificate that Landlord and/or any mortgagee and/or the lessor under any ground or underlying lease and/or their respective successors in interest may request, at no cost to Tenant. (B) Without limitation of any of the provisions of this lease, in the event that any mortgagee or its assigns shall succeed to the interest of Landlord or of any successor-Landlord and/or shall have become lessee under a new ground or underlying lease, then, at the option of such mortgagee, this lease shall nevertheless continue in full force and effect and Tenant shall and does hereby agree to attorn to such mortgage or its assigns and to recognize such mortgagee or its respective assigns as its Landlord. (C) Tenant shall, at any time and from time to time upon not less that five days' prior notice by Landlord, execute, acknowledge and deliver to Landlord a statement in writing 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 modification) and the dates to which the Rent, additional rent and other charges have been paid in advance, if any, and stating whether or not to the best knowledge of the signer of such certificate Landlord is in default in performance of any covenant, agreement, term, provision or condition contained in this lease, and if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser or lessee of said real property or any interest or estate therein, any mortgagee or prospective mortgagee thereof or any prospective assignee of any mortgage thereof. If, in connection with obtaining financing for the Building and the land allocated to it, a banking, insurance or other recognized institutional lender shall request reasonable modifications in this lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereof, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created. (D) The Tenant covenants and agrees that if by reason of a default under any underlying lease (including an underlying lease through which the Landlord derives its leasehold estate of the Landlord in the premises), such underlying lease and the leasehold estate of the Landlord in the premises demised hereby is terminated, providing notice has been given to the Tenant and leasehold -13- mortgagee, the Tenant will attorn to the then holder of the reversionary interest in the premises demised by this Lease or to anyone who shall succeed to the interest of the Landlord or to the lessee of a new underlying lease entered into pursuant to the provisions of such underlying lease, and will recognize such holder and/or such lessee as the Tenant's landlord of this Lease. The Tenant agrees to execute and deliver, at any time and from time to time, upon the request of the Landlord or of the lessor under any such underlying lease, any instrument which may be necessary or appropriate to evidence such attornment. The Tenant further waives the provision of any statute or rule of law now or hereafter in effect which may give or purport to give the Tenant any right of election to terminate this Lease or to surrender possession of the premises hereby in the event any proceeding is brought by the lessor under any underlying lease to terminate the same, and agrees that unless and until any such lessor, in connection with any such proceeding, shall elect to terminate this Lease and the rights of the Tenant hereunder, this Lease shall not be affected in any way whatsoever by any such proceeding, shall elect to terminate this Lease and the rights of the Tenant hereunder, this Lease shall not be affected in any way whatsoever by any such proceeding. Nothing herein contained shall diminish any rights derived by reason of Nondisturbance Agreements granted to Tenant by lessor under the terms of their underlying lease. (E) Landlord agrees to use good efforts to obtain a nondisturbance, subordination and attornment agreement from its mortgagee. Tenant agrees to sign said agreement on the form of the mortgagee. PROPERTY LOSS, DAMAGE REIMBURSEMENT 23. (A) Landlord or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. Landlord or its agents shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, electrical disturbance, water, rain or snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature, unless caused by or due to the negligence of Landlord, its agents, servants or employees; nor shall Landlord or its agents be liable for any such damage caused by other tenants or persons in the Building or caused by operations in construction of any private, public or quasi-public work; nor shall Landlord be liable for any latent defect in the Demised Premises or in the Building. If at any time any windows of the Demised premises are temporarily closed or darkened incident to or for the purpose of repairs, replacements, maintenance and/or cleaning in, on, to or about the Building or any part or parts thereof, Landlord shall liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement of rent shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall reimburse and compensate Landlord as additional rent for all expenditures made by, or damages or fines sustained or incurred by Landlord due to non-performance or non-compliance with or breach or failure to observe any term, covenants or condition of this lease upon Tenant's part to be kept, observed, performed or complied with. Tenant shall give immediate notice to Landlord in case of fire or accidents in the Demised Premises or in the Building or of defects therein or in any fixtures or equipment. -14- TENANT'S INDEMNITY (B) Except for any claim that may be covered by any insurance provided by the Tenant to Landlord, as provided in Article 25(D) or any other insurance provided by Tenant, Tenant shall indemnify and save harmless Landlord against and from any and all claims by or on behalf of any person or persons, firm or firms, corporation or corporations arising from the conduct or management of or from any work or thing whatsoever done (other than by Landlord or its contractors or the agents or employees of either) in and on the Demised Premises during the term of this lease and during the period of time, if any prior to the specified commencement date that Tenant may have been given access to the Demised Premises for the purpose of making installations, and will further indemnify and save harmless Landlord against and from any and all claims arising from any condition of the Demised Premises due to or arising from any act or omissions or negligence of Tenant or any of its agents, contractors, servants, employees, licensees or invitees and against and from all costs, expenses, and liabilities incurred in connection with any such claim or claims or action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, agrees that Tenant, at Tenant's expense, will resist or defend such action or proceeding and will employ counsel therefor reasonably satisfactory to Landlord. DESTRUCTION -- FIRE OR OTHER CASUALTY 24. (A) If the Premises or any part thereof shall be damaged by fire or other casualty and Tenant gives prompt notice thereof to Landlord, Landlord shall proceed with reasonable diligence to repair or cause to be repaired such damage. The Rent shall be abated to the extent that the Premises shall have been rendered untenantable, such abatement to be from the date of such damage or destruction to the date the Premises shall be substantially repaired or rebuilt, in proportion which the area of the part of the Premises so rendered untenantable bears to the total area of the Premises. (B) If the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and Landlord has not terminated this lease pursuant of Subsection (C) and Landlord has not completed the making of the required repairs and restored and rebuilt the Premises and/or access thereto within nine (9) months from the date of such damage or destruction, and such additional time after such date (but in no event to exceed six (6) months), as shall equal the aggregate period Landlord may have been delayed in doing so by unavoidable delays or adjustment of insurance, Tenant may serve notice on Landlord of its intention to terminate this lease, and within thirty (30) days thereafter Landlord shall not have completed the making of the required repairs and restored and rebuilt the Premises, this lease shall terminate on the expiration of such thirty (30) day period as if such termination date were the Expiration Date, and the Rent and additional rent shall be refunded by Landlord to Tenant. -15- (C) If the premises shall be totally damaged or rendered wholly untenantable by fire or other casualty or if the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlord's opinion, be required (whether or not the Premises shall been damaged by such fire or other casualty), then in any of such events Landlord may, at its option, terminate this lease and the Term and estate hereby granted, by giving Tenant thirty (30) days notice of said termination within thirty (30) days after the date of such damage. In the event that such notice of termination shall be given, this lease and the term and estate hereby granted, shall terminate as of the date provided in such notice of termination (whether or not the Term shall have commenced) with the same effect as if that were the Expiration Date, and the Rent and additional rent shall be apportioned as of the date of the fire or destruction or sooner termination, and any prepaid portion of Rent and additional rent for any period after such date shall be refunded by Landlord to Tenant. (D) Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage by fire or other casualty or the repair thereof. Landlord will not carry insurance of any kind on Tenant's property, and Landlord shall not be obligated to repair any damage thereto or replace the same. (E) This lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty, and Section 227 of the Real Property Law of the State of New York providing for such a contingency in the absence of such express agreement, and any other law of like import nor or hereafter enacted, shall have no application in such case. (F) Notwithstanding anything to the contrary elsewhere contained herein, if the Premises or the building containing the same are so damaged or rendered untenantable by fire or other casualty that the Landlord, in the Landlord's good faith estimate, cannot complete repairs or rebuild the Premises to a condition to restore possession of the same so that the Tenant may resume its business therein within one hundred twenty (120) days of the damage or destruction, then the Tenant is hereby given an option to cancel this lease without penalty, within fifteen (15) days of receipt of Landlord's Notice by written notice to Landlord. The Landlord shall deliver the aforesaid good faith estimate of repairs or rebuilding time within thirty (30) days from the date of damage or destruction. INSURANCE 25. (A) Tenant shall not do anything, or suffer or permit anything to do done in or about the Premises which shall (a) subject Landlord to any liability or responsibility for injury to any person or property by reason of any activity being conducted in the Premises or (b) cause any increase in the fire insurance rates applicable to the Building or equipment or other property located therein at the beginning of the Term or at any time thereafter. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the New York Board of Fire Underwriters and the New York Fire Insurance Rating Organization or any similar body. (B) If, by reason of any act or omission on the part of the Tenant, the rate of fire insurance with extended coverage on the Building or equipment or other property of Landlord or another tenant or occupant of the Building shall be higher than it otherwise would be, Tenant shall reimburse Landlord and all such other tenants or occupants on demand, for that part of the premises for fire insurance and extended coverage paid by Landlord and such other tenants or occupants because of an act or omission on the part of Tenant. -16- (C) In the event that any dispute should arise between Landlord and Tenant concerning insurance rates, a schedule or make up or insurance rates for the Building or the Premises, as the case may be, issued by the New York Fire Insurance Rating Organization or other similar body making rates for fire insurance and extended coverage for the Premises concerned, shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates with extended coverage then applicable to such Premises. (D) Tenant shall obtain and keep in full force and effect during Term, at its own cost and expense, (a) Public Liability Insurance, such insurance to afford protection in an amount of not less than Three Million ($3,000, 000) Dollars for injury or death arising out of any one occurrence, and Five Hundred Thousand ($500,000) Dollars for damage to property, protecting Landlord and Tenant as named insureds against any and all claim for personal injury, death or property damage occurring in, upon, adjacent to, or connected with the Premises or any part thereof; and (b) insurance against loss or damage by fire, and such other risks and hazards as are insurable under present and future standard forms of fire and extended coverage insurance policies, to Tenant's property for the full insurable value thereof, protecting Landlord and Tenant as named insured. (E) Said insurance is to be written in form and substance reasonably satisfactory to Landlord by a good and solvent insurance company of recognized standing, admitted to do business in the State of New York and rated as "good" in Bests Insurance Rating Manual. Tenant shall procure, maintain and place such insurance and pay all premiums and charges therefor and upon failure to do so Landlord may, but shall not be obligated to, procure, maintain and place such insurance or make such payments, and in such event the Tenant agrees to pay the amount thereof, plus interest at the legal rate then prevailing, to Landlord on demand and said sum shall be in each instance collectible as Additional Rent on the first day of the month following the date of payment by Landlord. Tenant shall cause to be included in all such insurance policies a provision to the effect that the same will be non-cancellable except upon twenty (20) days written notice to Landlord. On the Commencement Date the original insurance policies or appropriate certificates shall be deposited with Landlord. Any renewals, replacements or endorsements thereto shall also be deposited with Landlord to the end that said insurance shall be in full force and effect during the Term. (F) Each party agrees to use its best efforts to include in each of its insurance policies (insuring the Building and Landlord's property therein, in the case of Landlord, and insuring Tenant's property, in the case of Tenant, against loss, damage or destruction by fire or other casualty) a waiver of the insurer's right of subrogation against the other party, or if such waiver should be unobtainable or unenforceable (a) an express agreement that such policy shall not be invalidated if the assured waives or has waived before the casualty the right of recovery against any party responsible for a casualty covered by the policy, or (b) any other form of permission for the release of covered by the policy, or (b) any other form of permission or the release of the other party, or (c) the inclusion of the other party as an additional -17- insured, but not a party to whom any loss shall be payable. If such waiver, agreement or permission shall not be, or shall cease to be, obtainable without additional charge or at all, the insured party shall so notify the other party promptly after learning thereof. In such case, if the other party shall agree in writing to pay the insurer's additional charge therefor, such waiver, agreement or permission shall be included in the policy, or the other party shall be named as an additional assured in the policy, but not a party to whom any loss shall be payable. Each such policy which shall so name a party hereto as an additional assured shall contain, if obtainable, agreements by the insurer that the policy will not be cancelled without a least twenty (20) days prior notice to both assured and that the act or omission of one assured will not invalidate the policy as to the other assured. (G) As long as Landlord's fire insurance policies then in force include the waiver of subrogation or agreement or permission to release liability referred to in Subsection (F) or name the Tenant as an additional assured, Landlord hereby waives (a) any obligation on the part of Tenant to make repairs to the Premises necessitated or occasioned by fire or other casualty that is an insured risk under such policies, and (b) any right of recovery against Tenant, any other permitted occupant of the Premises, and any of their servants, employees, agents or contractors, for any loss occasioned by fire or other casualty that is an insured risk under such policies. In the event that at any time Landlord's fire insurance carriers shall not include such or similar provisions in Landlord's fire insurance policies, the waivers set forth in the foregoing sentence shall be deemed of no further force or effect. (H) As long as Tenant's fire insurance policies then in force include the waiver of subrogation or agreement or permission to release liability referred to in Subsection (F), or name the Landlord as an additional assured Tenant hereby waives (and agrees to cause any other permitted occupants of the Premises to execute and deliver to Landlord written instruments waiving) any right of recovery against Landlord, any other tenants or occupants of the Building, and any servants, employees, agents or contractors of Landlord or of any such other tenants or occupants, for any loss occasioned by fire or other casualty which is an insured risk under such polices. In the event that at any time Tenant's fire insurance carriers shall not include such or similar provisions in Tenant's fire insurance policies, the waiver set forth in the foregoing sentence shall, upon notice given by Tenant to Landlord, be deemed of no further force or effect with respect to any insured risks under such policy from and after the giving of such notice. During any period while the foregoing waiver of right of recovery is in effect, Tenant, or any other permitted occupant of the Premises, as the case maybe, shall look solely to the proceeds of such policies to compensate Tenant or such other permitted occupant of the Premises, as the case may be,shall look solely to the proceeds of such policies to compensate Tenant or such other permitted occupant for any loss occasioned by fire or other casualty which is an insured risk under such policies. -18- EMINENT DOMAIN 26. (A) In the event that the whole of the Demised Premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this lease and the Term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title. In the event that only a part of the Demised Premises shall be so condemned or taken, then effective as of the date of vesting of title, the Rent hereunder shall be abated in an amount thereof apportioned according to the area of the Demised Premises so condemned or taken. In the event that only a part of the Building shall be so condemned or taken, then (a) Landlord (whether or not the Demised Premised be affected) may, at its option, terminate this lease and the Term and estate hereby granted as of the date of such vesting of title by notifying Tenant in writing of such termination within sixty (60) days following the date on which Landlord shall have received notice of vesting of title, and (b) if such condemnation or taking shall be of a substantial part of the Demised Premises or a substantial part of the means of access thereof, Tenant shall have the right by delivery of notice in writing to Landlord within sixty (60) days following the date on which Tenant shall have received notice of vesting of title to terminate this lease and the Term and estate hereby granted as of the date of vesting of title, or (c) if neither Landlord nor Tenant elect to terminate this lease, as aforesaid, this lease shall be and remain unaffected by such condemnation or taking, except that the Rent shall be and remain unaffected by such condemnation or taking, except that the Rent shall be abated to the extent, if any, hereinabove provided in this Article 26. In the event that only a part of the Demised Premised shall be so condemned or taken and this lease and the Term and estate hereby granted are not terminated as hereinbefore provided Landlord will at its expense, restore the remaining portion of the Demised Premises as nearly as practicable to the same condition as it was in prior to such condemnation or taking. (B) In the event of a termination in any of the cases hereinabove provided, this lease and the Term and estate granted shall expire as of the date of such termination with the same effect as if that were the date hereinbefore set for the expiration of the Term of this lease, and the rent hereunder shall be apportioned as of such date. (C) In the event of any condemnation or taking hereinabove mentioned of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this lease in Tenant, and Tenant hereby expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and Tenant shall be entitled to receive no part of such award, except that the Tenant may file a claim for any taking of nonmovable fixtures owned by Tenant and for moving expenses incurred by Tenant. It is expressly understood and agreed that the provisions of this Article 26 shall not be applicable to any condemnation or taking for governmental occupancy for a limited period. -19- NONLIABILITY OF LANDLORD 27. (A) If Landlord or a successor in interest is an individual (which term as used herein includes aggregates of individuals, such as joint ventures, general or limited partnerships or associations) such individual shall be under no personal liability with respect to any of the provisions of this Lease, and if such individual hereto is in breach or default with respect to its obligations under this lease, Tenant shall look solely to the equity of such individual in the land and Building of which the Demised Premises form a part for the satisfaction of Tenant's remedies and in no event shall Tenant attempt to secure any personal judgment against any partner, employee or agent of Landlord by reason of such default by Landlord. (B) The word "Landlord" as used herein means only the owner in fee for the time being of the land and Building (or the owners of a lease of the Building or of the land and Building) of which the Premises form a part, and in the event of any sale of the Building and land of which the Demised Premises form a part, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder and it shall be deemed and construed without further agreement between the parties or between the parties and the purchaser of the Premises, that such purchaser has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. DEFAULT 28. (A) Upon the occurrence, at any time prior to or during the Demised Term, of any one or more of the following events (referred to as "Events of Default"): (i) If Tenant shall default in the payment when due of any installment of Rent or in the payment when due of any additional rent, and such default shall continue for a period of (5) days after notice by Landlord to Tenant of such default; or (ii) If Tenant shall materially default in the observance or performance of any term, covenant or condition of this lease on Tenant's part to be observed or performed (other than the covenants for the payment of Rent and additional rent) and Tenant shall fail to remedy such default within ten (10) days after notice by Landlord to Tenant specifying such default, or if such default is of such a nature that it cannot be completely remedied within said period of ten (10) days and Tenant shall not commence within said period of ten (10) days, or shall not thereafter diligently prosecute to completion, all steps necessary to remedy such default; or (iii) If Tenant shall file a voluntary petition in bankruptcy or insolvency, or shall be adjudicated a bankrupt or become insolvent, or shall file any petition or answer seeking any reorganization, arrangement, -20- composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute of law, or shall make an assignment for the benefit of creditors or shall seek or consent to or make an assignment for the benefit of creditors or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or of all or any part of Tenant's property; or (iv) If, within sixty (60) days after the commencement of any proceeding against Tenant, whether by the filing of a petition or otherwise seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, such proceedings shall not have been dismissed, or if, within sixty (60) days after the appointment or any trustee, receiver or liquidator of Tenant, or of all or any part of Tenant's property, without the consent or acquiescence of Tenant, such appointment shall not have been vacated or otherwise discharged, or if any execution or attachment shall be issued against Tenant or any of Tenant's property pursuant to which the Demised Premises shall be taken or occupied or attempted to be taken or occupied; or (v) If the Demised Premises shall become vacant, deserted or abandoned for a period of ten (10) consecutive days; or (vi) If Tenant's interest in this lease shall devolve upon or pass to any person, whether by operation of law or otherwise, except as expressly permitted under Article 20. Then , upon the occurrence, at any time prior to or during the Demised Term, of any one or more of such Events of Default, Landlord, at any time thereafter, at Landlord's option, may give to Tenant a five (5) days' notice of termination of this lease and, in the event such notice is given, this lease and the Term shall come to an end and expire (whether or not said term shall have commenced) upon the expiration of said five(5) days with the same effect as if the date of expiration of said five (5) days were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 30. (B) If, at any time (i) Tenant shall be comprised of two (2) or more persons, or (ii) Tenant's obligations under this lease shall have been guaranteed by any person other than Tenant, or (iii) Tenant's interest in this lease shall have been assigned, the word "Tenant", as used in subsection (iii) and (iv) of section 28A, shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under this lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of -21- any proceeding of the types referred to in said subsections (iii) and (iv) shall be deemed paid as compensation for the use and occupation of the Demised Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Rent or a waiver on the part of Landlord of any rights under section 28(A). TERMINATION ON DEFAULT 29. (A) If Tenant shall default in the payment when due of any installment of rent or in the payment when due of any additional rent and such default shall continue for a period of five (5)days after notice by Landlord to Tenant of such default, or if this lease and the demised term shall expire and come to an end as provided in Article 28: (i) Landlord and its agents and servants may immediately, or at any time after such default or after the date upon which this lease and the Demised Term shall expire and come to an end, re-enter the Demised Premises or any part thereof, without notice, either by summary proceedings or by any other applicable action or proceeding, or by force or otherwise (without being liable to indictment, prosecution or damages therefor), and may repossess the Demised Premises and dispossess tenant and any other persons from the Demised Premises and remove any and all of their property and effects from the Demised Premises; and (ii) Landlord, at Landlord's option, may relet the whole or any part or parts of the Demised Premises from time to time, either in the mane of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Expiration Date, at such rental or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in its sole discretion, may determine. Landlord shall have no obligation to relet the Demises Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Demised Premises or any part thereof, or in the event of any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this lease or otherwise to affect any such liability; Landlord, at Landlord's option, may make such repairs, replacements, alterations, additions, improvements, decoration and other physical changes in and to the Demised Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this lease or otherwise affecting any such liability. (B) Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, does hereby waive any and all rights which Tenant and all such persons might otherwise have under any present or future law to redeem the Demised Premises, or to re-enter or repossess the Demised Premises, or to restore the operation of this lease, after (i) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, -22- or (ii) any re-entry by Landlord, or (iii) any expiration or termination of this lease and the Demised term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this lease. In the event of a breach or threatened breach by Tenant or any persons claiming through or under Tenant, of any term, covenants or condition of this lease on Tenant's part to be observed or performed, Landlord shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies were not provided in this lease for such breach. The rights to invoke the remedies hereinbefore set forth are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity. DAMAGES 30. (A) If this lease and the demised term shall expire and come to an end as provided in Article 28 or by or under any summary proceeding, or any other action or proceeding or if Landlord shall re-enter the Demised Premises as provided in Article 29 or by or under any summary proceedings or any other action or proceeding, then, in any of said events: (i) Tenant shall pay to Landlord all Rent, additional rent and other charges payable under this lease by Tenant to Landlord to the date upon which this lease and the Demised Term shall have expired and come to an end or to the date of re-entry upon the Demised Premises by Landlord, as the case may be; and (ii)Tenant shall also be liable for and shall pay to Landlord, as damages, any deficiency (referred to as "Deficiency") between the rent and additional rent reserved in this lease for the period which otherwise would have constituted the unexpired portion of the Demised Term and the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of section 29(A) for any part of such period (first deducting from the rents collected under any such reletting all of Landlord's expenses in connection with the termination of this lease or Landlord's re-entry upon the Demised Premises and with such reletting including, but not limited to, all repossession costs, brokerage commissions for the balance of the Demised Term, for the balance of the Demised Term, legal expenses, attorney's fees, alteration costs and other expenses of preparing the Demised Premises for such reletting). Any such Deficiency shall be paid in monthly installments by tenant on the days specified in this lease for payment of installments of Rent, Landlord shall be entitled to recover form Tenant each monthly Deficiency as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Landlord's rights to collect the Deficiency for any subsequent month by a similar proceeding; and (iii) At any time after the Demised Term shall have expired and come to an end or Landlord shall have re-entered upon the Demised Premises, as the case may be, whether or not Landlord shall have collected any monthly Deficiencies as aforesaid, Landlord shall be entitled to recover from Tenant, -23- and Tenant shall pay to Landlord, on demand, as and for liquidated and agreed final damages, a sum equal to the amount by which the rent and additional Rent reserved in this lease for the period which otherwise would have constituted the unexpired portion of the Demised Term exceeds the then fair and reasonable rental value of the Demised Premises for the same period, both discounted to present worth at the rate of four (4%) per cent per annum. If, before presentation of proof of such liquidated damages to any court, commission, or tribunal, the Demised Premises, or any part thereof, shall have been relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Demised Term, or any part thereof, the amount of Rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part of the whole of the Demised Premises so relet during the time of the reletting. (B) If the demised Premises, or any part thereof, shall be relet together with other space in the Building, the rents collected or reserved under any such reletting and the expenses of any such reletting shall be equitably apportioned for the purposes of this Article 30. Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents shall exceed the rent reserved in this lease. Solely for the purposes of this Article, the term "Rent" as used in Section 30(A) shall mean the rent in effect immediately prior to the date upon which this lease and the Demised Term shall have expired and come to an end or the date of re-entry upon the Demised Premises by Landlord, as the case may be, plus any additional rent payable pursuant to the provisions of Article 11 of the Escalation Year (as defined in Article 11) immediately preceding such event. Nothing contained in Article 28 and 29 of this Lease shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in Section 30(A). SUMS DUE LANDLORD 31. In any case in which the Rent or additional rent is not paid within ten (10) days of the day when same is due, tenant shall pay a late charge equal to 6 cent for each dollar so due, and in addition thereto, the sum of $100.00 for the purpose of defraying expenses incident to the handling of such delinquent account. The provisions for payment of late charges shall be forgiven once in every calendar year. Tenant further agrees that the late charge imposed is fair and reasonable, complies with all laws, regulations and statutes, and constitutes an agreement between Landlord and Tenant as to the -24- compensation for costs and administrative expenses incurred by Landlord due to the late payment of rent to Landlord by tenant. Tenant further agrees that the late charge assessed pursuant to this lease is not interest, and the late charge assessed does not constitute a lender or borrower/creditor relationship between Landlord and Tenant. NO WAIVER 32. No act or thing done by Landlord or Landlord's agents during the term hereby Demised shall be deemed an acceptance of a surrender of said demised Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agent shall have any power to accept the keys of said Demised Premises prior to the termination of this lease. The delivery of keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of this lease or a surrender of the Demise Premises. In the event of Tenant at any time desiring to have Landlord underlet the demised Premises for Tenant's account, Landlord or Landlord's agents are authorized to received said keys for such purposes without releasing Tenant from any of the obligations under this lease, and Tenant hereby relieves Landlord of any liability for loss of or damage to any of Tenants effects in connections with such underletting. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenants or conditions of this lease, or any of the Rules and Regulations annexed hereto and made a part hereof or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations annexed hereto and made a part hereof, or hereafter adopted, against Tenant and/or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations. No provision of this lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount then the monthly Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlords' right to recover the balance of such Rent or pursue any other remedy in this lease provided. -25- 33. To the extent such waiver is permitted by law, Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by Landlord or Tenant against the other on any matter whatsoever arising out of or in any way connected with this lease, the relationship of landlord and tenant, the use or occupancy of the Demised Premises by Tenant or any person claiming through or under Tenant, any claim of injury or damage, and any emergency or other statutory remedy. The provisions of the foregoing sentence shall survive the expiration or any sooner termination of the Demised Term. If Landlord commences any summary proceeding for nonpayment of Rent, Tenant agrees not to interpose any counterclaim of whatever nature or description in any such proceeding. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord's obtaining possession of the Demised Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. BILL AND NOTICES 34. Except as otherwise expressly provided in this lease, any bills, statements, notices, demands, requests or other communications given or required to be given under this lease shall be effective only if rendered or given in writing, sent by registered or certified mail (return receipt requested), addressed (A) to Tenant (i) at Tenant's address set forth in this lease if mailed prior to Tenant's taking possession of the Demised Premises, or (ii) at the Building if mailed subsequent to Tenant's taking possession of the Demised Premises, or (iii) at any place where Tenant or any agent or employee of Tenant may be found if mailed subsequent to Tenant's vacating, deserting, abandoning or surrendering the Demised Premises, or (B) to Landlord at Landlord's address set forth in this lease, or (C) addressed to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article. Any such bills, statements, notices, demands, requests or other communications shall be deemed to have been rendered or given on the date when it shall have been mailed as provided in this Article. INABILITY TO PERFORM 35. (A) If, by reason of strikes or other labor disputes, fire or other casualty (or reasonable delays in adjustments of insurance), accidents, orders -26- or regulations of any Federal, State, County or Municipal authority, or any other cause beyond Landlord's reasonable control, whether or not such other cause shall be similar in nature to those hereinbefore enumerated, Landlord is unable to furnish or is delayed in furnishing any utility or service required to be furnished by Landlord under the provisions of this lease or any collateral instrument, or is unable to perform or make or is delayed in performing or making any installations, decorations, repairs, alterations, additions or improvements, whether or not required to be performed or made under this lease, or under any collateral instrument, or is unable to fulfill or is delayed in fulfilling any of Landlord's other obligations under this lease, or any collateral instrument, no such inability or delay shall constitute an actual or constructive eviction, in whole or in part or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. Notwithstanding anything to the contrary elsewhere contained herein, the Landlord covenants that it will use its best efforts to restore service to the Premises or remedy the conditions as soon as is reasonably possible. INTERRUPTION OF SERVICE (B) Landlord reserves the right to stop the services of the air conditioning, elevator, plumbing, electrical or other mechanical systems or facilities in the building when necessary by reason of accident or emergency, or for repairs, alterations, replacements or improvements, which, in the judgement of Landlord are desirable or necessary, until said repairs, alterations, replacements or improvements shall have been completed. Landlord agrees to give Tenant reasonable notice of any interruption of service, except in an emergency. The exercise of such rights by Landlord shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution or rent, or relieve Tenant from any of its obligations under this lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise. CONDITIONS OF LANDLORD'S LIABILITY (C) (i) Tenant shall not be entitled to claim a constructive eviction from the Demised Premises unless Tenant Shall have first notified Landlord of the condition or conditions giving rise thereto, and if the complaints be justified, unless Landlord shall have failed to remedy such conditions within a reasonable time after receipt of such notice. (ii) If Landlord shall be unable to give possession of the Demised Premises on any date specified for the commencement of the term by -27- reason of the fact that the Premises have not been sufficiently completed to make the premises ready for occupancy, or for any other reason, Landlord shall not be subject to any liability for the failure to give possession on said date, nor shall such failure in any way affect the validity of this lease or the obligations of Tenant hereunder. TENANT'S TAKING POSSESSION (D) (i) Tenant by entering into occupancy of the Premises shall be conclusively deemed to have agreed that Landlord up to the time of such occupancy had performed all of its obligations hereunder and that the Premises were in satisfactory condition as of the date of such occupancy, unless within thirty (30) days after such date Tenant shall have given written notice to Landlord specifying the respects in which the same were not in such condition. (ii) If Tenant shall use or occupy all or any part of the Demised Premises for the conduct of business prior to the Term Commencement Date, such use or occupancy shall be deemed to be under all of the terms, covenants and conditions of this lease, including the covenant to pay rent for the period from the commencement of said use or occupancy to the Term Commencement Date. (iii) In the event Landlord does not substantially complete the Premises by March 30, 1992, plus such additional time caused by Tenant Delays, Tenant shall have the right to serve a fifteen (15) day notice of termination. In the event the Premises are not substantially completed within said fifteen (15) days, this lease shall be null and void and neither party shall have any further rights or obligations to the other. ENTIRE AGREEMENT 36. This lease (including the Schedules and Exhibits annexed hereto) contains the entire agreement between the parties and all prior negotiations and agreements are merged herein. Neither Landlord nor Landlord's agent or representative has made any representations or statements, or promises, upon which Tenant has relied regarding any matter or thing relating to the Building, the land allocated to it (including the parking area) or the Demised Premises, or any other matter whatsoever, except as is expressly set forth in this lease, including but without limiting the generality of the foregoing, any statement, representation or promise as to the fitness of the Demised Premises for any particular use, the services to be rendered to the Demised Premises or the prospective amount of any item of additional rent. No oral or written statement, representation or promise whatsoever with respect to the foregoing or any other matter made by Landlord, its agents or any broker, whether contained in an affidavit, information circular, or otherwise shall be binding upon the Landlord unless expressly set forth in this lease. No rights, easements or licenses are or shall be acquired by Tenant by implication or otherwise unless expressly set forth in this lease. This lease may not be changed, modified or discharged, in whole or in part, orally and no executory agreement shall be effective to change, modify or discharge, in whole or in part, this lease or any obligations under this lease, unless such agreement is set forth in a written instrument executed by the party against whom enforcement of the change, modification or discharge is sought. All references in this lease to the consent or approval of Landlord shall be deemed to mean -28- the written consent of Landlord, or the written approval of Landlord, as the case may be, and no consent or approval of Landlord shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by Landlord. DEFINITIONS 37. The words "re-enter', "re-entry", and "re-entered" as used in this lease are not restricted to their technical legal meanings. The term "business days" as used in this lease shall exclude Saturdays (except such portion thereof as is covered by specific hours in Article 6 hereof), Sundays and all days observed by the State or Federal Government as legal holidays. The term "person" and "persons" as used in this lease shall be deemed to include natural persons, firms, corporations, associations and any other private or public entities, whether any of the foregoing are acting on their behalf or in a representative capacity. The various terms which are defined in other Articles of this lease or are defined in Schedules or Exhibits annexed hereto, shall have the meanings specified in such other Articles, Exhibits and Schedules for all purposes of this lease and all agreements supplemental thereto, unless the context clearly indicates the contrary. PARTNERSHIP TENANT 38. If Tenant is a partnership (or is comprised of two (2) or more persons, individually and as co-partners of a partnership) or if Tenant's interest in this lease shall be assigned to a partnership (or to two (2) or more persons, individually and as co-partners of a partnership) pursuant to Article 20 (any such partnership and such persons are referred to in this Section as "Partnership Tenant"), the following provisions of this Section as shall apply to such Partnership Tenant: (a) the liability of each of the parties comprising Partnership Tenant shall be joint and several, and (b) each of the parties comprising Partnership Tenant hereby consents in advance to, and agrees to be bound by, any modifications of this lease which may hereafter be made and by any notices, demands, requests or other communications which may hereafter be given by Partnership Tenant or by any of the parties comprising Partnership Tenant, and (c) any bills, statements, notices, demands, requests and other communications given or rendered to Partnership Tenant or to any of the parties comprising Partnership Tenant shall be deemed given or rendered to Partnership Tenant and to all such parties and shall be binding upon Partnership Tenant and all such parties, and (d) if Partnership Tenant shall admit new partners, all of such new partners shall, by their admission to Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this lease in Tenant's part to be observed and performed, and (e) Partnership Tenant shall give prompt notice to Landlord of the admission of any such new partners, and upon demand of Landlord shall cause each such new partner to execute and deliver to Landlord and agreement in form -29- satisfactory to Landlord, wherein each such new partner shall assume performance of all of the terms, covenants and conditions of this lease on Tenant's part to be observed and performed (but neither Landlord's failure to request any such agreement nor the failure of any such new partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of subdivision (d) of this Section). SUCCESSORS, ASSIGNS, ETC. 39. The terms, covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors, and, except as otherwise provided in this lease, their respective assigns. BROKER 40. Tenant represents that this lease was brought about by Commercial Industrial Associates Inc., as broker and all negotiations with respect to this Lease were conducted exclusively with said broker. Tenant agrees that if any claim is made for commissions by any other broker through or on account of any acts of Tenant, Tenant will hold Landlord free and harmless from any and all liabilities and expenses in connection therewith including Landlord's reasonable attorney's fees. CAPTIONS 41. The captions are included only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. RENEWAL OPTION 42. The Tenant shall have the right to be exercised as hereinafter provided, to extend the term of this Lease for one period of five (5) years upon the following terms and conditions: (A) That at the time of the exercise of such right the Tenant shall not be in default in the performance of any of the material terms, covenants or conditions herein contained with respect to a matter as to which notice of default has been given hereunder and which has not been remedied within the time limited in this Lease. -30- (B) That said extension shall be upon the same terms, covenants and conditions as in this lease provided, except that (a) there shall be no further privilege or extension for the term of this Lease beyond the one period referred to above; (b) during the said extension period the basic annual rent shall be ninety (90%) percent of the then market rental being charged by Landlord for comparable space in the Building, but in no event less than the Rent, plus escalations paid by Tenant in the last year of the term. (C) Notwithstanding anything in this paragraph "42" contained to the contrary, the Tenant shall not be entitled to said extension if at the time of the commencement of the extended period the Tenant shall be in default under any of the material terms, covenants or conditions of this Lease with respect to a matter as to which notice of default has been hereunder and which has not been remedied within the time limited in this Lease, or if this Lease shall have terminated prior to the commencement of said period. (D) The Tenant shall exercise its rights to said extension of the term of this Lease by notifying the Landlord of the Tenant's election to exercise such right at least nine (9) months prior to the expiration of the term of this Lease. Upon the giving of any such notice, this Lease shall be deemed extended for the specified period, subject to the provisions of this paragraph "42" without execution of any further instrument. (E) This option is personal to the Tenant named herein only. In the event of an assignment of the lease to the Premises by the Tenant named herein, this option shall be null and void and have no force and effect. (F) This option shall be null and void in the event the option for Additional Space or Second Additional Space, as Article "43" and "44". ADDITIONAL SPACE 43. A. After January 1, 1996, if the Lease shall be in full force and effect and tenant shall not be in default beyond the applicable cure period, in the payment of Rent, Additional Rent or any other sums or charges provided to be paid by Tenant under this Lease, Tenant shall have the right to lease approximately 12,00 square feet ("Additional Space") in place and instead of the Premises under this Lease for a term to commence on "Substantial Completion" of the Additional Space, and expire on the last day of the month which is ten (10) years after Substantial Completion of the Additional Space, unless such term shall sooner cease and expire pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. Subject to the foregoing, the exact location and exact size of the Additional Space shall be at Landlord sole discretion. Such right to lease the Additional Space shall be exercised, if at all, by Tenant's notice to Landlord ("Tenant's Notice") on or before December 31, 2001, and Tenant's failure duly to give the Tenant's Notice shall be deemed a waiver of such right to lease the Additional Space. -31- B. If Tenant shall effectively exercise its right to lease the Additional Space as set forth in Section A hereof, then, effective on and after "Substantial Completion" of all leasehold improvements within the Additional Space, this Lease shall be amended as follows: (i) the Additional Space shall be deemed to be the Premises demised under the Lease with the same force and effect as if originally demised under the Lease, and the terms "Premises", "premises", and "demised premises" as used in the Lease shall be the Additional Space; (ii) the Rent shall be an amount equal to the product of the number of rentable square feet of Additional Space, multiplied by the per square foot rental rate being paid by Tenant to Landlord on the date of the Commencement of the Term of the Additional Space; and the Rent as shall thereafter be further subject to increase at the rate of $1.12 per year for each year thereafter for the balance of the term; and (iii) Article (1A) shall be amended to reflect the new square footage leased to Tenant and the Tenant's proportionate share shall be adjusted to the new proportion. (iv) Article 9 shall be amended to reflect that new parking spaces shall be at the rate of four (4) spaces per 1,000 square feet of rentable area of Additional Space. C. If Tenant shall effectively exercise its right to lease the Additional Space, as set forth in Section (A) of this Article, Tenant shall accept the Additional Space and Landlord shall perform the work therein in accordance with the specifications set forth in Schedule "A". All such work shall be substantially completed prior to the commencement of Rent for such space. D. If Landlord is unable to give possession of the Additional Space, Landlord shall not be subject to any liability for failure to give possession on said date and the validity of the Lease shall not be impaired under any circumstances, nor shall the same be construed in any wise to extend the term of the Lease, but the rent payable hereunder for the Additional Space shall be abated (provided Tenant is not responsible for the delay) until after Landlord shall have given Tenant written notice that the Additional Space is substantially ready for Tenant's occupancy. E. The provisions of this Article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. F. In the event Tenant exercises its option for Second Additional Space, pursuant to Article "44" of this Lease, the provisions of this Article "43" shall be null and void. -32- SECOND ADDITIONAL SPACE 44. A. Provided the Lease shall be in full force and effect and Tenant shall not be in default beyond the applicable cure period in the payment of Rent or Additional Rent, or any other sums or charges provided to be paid by Tenant under this Lease after January 1, 1997, Tenant shall have the right to lease approximately 24,000 square feet ("Second Additional Space") in place and instead of the Premises under this Lease for a term to commence on "Substantial Completion" and expire on the last day of the month which is ten (10) years after completion of the Second Additional Space, unless such term shall sooner cease and expire pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. The exact location and exact size of the Second Additional Space shall be at Landlord's sole discretion. Such right to lease the Additional Space shall be exercised, if at all, by Tenant's notice to Landlord ("Tenant's Notice") prior to December 31, 2001 and Tenant's failure duly to give the Tenant's Notice shall be deemed a waiver of such right to lease the Second Additional Space. B. If Tenant shall effectively exercise its right to lease the Second Additional Space as set forth in Section A hereof, then, effective on and after "Substantial Completion" of all leasehold improvements within the Additional Space, this Lease shall be amended as follows: (i) the Second Additional Space shall be deemed to be the Premises demised under the Lease with the same force and effect as if originally demised under the Lease, and the terms "Premises", "premises", and demised premises" as used in the Lease shall be the Second Additional Space; (ii) the Rent shall be an amount equal to the product of the number of rentable square feet of Second Additional Space, multiplied by the square foot rental rate being paid by Tenant to Landlord on the date of the Commencement of the Term of the Second Additional Space and the Rent as shall thereafter be further subject to increase at the rate of $1.12 per year for each year thereafter for the balance of the term. (iii) Article (1A) shall be amended to reflect the new square footage leased to Tenant and the Tenant's proportionate share shall be adjusted to the new proportion. (iv) Article 9 shall be amended to reflect that new parking spaces shall be at the rate of four (4) spaces per 1,000 square feet of rentable area of Second Additional Space. C. If Tenant shall effectively exercise its right to lease the Second Additional Space, as set forth in Section (A) of this Article, Tenant shall accept the Second Additional Space and Landlord shall perform the work therein in accordance with the specifications set forth in Schedule "A". All such work shall be substantially completed prior to the commencement of Rent for such space. D. If Landlord is unable to give possession of the Second Additional Space, Landlord shall not be subject to any liability for failure to give possession on said date and the validity of the Lease shall not be impaired under any circumstances, nor shall the same be construed in any wise to extend the term of the Lease, but the rent payable hereunder for the Second Additional Space shall be abated (provided Tenant is not responsible for the inability to obtain possession or complete construction) until after Landlord shall have given Tenant written notice that the Second Additional Space is substantially ready for Tenant's occupancy. E. The provisions of this Article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. F. In the event Tenant exercises its option for Additional Space, pursuant to Article "43" of this Lease, the provisions of this Article "44" shall be null and void. THIRD ADDITIONAL SPACE 45. A. Provided the Lease shall be in full force and effect and Tenant shall not be in default beyond the applicable cure period in the payment of Rent or Additional Rent, or any other sums or charges provided to be paid by Tenant under this Lease after February 1, 1992, Tenant shall have the right to lease approximately 5,017 square feet ("Third Additional Space") for a term to commence on "Substantial Completion" and expire on the last day of the month which is ten (10) years after completion of the Third Additional Space, unless such term shall sooner cease and expire pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. The exact location and exact size of the Third Additional Space shall be adjacent. Such right to lease the Additional Space shall be exercised, if at all, by Tenant's notice to Landlord ("Tenant's Notice") prior to February 1, 1992 and Tenant's failure duly to give the Tenant's Notice shall be deemed a waiver of such right to lease the Third Additional Space. B. If Tenant shall effectively exercise its right to lease the Third Additional Space as set forth in Section A hereof, then, effective on and after "Substantial Completion" of all leasehold improvements within the Additional Space, this Lease shall be amended as follows: (i) the Third Additional Space shall be deemed to be the Premises demised under the Lease with the same force and effect as if originally demised under the Lease, and the terms "Premises", "premises", and demised premises" as used in the Lease shall be the Third Additional Space; (ii) the Rent shall be an amount equal to the product of the number of rentable square feet of Third Additional Space, multiplied by the -34- square foot rental rate being paid by Tenant to Landlord on the date of the Commencement of the Term of the Third Additional Space and the Rent as shall thereafter be further subject to increase at the rate of $1.12 per year for each year thereafter for the balance of the term. (iii) Article (1A) shall be amended to reflect the new square footage leased to Tenant and the Tenant's proportionate share shall be adjusted to the new proportion. (iv) Article 9 shall be amended to reflect that new parking spaces shall be at the rate of four (4) spaces per 1,000 square feet of rentable area of Third Additional Space. C. If Tenant shall effectively exercise its right to lease the Third Additional Space, as set forth in Section (A) of this Article, Tenant shall accept the Third Additional Space and Landlord shall perform the work therein in accordance with the specifications set forth in Schedule "A". All such work shall be substantially completed prior to the commencement of Rent for such space. D. If Landlord is unable to give possession of the Third Additional Space, Landlord shall not be subject to any liability for failure to give possession on said date and the validity of the Lease shall not be impaired under any circumstances, nor shall the same be construed in any wise to extend the term of the Lease, but the rent payable hereunder for the Third Additional Space shall be abated (provided Tenant is not responsible for the inability to obtain possession or complete construction) until after Landlord shall have given Tenant written notice that the Third Additional Space is substantially ready for Tenant's occupancy. E. The provisions of this Article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and -35- sealed this lease as of the day and year first above written. Witness for Landlord: HMCC ASSOCIATES by RECKSON ASSOCIATES _________________________________ By: _________________________________ Partner Witness for Tenant: MEDE AMERICA, INC. _________________________________ By: _________________________________ STATE OF NEW YORK) ss.:) COUNTY OF SUFFOLK) On the 15th day of October, 1991, before me personally came Mitchell Rerhler, to me known, who, being by me duly sworn, did depose and say that he is a general partner of RECKSON ASSOCIATES which is a general partner of HMCC ASSOCIATES the limited partnership described in, and which executed the foregoing instrument; that he signed his names thereto and executed said instrument for and on behalf of and with the authority of said partnership for the uses and purposes therein mentioned. /s/__________________________________ Notary Public STATE OF NEW YORK) ss.:) COUNTY OF NASSAU) On this 15th day of October, 1991, before me personally came Mitchell Di|Diamond to me known, who being by me duly sworn, did depose and say that he resides at 377 Oak St. Garden City, NY 11530 that he is the President of MEDE AMERICA, INC., the corporation described in and which executed the foregoing instrument as "Tenant"; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/________________________________ Notary Public Reg# 4958822 Exp: 11/13/91 -35A- SCHEDULE "A" LANDLORD'S INITIAL CONSTRUCTION 1. Initial Office Finishing Schedule At the Tenant's option, Landlord will design or follow Tenant's plans annexed hereto in preparing Tenant's office area at Landlord's cost to the following specifications: Erect the necessary demising walls constructed of metal stud, 5/8" Fire X gypsum board, with batts of 3" fiberglass for sound attenuation. Finish exterior walls with 1/2" sheetrock. Erect per approved plan dry-wall participating of 2 1/2" metal studs with 1/2" gypsum board on each side to underside of hung ceiling. Spackle and tape walls three coats to a smooth and true finish. Paint walls two coats flat latex and doors and trim coats matching enamel. Install in executive offices, main conference room and reception area, over padding, executive grade 30 ounce cut pile carpet. Balance of space shall be carpeted with building standing 22 ounce loop pile carpet installed glued down. Building standard vinyl reinforced tile may be installed in place of carpet. Install a 2'0" x 2'0" Armstrong Cortege Minatone acoustical tile ceiling with a Donn Fineline DXF-29 Suspension System. Provide interior 3'0" x 8'0" stain grade solid core birch wood doors with hollow metal bucks. 2. Lavatory Area -- Public Spaces a) Separate male and female toilet facilities. 3. Landscaping The building will be extensively landscaped with trees, plantings and other materials. An underground sprinkler system will be provided with a time clock to maintain proper watering. 4. Electrical Specifications All electrical work shall be installed in accordance with the National Electrical Code, and the local building code. A "Certificate of Compliance -36- shall be obtained from the New York Board of Fire Underwriters at the completion of the project. Lighting throughout the entire finished office area shall be obtained by the use of recessed 2'0" by 4'0" fluorescent fixtures with parabolic lenses, not to exceed one (l) fixture for each eighty (80) square feet of usable space. Local wall switches shall be provided for control of lighting. Toilet, corridor, lobby and other similar areas shall be lit to 50 foot candles. Exit light lighting for all paths of egress shall be provided in accordance with local building department regulations, if required. All branch circuit wiring shall be above hung ceiling or within dry-wall construction in finished areas and shall be type BX. All exposed conduits in non-finished areas shall be thin-walled "EMT". Wall mounted duplex convenience outlets shall be provided on the basis of one duplex outlet for each 120 square feet of rentable area. This formula shall be used to establish the quantity of outlets. However, the exact location of each outlet shall be coordinated with the Tenant's furniture layout. All duplex outlets are to be considered as normal convenience outlets and shall be wired up with an average of 5 to 8 outlets on one 20 ampere, 120 volt circuit. Panel capacity shall be adequate to handle all tenant lighting and equipment load, providing such equipment load does not exceed 2 watts per square foot of usable area. No credits given for installation less than standard installation. 5. Heating, Ventilation and Air Conditioning Specifications GENERAL The intent of this specification is to define a design concept for the subject area. DESIGN CRITERIA Central air conditioning with modular systems with individual zone control shall be capable of the following performance when the criteria noted are not exceeded; A) Between September 1 and June 1, the "heating system" shall be operative and maintain a minimum of 70|SD FDB when the outdoor temperature is 0|SD FDB and the prevailing wind velocity does not exceed 15 mph. B) Between April 15 and October 14, the "cooling system" shall be operative and maintain a maximum of 78|SD FDB and 55% relative humidity when the outdoor temperature is 95|SD FDB and 75|SD FDB with the prevailing wind velocity not exceeding 13 mph. -37- C) During the overlapping seasons (April 15 - June 1 and September 1 - October 15) both systems shall be operative (cooling and heating). D) Zoning temperature and balancing controls shall be operated solely by the Landlord to assure the conditions above. E) Maintenance of the foregoing temperature conditions is conditioned upon the following criteria, which shall not be exceeded by the Tenant in any room, or area, within the demised premises: a) Population Density ........................... 1 person per 150 square feet b) Lighting and Electrical Load Density ......... 4 watts per square foot c) Exhaust and Ventilation Load ................. 5 cfm per person
6. Ventilation Bathroom and similar areas to be ventilated per code using rooftop fans. 7. System Design Exterior Perimeter Zones Heating/cooling of exterior offices and areas provided by variable air volume terminals with integrated thermostats to meet Tenant's requirements for individual control. Interior Zones Heating/cooling provided by variable air volume system terminals with integrated thermostats for areas 2,000 square feet. SCHEDULE "B" LANDLORD'S CLEANING SERVICES AND MAINTENANCE OF PREMISES (to be performed on all business days except those which are union holidays of the employees performing cleaning services and maintenance in the Building and grounds or on days on which the building is closed) -38- I. CLEANING SERVICE - PUBLIC SPACES: A. Floor of entrance lobby and public corridors will be vacuumed or swept and washed nightly and waxed as necessary. B. Entranceway glass and metal work will be washed and rubbed down daily. C. Wall surfaces and elevator cabs will be kept in polished condition. D. Lighting fixtures will be cleaned and polished annually. Bulbs will be replaced as needed. E. Elevators and restrooms will be washed and disinfected once a day. The floors will be mopped as many times as required. All brightwork and mirrors will be kept in polished condition. Dispensers will be continuously checked and receptacles continuously emptied. F. Exterior surfaces and all windows of the building will be cleaned quarterly. II. CLEANING SERVICES - TENANT SPACES: A. Floors will be swept and spot cleaned nightly. Carpets will be swept daily and carpet sweeper and vacuumed weekly. B. Office equipment, telephones, etc, will be dusted nightly. C. Normal office waste in receptacles and ashtrays will be emptied nightly. D. Interior surface of windows and sills will be washed and blinds dusted quarterly. E. There shall be regularly scheduled visits by a qualified exterminator. III. EXTERIOR SERVICES: A. Parking fields will be regularly swept, cleared of snow in excess of two inches and generally maintained so as to be well drained, properly surfaced and striped. B. All landscaping, gardening, exterior lighting and irrigation systems will have regular care and servicing. IV. EQUIPMENT SERVICE: A. All air-conditioning and heating equipment and elevators will be regularly serviced and maintained. -39- B. Plumbing and electrical facilities, doors, hinges and locks will be repaired as necessary. C. All appurtenances, such as rails, stairs, etc. will be maintained in a safe condition. V - EXTRA CLEANING SERVICES Tenant shall pay to Landlord, on demand, Landlord's charges for (a) cleaning work in the Premises required because of (i) misuse or neglect on the part of Tenant or its employees or visitors, (ii) use of portions of the Premises for preparation, serving or consumption of food or beverages, or other special purposes requiring greater or more difficult cleaning work than office areas; (iii) unusual quantity of interior glass surfaces; or (iv) non-building standard materials or finishes installed by Tenant or at its request; (v) increases in frequency or scope in any item set forth in Schedule B as shall have been requested by Tenant; and (b) removal from the Premises and Building of (i) so much of any refuse and rubbish of Tenant as shall exceed that normally accumulated daily in the routine of ordinary business office activity and (ii) all of the refuse and rubbish of any eating facility requiring special handling (wet garbage). SCHEDULE "C" 1. Landlord shall provide at the rates hereinafter set forth and Tenant shall purchase from Landlord "energy service" for Tenant's requirements. There shall be the following categories of energy service: A) NORMAL SERVICE: NORMAL SERVICE is energy consumed during Working Hours as defined in Article 6 whose power demands do not exceed 4 watts per rentable square foot of the Demised Premises, or part thereof, per Working Hour. Of this amount, two watts are allocated to Landlord supplied lighting. Two watts are allocated for Tenant's usual office equipment ("TENANT'S ALLOWABLE USE"). B) EXCESS SERVICE: EXCESS SERVICE is energy demanded, regardless of hours, in excess of ALLOWABLE USE. C) OVERTIME SERVICE; OVERTIME SERVICE is energy consumed at all other hours than WORKING HOURS ("OVERTIME HOURS"). For the purpose of OVERTIME SERVICE, the Demised Premises may be separated into zones of use. The minimum practical size of these zones is 2500 square feet. Zones less than 2500 square feet will be billed at the rate applicable to 2500 square feet. -40- 2. Charges for NORMAL SERVICE: The charge for NORMAL SERVICE is payable at the rate of $2.25 per annum per rentable square foot of the Demised Premises and is subject to escalation as hereinafter provided. The charged for NORMAL SERVICE is included in the monthly rent set forth in Article 3. Any escalation shall be payable as additional rent. After this, the charge to change "WORKING HOURS" shall be $25.00 per zone. 3. Charges for OVERTIME SERVICE: Subject to escalation as hereinafter provided the Landlord's monthly charge for Tenant's OVERTIME SERVICE, payable in addition to any additional charges for NORMAL SERVICE and EXCESS SERVICE if applicable, shall be derived as follows: A) Full Energy OVERTIME SERVICE: An amount equal to the number of OVERTIME HOURS in the month, multiplied by rentable square feet of the zones in use, multiplied by $.0022. B) OVERTIME charges shall be increased by the same percentage the EXCESS SERVICE (if applicable) exceeds the ALLOWABLE USE for NORMAL SERVICE. C) Equipment Energy: Any energy use in the Tenant's space, outside of NORMAL SERVICE and OVERTIME SERVICE, shall be charged an amount equal to $1.28 per year, multiplied by the connected watts (or part thereof), computed and adjusted to the nearest 100th). These amounts shall be billed at least once every three months and shall be payable during the month in which billed as additional rent 4. Charges for EXCESS SERVICE: The Landlord's monthly charges for Tenant's EXCESS SERVICE payable in addition to any charges for NORMAL SERVICE and OVERTIME SERVICE, if applicable, shall be an amount derived as follows: The excess above the TENANT'S ALLOWABLE USE shall be charged to tenant at the rate of $0.625 per square foot per year, for each excess watt (or part thereof, computed and adjusted to the nearest 100th). -41- 5. Escalation of Charges for NORMAL SERVICE, EXCESS SERVICE AND OVERTIME SERVICE AND TWENTY-FOUR HOUR SERVICE: The rates referred to in this Schedule "C" are based upon current rates promulgated by the utility company during the month prior to the "Commencement Date." All of the rates, fuel and adjustment costs, state and local government taxes, and all other component parts of the utility company charges referred to in this Schedule "C" are subject to increase to reflect changes in rate or classification or other component parts of the bill employed by the utility company providing services to the building. Tenant agrees to pay such increase in utility company charges. Landlord shall give due notice to Tenant of any such increase or change in charge. Tenant shall not be or become entitled to a reduction in rent, additional rent or to other reimbursement in the event it uses less energy than contemplated by this Schedule "C". 6. Landlord's energy management system will be conclusive evidence of the computation of Normal Service, Excess Service, Overtime Service and Twenty-four Hour Service. However, Landlord hereby reserves to itself the right, from time to time, to cause a reputable electric engineering company (the "Engineer") to make a survey of Tenant's energy usage requirements to determine whether the Tenant's Allowable Use limitation has been exceeded and, if so, to what extent. If these surveys indicate at the time that the cost to Landlord by reason thereof, computed on an annual basis at rates which would be charged by a public utility company servicing the Building for such purposes, is in excess of the initial cost similarly computed, then the additional rent provided for in this Schedule shall be increased as provided for herein, commencing with the first day of the month immediately following the computation of such survey and the submission of a copy thereof to Tenant. 7. Landlord shall have full and unrestricted access to all air-conditioning and heating equipment, and to all other utility installations servicing the Building and the Demised Premises. Landlord reserves the right temporarily to interrupt, curtail, stop or suspend air-conditioning and heating service, and all other utility, or other services, because of Landlord's inability to obtain, or difficulty or delay in obtaining, labor or materials necessary therefor, or in order to comply with governmental restrictions in connection therewith, or for any other cause beyond Landlord's reasonable control. No diminution or abatement of Basic Rent, Additional Rent, or other compensation shall or will be claimed by Tenant, nor shall this Lease or any of the obligations of Tenant hereunder be affected or reduced by reason of such interruptions, stoppages or curtailments, the causes of which are herein above enumerated, nor shall the same give rise to a claim in Tenant's favor that such failure constitutes actual or constructive, total or partial eviction from the Demised Premises, unless such interruptions, stoppages or curtailments have been due to the arbitrary, willful or negligent act, or failure to act, of Landlord. 8. Telephone and service shall be the responsibility of Tenant. Tenant shall make all arrangements for telephone service with the company supplying -42- said service, including the deposit requirement for the furnishing of service. Landlord shall not be responsible for any delays occasioned by failure of the telephone company to furnish service. SCHEDULE "D" 1. The sidewalk, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress to and egress from the Demised Premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Landlord. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or other in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and safeguards. 2. The water and wash closets and plumbing fixtures shall not be used or any purpose other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No Tenant shall sweep or throw or permit to be swept or thrown from the Premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building, and Tenant shall not use, keep or permit to be used or keep any vending machine, burner, microwave oven, or oven, or noxious gas or substance in the Demised Premises, or permit or suffer the Demised Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, not shall any animals or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of the Landlord. 5. No sign, advertisement, notice or other lettering and/or window treatment shall be exhibited, inscribed, painted or affixed by any Tenant on -43- any part of the outside of the Demised Premises or the Building or on the inside of the Demised Premises if the same is visible from the outside of the Demised Premises without the prior written consent of Landlord. In the event of the violation of the foregoing by any Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tables shall be inscribed, painted or affixed for each Tenant by Landlord at the expense of such Tenant, and shall be of a size, color and style acceptable to Landlord. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the Demised Premises or the Building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct. No Tenant shall lay linoleum, other similar floor covering so that the same shall come in direct contact with the floor of the Demised Premises, and, if linoleum or other similar floor covering is desired to be used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost thereof. Landlord consents to Tenant installing a lock on the computer room door. Landlord shall have no obligation to clean said room. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only through the service entrances and corridors, and only during hours and in a manner approved by Landlord. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations or the lease of which these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall co-operate to prevent the same. 10. Landlord reserves the right to exclude from the building between the hours of 6:00 P.M. and 8:00 A.M. and at all hours on Sundays, and legal holidays all persons who do not present a pass to the Building signed by Landlord. Landlord will furnish passes to persons for whom any Tenant requires -44- same in writing. Each Tenant shall be responsible for all persons for whom he requests such a pass and shall be liable to Landlord for all acts of such persons. 11. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's opinion, tends to impair the reputation of the Building or its desirability as an office building, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the Premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the Premises. 13. Tenant agrees to keep all entry doors closed at all times and to abide by all rules and regulations issued by the Landlord with respect to such services. -45- EX-10.9 8 EXHIBIT 10.9 EXHIBIT 10.9 TRANSACTION PROCESSING AND DEVELOPMENT AGREEMENT AGREEMENT (the "Agreement"), dated as of July 21, 1998, by and between MedE America Corporation, a Delaware corporation ("MedE"), and Medic Computer Systems, Inc., a North Carolina corporation ("Medic"). WHEREAS, Medic provides electronic data interchange ("EDI") services to certain hospitals, physicians and other health care service providers; and WHEREAS, Medic wishes to engage MedE to provide transaction or claims processing services via EDI for transmitting claims to insurance carriers; NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, and other good and valuable consideration, the parties hereto hereby agree as follows: Section 1. Definitions. "Medic/MedE System" shall mean the system currently used by MedE to process transactions with Payors and other entities providing claims coverage via EDI on behalf of its customers as such system shall be customized and otherwise altered and modified in accordance with the terms of this Agreement for use by MedE, Medic and the Payors in connection with the MedE Services under this Agreement, and used on communications and data server hardware (existing or newly acquired), together with separate data storage systems, that are server-integrated into MedE's network, all as further defined in Schedule 1 (Medic/MedE System). "Medic Subscribers" shall mean any individuals or group "providers" or other organizations that have licensed Medic software products for submission of claims or other transactions to Payors. The term "Medic Subscribers" shall not include any third party claims clearinghouses. ***** This material has been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. "Payor" shall mean any insurance company or other organization providing health care coverage, including Blue Cross/Blue Shield, Medicare, Medicaid, HMOs and commercial health insurance companies. Section 2. MedE Services; Transaction Information. (a) Subject to and in accordance with the terms and conditions of this Agreement, MedE will provide claims and transaction processing services (the "MedE Services") to Medic in accordance with Schedule 2(a) (Medic/MedE Transaction Processing Relationship Guidelines). (b) Medic and MedE shall transmit claims, remittance, transaction and other information to each other in the standard data format (the "Data Format") set forth on Schedule 2(b) (Standard Data Format). MedE shall be responsible for configuring the Medic/MedE System, including the electronic link with Medic's system, to the Data Format and updating the Medic/MedE System to accommodate any changes in such Data Format that the parties may mutually agree upon. Medic shall be responsible for configuring its own system to the Data Format. (c) MedE shall have no responsibility to verify, check or otherwise inspect any claims, transaction or other information transmitted by Medic, except as may be necessary to keep an accounting of the number of records, the number of claims and transactions and the total dollar amount of the claims and transactions transmitted for processing. (d) Medic shall use all reasonable efforts to ensure that any data submitted to MedE shall be correct and complete, and in the Data Format (as set forth in Schedule 2(b)). MedE shall notify Medic promptly of any claims or transactions that are rejected by any Payor or if MedE discovers or learns of any errors in any claims, transaction or other data transmitted by Medic. If any data supplied by Medic is in error because it is not correct or complete or in the proper format, Medic shall have sole authority to make any corrections of such errors and, upon making any such corrections, shall retransmit such corrected data to MedE unless, upon Medic's written request, Medic engages MedE to correct any such data, such as in the case of formatting errors, for a reasonable service charge as MedE may propose and the parties may agree upon. Section 3. Payor Arrangements. (a) MedE shall add and integrate Payors to the MedE Services by (i) using its best efforts to enter into agreements with each of the Payors listed on Schedule 3(a) (Payor Schedule) for the submission of claims and other transactions via EDI (each such agreement, a "Payor Agreement") and (ii) upon entering into any such Payor Agreement, establishing electronic links, in accordance with Section 4, with each such Payor. MedE shall furnish to Medic copies of its standard form(s) of "payor agreement," including any revised versions thereof. 2 (b) MedE shall have primary responsibility for negotiating such Payor Agreements. MedE shall use its best efforts to negotiate with each Payor the most favorable terms possible, including as to the amount of revenues per claim or transaction (the "Revenue Rates") to be paid by such Payor, subject to Schedule 3(b) (Revenue Rates) in respect of any Revenue Rates in the amounts described therein. MedE shall consult with Medic regarding any terms proposed to be included in such Payor Agreements which differ from any of MedE's standard form(s) of "payor agreement" as previously furnished to Medic. Medic shall use its best efforts to cooperate with MedE in establishing agreements with Payors. (c) MedE shall use its best efforts to cause each Payor with whom MedE enters into a Payor Agreement to enter into a Recognition and Nondisturbance Agreement substantially in the form of Exhibit A. MedE shall not enter into any Payor Agreement with any Payor which refuses to enter into such Recognition and Nondisturbance Agreement simultaneously with such Payor Agreement without Medic's prior written consent (which consent shall not be unreasonably withheld). Section 4. Development Milestones. MedE shall perform its obligations under Section 3(a) in accordance with the development milestones (each, a "Development Milestone") set forth in Schedule 4 (Development Milestones). If, upon reaching the date on which any Development Milestone is scheduled to be met, the aggregate transaction volumes represented by any Payors that have been added to date is ***** then Medic shall have the right to terminate the Agreement without further obligation to MedE, provided, however, that in order to avoid termination, MedE may propose, for Medic's approval (which approval shall not be unreasonably withheld), a plan of action for prompt cure of its failure to achieve such Development Milestones within a commercially reasonable period of time, provided, further, that Medic may condition its acceptance of such plan of action and waiver of its right to terminate upon payment of a reasonable estimate of what is likely to be the shortfall at July 1, 1999 into escrow, to be released (x) to Medic in the event of any failure to meet the July 1, 1999 Processing Milestone or, if earlier, upon the termination by Medic as a result of any Termination Event set forth in clauses (i), (ii), (iii), (v), (vii) or (ix) of Section 18(a) or (y) to MedE if the July 1, 1999 Processing Milestone is met or, if earlier, upon any termination by MedE due solely to any Termination Event set forth in clauses (iv), (vi) or (viii) of Section 18(a). For the purposes of this Section 4, the "aggregate transaction volumes" of any Payors shall be calculated by reference to the transaction volumes set forth in Schedule 3(a) with respect to each of the Payors. 3 Section 5. Medic/MedE System; Development. (a) MedE will, in a professional and diligent manner, develop, operate, maintain and support the Medic/MedE System (including but not limited to any and all electronic links to Medic or any of the Payors) in accordance with the development specifications set forth in Schedule 5(a) (Development Specifications). Without limiting the foregoing, MedE shall be responsible for any and all development, maintenance and support of any electronic links to Medic and each Payor to ensure that any and all transactions processed via EDI over any such electronic links are, and shall continue to be, processed in a timely, accurate and error free manner. Medic shall provide all reasonably necessary cooperation to enable MedE to perform its duties hereunder. (b) Any electronic links established with any Payor shall be established in accordance with the procedures set forth in Schedule 5(b) (Payor Implementation Guide). (c) Medic and MedE acknowledge that the Medic/MedE System, including any electronic links to Medic and to each Payor, shall be tested by Medic and MedE in accordance with Section 6 to the satisfaction of both MedE and Medic. (d) MedE shall ensure that the Medic/MedE System shall conform with the performance and scalability criteria set forth in Schedule 5(d) (Medic/MedE System Performance and Scalabilty Criteria) throughout the Term. (e) Medic and MedE acknowledge that MedE shall have no responsibility for, and shall be provided no access to, any of Medic's systems or the systems of any Medic Subscriber. (f) Medic may request in writing from time to time (the "Medic Request") that MedE provide a service not heretofore provided or proposed to be provided by MedE to Medic of establishing an electronic link to a Payor not covered by Schedule 3(a) with whom Medic may want to have a link to process commercial claims (each an "Additional Service"). ***** Any such Additional Service to be provided by MedE pursuant to this Section 5(f) shall be deemed to be a part of the 4 "MedE Services" and shall be developed, commercially implemented, tested and provided by MedE in accordance with and subject to the terms of this Agreement***** Section 6. Testing. Upon completing any stage of development of the Medic/MedE System, establishing any electronic link to Medic or any Payor or commencing live operation of the Medic/MedE System or upon the reasonable request of MedE or Medic at any time, MedE and Medic shall run, as and when appropriate, such in-house tests, live tests or client tests set forth in Schedule 5(b) or such other tests as either Medic or MedE may deem reasonably necessary or appropriate to determine if the Medic/MedE System operates without any material incorrect functioning, material incorrect results or other material errors (each, an "Error"). If upon running such tests Medic or MedE determines that the Medic/MedE System contains Errors, MedE shall, as soon as commercially reasonable (but in any event within five (5) business days), correct any and all such Errors. Medic and MedE shall conduct further tests on any corrected Medic/MedE System. Medic shall, as soon as commercially reasonable (but in any event within five (5) business days), correct any Errors caused by Medic or within Medic's control. Section 7. Processing Milestones. (a) MedE shall perform the MedE Services in accordance with each of the claims and transaction processing milestones (each, a "Processing Milestone") set forth on Schedule 7(a) (Processing Milestones). (b) If MedE exceeds any Processing Milestone, Medic shall pay MedE ***** . (c) If MedE fails to meet any Processing Milestone, as a result of its failure (i) to enter into agreements with or connect to Payors or (ii) to perform MedE Services to standard, MedE will pay such damages to Medic as provided in Schedule 7(c) (Damages Relating to Processing Milestones). Section 8. Payments. (a) Each party shall pay the other party, in 5 accordance with Section 8(b), any and all amounts owing to such other party as set forth in Schedule 8(a) (Payment Schedule). (b) Within twenty (20) days after the end of each month during the Term (each such month, a "Commission Period"), MedE shall (i) provide Medic with (A) a statement of accounting (each, a "Statement of Accounting") of all transactions and claims processed through the MedE Services for Medic Subscribers during, and through the end of, such Commission Period just completed and (B) an invoice (each, an "Invoice") of any and all transactions processed by the MedE Services during, and through the end of, such Commission Period in respect of which Medic owes MedE any transaction fees in accordance with Schedule 8(a) or as otherwise agreed in writing by the parties; and (ii) pay to Medic, by wire transfer to an account or accounts designated by Medic from time to time, the amount equal to (A) Medic's commissions owing or payable by any Payors, in accordance with the relevant Revenue Rates, for any and all transactions and claims required to be set forth in the Statement of Accounting for Medic Subscribers, less (B) any amounts retained by MedE as payment for any undisputed and unpaid transaction fees for which an Invoice has been submitted to Medic pursuant to Section 8(b)(i)(B); provided that, notwithstanding the foregoing, if MedE manages the cash flow from Payors such that significant revenues are received from any Payors prior to such twentieth day following the end of each Commission Period, MedE shall make reasonable arrangements to pay to Medic such commissions owing to Medic in a timely manner. Section 9. Medic/MedE System; Use and Maintenance. (a) MedE shall grant, and hereby grants, to Medic a nonexclusive, non-transferable (except as provided in Section 28), worldwide, perpetual (subject to the terms hereof), irrevocable, royalty-free, fully paid-up right and license to use (i) the software comprising the Medic/MedE System and (ii) upon any Termination Event (other than any termination due solely to any Termination Event set forth in Sections 18(a)(iv) and 18(a)(vi)), the source code of the Medic/MedE System and any other Escrowed Materials relating to the Medic/MedE System, solely for the purpose of enabling Medic to provide claims and transaction processing services directly to the Medic Subscribers (in the case of any source code, such use shall include the creation of derivative works thereof to be used solely for the aforementioned purpose). In certain circumstances, as provided in Section 18(b)(i), 6 Medic shall pay an additional one-time fee upon delivery of such Escrowed Materials (b) MedE shall make any upgrade, update, correction or other modification to the Medic/MedE System that becomes necessary or appropriate due to (i) any changes in applicable laws, rules or regulations, (ii) any changes in a Payor's system or interface, (iii) any change in the preferred data communications medium used by MedE or any Payor or (iv) any corrections of any Errors, provided that in the case of clause (iv), MedE shall use its best efforts to correct any Errors which impact the ability to accurately process claims as promptly as possible (but in any event within two (2) business days) after becoming aware of such Error. Prior to undertaking any such upgrade, update, correction or other modification, MedE shall consult with Medic. If Medic wishes to modify the preferred data communications medium used by it, or wishes for MedE to otherwise modify the Medic/MedE System, Medic shall so inform MedE. If such modification does not require that MedE implement any unique or proprietary operating methods, and can be effected without unreasonable cost, MedE shall use its best efforts to accommodate such requests. MedE shall respond to any other requests for modifications by providing in good faith an estimate of the time and cost involved in such modifications (which costs, if the modifications are undertaken, shall be borne as MedE and Medic shall in good faith agree). (c) Except for (and only to the extent of) the limited license to use the software comprising the Medic/MedE system set forth in Section 9(a) above, Medic acknowledges and agrees that MedE owns and retains all right, title and interest of any sort whatsoever in and to the Medic/MedE System and all elements thereof (excluding, however, the "Medic Data" (as defined herein)), including the software and hardware used in the system. Medic further confirms its understanding that the Medic/MedE System and all specifications, manuals, other documentation and materials (other than the Medic Data), and all improvements, corrections and modifications related thereto to the extent developed by MedE (or its developers), are and shall remain the sole substantial proprietary interests and valuable trade secrets of MedE. (d) MedE shall be solely responsible for any and all internal and external costs, expenses and disbursements incurred in connection with development, operation, support and maintenance of the Medic/MedE System. Without limiting the foregoing, MedE shall be responsible for any and all license fees, royalties and other payments to third parties for development platforms or software used in connection with or incorporated in the Medic/MedE System. (e) Medic shall pay to MedE a service fee in the amount of ***** 7 provided that, without limiting Medic's rights under Section 9(a), upon any termination of this Agreement prior to September 30, 2000 (except a termination due solely to a Termination Event set forth in Section 18(a)(iv)), there shall be no further obligation on the part of Medic to pay any subsequent installment. (f) During the Term, Medic shall not attempt to obtain the source code to the Medic/MedE System except as expressly permitted under Section 9(a) hereof, including without limitation by means of decompilation, disassembly or other means, and shall make no copies of the software other than archival or back-up copies or as otherwise specifically authorized. (g) Medic may export any part of the software comprising the Medic/MedE System, directly or indirectly, to any country outside the United States or Canada so long as Medic complies with all applicable laws (including the International Traffic in Arms Regulations (ITAR 22 CFR 1-130) of the U.S. State Department, Office of the Defense Trade Controls as and to the extent applicable). Section 10. Medic Subscriber Database. (a) All right, title and interest in and to any and all information relating to Medic Subscribers (including any claims, transactions and other information submitted by Medic for processing by the MedE Services and any claims remittances and other information provided by any Payors upon adjudication of any claims and transactions) (collectively, the "Medic Data") are and shall be owned exclusively by Medic. MedE shall not have the right to use, license, rent, sell or otherwise make available any such information for any purpose (other than to the relevant Payor or otherwise for the benefit of Medic as specifically provided in this Agreement). (b) MedE shall develop and maintain a database of the Medic Data (to be built on an Informix database platform or such other platform as the parties may mutually agree) (the "Medic Database") that shall at all times be segregated and secure from any database or information of any other vendors and customers of MedE. MedE will give Medic direct electronic remote access as may be reasonably necessary or desired to conduct searches, queries and generate reports of the Medic Data between the hours of 7 A.M. and 9 P.M. (EST) for database queries and reporting. If Medic requires access outside these hours, MedE and Medic will cooperate in good faith to work out a mutually agreeable solution to provide Medic with additional access. Further, at the end of each quarter during the Term, MedE shall provide Medic with a complete copy, in its entirety, of the Medic Database. From time to time, upon Medic's request, MedE will provide documentation of the schema details in a format indicating both table structures and 8 relationships, including updates as and when changes to the schema are made. (c) MedE shall provide, at MedE's cost, for ten (10) concurrent users licenses of the Medic Database as is currently permitted by the Informix licenses between Informix and MedE. Should Medic need to increase the number of concurrent users, MedE will acquire any additional Informix licenses as needed to accommodate the additional number of concurrent users specified by Medic, provided, however, that MedE shall only be responsible to pay any costs thereof up to $15,000 in the aggregate (i.e., for the ten concurrent user licenses provided above plus any additional concurrent user licenses) and if such costs exceed $15,000, Medic and MedE shall negotiate in good faith to determine which party shall bear any additional costs in excess of $15,000. Medic and MedE shall work together to negotiate appropriate license fee rates with Informix. Section 11. Resources; Project Manager. (a) MedE will commit adequate resources (including technically competent personnel) to ensure timely and satisfactory performance of its obligations hereunder. ******* (b) MedE will designate one member of its personnel to serve as the project manager for the performance of the MedE Services and MedE's other obligations hereunder (the "Project Manager"). Such Project Manager will serve as the primary contact person at MedE for Medic. MedE shall in good faith take into account any comments raised by Medic in the event that Medic is dissatisfied with such Project Manager's performance. (c) Medic will designate one member of its personnel to serve as the project manager to be the primary contact for MedE in relation to the performance of the MedE Services (the "Medic Project Manager"). Section 12. Responsibilities of Medic. (a) Medic represents and agrees that it will not use the Medic/MedE System as a conduit to provide services to any third party clearinghouse or company engaged in a business substantially similar to that of MedE absent the express prior written consent of MedE. 9 (b) Medic represents and agrees that it will use the Medic/MedE System in accordance with the reasonable conditions, rules, and regulations which are established or specified by MedE in writing from time to time for all of MedE's customers and as are set forth in any manuals, materials, documents, or instructions furnished by MedE in advance of their effectiveness to its customers (including Medic), provided that Medic shall not be required to comply with any conditions, rules or regulations that conflict with any provisions of this Agreement or materially adversely affect the ability of Medic to use the Medic/MedE System as contemplated herein. Section 13. Training; Customer Service. (a) MedE shall provide training to Medic personnel in the use of the Medic/MedE System and the Medic Database (including operation of any electronic access, as well as use of any search, query and reporting functions). The duration and nature of this training shall be pursuant to terms to be mutually agreed upon. (b) MedE and Medic acknowledge that MedE shall not provide customer service directly to any Medic Subscriber (including any customer of any Medic Subscriber). MedE shall provide first-line support (e.g., telephone, on-site and other support) to the Payors and second-line support to Medic, who shall be responsible for providing first-line support to Medic Subscribers (including their customers). In order to insure that Medic will be able to provide customer service to Medic Subscribers and their customers, MedE will provide the support services set forth on Schedule 13(b) (Customer Service). Section 14. Disaster Recovery. Within forty-five (45) days prior to the date that MedE commences processing transactions hereunder, MedE shall establish, purchase or lease, and thereafter maintain at its own expense and to the satisfaction of Medic, a fully redundant system which may be in the form of MedE's main non-Medic server and system, coupled with a geographically-remote secondary fully redundant system, as well as daily off-site back-up of the Medic Database (the "Disaster Recovery System") to be made available to Medic in event of a natural disaster, hardware failure, data communications problem or other unplanned interruption of, or inaccessibility to, the Medic/MedE System, such that MedE will be able to process 100% of Medic's then current EDI transaction volume within twenty-four (24) hours of such disaster or problem. MedE shall be responsible for, subject to Medic's approval, the development, testing and implementation of a viable contingency plan for accessing and using the Disaster Recovery System in the event of a disaster. 10 Section 15. Representations and Warranties. (a) Each of MedE and Medic represents and warrants to the other party that it has full legal right and authority to enter into this Agreement and perform its respective obligations contained herein, and that no agreement or understanding with any other person or entity exists or will exist which would interfere with such party's respective obligations hereunder. (b) Further, MedE hereby represents and warrants and covenants to Medic that: (i) the Medic/MedE System (which includes any communications and data servers and other hardware installed and any software portions used by MedE and any software portions delivered by MedE for use by Medic or any of the Payors) is, and will be, capable of performing in all material respects the functions for which the Medic/MedE System is intended as contemplated herein; (ii) the Medic/MedE System has been screened for, and does not contain any virus, back door, drop lock or similar or other programming code or instruction that is intentionally constructed to (x) damage, interfere or otherwise adversely affect the operations of the Medic/MedE System or any systems of Medic, any of the Payors or any of the Medic Subscribers or (y) permit unauthorized electronic, remote or other access by any person or entity through modem or other means or medium, in each case without the consent or intent of the party utilizing any portion of such Medic/MedE System; (iii) except for such third party software or other rights disclosed by MedE on Schedule 15(b)(iii) (Third Party Software and Other Rights), (x) MedE owns or will own the entire Medic/MedE System, including any modification, upgrade, enhancement and customization thereof or thereto, (y) no license or other right to use any third party software or other intellectual property is or will be required to develop, operate, maintain or support the Medic/MedE System, and (z) the delivery, installation and use of the Medic/MedE System as a whole does not and will not infringe or otherwise conflict with the rights of any other person or entity; (iv) the Medic/MedE System, together with the rest of MedE's network system, or any part thereof that contains or calls on a calendar function, including but not limited to any function that is indexed to a computer processing unit clock, provides specific dates or calculates spans of dates, is and will be able to 11 record, store, process and provide true and accurate dates and calculations for dates and spans of dates including and following January 1, 2000; and (v) assuming the assignment or sublicense of the third party software listed on Schedule 15(b)(iii) in accordance with Section 18(b)(i) and when used in connection with any telecommunications and data lines used by MedE to make any physical links with Medic and the Payors (which are being retained by MedE), the software portions of the Medic/MedE System and the other Escrowed Materials, together with the data and communications servers included in the Medic/MedE System, comprise all of the software and hardware necessary to operate the MedE Services, including without limitation on a standalone basis, in the manner contemplated by this Agreement. (c) THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES, AND MEDIC HEREBY WAIVES ALL OTHER WARRANTIES, EXPRESSED, IMPLIED, OR STATUTORY, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, RELATING TO MEDIC/MEDE SYSTEM AND THE PROVISION OF THE MEDE SERVICES. Section 16. Escrow. Within sixty (60) days after the date hereof, Medic and MedE, together with an escrow agent located in the United States to be selected by Medic, shall negotiate in good faith to agree upon an escrow agreement (the "Escrow Agreement") containing commercially reasonable terms and conditions that are standard in the industry. Such Escrow Agreement shall provide for deposit of the materials relating to the Medic/MedE System that are described on Schedule 16 (Escrowed Materials) and ------ shall provide for the release of such Escrowed Materials upon the occurrence of a Termination Event in accordance with Section 18, other than a Termination Event solely declared by MedE pursuant to clause (iv) or (vi) of Section 18(a). Section 17. Term. The term (the "Term") of this Agreement shall commence upon the date hereof and, unless terminated sooner pursuant to Section 18, shall continue in effect until June 30, 2003 (the "Initial Term"), provided that the Term shall continue for additional one-year periods (each, a "Renewal Period") unless either party notifies the other party in writing at least twelve (12) months prior to the expiration of the Initial Term or any Renewal Period, as applicable, of such party's desire to terminate the Agreement. 12 Section 18. Termination. (a) This Agreement may be terminated upon written notice upon the occurrence of any of the following (each, a "Termination Event"): (i) upon mutual agreement of Medic and MedE; (ii) by MedE, upon not less than six (6) months prior written notice, if for reasons beyond MedE's control, the project fails to meet the Processing Milestones and MedE processes in any year less than ***** of the total transaction volume that would have been processed had the timetable been met; (iii) by Medic, upon any failure by MedE (through no fault of Medic) to meet any Processing Milestone by ***** or more of the transaction volumes corresponding to such Processing Milestone; (iv) by MedE, upon a material breach of any representation, warranty, covenant or agreement by Medic (other than as provided by Section 18(a)(viii)), which breach is not cured within thirty (30) days after receipt of notice of such breach, provided that for the purposes of this Agreement, a "material breach" shall include, but shall not be limited to, (x) Medic fails or refuses to pay any amount due hereunder to MedE, except any amount which is being disputed in good faith by Medic, (y) Medic fails to substantially perform any obligation contained herein which, by its terms, is required to be performed by a certain deadline or within a certain time period (notwithstanding Medic's best efforts to do so) or (z) a series of breaches each of which individually may have been cured or are not material, but in the aggregate, constitute a material breach or indicate a pattern of breaches; (v) by Medic, upon a material breach of any representation, warranty, covenant or agreement by the other party which is not cured within thirty (30) days after receipt of notice of such breach, provided that for the purposes of this Agreement, a "material breach" shall have occurred if, without limitation, (w) MedE fails or refuses to pay any amount due hereunder to Medic, except any amount which is being disputed in good faith by MedE, (x) the Medic/MedE System or any material component thereof continues to exhibit Errors, or the Medic Database continues to be unable to be accessed or searched, in either case causing disruptions in or repeated periods of downtime of the MedE Services or customer service of Medic or Medic Subscribers (notwithstanding MedE's remedial or maintenance efforts) during any 45-day period (which shall include the 30-day notice period), (y) MedE fails to substantially perform any 13 obligation contained herein which, by its terms, is required to be performed by a certain deadline or within a certain time period (notwithstanding MedE's best efforts to do so) or (z) a series of breaches each of which individually may have been cured or are not material, but in the aggregate, constitute a material breach or indicate a pattern of breaches; (vi) by MedE, if Medic becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, becomes subject to any proceeding under any bankruptcy or insolvency law, whether domestic or foreign, or has wound up or liquidated, voluntarily or otherwise; (vii) by Medic, if MedE becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, becomes subject to any proceeding under any bankruptcy or insolvency law, whether domestic or foreign, or has wound up or liquidated, voluntarily or otherwise; (viii) by MedE, if Medic materially breaches its obligations contained in Section 20, unless Medic cures such breach within thirty (30) days after receipt of notice thereof; or (ix) by Medic, upon any "change of control" of MedE, which shall be defined to have occurred if a non-financial buyer acquires, directly or indirectly, beneficial ownership of 35% or more of the then outstanding voting shares or share equivalents of MedE, provided that Medic's termination right in this Section 18(a)(ix) may be exercised upon and at any time within eight (8) months after the occurrence of such change of control of MedE during which such non-financial buyer continues to be a shareholder, provided, further, that prior to the occurrence of such "change of control" event, MedE and Medic may agree upon a notice period of such termination. (b) Upon any termination or expiration of the Agreement (subject to Section 18(d) below): (i) MedE shall deliver (or allow to be delivered out of escrow), and Medic shall receive, (x) the software portions of the Medic/MedE System, together with good and merchantable title to, and the manufacturers' warranties on and any support arrangements relating to, the data and communications servers, 14 and any and all Escrowed Materials (whether out of escrow or otherwise), in each case, free and clear of any liens, security interests and other encumbrances, provided that such software portions thereof shall be subject to the limited license granted under Section 9(a) hereof, and (y) assignment or sublicense of any and all third party software components used as part of or in connection with the development, operation, maintenance and support of the Medic/MedE System, so long as (i) the owner of such software shall have consented to such assignment or sublicense and (ii) Medic agrees to assume and perform any ongoing obligations in respect of any such assigned or sublicensed third party software. If, and only to the extent that, the Medic/MedE System relies on any third party software to be so assigned or sublicensed, and either (i) the owner of such software does not consent to such assignment or sublicense or (ii) Medic does not agree to assume the ongoing obligations with respect to such software as aforesaid, then MedE makes no representations of any nature whatsoever relating to the Medic/MedE System and Medic accepts the Medic/MedE System "AS-IS, WHERE-IS" in respect of those portions of such Medic/MedE System that depend upon the use of such third party software. The delivery of the Medic/MedE System and other Escrowed Materials to Medic in accordance with this Section 18(b)(i) shall be at no additional cost to Medic, except that if any such termination or expiration is due to (A) either (x) the nonrenewal or nonextension of the Initial Term or, if applicable, any Renewal Period or (y) a Termination Event as set forth in Section 18(a)(ix), Medic shall pay to MedE a one-time payment of ***** to be paid upon satisfactory delivery of the items to be delivered by MedE in accordance with this Section 18(b)(i), or (B) a Termination Event pursuant to Section 18(a)(viii), Medic shall be required to purchase the items to be delivered by MedE in accordance with this Section 18(b)(i) for a one-time payment of ***** to be paid upon satisfactory delivery of such items. (ii) MedE shall provide Medic with (x) reasonable support, training and assistance that is mutually agreed upon in effecting a smooth transition and assisting Medic personnel in the use of the Medic/MedE System, for a period not to exceed six (6) months, consisting of certain periods of support, training and assistance for free and thereafter at rates to be agreed and (y) cooperation in conversions to new providers for a period of six months on terms that are reasonable. - - (iii) Any residual transactions that remain to be processed by MedE upon the termination of this Agreement will be processed upon terms that will be mutually agreed to, but that shall not be less favorable than those that were 15 in effect immediately prior to the termination of this Agreement. (iv) MedE shall provide reasonable assistance at no additional cost to Medic in connection with effecting a smooth transition to Medic or a new provider. (c) Notwithstanding anything to the contrary contained herein, Sections 8(b), 9(a), 9(c), 10(a), 15, 16, 18(b), 18(c), 18(d), 19, 21, 23, 24, 25, 31, 32 and 33 shall survive any expiration or termination of this Agreement. (d) Notwithstanding anything to the contrary set forth herein, in the event of a termination solely due to a Termination Event set forth in clause (iv) or (vi) of Section 18(a), (1) Medic shall have no entitlement to possess or use the Medic/MedE System for any purpose whatsoever, (2) Medic shall promptly return to MedE and/or delete all elements of the Medic/MedE System in its possession or control, and (3) Medic shall not be entitled to any of the benefits set forth in Section 18(b) hereof. Section 19. Indemnification. (a) MedE shall indemnify, defend and hold harmless, and shall pay and reimburse, Medic, Medic Subscribers and its and their respective employees, officers, directors, representatives, customers and agents for any and all suits, proceedings, claims, actions, judgments, settlements, losses, damages, liabilities, debts, costs and expenses (including attorneys' fees and disbursements) resulting from or arising out of (i) any alleged or actual infringement of or other conflict of the Medic/MedE System with any third party's intellectual property, proprietary or other rights, (ii) any breach of any representation and warranty contained in Section 15(b)(iii), or (iii) any breach of any other representation or warranty or any covenant or other obligation of MedE hereunder, provided, however, that MedE's indemnification obligation hereunder shall continue during the Term and thereafter (x) in the case of the foregoing Section 19(a)(iii), for one additional year following any expiration or termination of the Term and (y) in the case of the foregoing Section 19(a)(i) or Section 19(a)(ii), for five additional years following any expiration or termination of the Term. (b) Except as provided in Section 19(a), Medic shall indemnify, defend and hold harmless, and shall pay and reimburse, MedE and its respective employees, officers, directors, representatives, customers and agents for any and all suits, proceedings, claims, actions, judgments, settlements, losses, damages, liabilities, debts, costs and expenses (including attorneys' fees and disbursements) resulting from or arising out of (i) any claim by any Medic Subscriber relating to Medic's performance of its obligations to any Medic Subscriber or (ii) any breach of any representation, warranty, 16 covenant or other obligation of Medic hereunder. Section 20. Exclusivity. (a) Scope of Exclusivity. During the Term, subject to Section 20(b) and 20(c), MedE will be the exclusive EDI processor for Medic in respect of claims and transactions that can be processed by the MedE Services, including, without limitation, in respect of any Payors which have been added and integrated into the MedE Services (i.e., a Payor with which MedE has established a Payor Agreement and EDI link) and to which Medic shall submit any and all claims and transactions of Medic Subscribers covered by such Payor for processing by the MedE Services. (b) Medic and MedE Obligations. ***** (c) Certain Exceptions to Exclusvity. Notwithstanding anything to the contrary contained herein, the parties acknowledge that Medic shall not be bound by, or be deemed to have breached, any obligations of exclusivity or otherwise hereunder if: ***** Section 21. Limitation of Liability. (a) In no event shall either party be liable for indirect, special, or consequential damages (including loss of profits or damage to business reputation), even if such party has been advised of the possibility of such damages, except as specifically provided in Section 4 and 7(c). (b) During the Initial Term, such penalties and damages payable pursuant to Sections 4 and 7(c) shall not exceed ***** in the aggregate. No such limit on the amount of damages and penalties payable during any Renewal Period shall apply unless mutually agreed upon by the parties. (c) Notwithstanding anything to the contrary contained herein, each party's total cumulative liability to the other party under this Agreement shall be limited to ***** and each party releases the other party from any and all obligations, liability, claims or demands in excess of such limitation. Section 22. Compliance with Laws. Each of Medic and MedE agrees that, with respect to its respective performance hereunder, it shall comply with any and all applicable laws and regulations (including without limitation any confidentiality requirements established by the Health Care Financing Administration and any state health care authorities). Section 23. Confidentiality. (a) Each party shall, and shall cause their respective affiliates and any of its and their respective officers, consultants, principals, agents, employees and directors to, use all reasonable efforts to (a) protect the other party's confidential information and (b) not disclose, nor permit unauthorized access to, the other party's confidential information, without the prior written consent of such other party. 17 (b) In the event that either party (the "Disclosing Party") is required under applicable law to disclose any confidential information of the other party (the Non-Disclosing Party"), including in connection with any filings to be made with the Securities Exchange Commission pursuant to the U.S. Securities Act of 1933, as amended, or the U.S. Securities Exchange Act of 1934 as amended, such Disclosing Party shall give the Non-Disclosing Party prompt written notice of such requirement so that the Non- Disclosing Party may seek an appropriate confidential treatment or protective order of such confidential information or portions thereof. If in the absence of a protective order the Disclosing Party is compelled to disclose such confidential information, such Disclosing Party may disclose such portion of such confidential information that in the opinion of the Disclosing Party's counsel such Disclosing Party is compelled to disclose, without liability under this Agreement, provided, however, that such Disclosing Party shall give such Non-Disclosing Party written notice of the confidential information to be disclosed as far in advance of its disclosure as is practicable and shall use reasonable efforts to obtain assurances that confidential treatment, if available, will be accorded to such confidential information. (c) The parties acknowledge that the term "confidential information" as used herein will include the terms of this Agreement (including any Schedules hereto) and the Medic/MedE System, the Medic Data and Medic Database, and all specifications, manuals, other documentation and materials, and all improvements, corrections and modifications related thereto. (d) The obligations of each party hereto under this Section 23 shall not apply to any information that: (i) was known to such party prior to the disclosure by the other party; (ii) is or becomes generally available to the public (other than by a breach of this Agreement); or (iii) otherwise becomes available on a non-confidential basis by a third party who is not under an obligation of confidence to either party hereto. Section 24. Maintenance of Records; Audit. (a) Each of Medic and MedE agrees that it shall maintain a copy of this Agreement and any books, documents, records and other data of such party as may be required to be maintained by applicable law, for such periods as such laws may require. (b) During the Term and for three (3) years thereafter, MedE shall maintain on its premises all usual and proper records and books of account and all usual and proper entries to substantiate the number of claims and transactions processed in connection with the MedE Services. In order to verify statements issued by MedE and MedE's compliance with the terms of this Agreement, Medic may audit, or cause an audit to be made of, MedE's books and records. Any audit 18 shall be conducted during regular business hours at MedE's facilities upon five (5) days' prior written notice. Any audit shall be conducted by Medic or an independent certified public accountant selected by Medic (other than on a contingent fee basis), provided that, if Medic elects to use an independent certified public accountant, such accountant shall be reasonably acceptable to MedE. MedE agrees to provide Medic or its designated auditors, as the case may be, access to all relevant records and facilities of MedE, and Medic agrees to take such actions as are reasonable to minimize any disruption to MedE's business. Prompt adjustment shall be made to compensate for any errors or omissions disclosed by such audit. Any such audit shall be paid for by Medic unless material discrepancies are disclosed. "Material" shall mean at least 10% (in Medic's favor) of the amount that was reported. If material discrepancies are disclosed, MedE agrees to pay Medic for the reasonable costs associated with the audit. In no event shall audits be made more frequently than semi-annually unless the immediately preceding audit disclosed a material discrepancy. Section 25. Non-Solicitation. (a) During the Term and for a period of one (1) year following the expiration or termination of the Term, neither MedE nor any of its affiliates, nor any of its or their employees, officers or directors, will, directly or indirectly, solicit or endeavor to entice away from Medic or any of its affiliates or otherwise intentionally interfere with Medic's relationship with, any person or entity who or which (i) is at the time employed by or otherwise engaged to perform services (other than clerical or routine administrative services) for Medic or any of its affiliates or (ii) is, or has been within the two-year period ending on the date of such expiration or termination, a Medic Subscriber or other customer or client of Medic or any of its affiliates. (b) During the Term and for a period of one (1) year following the expiration or termination of the Term, neither Medic nor any of its affiliates, nor any of its or their employees, officers or directors, will, directly or indirectly, solicit or endeavor to entice away from MedE or any of its affiliates or otherwise intentionally interfere with Medic's relationship with, any person or entity who or which (i) is at the time employed by or otherwise engaged to perform services (other than clerical or routine administrative services) for MedE or any of its affiliates or (ii) is, or has been within the two-year period ending on the date of such expiration or termination, a customer or client of MedE or any of its affiliates. Section 26. Force Majeure. Neither Medic nor MedE shall be held liable for failure to fulfill its respective obligations hereunder if such failure is caused by strikes, acts of God, flood, extreme weather, fire, or other natural calamity, or similar causes beyond the control of such party (each a "Force Majeure Event"). Notwithstanding the 19 foregoing, a Force Majeure Event will not excuse MedE from performance of its obligations hereunder if and to the extent a Disaster Recovery System (as provided in Section 14) would have mitigated any such failure on the part of MedE to perform such obligations. During the pendency of a Force Majeure Event, each of the parties shall take all reasonable steps to furnish the services required hereunder by other means, and, in any event, shall, upon termination of such Force Majeure Event, forthwith resume obligations under this Agreement. Section 27. Relationship of Parties. Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment arrangement between the parties hereto, nor shall either party have the right, power or authority to create any obligation or duty, expressed or implied, on behalf of the other party hereto. Section 28. Assignment. Notwithstanding anything to the contrary contained in this Agreement, each party hereto may assign, or provide the benefit of, this Agreement or any rights hereunder to any parent, subsidiary, affiliate or successor in interest (including a successor in interest to substantially all the assets of such party). Notwithstanding anything to the contrary contained in this Agreement, Medic may subcontract or sublicense any rights granted to it under this Agreement to any third party person or entity for use for the benefit of Medic or any of its affiliates (such as in an outsourcing arrangement), except any third party person or entity who is a direct competitor of MedE unless MedE gives its prior written consent (which consent shall not be unreasonably withheld), provided, however, that all obligations for performance under this Agreement shall remain with Medic following such subcontract or sublicense. Except as provided in the foregoing, this Agreement may not be assigned by either party without the other party's prior written consent, which consent shall not be unreasonably withheld, and any attempted assignment without such consent shall be null and void. Section 29. No Waiver. No failure on the part of either party to exercise and no delay in exercising any right or remedy hereunder shall operate as a waiver thereof or modify the terms of this Agreement. The exercise of any one remedy shall not be deemed to waive or preclude the exercise of any other remedy. Section 30. Entire Agreement, Amendments. This Agreement, including all the Schedules hereto, constitutes the entire agreement, understanding, and representations, express or implied, between MedE and Medic regarding the subject matter hereof and supersedes all prior communications between the parties including all oral or written proposals. No representation, warranty, promise, inducement, or statement of intention has been made by either party which is not embodied in this Agreement, and 20 neither MedE, on the one hand, nor Medic, on the other hand, shall be bound by, or be liable for, any alleged representation, warranty, promise, inducement, or statement of intention not embodied herein. Any amendments to this Agreement must be in writing signed by both parties hereto. Section 31. Severability. In the event that any provision hereof is found to be invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms. It is expressly understood and agreed that each provision of this Agreement that provides for a disclaimer of warranties, limitation on liability, or exclusion of damages is intended by the parties to be severable and independent of any other provision and to be enforced as such. Section 32. Applicable Law; Dispute Resolution. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of law principles. (b) (i) Any dispute, controversy or claim arising out of, relating to, or in connection with, this Agreement or any breach, termination or validity thereof shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect at the time of the arbitration, except as they may be modified herein or by mutual agreement of the parties. The seat of the arbitration shall be New York, and it shall be conducted in the English language. (ii) The arbitration shall be conducted by three arbitrators. The party initiating arbitration ("the Claimant") shall appoint its arbitrator in its request for arbitration (the "Request"). The other party ("the Respondent") shall appoint its arbitrator within thirty (30) days of receipt of the Request and shall notify the Claimant of such appointment in writing. If the Respondent fails to appoint an arbitrator within such 30-day period, the arbitrator named in the Request shall decide the controversy or claim as a sole arbitrator. Otherwise, the two arbitrators appointed by the parties shall appoint a third arbitrator within thirty (30) days after the Respondent has notified Claimant of the appointment of the Respondent's arbitrator. When the arbitrators appointed by the Claimant and Respondent have appointed a third arbitrator and the third arbitrator has accepted the appointment, the two arbitrators shall promptly notify the parties of the appointment of the third arbitrator. If the two arbitrators appointed by the parties fail or are unable so to appoint a third arbitrator or so to notify the parties, then the appointment of the third arbitrator shall be made by President of the American Arbitration Association 21 which shall promptly notify the parties of the appointment of the third arbitrator. The third arbitrator shall act as Chairman of the panel. (iii) The arbitral award shall be in writing and shall be final and binding on the parties. The award may include an award of costs, including reasonable attorneys' fees and disbursements. Judgment upon the award may be entered by any court having jurisdiction thereof or having jurisdiction over the parties or their assets. This Section 32 shall in no way affect the right of either party hereto to seek interim relief in any court of competent jurisdiction, and a request for such interim relief shall not be deemed incompatible with, or a waiver of, the agreement to arbitrate contained herein. Section 33. Notices. Notices required to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, transmitted by confirmed fax, or sent by a nationally recognized overnight courier service, or by registered or certified mail, postage prepaid, as follows: If to MedE, send to: MedE America Corporation 90 Merrick Avenue, Suite 501 East Meadow, NY 11554 Attn: David Goldwin, Esq. Phone (516) 542-4500 ext. 108 Fax: (516) 542-4508 If to Medic, send to: Medic Computer Systems, Inc. 8601 Six Forks Road, Suite 300 Raleigh, North Carolina 27615 Tel: (919) 847-8102 Fax: (919) 847-7110 Attention: with a copy to: Misys plc Burleigh House Chapel Oak 22 Salford Priors 23 Evesham, England WORCS WR11 5SH Tel: 011 44 138 687-1373 Fax: 011 44 138-687-1045 Attention: Ross K. Graham or to such other address as either party shall have designated by notice to the other. Section 34. Execution in Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 23 IN WITNESS WHEREOF, MedE and Medic have duly executed and delivered this Agreement as of the date first above written. MEDIC COMPUTER SYSTEMS, INC. By: ------------------------------- Name: Title: MEDE AMERICA CORPORATION By: ------------------------------- Name: Title: 24 EXHIBIT A RECOGNITION AND NONDISTURBANCE AGREEMENT RECOGNITION AND NONDISTURBANCE AGREEMENT (the "Agreement"), dated as of __________by and among MedE Corporation, a Delaware corporation ("MedE"), Medic Computer Systems, Inc., a North Carolina corporation ("Medic") and [PAYOR], a ____________corporation ("Payor"). BACKGROUND WHEREAS, MedE and Payor are parties to the [Payor Agreement], dated as of [____], (the "Payor Agreement"); WHEREAS, MedE and Medic are parties to the Transaction Processing and Development Agreement, dated as of [July _, 1998] (the "Transaction Agreement"), whereby MedE has agreed to process, via electronic data interchange ("EDI"), claims or other transactions of Medic's subscribers and customers (such services, the "MedE Services"); and WHEREAS, the parties hereto desire to assure Medic of its ability to continue submitting claims to Payor, upon the terms and conditions substantially similar to the Payor Agreement, irrespective of termination of the MedE Services or Medic's arrangement with MedE; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: Section 1. Recognition and Nondisturbance. (a) Medic shall immediately notify Payor in writing upon the occurrence of any Termination Event (as defined below). (b) Upon occurrence of any Termination Event: (i) The Payor Agreement will continue as a direct agreement between the Payor and Medic upon the terms and conditions of the Payor Agreement, but only with respect to the claims and transactions of Medic subscribers and customers being processed with such Payor, and with such changes as Payor and Medic may thereafter mutually agree in writing are appropriate under the circumstances. (ii) Medic will perform all of the obligations of MedE under the Payor Agreement from and after the date of such Termination Event, but Medic shall have no liability to the Payor for acts or omissions of MedE on, prior to or after the date of such Termination Event; (iii) the Payor acknowledges that Payor shall have to cooperate with Medic to establish an EDI electronic link between Medic's systems and the Payor's system as promptly as commercially practicable in accordance with and as contemplated by the terms of the Payor Agreement; and (iv) Payor will (i) not disturb the rights granted to Medic to process claims and transactions of Medic subscribers and customers via an EDI link with the Payor, (ii) grant to Medic rights and benefits substantially similar to those granted to MedE under its Payor Agreement, including the rate of commissions paid by Payor in connection with processing claims and transactions via EDI and (iii) perform Payor's obligations under the Payor Agreement from and after the date of such Termination Event. (c) The provisions of this Agreement shall be effective and self-operative as of the date of such Termination Event without execution of any further instrument on the part of MedE, Payor or Medic. (d) Upon the reasonable written request of either Payor or Medic, Payor, Medic and MedE shall execute and deliver promptly to the requesting party such other documents or instruments (in recordable form, if so requested) reasonably necessary to effectuate or evidence the intent of the parties hereunder. (e) For purposes of this Agreement, "Termination Event" shall mean the occurrence of any of the following events: (1) MedE becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, becomes subject to any proceeding under any bankruptcy or insolvency law, whether domestic or foreign, or has wound up or liquidated, voluntary or otherwise; or (2) the receipt by Medic of any portion of the Medic/MedE System (as the same is defined and referred to in the Transaction Processing Agreement) to be received by it, including any of the items deposited by MedE into escrow in accordance with the Transaction Agreement, whether such termination is due to notice of termination by Medic or MedE or otherwise. 2 Section 2. Consent of Payor. Payor consents to, and shall give Medic the benefit of, Medic's assumption and performance of terms and obligations substantially similar to the duties of MedE under the Payor Agreement. Section 3. Assignment. Notwithstanding anything to the contrary contained in this Agreement , each party hereto may assign this Agreement or any rights hereunder to any parent, subsidiary, affiliate or successor in interest (including a successor in interest to substantially all the assets of such party). Notwithstanding anything to the contrary contained in this Agreement, Medic may subcontract or sublicense any rights granted to it under any Agreement to any third party person or entity for use for the benefit of Medic (such as in an outsourcing arrangement), provided, however, that all obligations for performance under this Agreement shall remain with Medic following such assignment. Except as provided in the foregoing, this Agreement may not be assigned by either party without the other party's prior written consent, which consent shall not be unreasonably withheld, and any attempted assignment without such consent shall be null and void. Section 4. No Waiver. No failure on the part of either party to exercise and no delay in exercising any right or remedy hereunder shall operate as a waiver thereof or modify the terms of this Agreement. The exercise of any one remedy shall not be deemed to waive or preclude the exercise of any other remedy. Section 5. Entire Agreement, Amendments. This Agreement, together with the Payor Agreement, constitutes the entire agreement, understanding, and representations, express or implied, among the Payor, MedE and Medic regarding the subject matter hereof and supersedes all prior communications between the parties including all oral or written proposals. No representation, warranty, promise, inducement, or statement of intention has been made by either party which is not embodied in this Agreement, and neither MedE, on the one hand, nor Medic, on the other hand, shall be bound by, or be liable for, any alleged representation, warranty, promise, inducement, or statement of intention not embodied herein. Any amendments to this Agreement must be in writing signed by both parties hereto. Section 6. Severability. In the event that any provision hereof is found to be invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms. It is expressly understood and agreed that each provision of this Agreement that provides for a disclaimer of warranties, limitation on liability, or exclusion of damages is intended by the parties to be severable and independent of any other provision and to be enforced as such. 3 Section 7. Applicable Law; Dispute Resolution. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of law principles. Section 8. Notices. Notices required to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, transmitted by confirmed fax, or sent by a nationally recognized overnight courier service, or by registered or certified mail, postage prepaid, as follows: If to Payor, send to: If to MedE, send to: MedE America Corporation 90 Merrick Avenue, Suite 501 East Meadow, NY 11554 Attn: David Goldwin, Esq. Phone (516) 542-4500 ext. 108 Fax: (516) 542-4508 If to Medic, send to: Medic Computer Systems, Inc. 8601 Six Forks Road, Suite 300 Raleigh, North Carolina 27615 Tel: (919) 847-8102 Fax: (919) 847-7110 Attention: with a copy to: Misys plc Burleigh House Salford Priors Evesham, England WORCS WR11 5SH Tel: 011 44 138 687-1373 Fax: 011 44 138-687-1045 Attention: Ross K. Graham 4 or to such other address as either party shall have designated by notice to the other. Section 9. Execution in Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, each of MedE, Medic and the Payor have duly executed and delivered this Agreement as of the date first above written. [PAYOR] By: ----------------------------- Name: Title: MEDIC COMPUTER SYSTEMS, INC. By: ------------------------------ Name: Title: MEDE AMERICA CORPORATION By: ----------------------------- Name: Title: 6 Transaction Processing Agreement List of Schedules ----------------- Schedule 1 Medic/MedE System Schedule 2(a) Medic/MedE Transaction Processing Relationship Guidelines Schedule 2(b) Standard Data Format Schedule 3(a) Payor Schedule Schedule 3(b) Revenue Rates Schedule 4 Development Milestones Schedule 5(a) Development Specifications Schedule 5(b) Payor Implementation Guide Schedule 5(d) Medic/MedE System Performance and Scalability Criteria Schedule 7(a) Processing Milestones Schedule 7(c) Damages Relating to Processing Milestones Schedule 8(a) Payment Schedule Schedule 13(b) Customer Service Schedule 15(b)(iii) Third Party Software and Other Rights Schedule 16 Escrowed Materials
Schedule 1 Medic/MedE System The "Medic/MedE System" shall include, but not be limited to, (a) any and all electronic links established to Medic and to any Payors, including any software provided and licensed thereto, (b) hardware including but not limited to servers, equipment for receiving and transmitting data communications and any other hardware used by MedE to provide the MedE Services, (c) any and all documentation, third party software or other rights (whether incorporated as a component or used in connection with development of the Medic/MedE System), and (d) upon the occurrence of any Termination Event (other than a Termination Event declared by MedE under clauses (iv) or (vi) of Section 18(a)), the source code and other Escrowed Materials (as defined in Section 16). 2 Schedule 2(a) Medic/MedE Transaction Processing Relationship Guidelines - -- Medic will make multiple transmissions throughout the day - -- MedE will be able to receive claims 24 hours-a-day, 7 days-a-week, 365 days-a-year, except for scheduled maintenance and down times. - -- The cutoff for claims transmission will be ***** - -- MedE will provide dial backup of claims transmission. - -- MedE will provide daily control totals for incoming and outgoing claim transmission - -- MedE will forward to Medic any status or other messages from any Payor with respect to any claims or transactions of any Medic Subscriber. - -- Medic shall be responsible for implementing an enrollment process to enroll any Medic Subscribers with the Payors. - -- MedE will assign to each claim or transaction a tracking number. - -- MedE shall have the right to change the passwords used by Medic to access the Medic/MedE System every 90 days; provided, however, that MedE shall inform Medic in advance of any such password changes. - -- MedE will provide Medic with five (5) business days' prior written notice of all scheduled down time for maintenance and system upgrade, provided, however, that in the case of an emergency, MedE shall provide Medic with such notice as soon as is reasonably possible. 3 Schedule 2(b) Standard Data Format -------------------- The "Data Format" for communications for transactions between Medic and MedE will be Medic National Standard Format (NSF) for claims and Medic NSF remittance. 4 Schedule 3(a) Payor Schedule -------------- June 1998 list of commercial and governmental Payors as provided to MedE on or prior to the date hereof. 5 Schedule 3(b) Revenue Rates ------------- ***** 6 Schedule 4 Development Milestones ---------------------- - ***** - MedE shall provide Medic with development services to support the development and implementation of ***** . MedE and Medic shall mutually agree further on the schedule for such remittance development and implementation. 7 Schedule 5(a) Development Specifications -------------------------- - -- The Medic/MedE System shall have the capability to transmit transactions and claims processed by Medic via EDI to Payors, obtain a result set for each such transaction and/or claim, act on the result set and transmit the result set via EDI to Medic. - -- MedE will furnish a weekly status report to the Medic Project Manager, which report shall include the status of all active projects with respect to each Payor and each MedE developer. These reports will also include "Actual Project Status versus Goals," "Time Spent versus Allocated," and potential problem areas in the development of the Medic/MedE System. - -- Development cycle for establishing an electronic link with any Payor shall start with receipt of specifications, contact person information and signed Payor Agreement with such Payor. - -- Development does not include claim referral and eligibility. - -- On a monthly basis MedE will furnish to the Medic Project Manager a status report in respect of each MedE developer and any Payor then being linked, as well as forward looking plans for the next 90 days, claims and transaction volumes versus established goals, and projected claims and transaction volumes for the next 90 days. - -- Medic will supply test claims to MedE within an appropriate time frame after signing any Payor Agreement as the parties may mutually agree upon. 8 Schedule 5(b) Payor Implementation Guide -------------------------- See attached "Payer Implementation Guide" Commercial Claims - -- Each electronic link to a Payor shall be considered completed and tested only if it has tested in accordance with one of the following: ***** Government Claims - -- Each electronic link to a Payor shall be considered completed and tested only if it has either been: ***** 9 Payor Implementation Guide - - INITIAL PAYOR CONTACT 1. Obtain Contact Name and Numbers for EDI Testing, Production, Billing, and Provider Support 2. Order Claim, Communication, Report and Remittance Specifications 3. Obtain all Vendor and Provider Enrollment Forms with Instructions 4. Negotiate and agree upon a Payor Agreement 5. Agree upon procedures to establish link - - DEVELOPMENT 1. Fill out and submit Vendor Enrollment 2. Review specifications 3. Create Electronic Format and Map 4. Write initial Payor specific edits 5. Obtain or create test claims - - IN-HOUSE TESTING 1. Obtain test data 2. Run test data through Payor specific edits on MedE Claim 3. Run test data through electronic format and map 4. Validate output file 10 - - PAYOR TESTING 1. Set up communication (obtain modem number, submitter ID and login) 2. Transmit test claims to Payor (notify Payor of transaction) 3. Contact Payor for test results 4. Make corrections if errors are found 5. Send out a second test for claim validation (more detailed) 6. Contact Payor for test results from second file 7. Set up router for Electronic Reports (if available) - - LIVE CLIENT TEST 1. Obtain sample of live claims for client 2. Follow up on Provider Enrollment (must be completed before first live file is sent) 3. Set up Live Communication 4. Process and transmit claims to Payor 5. Pick up Electronic Reports 6. Route reports to Providers' directory for pick up with their next submission 7. Review reports on a daily basis, making changes when needed until the accept rate is ***** or above 11 - - REMITTANCE (IF REQUESTED) 1. Work with Provider and Payor to set up Electronic Remittance Advice 2. Follow up with details of the contract 3. Create Map to read input file then export the file based on the Providers' needs 4. If applicable, test with Payor and Provider 5. Pick up Electronic Remittance from Payor 6. Run through conversion map 7. Route to Provider 12 Payor Implementation Time Line - ------------------------------ ***** 13 Remittance Implementation Guide Implementation is per Payor - - Initial Provider Contact (2-3 Days) 1. Obtain Contact Name and Numbers for EDI Testing, Production Provider Support 2. Develop Report and Remittance Specifications with Provider - - Initial Payor Contact (this is done in cooperation with the claim processing development) 1. Obtain Contact Name and Numbers for EDI Testing, Production Provider Support 2. Obtain Report and Remittance Specifications from Payor 3. Negotiate and agree upon a Payor Agreement 4. Agree upon procedures to establish link - - Development ***** 14 - - In-house Testing ***** 1. Obtain test remittance 2. Validate test data format 3. Run test data through maps 4. Validate output file 5. Make changes as necessary - - Testing ***** (This time frame can vary depending on the medium used to obtain and deliver the remittance, i e. tape, electronic, etc., and the remittance cycle of the Payor) 1. Set up communication with Payor (this will be in place for all but new Payors) 2. Set up communication with Provider (this will be in place for most providers who submit claims) 3. Receive test remittance from Payor 4. Transmit remittance (in Provider format) to Provider 5. Contact Provider for test results 6. Make corrections per Provider requests - - Automate Process ***** 1. Write scripts to automate communication and processing 2. Activate automated process after testing phase is complete 15 Remittance Implementation Guide - - Initial Provider Contact - ***** - - Negotiate and agree upon a Payor Agreement - - Agree upon procedures to establish link - - Initial Payor Contact - ****** - - Development - ***** - - In-house Testing - ***** - - Live Testing - ongoing - - Automate Process - ***** Total development time is *****. 16 Schedule 5(d) Medic/MedE System Performance and Scalability Criteria ------------------------------------------------------ The Medic/MedE System shall meet the following standards of performance and scalability: (1) Claims submitted by Medic for processing by the MedE Services must be (i) processed within ***** of transmission of such claims, or (ii) if such claims are not processed within ***** of transmission, such claims must be processed ***** (2) The MedE system contains no limitations in Field Lengths, Counters, etc. that will negatively impact the ability to efficiently handle Medic's current and future volumes (including, without limitation, ***** . (3) Medic intends to exercise its right to query the Medic Database for analysis and reporting purposes on a regular basis. MedE warrants that the production environment will provide adequate response times to the reasonably necessary or desirable number of on-line queries without negatively impacting the transaction processing system in violation of (1) above. In the event that the transaction processing system does not complete its tasks within the allotted times set forth in (1) above, MedE agrees to enhance the environment to bring the transaction processing times into compliance. (4) Bandwidth provided by MedE to Medic must be sufficient to ensure that the communication links between Medic and MedE are not a constraining factor in the times required to process claims and other EDI transactions. 17 Schedule 7(a) Processing Milestones --------------------- Milestone Dates Processing Milestone - --------------- -------------------- ***** 18 Schedule 7(c) Damages Relating to Processing Milestones ----------------------------------------- Damages for failure to meet any Processing Milestone shall be the amount equal to ***** . 19 Schedule 8(a) Commission Payment Schedule --------------------------- MedE Payment Obligation - ----------------------- Medic and MedE agree to pay to Medic ***** Medic Payment Obligation - ------------------------ Medic shall pay to MedE ***** 20 Schedule 13(b) Customer Service ---------------- - - MedE will provide second-level telephone support to Medic between the hours of 7:00 a.m. to 6:00 p.m., Eastern standard time, and will provide an average call response time of no greater than 2 hours from their Help Desk. - - MedE will provide a dedicated person for Medic's questions and inquiries 21 Schedule 15(b)(iii) Third Party Software -------------------- The following is a list of third party software used in or in connection with the Medic/MedE System: Solaris Operating system Informix database license and software Mercator Data Mapping software Procomm Communications software NT Back Office 22 Schedule 16 Escrowed Materials ------------------ - - Appropriate product related information for all electronic links to Payors will be placed into escrow with an escrow agent designated by Medic within 30 days of closing. This will include but not be limited to: - Data Communications Source Code and Specifications - Business Logic - Data Element Mapping - End User Documentation - Technical Specifications and Documentation - - A backup copy of all MedE executable programs required to run the Medic/MedE System and operate the MedE Services successfully. - - All documentation required to effectively install, prepare, execute, and maintain the Medic/MedE System and operate the MedE Services. - - Escrowed Materials will be updated every 30 days until and including July 1, 1999. After July 1, 1999, Escrowed Materials will be updated every 60 days. 23 EX-10.10 9 EXHIBIT 10.10 [MEDE AMERICA LOGO] 1998 EMPLOYEE STOCK PURCHASE PLAN The following constitutes the provisions of the MEDE American Corporation 1998 Employee Stock Purchase Plan. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986 as amended. The provisions of the Plan accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986 as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean MEDE America Corporation, a Delaware corporation, and any Designated Subsidiary of the Company. (e) "Compensation" shall mean amounts received by an Employee during an Offering Period for personal services rendered and which are included as W-2 earnings. (f)"Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. (i) "Exercise Date" shall mean the last day of each Offering Period. (j) "Fair Market Value" shall mean, as of any date the value of Common Stock determined as follows: 1. If the Common Stock is listed on any established stock exchange or a national market system, including limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; 2. If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; 3. In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (k) "Offering Period" shall mean a period of approximately six (6) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after January 1, and July 1, and terminating on the last Trading Day in the period ending the following June 30 and December 31; provided, however, that the first Offering Period under the Plan is after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean the MEDE America Corporation 1998 Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (o) "Subsidiary" shall mean a corporation, domestic or foreign of which not less than 50% of the voting shares are held by the Company or a Subsidiary whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (p) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility (a) Any Employee who shall be employed by the Company on a given Enrollment Date and who has served at least six months with the Company or Subsidiary thereof and is at least 18 years of age. (b) Any provisions of the Plan to the contrary notwithstanding no Employee shall be granted an option under the Plan (i) to the extent that immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive offering Periods with a new Offering Period commencing on the first Trading Day on or after January 1 and July 1 or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof provided, however, that the first Offering Period under the Plan shall commence after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation (a) An eligible Employee may become a participant in the plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's Human Resources department prior to the applicable Enrollment Date. Newly eligible Employee's may enter the Offering Period by filing a subscription agreement within 30 days of their eligibility date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date (or, in the case of newly eligible Employees, the next payroll after Human Resources receives the participant's subscription agreement) and shall continue unless terminated by the participant as provided in Section 10 hereof. (a) At the time a participant files his or her subscription agreement he or she shall elect to have payroll deductions made on each pay day during the Offering Period between one percent (1%) and not exceeding ten percent (10%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions by completing or filing with the Company a new subscription agreement authorizing a change to be effective the first payroll period after the next Enrollment Date or after Human Resources receives the change, whichever is designated by the participant. A participant may make only one change to his or her contribution percentage during an Offering Period. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b) or the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of shares (including fractional shares) subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. A book balance account will be established for each participant at a financial institution approved by the Board. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, statements will be generated and mailed to all participants evidencing ownership. Participants will have the option of receiving a physical certificate, selling a portion or all shares held in the account or leaving the shares in their account. 10. Withdrawal. A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit A to the Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant during the payroll period after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, the participant will not be allowed to resume payroll deductions for a period of at least six (6) months following the end of the Offering Period in which he or she withdrew their contributions. The participant must submit a new subscription agreement when they are eligible to resume payroll deductions. 11. Termination of Employment. Upon a participant's ceasing to be an Employee for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or in the case of his or her death to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 300,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof. If on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds to number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Dividends. Any dividends declared by the Company in connection with this Plan will be reinvested in the participant's account and shall be used to purchase shares. 15. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 16. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participants account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall delivery such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may delivery such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company my designate. 17. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 18. Use of Funds. All payroll deductions and any interest earned on payroll deductions that are received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 19. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price and the number of shares purchased. 20. Adjustments. Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase pr Offering Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company: provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 21. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interest of the Company and its shareholders. Except as provided in Section 19 hereof, no amendment may make any changes in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule, the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 22. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 23. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic and foreign, including without limitation, the Securities Act or 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the period exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. EXHIBIT A MEDE AMERICA EMPLOYEE STOCK PURCHASE PLAN ENROLLMENT/CHANGE FORM EMPLOYEE NAME: ------------------------------------------ (Please Print) SOCIAL SECURITY: ---------------- LOCATION: --------------------- - -------------------------------------------------------------------------------- COMPLETE REASONS(S) FOR ENROLLMENT/CHANGE: - ---------- New Enrollment - ---------- Stop Deductions (This will terminate your participation in the Plan for this Offering Period and the next Offering Period. Your existing balance will be refunded to you as soon as administratively possible.) - ---------- Change: Contribution Rate ---------- Beneficiary ---------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAYROLL DEDUCTION AUTHORIZATION I authorized deductions from each payroll check of the following percentage of my total compensation. Contribution Rate: ---------------- (1-10%, whole increments) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BENEFICIARY - ------------------------------- ------------------ ------------------ Name Social Security # Relationship - -------------------------------------------------------------------------------- Address - ---------------------------------------------------- Signature of Spouse (If beneficiary other than spouse) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By signing below, I represent that I have received and reviewed the Company's Prospectus issued in connection with my participation in the MEDE America 1998 Employee Stock Purchase Plan. I further represent that I have carefully reviewed and understand the terms of the Plan and such other matters as I found necessary to understand the mechanics and risks of participation in the Plan. - ------------------------------------------ ------------ Employee Signature Date - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (For Corporate Benefits Department Use Only) Approved By: ---------------------------------------------- Date: ---------------- Deposit Processing Code - -------------------------------------------------------------------------------- Fax form to confidential fax number: 330-963-3713 EX-23.1 10 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. 2 to Registration Statement No. 333-55977 of MEDE America Corporation on Form S-1 of our report dated May 8, 1998 (July 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 22, 1998 EX-23.2 11 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT MEDE America Corporation East Meadow, New York We consent to the use in Amendment No. 2 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 22, 1998 -----END PRIVACY-ENHANCED MESSAGE-----