-----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, P84+k2T6IR3UwEF3p9iUEHfDby3GUxShtonZ1M7CrJ9SHT8Tsr/+XE3TwQ3gv1gb 3YM37EntgfTH6Emw8uA/Nw== 0001005150-98-001230.txt : 19981228 0001005150-98-001230.hdr.sgml : 19981228 ACCESSION NUMBER: 0001005150-98-001230 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19981223 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: 98774546 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 DECEMBER 23, 1998 REGISTRATION NO. 333-55977 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- MEDE AMERICA CORPORATION (Exact name of registrant as specified in its charter) 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 DECEMBER 23, 1998 PROSPECTUS 4,166,667 SHARES [GRAPHIC OMITTED] MEDE AMERICA CORPORATION COMMON STOCK ------------------ All of the shares of Common Stock offered hereby (the "Offering") are being sold by MEDE AMERICA Corporation ("MEDE AMERICA" or the "Company"). Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company's Common Stock has been approved for listing on the Nasdaq National Market under the symbol "MEDE." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS(1) COMPANY(2) Per Share ......... $ $ $ Total(3) .......... $ $ $
- -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses estimated at $1,700,000, payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 625,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and the Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered and accepted by them, and subject to their right to reject orders in whole or in part. It is expected that certificates for such shares of Common Stock will be made available for delivery at the offices of Salomon Smith Barney Inc., 333 West 34th Street, New York, New York 10001, on or about , 1999. ------------------ SALOMON SMITH BARNEY 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. [DIAGRAM OF MEDE AMERICA CORPORATION'S TECHNOLOGY, PRODUCTS AND SERVICES] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY OVER-ALLOTMENT, STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." MEDE AMERICA is a trademark of the Company. All other trade names, trademarks or service marks appearing in this Prospectus are the property of their respective owners and are not the property of the Company. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. THE COMPANY MEDE AMERICA is a leading provider of electronic data interchange ("EDI") products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. As of November 30, 1998, the Company processed over 900,000 transactions per day for over 65,000 providers located in all 50 states. Since its formation in March 1995, the Company has expanded both through internal growth and the acquisition of six healthcare EDI processing businesses. As part of its strategy of providing an integrated suite of EDI solutions to a broad range of healthcare providers, the Company has focused on acquisitions that provide entry into new markets or expand the Company's product suite. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or restructured various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. Innovations over the past decade in computer and telecommunications technologies have resulted in the development of EDI systems to electronically process and transmit information among the various participants in the healthcare industry. These systems were designed to replace the paper-based recording and transmission of information, enabling greater processing speed, reduced processing costs and more accurate data interchange. According to Health Data Directory, in 1998 over 4.4 billion electronic and paper claims will be paid in all sectors of the healthcare services market. From 1994 to 1998 (estimated), the proportion of total healthcare claims that were electronically processed increased from 47% to approximately 62%. During such period the number of claims processed electronically increased at an average rate of 14% per year. The Company expects the electronic processing of healthcare claims to continue to increase as a result of increased reliance on electronic commerce and increased emphasis on cost containment in the healthcare industry. The penetration of electronic processing varies significantly among the different markets within the healthcare industry. Health Data Directory estimates that in 1998 electronic processing will account for approximately 16% of total dental claims, 40% of total physician medical claims, 84% of total hospital medical claims and 88% of total pharmacy claims. In addition to the remaining opportunity to convert paper-based claims to electronic processing, the Company believes that there is significant market potential for EDI processing in the non-claim area, including eligibility verification, remittance transactions and other data exchange transactions such as claims tracking, referrals and physician scripting. The Company believes that EDI penetration in these non-claim transaction categories is low, and as a result, the EDI transaction growth in these areas will exceed that of the EDI claims processing market. The Company believes that it has several competitive strengths which will enable it to capitalize on the significant growth opportunities in the healthcare EDI marketplace. 3 COMPREHENSIVE SUITE OF EDI PRODUCTS AND SERVICES. The Company has followed a strategy of developing or acquiring EDI products and services that may be offered to a broad range of healthcare providers. The Company's products incorporate open architecture designs and what the Company regards as "best of breed" technology and may be purchased as modular additions to the client's existing data storage and retrieval system, or as part of a comprehensive EDI processing system. The Company believes it is well positioned to take advantage of the expected growth of EDI in areas such as eligibility, managed care transactions and physician scripting. BROAD AND DIVERSIFIED CLIENT BASE. The Company's client base is highly diversified, consisting of approximately 42,000 pharmacies, 8,000 dental offices, 1,100 hospitals and clinics and 14,000 physicians. The Company's broad and diversified client base provides it with transaction-based revenues that tend to be recurring and positions it to capitalize on the rapid consolidation taking place within the healthcare industry. DIRECT RELATIONSHIPS WITH PROVIDERS AND PAYORS. The range of MEDE AMERICA's services and the extent of its connectivity with payors provides the opportunity to achieve deeper penetration of its provider base, while at the same time offering more complete solutions to new clients. MEDE AMERICA believes that it is strongly positioned to offer reliable, one-stop shopping to providers for all their EDI needs. FOCUS ON CLIENT SERVICE. The Company has focused on implementing a wide range of client service and support functions including the use of automated client service tracking software, expanded client help desk and account executive support functions and extensive client feedback mechanisms. The Company believes that its high quality client service enhances the satisfaction of its clients and generates new revenue opportunities in the form of expanded transaction volume and sales of new products and services. LEADING TECHNOLOGY AND PRODUCT PLATFORMS. Over the past two years, MEDE AMERICA has invested significant capital in new hardware and software systems to increase its transaction processing capacity. As a result of such technology investments, MEDE AMERICA believes it is able to provide high quality service to its clients in the form of high network availability, batch transaction reliability and high rates of payor claims acceptance. Through its various processing platforms, MEDE AMERICA can provide Internet access to its clients for the transmission and receipt of EDI transactions. MEDE AMERICA also believes that its technology platform, which is operating at approximately one-third of its total capacity, provides the Company with substantial operating leverage. EXPERIENCED MANAGEMENT TEAM. Each member of the Company's senior management team has over 15 years of experience in the information technology and transaction processing industries and has extensive background in working with emerging companies in the information processing industry. The Company believes that the range and depth of its senior management team position it to address the evolving requirements of its clients and to manage the growth required to meet its strategic goals. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. To achieve this objective, the Company is pursuing a growth strategy comprised of the following elements: provide a comprehensive suite of EDI solutions; further penetrate its existing client base through cross-selling of emerging products and services; develop new EDI solutions to meet the evolving electronic transaction processing needs of its clients; provide multiple communications technologies for healthcare providers, including direct lines, common carrier dial-ups, commercial data networks and the Internet; continue to utilize strategic alliances with key players in the healthcare industry; and pursue strategic acquisitions in order to expand the Company's product offerings, enter new markets and capitalize on the Company's operating leverage. The Company's executive offices are located at 90 Merrick Avenue, Suite 501, East Meadow, New York 11554, and its telephone number is (516) 542-4500. 4 THE OFFERING COMMON STOCK OFFERED BY THE COMPANY.. 4,166,667 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING............................ 12,596,374 shares (1)(2) USE OF PROCEEDS.................. To retire all outstanding subordinated indebtedness and accrued interest thereon, and a portion of outstanding bank indebtedness. PROPOSED NASDAQ NATIONAL MARKET SYMBOL..................... MEDE - ---------- (1) Reflects the proposed Recapitalization (as defined herein). (2) Excludes (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic Warrant (as defined herein), (ii) 84,050 shares of Common Stock issuable pursuant to the 1998 Guaranty Warrants (as defined herein) and (iii) 482,823 shares of Common Stock issuable upon the exercise of stock options outstanding as of November 30, 1998 under the MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Stock Plan"), of which 228,917 were exercisable at such date. The weighted average exercise price of all outstanding stock options is $4.84 per share. See "Recent Developments" and "Management -Employee Benefit Plans." RECENT DEVELOPMENTS On July 17, 1998, the Company entered into a Transaction Processing Agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, medical service organizations ("MSOs") and physician practice management companies ("PPMs"). Under the Processing Agreement, the Company will undertake certain software development obligations, and from July 1, 1999 it will become the exclusive processor (subject to certain exceptions) of medical reimbursement claims for Medic's subscribers submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to revenues to be paid by payors (in respect of which a commission is payable to Medic) as well as fees to be paid by Medic. Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998 the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock offered to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The difference between the two alternative prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The Medic Warrant vests over a two year period and may be exercised up to five years after the date of grant. The Medic Warrant contains customary weighted average antidilution provisions. The Company and certain of its principal stockholders have agreed that, following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. On October 30, 1998, the Company acquired all the outstanding shares of capital stock of Healthcare Interchange, Inc. ("HII"), a St. Louis, Missouri based provider of EDI transaction processing services to hospitals and physician groups in Missouri, Kansas and Illinois. Prior to the acquisition, HII was a subsidiary of RightCHOICE Managed Care, Inc. ("RightCHOICE") and General American Life Insurance Company ("General American"). The Company acquired HII for a total cash payment of approximately $11.7 million, including transaction expenses. 5 The HII acquisition was financed pursuant to an amendment to the Company's Credit Agreement, dated as of December 18, 1995, as amended (the "Credit Facility") increasing the facility to $36,000,000. To induce investment funds affiliated with Welsh, Carson, Anderson & Stowe, a private investment firm ("WCAS"), and William Blair Capital Partners L.L.C. ("WBCP") to guarantee this increases, on October 7, 1998 the Company granted to such funds warrants (the"1998 Guaranty Warrants") to purchase an aggregate 84,050 shares of the Company's Common Stock, at a per share exercise price determined in the same manner as the Medic Warrant. The 1998 Warrants are immediately exercisable and may be exercised up to five years after the date of grant. RISK FACTORS Prospective purchasers should consider all of the information contained in this Prospectus before making an investment in shares of Common Stock. In particular, prospective purchasers should consider the factors set forth herein under "Risk Factors." 6 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED JUNE 30, ----------------------------------------------------------------- ACTUAL ----------------------------------------------------------------- 1995 1996 1997(3) 1998(3) ---------------- ---------------- ------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(4) .............................. $ 16,246 $ 31,768 $ 35,279 $ 42,290 Operating expenses: Operations .............................. 9,753 19,174 16,817 16,958 Sales, marketing and client services 3,615 7,064 8,769 10,765 Research and development ................ 2,051 2,132 3,278 3,941 General and administrative .............. 3,119 6,059 5,263 4,865 Depreciation and amortization ........... 2,995 5,176 5,460 7,143 Write-down of intangible assets ......... 8,191 (5) 9,965 (6) -- -- Acquired in-process research and development(7) ........................ -- -- 1,556 -- Other charges(8) ........................ 2,864 538 2,301 -- --------- --------- --------- -------- Total operating expenses ................. 32,588 50,108 43,444 43,672 --------- --------- --------- -------- Income (loss) from operations ............ (16,342) (18,340) (8,165) (1,382) Other (income) expense ................... -- 313 (893) (12) Interest expense (income), net ........... 189 584 1,504 3,623 --------- --------- --------- -------- Loss before provision for income taxes ................................... (16,531) (19,237) (8,776) (4,993) Provision for income taxes ............... 70 93 57 42 --------- --------- --------- -------- Net loss ................................. (16,601) (19,330) (8,833) (5,035) Preferred stock dividends ................ (27) (2,400) (2,400) (2,400) --------- --------- --------- -------- Net loss applicable to common stockholders ............................ $(16,628) $(21,730) $ (11,233) $ (7,435) ========= ========= ========= ======== Basic and diluted net loss per com- mon share ............................... $ (3.17) $ (4.14) $ (2.07) $ (1.31)(9) Weighted average common shares outstanding - Basic and diluted ......... 5,238 5,245 5,425 5,679 THREE MONTHS YEAR ENDED JUNE 30, ENDED SEPTEMBER 30, -------------- ------------------------------------------- PRO FORMA(1) ACTUAL PRO FORMA(2) -------------- ----------------------------- ------------- 1998(3) 1997(3) 1998 1998 -------------- ----------- ----------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(4) .............................. $ 48,880 $ 9,241 $ 12,006 $13,318 Operating expenses: Operations .............................. 18,882 4,285 4,793 5,272 Sales, marketing and client services 12,376 2,385 2,930 3,208 Research and development ................ 3,984 806 1,106 1,106 General and administrative .............. 6,027 1,061 1,263 1,511 Depreciation and amortization ........... 8,645 1,698 1,894 2,177 Write-down of intangible assets ......... -- -- -- -- Acquired in-process research and development(7) ........................ -- -- -- -- Other charges(8) ........................ -- -- -- -- -------- -------- -------- ------- Total operating expenses ................. 49,914 10,235 11,986 13,274 -------- -------- -------- ------- Income (loss) from operations ............ (1,034) (994) 20 44 Other (income) expense ................... (12) -- -- -- Interest expense (income), net ........... 639 655 1,089 214 -------- -------- -------- ------- Loss before provision for income taxes ................................... (1,661) (1,649) (1,069) (170) Provision for income taxes ............... 42 12 16 16 -------- -------- -------- ------- Net loss ................................. (1,703) (1,661) (1,085) (186) Preferred stock dividends ................ -- (600) (600) -- -------- -------- -------- ------- Net loss applicable to common stockholders ............................ $ (1,703) $ (2,261) $ (1,685) $ (186) ======== ======== ======== ======= Basic and diluted net loss per com- mon share ............................... $ (0.14) $ (0.40) $ (0.30)(9) $ (0.02) Weighted average common shares outstanding - Basic and diluted ......... 12,308 5,674 5,685 12,314
AS OF SEPTEMBER 30, 1998 ------------------------------- PRO FORMA, ACTUAL AS ADJUSTED(10) ------------ ---------------- BALANCE SHEET DATA: Working capital ................................... $ 2,232 $ 3,295 Total assets ...................................... 64,726 76,392 Long-term debt, including current portion ......... 42,627 11,715 Redeemable cumulative preferred stock ............. 31,823 -- Stockholders' equity (deficit) .................... (23,750) 51,328
YEAR ENDED JUNE 30, ---------------------------------------------------- ACTUAL ---------------------------------------------------- 1995 1996 1997(3) 1998(3) ------------- ------------- ----------- ------------ (IN THOUSANDS, EXCEPT PER TRANSACTION DATA) OTHER DATA: EBITDA(11) ............................... $ (13,347) $ (13,164) $ (2,705) $ 5,761 Adjusted EBITDA(11) ...................... (2,292) (2,052) 2,211 5,761 Cash flows from operating activities (3,561) (1,653) (4,020) (2,500) Cash flows from investing activities. (22,074) (4,919) (12,221) (12,104) Cash flows from financing activities. 33,434 657 15,521 15,635 Transactions processed(12) Pharmacy ................................ -- 107,032 126,211 188,114 Medical ................................. -- 15,687 23,075 31,564 Dental .................................. -- 6,021 12,188 14,681 --------- --------- --------- ---------- Total transactions processed .......... -- 128,740 161,474 234,359 Transactions per FTE(12)(13) ............. -- 321 415 642 Revenue per FTE(13) ...................... $ 48 $ 79 $ 91 $ 116 Operating expenses per transac- tion(12) ................................ -- 0.39 0.27 0.19 THREE MONTHS YEAR ENDED JUNE 30, ENDED SEPTEMBER 30, 1998 ------------------- ------------------------------------ PRO FORMA(1) ACTUAL PRO FORMA(2) ------------------- ---------------------- ------------- 1998(3) 1997 1998 1998 -------------- ----------- ---------- ------------- (IN THOUSANDS, EXCEPT PER TRANSACTION DATA) OTHER DATA: EBITDA(11) ............................... $ 7,611 $ 704 $ 1,914 $ 2,221 Adjusted EBITDA(11) ...................... 7,611 704 1,914 2,221 Cash flows from operating activities -- (1,616) 447 -- Cash flows from investing activities. -- (519) (869) -- Cash flows from financing activities. -- 2,781 1,023 -- Transactions processed(12) Pharmacy ................................ 191,663 38,513 53,608 53,608 Medical ................................. 46,821 7,762 8,348 12,601 Dental .................................. 14,681 3,546 4,135 4,135 ---------- --------- ------- -------- Total transactions processed .......... 253,165 49,821 66,091 70,344 Transactions per FTE(12)(13) ............. 633 137 174 170 Revenue per FTE(13) ...................... $ 122 $ 25 $ 32 $ 32 Operating expenses per transac- tion(12) ................................ 0.20 0.21 0.18 0.19
(Footnotes on following page) 7 (1) Gives effect to (i) the acquisition of Stockton in November 1997, (ii) the acquisition of HII in October 1998, (iii) the Recapitalization and (iv) the Offering, as if they had occurred on July 1, 1997. (2) Gives effect to (i) the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the Offering, as if they had occurred on July 1, 1997. (3) As restated, to adjust the write-off of acquired in-process research and development and the amortization of goodwill resulting from the acquisition of Time-Share Computer Systems, Inc.("TCS"). See Note 13 to Notes to Consolidated Financial Statements. (4) During the periods presented, the Company made a series of acquisitions and divested certain non-core or unprofitable operations. Revenues attributable to these divested operations, which are included in the statement of operations data, were $1,709,000, $3,617,000, $2,252,000, $241,000 and $190,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months ended September 30, 1997, respectively. (5) Reflects the write-off of goodwill related to the acquisitions of Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"). (6) Reflects the write-down of costs relating to client lists and related allocable goodwill obtained in the acquisition of General Computer Corporation, subsequently renamed MEDE AMERICA Corporation of Ohio ("MEDE OHIO"). (7) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (8) Reflects (i) expenses of $2,864,000 relating to the spin-off of the Company by Card Establishment Services, Inc. ("CES") in the fiscal year ended June 30, 1995 and (ii) expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000 and $2,301,000 in the fiscal years ended June 30, 1996 and 1997, respectively. (9) Supplemental net loss per share, giving effect to the Recapitalization, would be $(0.62) and $(0.13) for the fiscal year ended June 30, 1998 and the three months ended September 30, 1998, respectively. (10) Gives effect to (i) the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the Offering, as if they had occurred on September 30, 1998. (11) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with generally accepted accounting principles ("GAAP") and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described below. The following table summarizes EBITDA and adjusted EBITDA for all periods presented:
YEAR ENDED JUNE 30, --------------------------------------------------- ACTUAL --------------------------------------------------- 1995 1996 1997 1998 -------------- -------------- ------------ -------- (IN THOUSANDS) EBITDA ...................................... $ (13,347) $ (13,164) $ (2,705) $5,761 Contingent consideration paid to former owners of acquired businesses ............. -- 538 2,301 -- Write-down of intangible assets ............. 8,191 9,965 -- -- Acquired in-process research and development ............................... -- -- 1,556 -- Expenses related to the CES spin-off ........ 2,864 -- -- -- Contract and legal settlement provisions -- 609 1,059 -- ---------- ---------- -------- ------ Adjusted EBITDA ............................. $ (2,292) $ (2,052) $ 2,211 $5,761 ========== ========== ======== ====== YEAR ENDED THREE MONTHS JUNE 30, ENDED SEPTEMBER 30, ----------- ------------------------------ PRO FORMA ACTUAL PRO FORMA ----------- ------------------- ---------- 1998 1997 1998 1998 ----------- -------- ---------- ---------- (IN THOUSANDS) EBITDA ...................................... $7,611 $ 704 $ 1,914 $ 2,221 Contingent consideration paid to former owners of acquired businesses ............. -- -- -- -- Write-down of intangible assets ............. -- -- -- -- Acquired in-process research and development ............................... -- -- -- -- Expenses related to the CES spin-off ........ -- -- -- -- Contract and legal settlement provisions -- -- -- -- ------ ----- ------- ------- Adjusted EBITDA ............................. $7,611 $ 704 $ 1,914 $ 2,221 ====== ===== ======= =======
(12) Transaction volumes are not available for the fiscal year ended June 30, 1995. (13) Full-time equivalents ("FTE") represents the number of full-time employees and part-time equivalents of full-time employees as of the end of the period shown. 8 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(1) 6/30/97(1) ----------- ---------- ------------ ------------ (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues .................... $ 8,179 $ 7,831 $ 8,954 $ 10,315 Income (loss) from oper- ations ..................... (1,301) (1,108) (2,784) (2,972) Net loss .................... (1,465) (1,324) (2,341) (3,703) OTHER DATA: EBITDA(2) ................... $ (199) $ (64) $ (1,361) $ (1,081) Contingent consideration paid to former owners of acquired businesses ................. 330 330 330 1,311 Acquired in-process re- search and development ................ -- -- 1,556 -- Contract and legal settle- ment provisions ............ -- -- -- 1,059 -------- -------- --------- --------- Adjusted EBITDA(1) .......... $ 131 $ 266 $ 525 $ 1,289 ======== ======== ========= ========= THREE MONTHS ENDED --------------------------------------------------------------- 9/30/97(1) 12/31/97(1) 3/31/98(1) 6/30/98(1) 9/30/98 ------------ ------------- ------------ ------------ ---------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues .................... $ 9,241 $ 9,849 $ 11,099 $ 12,101 $ 12,006 Income (loss) from oper- ations ..................... (994) (389) (123) 124 20 Net loss .................... (1,661) (1,316) (1,049) (1,009) (1,085) OTHER DATA: EBITDA(2) ................... $ 704 $ 1,309 $ 1,729 $ 2,019 $ 1,914 Contingent consideration paid to former owners of acquired businesses ................. -- -- -- -- -- Acquired in-process re- search and development ................ -- -- -- -- -- Contract and legal settle- ment provisions ............ -- -- -- -- -- -------- -------- -------- -------- -------- Adjusted EBITDA(1) .......... $ 704 $ 1,309 $ 1,729 $ 2,019 $ 1,914 ======== ======== ======== ======== ========
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Operating Results." - ----------- (1) As restated, to adjust the write-off of acquired in-process research and development and the amortization of goodwill resulting from the TCS acquisition. See Note 13 to Notes to Consolidated Financial Statements. (2) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with GAAP and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described above. - ----------- Except as otherwise noted herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes no exercise of the Medic Warrant or the 1998 Guaranty Warrants and (iii) has been adjusted to give effect to a one-for-4.5823 reverse stock split of all outstanding Common Stock (the "Reverse Stock Split"). The Company's Preferred Stock, $.01 par value ("Preferred Stock"), provides for conversion of the aggregate liquidation value of the Preferred Stock, including accrued but unpaid dividends, into Common Stock at the initial public offering price per share. However, cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends on the Preferred Stock and the remainder of such accrued dividends would convert into Common Stock. Except as otherwise noted herein, each reference in this Prospectus to Common Stock issuable upon conversion of all of the Preferred Stock assumes a conversion price of $12.00. Based on an aggregate liquidation preference of the Preferred Stock of $32,219,847 (including $8,224,247 of accrued dividends) as of November 30, 1998, 2,684,933 shares of Common Stock would be so issuable as of such date. In addition, concurrently with the consummation of the Offering, an additional 59,926 shares of Common Stock will be issued upon the exercise of certain outstanding Common Stock purchase warrants. The Medic Warrant and the 1998 Guaranty Warrants, all having an exercise price equal to the price to the public in the Offering, will remain outstanding after the Offering. Such conversion of the Preferred Stock, and exercise of warrants to purchase 59,926 shares of Common Stock (on a "net exercise" basis), are referred to herein as the "Recapitalization." See "Capitalization," "Description of Common Stock," "Principal Stockholders" and "Underwriting." 9 RISK FACTORS In addition to other information contained in this Prospectus, prospective investors should carefully consider the following risk factors before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors and the matters set forth in this Prospectus generally. HISTORY OF OPERATING LOSSES; LIMITED OPERATING HISTORY The Company has experienced substantial net losses, including net losses of $16.6 million, $19.3 million, $8.8 million, $5.0 million and $1.1 million for the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months ended September 30, 1998, respectively. The Company had an accumulated deficit of approximately $51.3 million as of September 30, 1998. In connection with its acquisitions completed to date, the Company has incurred significant acquisition-related charges and will record significant amortization expense related to goodwill and other intangible assets in future periods. There can be no assurance that the Company will be able to achieve or sustain revenue growth or profitability on a quarterly or annual basis. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's operating history is limited. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with limited operating histories, particularly companies in new and rapidly evolving markets such as EDI and transaction processing. Such risks include, but are not limited to, an evolving and unpredictable business model and the difficulties inherent in the management of growth. To address these risks, the Company must, among other things, maintain and increase its client base, implement and successfully execute its business and marketing strategies, continue to develop and upgrade its technology and transaction-processing systems, provide superior client service, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks or in achieving profitability, and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. ACQUISITION STRATEGY; NEED FOR ADDITIONAL CAPITAL The Company's strategy includes acquisitions of healthcare EDI businesses that complement or supplement the Company's business. The success of such a strategy will depend on many factors, including the Company's ability to identify suitable acquisition candidates, the purchase price and the availability and terms of financing. Significant competition for acquisition opportunities exists in the healthcare EDI industry, which may significantly increase the costs of and decrease the opportunities for acquisitions. Although the Company is actively pursuing possible acquisitions, there can be no assurance that any acquisition will be consummated. No assurances can be given that the Company will be able to operate any acquired businesses profitably or otherwise successfully implement its expansion strategy. The Company may finance future acquisitions through borrowings or the issuance of debt or equity securities. The Company believes its new credit facility, which is expected to be in place after the Offering, will provide a line of credit sufficient for the Company's foreseeable working capital needs, but any significant acquisition that is to be financed with indebtedness would require additional borrowings. There can be no assurance that future lenders will extend credit on favorable terms, if at all. Further, any borrowings would increase the Company's interest expense and any issuance of equity securities could have a dilutive effect on the holders of Common Stock. The Company will not be able to account for acquisitions under the "pooling of interests" method for at least two years following the Offering. Accordingly, such future acquisitions may result in significant goodwill and a corresponding increase in the amount of amortization expense and could also result in write-downs of purchased assets, all of which could adversely affect the Company's operating results in future periods. 10 INTEGRATION OF ACQUIRED BUSINESSES The success of the Company's acquisition strategy also depends to a large degree on the Company's ability to effectively integrate the acquired products and services, facilities, technologies, personnel and operations into the Company. The process of integration often requires substantial management attention and other corporate resources, and the Company may not be able to accurately predict the resources that will be needed to integrate acquired operations. There can be no assurance that the Company will be able to effectively integrate any or all acquired companies or operations. Any failure to do so could result in operating inefficiencies, redundancies, management distraction or technological difficulties (among other possible adverse consequences), any of which could have a material adverse effect on the Company's business, financial condition and results of operations. EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards and the frequent introduction of new and enhanced services. The Company's success will depend upon its ability to enhance its existing services, to introduce new products and services on a timely and cost-effective basis to meet evolving client requirements, to achieve market acceptance for new products or services and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company will be able to respond effectively to technological changes or new industry standards. Moreover, there can be no assurance that other companies will not develop competitive products or services, or that any such competitive products or services will not have an adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON CONNECTIONS TO PAYORS The Company's business is enhanced by the substantial number of payors (such as insurance companies, Medicare and Medicaid agencies and Blue Cross/Blue Shield organizations) to which the Company has electronic connections. These connections may either be made directly or through a clearinghouse or other intermediary. The Company has attempted to enter into suitable contractual relationships to ensure long term payor connectivity; however, there can be no assurance that the Company will be able to maintain its links with all payors with whom it currently has connections. In addition, there can be no assurance that the Company will be able to develop new connections (either directly or through clearinghouses) on satisfactory terms, if at all. Lastly, certain third-party payors provide EDI systems directly to healthcare providers, bypassing third-party processors such as the Company. The failure to maintain its existing connections with payors and clearinghouses or to develop new connections as circumstances warrant, or an increase in the utilization of direct links between providers and payors, could have a material adverse effect on the Company's business, financial condition and results of operations. DEVELOPMENT OF EDI PROCESSING IN THE HEALTHCARE INDUSTRY The Company's strategy anticipates that electronic processing of healthcare transactions, including transactions involving clinical as well as financial information, will become more widespread and that providers and third-party payors increasingly will use EDI processing networks for the processing and transmission of data. Electronic transmission of healthcare transactions is still developing, and complexities in the nature and types of transactions which must be processed have hindered, to some degree, the development and acceptance of EDI processing in this market. There can be no assurance that continued conversion from paper-based transaction processing to EDI processing in the healthcare industry will occur or that, to the extent it does occur, healthcare providers and payors will use independent processors such as the Company. Furthermore, if EDI processing extensively penetrates the healthcare market or becomes highly standardized, it is possible that competition among transaction processors will focus increasingly on pricing. If competition causes the Company to reduce its pricing in order to retain market share, the Company may suffer a material adverse change in its business, financial condition and results of operations. 11 POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS The Company's quarterly operating results have varied significantly in the past and are likely to vary from quarter to quarter in the future. Quarterly revenues and operating results may fluctuate as a result of a variety of factors, including: integration of acquired businesses; seasonal variability of demand for healthcare services generally; the number, timing and significance of announcements and releases of product enhancements and new products by the Company and its competitors; the timing and significance of announcements concerning the Company's present or prospective strategic alliances; the loss of clients due to consolidation in the healthcare industry; legislation or changes in government policies or regulations relating to healthcare EDI processing; delays in product installation requested by clients; the length of the sales cycle or the timing of sales; client budgeting cycles and changes in client budgets; marketing and sales promotional activities; software defects and other quality factors; and general economic conditions. The Company's operating expense levels, which will increase with the addition of acquired businesses, are relatively fixed. If revenues are below expectations, net income is likely to be disproportionately adversely affected. Further, in some future quarters the Company's revenues or operating results may be below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock would likely be materially adversely affected. See "Summary -- Quarterly Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Operating Results." PROPOSED HEALTHCARE DATA CONFIDENTIALITY LEGISLATION Legislation that imposes restrictions on third-party processors' ability to analyze certain patient data without specific patient consent has been introduced in the U.S. Congress. Although the Company does not currently access or analyze individually identifiable patient information, such legislation, if adopted, could adversely affect the ability of third-party processors to transmit information such as treatment and clinical data, and could adversely affect the Company's ability to expand into related areas of the EDI healthcare market. In addition, the Health Insurance Portability and Accountability Act, passed in 1997, mandates the establishment of federal standards for the confidentiality, format and transmission of patient data, as well as recordkeeping and data security obligations. It is possible that the standards so developed will necessitate changes to the Company's operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The Company faces significant competition from healthcare and non-healthcare EDI processing companies. The Company also faces potential competition from other companies, such as vendors of provider information management systems, which have added or may add their own proprietary EDI processing systems to existing or future products and services. Competition may be experienced in the form of pressure to reduce per transaction prices or eliminate per transaction pricing altogether. If EDI processing becomes the standard for claims and information processing, a number of larger and better capitalized entities may elect to enter the industry and further increase competitive pricing pressures. Many of the Company's existing and potential competitors are larger and have significantly greater financial, marketing, technological and other resources than the Company. There can be no assurance that increased competition will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business - -- Competition." RISK OF INTERRUPTION OF DATA PROCESSING The Company currently processes its data through its facilities in Twinsburg, Ohio, Mitchel Field, New York, and Atlanta, Georgia. The Twinsburg and Mitchel Field sites are designed to be redundant. Additionally, the Company transmits data through a number of different telecommunications networks, using a variety of different technologies. However, the occurrence of an event that overcomes the data processing and transmission redundancies then in place could lead to service interruptions and could have a material adverse effect on the Company's business, financial condition and results of operations. 12 YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, prior to January 1, 2000, computer systems and/or software used by many companies (including the Company) will need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential consequences of the Year 2000 phenomenon. Although the Company currently offers software products that are designed or have been modified to comply with the Year 2000 requirements, the Company has identified certain products and services which it believes are not Year 2000 compliant. While the Company has plans to address such problems, there can be no assurance that the costs of bringing these systems into compliance will not be significantly greater than expected, that compliance will be achieved in a timely manner, or that providers and payors will bring their systems into Year 2000 compliance in a timely manner. The failure to achieve Year 2000 compliance in a timely manner could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Year 2000 Compliance." In October 1998 the Company acquired HII. HII's EDI products and services fall into three categories: physician claims processing, hospital claims processing and claims data transmission (extraction and transmission of claim data to a third party data analyst). Based on its review at the time of the acquisition, the Company determined that none of these products is Year 2000 compliant. Prior to the HII acquisition, certain employees and officers of HII made express and implied representations to a number of HII's clients as to the time at which HII's systems would be Year 2000 compliant. The Company does not expect to be able to meet the deadlines set forth in such representations. While the Company does not believe that a material number of these clients will terminate their relationships with HII and the Company based on the Company's inability to meet such deadlines, there can be no assurance that such clients will not attempt to do so or that such terminations would not have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's performance depends in significant part on the continued service of its executive officers, its product managers and key sales, marketing and development personnel. The Company considers its key management personnel to be Thomas P. Staudt, President and Chief Executive Officer, William M. McManus, Linda K. Ryan and Roger L. Primeau, in charge of the pharmacy, medical and dental operations, respectively, James T. Stinton, the Company's Chief Information Officer, and Richard P. Bankosky, the Company's Chief Financial Officer. No single individual is considered by the Company to be critical to the Company's success. The Company does not maintain employment agreements with these officers or other employees (with limited exceptions) and the failure to retain the services of such persons could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare industry participants. Federal and state legislatures periodically consider programs to modify or amend the United States healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including investments in the Company's products and services. In addition, many healthcare providers are consolidating to create larger healthcare delivery organizations. This consolidation reduces the number of potential clients for the Company's services, and the increased bargaining power of these organizations could lead to reductions in the amounts paid for the Company's services. Other healthcare information companies, such as billing services and practice management vendors, which currently utilize the Company's ser- 13 vices, could develop or acquire transaction processing and networking capabilities and may cease utilizing the Company's services in the future. The impact of these developments in the healthcare industry is difficult to predict and could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent that the current trend toward consolidation in the industry continues, MEDE AMERICA may find it more difficult to obtain access to payors, information providers and practice management software vendors on whom its ability to deliver services and enroll new clients now depends. Loss of access to these industry participants could materially adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT The Company's ability to compete effectively depends to a significant extent on its ability to protect its proprietary information. The Company relies on a combination of statutory and common law copyright, trademark and trade secret laws, client licensing agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. The Company does not include in its software any mechanisms to prevent or inhibit unauthorized use, but generally enters into confidentiality agreements with its consultants, clients and potential clients and limits access to, and distribution of, its proprietary information. The Company has not filed any patent applications with respect to its intellectual property. It is the Company's policy to defend its intellectual property; however, there can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company is also subject to the risk of alleged infringement by it of intellectual property rights of others. Although the Company is not currently aware of any pending or threatened infringement claims with respect to the Company's current or future products, there can be no assurance that third parties will not assert such claims. Any such claims could require the Company to enter into license arrangements or could result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Furthermore, litigation may be necessary to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects that software developers will increasingly be subject to such claims as the number of products and competitors providing software and services to the healthcare industry increases and overlaps occur. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. RISK OF PRODUCT DEFECTS Products such as those offered by the Company may contain errors or experience failures, especially when initially introduced or when new versions are released. While the Company conducts extensive testing to address these errors and failures, there can be no assurance that errors or performance failures will not occur in products under development or in enhancements to current products. Any such errors or failures could result in loss of revenues and clients, delay in market acceptance, diversion of development resources, damage to the Company's reputation or increased service costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company has not experienced any material product defects. CONTROL BY EXISTING STOCKHOLDERS After the Offering, 48.2% of the Common Stock will be owned by investment funds affiliated with WCAS and 7.7% will be owned by investment funds affiliated with WBCP. See "Principal Shareholders" and "Description of Capital Stock -- Recapitalization." As a result of this concentration of owner- 14 ship, these shareholders may be able to exercise control over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such control may have the effect of delaying or preventing a change in control of the Company. The Company's Board of Directors currently includes Thomas E. McInerney and Anthony J. de Nicola, designees of WCAS, and Timothy M. Murray, a designee of WBCP. The funds affiliated with WCAS may be deemed to be controlled by their respective general partners, the general partners of each of which include some or all of the following individuals: Thomas E. McInerney and Anthony J. de Nicola, directors of the Company, Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Andrew M. Paul, Robert A. Minicucci, Paul B. Queally and Laura M. VanBuren. The funds affiliated with WBCP may be deemed to be controlled by their respective general partners, the general partners of which include William Blair & Company L.L.C. and certain of its employees, including Timothy E. Murray, a director of the Company. NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price has been determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the market price of the Common Stock in the future. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The stock market has from time to time experienced extreme price and volume fluctuations, particularly in the securities of technology companies, which have often been unrelated to the operating performance of individual companies. Announcements of technological innovations or new and enhanced commercial products by the Company or its competitors, market conditions in the industry, developments or disputes concerning proprietary rights, changes in earnings, economic and other external factors, political and other developments and period-to-period fluctuations in financial results of the Company may have a significant impact on the market price and marketability of the Company's Common Stock. Fluctuations in the trading price of the Common Stock may also adversely affect the liquidity of the trading market for the Common Stock. POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS The Company's Board of Directors is authorized to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that may be issued in the future. While the Company has no present intention to issue shares of Preferred Stock, any such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have other rights, including economic rights senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. Furthermore, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"), which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of these provisions could have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Amended and Restated Certificate of Incorporation and the Company's Bylaws could also have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Laws and Certain Charter and Bylaw Provisions; Anti-Takeover Measures." SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE Sales of Common Stock (including Common Stock issued upon the exercise of outstanding stock options) in the public market after this Offering could materially adversely affect the market price of the Common Stock. Upon the completion of this Offering and giving effect to the Recapitalization, the 15 Company will have 12,596,374 shares of Common Stock outstanding, assuming no exercise of stock options and no exercise of the Underwriters' over-allotment option. Of these outstanding shares of Common Stock, the 4,166,667 shares sold in this Offering will be freely tradeable, without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 8,429,707 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act and were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be resold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144 under the Securities Act. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, approximately shares of Common Stock and options to purchase shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this Prospectus without the prior written consent of Salomon Smith Barney Inc. Upon expiration of the lock-up agreements, all shares of Common Stock currently outstanding will be immediately eligible for resale, subject to the requirements of Rule 144. The Company is unable to predict the effect that sales may have on the then prevailing market price of the Common Stock. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and "Shares Eligible for Future Sale." BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS Prospective investors should be aware that current holders of the Company's Common Stock and Preferred Stock will benefit from the Offering. Approximately $25.0 million of the net proceeds of the Offering will be used to prepay all then outstanding principal and accrued interest on a Senior Subordinated Note (as herein defined) held by WCAS Capital Partners II, L.P., one of the Company's principal stockholders. In addition, approximately $19.8 million of the net proceeds will be used to repay all but $13.0 million of the outstanding indebtedness and accrued interest under the Company's current Credit Facility. If the Underwriters' overallotment option is exercised, the cash realized by the Company therefrom will be applied to the payment of accrued dividends on the Preferred Stock (which amounted to $8,224,247 as of November 30, 1998) and the remainder of such accrued dividends would convert into Common Stock. The Credit Facility, which is guaranteed by the Company's four principal stockholders, will be replaced with a new facility, which will not be guaranteed by a third party. See "Use of Proceeds" and "Certain Transactions." After the Offering, all existing stockholders will benefit from certain changes including the creation of a public market for the Company's Common Stock. Moreover, the current shareholders will realize an immediate increase in market and tangible book value. Assuming an initial public offering price of $12.00 per share, the aggregate unrealized gain to current stockholders of the Company, based on the difference between such public offering price of the Common Stock and the acquisition cost of their equity, will be $72.4 million. See "Dilution." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will incur immediate and substantial dilution in the net tangible book value per share of Common Stock in the amount of $11.09 per share, at an assumed initial public offering price of $12.00 per share. To the extent that outstanding options to purchase Common Stock are exercised, there will be further dilution. See "Dilution." ABSENCE OF DIVIDENDS No dividends have been paid on the Common Stock to date and the Company does not anticipate paying dividends on the Common Stock in the foreseeable future. The Credit Facility prohibits the payment of dividends on the Common Stock. Moreover, it is expected that the terms of the Amended Credit Facility will prohibit the Company from paying dividends on the Common Stock. See "Dividend Policy." 16 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. As of November 30, 1998, the Company processed over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of Card Establishment Services, Inc. ("CES"), in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"), which comprised the heathcare services business of CES, historically provided EDI services to hospitals and physicians. After the spin-off, the Company made several strategic acquisitions to strengthen its core hospital/medical business and to expand into the pharmaceutical and dental markets. In March 1995, the Company acquired General Computer Corporation, subsequently renamed MEDE AMERICA Corporation of Ohio (referred to herein as "MEDE OHIO"), a developer of EDI systems and services for the pharmaceutical industry, and in June 1995 the Company acquired Latpon Health Systems, Incorporated ("Latpon"), a developer of proprietary EDI claims processing software for hospitals and physicians. These acquisitions were followed by acquisitions of Electronic Claims and Funding, Inc. ("EC&F"), and Premier Dental Systems, Corp. ("Premier"), in October 1995. These companies were engaged in the EDI and management software businesses in the dental market. The Company enhanced its presence in the pharmacy market by acquiring Time-Share Computer Systems, Inc. ("TCS"), in February 1997 and The Stockton Group, Inc. ("Stockton") in November 1997. Healthcare Interchange, Inc. ("HII"), a provider of transaction processing services to hospitals and physician groups, was acquired in October 1998. The Company's executive offices are located at 90 Merrick Avenue, Suite 501, East Meadow, New York 11554, and its telephone number is (516) 542-4500. 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, assuming an initial public offering price of $12.00 per share, are estimated to be $44.8 million ($51.8 million if the Underwriters' over-allotment option is exercised in full), after deducting the estimated offering fees and expenses payable by the Company. The Company intends to use the net proceeds from the Offering as follows: (i) approximately $25.0 million to prepay all then outstanding principal and accrued interest on its outstanding 10% Senior Subordinated Note due February 14, 2002 (the "Senior Subordinated Note") and (ii) approximately $19.8 million to repay all but $13.0 million of the outstanding indebtedness and accrued interest under the Credit Facility. Cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends on the Preferred Stock and the remainder of such accrued dividends would convert into Common Stock. As of November 30, 1998, such accrued dividends totaled $8,224,247. See "Certain Transactions." Pending application to the foregoing uses, such proceeds will be invested in short-term, investment-grade, interest-bearing obligations. Outstanding borrowings under the Credit Facility bear interest at a weighted average rate of 6.41% per annum (as of November 30, 1998) and are guaranteed by WCAS and WBCP. The Credit Facility matures on October 31, 1999. During July 1998, the Company received a letter from the lender under the Credit Facility committing to provide an amended credit facility with total available credit of $15.0 million (the "Amended Credit Facility"). This facility would be comprised of a $7.5 million term loan to be used for acquisitions and a $7.5 million revolving credit loan to be used for working capital purposes, each with a maximum term of two years from October 31, 1998. Interest for the term and revolver loans is computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based rate. Such borrowing rates are at the option of the Company for any particular period during which borrowings exist. The Company is currently negotiating with the lender to increase such total available credit to $20.0 million. Borrowings under the Amended Credit Facility will not be guaranteed by any third party, but will be secured by substantially all of the Company's assets including the stock of the Company's subsidiary. It is anticipated that the Amended Credit Facility will take effect upon the consummation of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Credit Facility prohibits the payment of dividends on the Common Stock. Moreover, it is expected that the terms of the Amended Credit Facility will prohibit the Company from paying dividends on the Common Stock. The Company currently intends to retain any earnings to fund future growth and the operation of its business. See "Risk Factors -- Absence of Dividends." 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1998 on an actual basis and pro forma, as adjusted to reflect (i) the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the issuance and sale by the Company of 4,166,667 shares of Common Stock offered hereby, assuming an initial public offering price of $12.00 per share, after deducting the estimated offering fees and expenses payable by the Company, and the application of the net proceeds thereof as described under "Use of Proceeds." The following table should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the "Unaudited Pro Forma Consolidated Financial Information" appearing elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1998 ----------------------------- PRO FORMA, ACTUAL AS ADJUSTED(1) ----------- --------------- (IN THOUSANDS) Long-term debt (including current portion) Senior Subordinated Note ..................... $ 23,455 $ -- Credit Facility .............................. 17,950 -- Other debt ................................... 1,222 11,715 --------- --------- Total long-term debt ....................... 42,627 11,715 --------- --------- Redeemable cumulative preferred stock ......... 31,823 -- --------- --------- Stockholders' (deficit) equity Common Stock(2) .............................. 57 127 Additional paid-in capital ................... 27,521 104,074 Accumulated deficit .......................... (51,328) (52,873) --------- --------- Total stockholders' (deficit) equity ......... (23,750) 51,328 --------- --------- Total capitalization ......................... $ 50,700 $ 63,043 ========= =========
- ---------- (1) As adjusted to reflect (i) the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the sale of 4,166,667 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the anticipated application of the estimated net proceeds therefrom. (2) Excludes (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic Warrant, (ii) 84,050 shares of Common Stock issuable pursuant to the 1998 Guaranty Warrants and (iii) 482,823 shares of Common Stock reserved for issuance upon exercise of stock options outstanding under the Stock Plan as of November 30, 1998, at a weighted average exercise price of $4.84 per share, of which 228,917 were exercisable at such date. See "Prospectus Summary -- Recent Developments" and "Management-Employee Benefit Plans." Includes 59,926 shares of Common Stock issuable upon exercise of Common Stock purchase warrants as contemplated by the Recapitalization. See "Description of Capital Stock." 20 DILUTION The pro forma deficit in net tangible book value of the Company as of September 30, 1998, after giving effect to the Recapitalization, was approximately $(31.8) million or $(3.79) per share of Common Stock. Pro forma net deficit in tangible book value per share is determined by dividing the net tangible deficit in book value of the Company (pro forma tangible assets less total liabilities) by the number of shares of Common Stock outstanding. Dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offering. Without taking into account any changes in such pro forma net tangible book value after September 30, 1998, other than to give effect to (i) the sale of 4,166,667 shares of Common Stock by the Company in this Offering at an assumed initial public offering price of $12.00 per share and after deducting the estimated fees and offering expenses, (ii) the application of the estimated net proceeds therefrom and (iii) the Recapitalization, the pro forma net tangible book value of the Company as of September 30, 1998 would have been approximately $11.5 million or $0.91 per share. This represents an immediate increase in pro forma net tangible book value of $4.70 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $11.09 per share to new investors. The following table illustrates this dilution on a per share basis. Assumed initial public offering price per share ...................... $ 12.00 Pro forma net tangible book value per share before this Offering(1). $(3.79) Increase per share attributable to new investors ................... 4.70 ------ Pro forma net tangible book value per share after this Offering ...... 0.91 ------- Dilution per share to new investors(2) ............................... $ 11.09 =======
- ---------- (1) Pro forma net tangible book value per share of Common Stock is determined by dividing the Company's pro forma deficit in net tangible book value at September 30, 1998 of $(31.8) million, by the pro forma number of shares of Common Stock outstanding, in each case after giving effect to the Recapitalization. (2) Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this Offering from the initial public offering price per share. The following table sets forth, on a pro forma basis as of September 30, 1998, after giving effect to the Recapitalization, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders (excluding the fair value of companies contributed in the March 1995 spin-off from CES) and to be paid by new investors, based on an assumed initial public offering price of $12.00 per share and before deducting estimated fees and expenses payable by the Company:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------ -------------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ --------- -------------- --------- ---------- Existing stockholders ......... 8,396,299 66.8% $28,349,000 36.2% $ 3.38 New investors ................. 4,166,667 33.2 50,000,004 63.8 12.00 --------- ----- ----------- ----- Total ......................... 12,562,966 100.0% $78,349,004 100.0% ========== ===== =========== =====
The foregoing tables assume no exercise of any outstanding stock options to purchase Common Stock. At September 30, 1998 there were 482,823 shares of Common Stock issuable upon the exercise of stock options outstanding under the Company's Stock Plans, of which 221,890 were currently exercisable. Such options have a weighted average exercise price of $4.84 per share. To the extent such options are exercised, there will be further dilution to the new investors. See "Capitalization," "Management -- Employee Benefit Plans" and "Description of Capital Stock." 21 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma consolidated financial information has been prepared by the Company's management from the historical Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. The unaudited pro forma consolidated statements of operations for the year ended June 30, 1998 and the three months ended September 30, 1998 include adjustments that give effect to (i) the acquisition of Stockton in November 1997, (ii) the acquisition of HII in October 1998, (iii) the Recapitalization and (iv) the Offering, as if they had occurred as of July 1, 1997. The unaudited pro forma consolidated balance sheet as of September 30, 1998 gives effect to (i) the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the Offering, as if they had occurred on such date. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma consolidated financial information should be read in conjunction with the historical financial statements of the Company, Stockton and HII and the respective notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included herein. The unaudited pro forma consolidated financial information is provided for information purposes only and does not purport to be indicative of the results which would have been obtained had the acquisitions of Stockton and HII, the Recapitalization and the Offering been completed on the dates indicated or which may be expected to occur in the future. 22 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL ADJUSTMENTS ------------------------------------- RELATING TO THE COMPANY(1) STOCKTON(2) HII(3) ACQUISITIONS ------------ ------------- ---------- ----------------- Revenues ............................. $ 42,290 $1,646 $4,944 $ -- Operating expenses: Operations .......................... 16,958 216 1,679 29 (4) Sales, marketing and client ser- vices .............................. 10,765 298 1,313 -- Research and development ............ 3,941 43 -- -- General and administrative .......... 4,865 161 1,001 -- Depreciation and amortization........ 7,143 54 200 1,270 (5) (22)(6) -------- Total operating expenses ............. 43,672 772 4,193 1,277 --------- ------ ------ -------- Income (loss) from operations ........ (1,382) 874 751 (1,277) Other (income) expense ............... (12) -- -- -- Interest expense (income), net ....... 3,623 27 190 791 (7) --------- ------ ------ -------- Income (loss) before provision for income taxes ........................ (4,993) 847 561 (2,068) Provision for income taxes ........... 42 -- -- -- --------- ------ ------ -------- Net income (loss) .................... (5,035) 847 561 (2,068) Preferred stock dividends ............ (2,400) -- (94) 94 (10) --------- ------ ------ -------- Net income (loss) applicable to common stockholders ................. $ (7,435) $ 847 $ 467 $ (1,974) ========= ====== ====== ======== Basic and diluted net loss per common share ........................ $ (1.31) Weighted average common shares outstanding - Basic and diluted 5,679 -- ADJUSTMENTS RELATING TO THE OFFERING PRO FORMA, RECAPITALIZATION PRO FORMA ADJUSTMENTS AS ADJUSTED ------------------ ------------- ----------------- ------------ Revenues ............................. $ -- $ 48,880 $ -- $ 48,880 Operating expenses: Operations .......................... -- 18,882 -- 18,882 Sales, marketing and client ser- vices .............................. -- 12,376 -- 12,376 Research and development ............ -- 3,984 -- 3,984 General and administrative .......... -- 6,027 -- 6,027 Depreciation and amortization........ -- 8,645 -- 8,645 -- ---------- Total operating expenses ............. -- 49,914 -- 49,914 ---------- --------- ---------- --------- Income (loss) from operations ........ -- (1,034) -- (1,034) Other (income) expense ............... -- (12) -- (12) Interest expense (income), net ....... -- 4,631 (3,992)(8) 639 ---------- --------- ---------- --------- Income (loss) before provision for income taxes ........................ -- (5,653) 3,992 (1,661) Provision for income taxes ........... -- 42 -- 42 ---------- --------- ---------- --------- Net income (loss) .................... -- (5,695) 3,992 (9) (1,703) Preferred stock dividends ............ 2,400 (11) -- -- -- ---------- --------- ---------- --------- Net income (loss) applicable to common stockholders ................. $ 2,400 $ (5,695) $ 3,992 $ (1,703) ========== ========= ========== ========= Basic and diluted net loss per common share ........................ $ (0.14) Weighted average common shares outstanding - Basic and diluted 2,462 (12) 8,141 4,167 (13) 12,308
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL ADJUSTMENTS ----------------------- RELATING TO THE COMPANY HII(14) HII ACQUISITION ------------- --------- ----------------- Revenues ............................. $ 12,006 $1,312 $ -- Operating expenses: Operations .......................... 4,793 479 -- Sales, marketing and client ser- vices .............................. 2,930 278 -- Research and development ............ 1,106 -- -- General and administrative .......... 1,263 248 -- Depreciation and amortization........ 1,894 44 239 (5) --------- ------ ------ Total operating expenses ............. 11,986 1,049 239 --------- ------ ------ Income (loss) from operations ........ 20 263 (239) Other (income) expense ............... -- -- -- Interest expense (income), net ....... 1,089 64 120 --------- ------ ------ Income (loss) before provision for income taxes ........................ (1,069) 199 (359) Provision for income taxes ........... 16 -- -- --------- ------ ------ Net income (loss) .................... (1,085) 199 (359) Preferred stock dividends ............ (600) (23) 23 (10) --------- ------ ------ Net income (loss) applicable to common stockholders ................. $ (1,685) $ 176 $ (336) ========= ====== ====== Basic and diluted net loss per common share ........................ $ (0.30) Weighted average common shares outstanding - Basic and diluted. 5,685 -- ADJUSTMENTS RELATING TO THE OFFERING PRO FORMA, RECAPITALIZATION PRO FORMA ADJUSTMENTS AS ADJUSTED ------------------ ------------- ----------------- ------------ Revenues ............................. $ -- $ 13,318 $ -- $ 13,318 Operating expenses: Operations .......................... -- 5,272 -- 5,272 Sales, marketing and client ser- vices .............................. -- 3,208 -- 3,208 Research and development ............ -- 1,106 -- 1,106 General and administrative .......... -- 1,511 -- 1,511 Depreciation and amortization........ -- 2,177 -- 2,177 ---------- --------- ---------- -------- Total operating expenses ............. -- 13,274 -- 13,274 ---------- --------- ---------- -------- Income (loss) from operations ........ -- 44 -- 44 Other (income) expense ............... -- -- -- -- Interest expense (income), net ....... -- 1,273 (1,059)(8) 214 ---------- --------- ---------- -------- Income (loss) before provision for income taxes ........................ -- (1,229) 1,059 (170) Provision for income taxes ........... -- 16 -- 16 ---------- --------- ---------- -------- Net income (loss) .................... -- (1,245) 1,059 (9) (186) Preferred stock dividends ............ 600 (11) -- -- -- ---------- --------- ---------- -------- Net income (loss) applicable to common stockholders ................. $ 600 $ (1,245) $ 1,059 $ (186) ========== ========= ========== ======== Basic and diluted net loss per common share ........................ $ (0.02) Weighted average common shares outstanding - Basic and diluted. 2,462 (12) 8,147 4,167 (13) 12,314
23 DESCRIPTION OF ACQUISITIONS STOCKTON The acquisition of Stockton was accounted for using the purchase method of accounting and, accordingly, the net assets acquired have been recorded at estimated fair value on the date of acquisition and the historical statement of operations data of the Company reflects the results of operations of Stockton from its date of acquisition. The purchase price and the allocation of the purchase price to the acquired assets are as follows (in thousands): Cash purchase price ....................... $10,674 ======= Computer equipment ........................ $ 260 Purchased client lists .................... 903 Purchased software and technology ......... 1,230 Goodwill .................................. 8,281 ------- $10,674 =======
The Company is also contingently liable for additional consideration of up to $2,600,000 (plus interest at an annual rate of 7.25%) if Stockton's revenue during the 12-month period ending September 30, 1998 is at least $5,000,000. Based on revenues recorded through September 30, 1998 by Stockton, the Company has accrued additional contingent consideration of $2,022,000 as of September 30, 1998 which was treated as additional purchase price and was, therefore, included in goodwill (but is not reflected in the chart above). The purchased client lists are being amortized on a straight-line basis over five years and the purchased software and technology generally is being amortized on a straight-line basis over five years. Goodwill is being amortized on a straight-line basis over 20 years. Computer equipment is being amortized on a straight-line basis over three years. HII The acquisition of HII will be accounted for using the purchase method of accounting and, accordingly, the net assets acquired will be recorded at estimated fair value on the date of acquisition. The allocation of purchase price is preliminary and subject to change upon review by management of additional evidence relating to the fair value of assets acquired and liabilities assumed at the closing date. Adjustments to the purchase price allocation, if any, would likely relate to amounts assigned to intangible assets. The purchase price and the allocation of the purchase price to the acquired net assets are as follows (in thousands): Cash purchase price .............................................. $11,600 Acquisition related costs ........................................ 118 ------- Total estimated purchase price ................................. $11,718 ======= Historical adjusted net book value at September 30, 1998 ......... $ 856 Write-off of inventory ........................................... (13) Goodwill ......................................................... 8,250 Purchased client lists ........................................... 2,713 Estimated liability for severence payments ....................... (88) ------- Net assets acquired ............................................ $11,718 =======
The purchased client lists will be amortized on a straight-line basis over five years and goodwill will be amortized on a straight-line basis over 20 years. 24 - ---------- (1) As restated, to adjust the write-off of acquired in-process research and development and the amortization of goodwill resulting from the TCS acquisition. See Note 13 to Notes to Consolidated Financial Statements. (2) Represents the historical results of operations of Stockton from July 1, 1997 through the date of acquisition by the Company in November 1997. (3) Represents the historical continuing operations of HII for the 12 months ended June 30, 1998. (4) Represents rent expense relating to a new operating lease for the Stockton facility. (5) Represents adjustments for amortization expense related to the acquisitions of Stockton and HII as if they had occurred July 1, 1997, as follows:
THREE MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ---------------------------- ------------------- STOCKTON HII TOTAL HII ---------- ------- --------- ------------------- (IN THOUSANDS) Purchased client lists .................... $ 67 $543 $ 610 $136 Purchased software and technology ......... 92 -- 92 -- Goodwill .................................. 156 412 568 103 ----- ---- ------ ---- $ 315 $955 $1,270 $239 ===== ==== ====== ====
(6) Represents the elimination of depreciation and amortization expenses relating to assets of Stockton that were not acquired. (7) The interest expense adjustment relating to the Stockton and HII acquisitions is as follows:
THREE MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 --------------- ------------------- (IN THOUSANDS) Elimination of historical interest expense of Stockton ..................... $ (38) $ -- Elimination of historical interest expense of HII .......................... (190) (64) Interest expense on borrowings under the Credit Facility used to fund Stockton acquisition at a composite interest rate of 6.93% (The effect of a .125% variance in the interest rate on the pro forma adjustment for the year ended June 30, 1998 would be $5) ..................................... 290 -- Interest expense on borrowings under the Credit Facility used to fund HII acquisition at a composite interest rate of 6.22% (The effect of a .125% variance in the interest rate on the pro forma adjustment for the year ended June 30, 1998 and the three months ended September 30, 1998 would be $15 and $4, respectively)......................................... 729 184 ------ ----- $ 791 $ 120 ====== =====
(8) The interest expense adjustment relating to the Offering is as follows:
THREE MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 --------------- ------------------- (IN THOUSANDS) Interest expense on Senior Subordinated Note including amortization of discount ............................................................ $ (2,859) $ (721) Interest expense on borrowings under the Credit Facility ............. (1,133) (338) -------- -------- $ (3,992) $ (1,059) ======== ========
(9) In connection with the repayment of the Senior Subordinated Note, the Company will record an extraordinary charge relating to the write-off of the remaining discount on the Senior Subordinated Note. Such charge would have approximated $2,025,000 as of July 1, 1997. Such charge has been excluded from the pro forma statements of operations. (10) Represents the elimination of the dividends accrued on HII's preferred stock. (11) Represents the elimination of the dividends accrued on the Preferred Stock due to the Recapitalization. (12) Represents the conversion of the Preferred Stock and accrued dividends thereon into Common Stock due to the Recapitalization. (13) Represents the sale by the Company of 4,166,667 shares of Common Stock in the Offering. (14) Represents the historical continuing operations of HII for the three months ended September 30, 1998. 25 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 -------------------------------------------- ACTUAL ------------------------ ADJUSTMENTS RELATING TO THE COMPANY HII(1) HII ACQUISITION ------------ ----------- ------------------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents ................ $ 3,551 $ 38 $ -- Accounts receivable, less allowance for doubtful accounts ....................... 8,579 661 -- Formulary receivables .................... 3,283 -- -- Inventory ................................ 250 13 (13)(2) Prepaid expenses and other current as- sets .................................... 668 260 (169)(3) ---------- --------- ---------- Total current assets .................... 16,331 972 (182) Property and equipment-Net ................ 4,885 577 -- Goodwill-Net .............................. 34,735 -- 8,250 (4) Other intangible assets-Net ............... 5,143 -- 2,713 (5) Other assets .............................. 3,632 202 (11)(3) ---------- --------- ---------- Total ..................................... $ 64,726 $ 1,751 $ 10,770 ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ......................... $ 3,096 $ 1,140 $ (1,131)(3) Accrued expenses and other current li- abilities ............................... 10,741 706 88 (7) Current portion of long-term debt ........ 262 2,325 (2,325)(3) ---------- --------- ---------- Total current liabilities ............... 14,099 4,171 (3,368) Long-term debt ............................ 42,365 -- 11,718 (10) -- Other long-term liabilities ............... 189 -- -- Redeemable cumulative preferred stock...... 31,823 -- -- Stockholders' equity (deficit): Preferred Stock .......................... -- 63 (63)(12) Common Stock ............................. 57 90 (90)(12) Additional paid-in capital ............... 27,521 2,993 (2,993)(12) Accumulated deficit ...................... (51,328) (5,566) 5,566 (12) ---------- --------- ---------- Total stockholders' equity (deficit) . (23,750) (2,420) 2,420 ---------- --------- ---------- Total ..................................... $ 64,726 $ 1,751 $ 10,770 ========== ========= ========== AS OF SEPTEMBER 30, 1998 ------------------------------------------------------------------ ADJUSTMENTS ADJUSTMENTS RELATING TO THE RELATING TO PRO FORMA, RECAPITALIZATION PRO FORMA THE OFFERING AS ADJUSTED -------------------- ----------- -------------------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents ................ $ -- $ 3,589 $ -- $ 3,589 Accounts receivable, less allowance for doubtful accounts ....................... -- 9,240 -- 9,240 Formulary receivables .................... -- 3,283 -- 3,283 Inventory ................................ -- 250 -- 250 Prepaid expenses and other current as- sets .................................... -- 759 -- 759 ------------ --------- ------------ --------- Total current assets .................... -- 17,121 -- 17,121 Property and equipment-Net ................ -- 5,462 -- 5,462 Goodwill-Net .............................. -- 42,985 -- 42,985 Other intangible assets-Net ............... -- 7,856 -- 7,856 Other assets .............................. -- 3,823 (855)(6) 2,968 ------------ --------- ------------ --------- Total ..................................... $ -- $ 77,247 $ (855) $ 76,392 ============ ========= ============ ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ......................... $ -- $ 3,105 $ (280)(6) $ 2,825 Accrued expenses and other current li- abilities ............................... -- 11,535 (625)(8) 10,335 (575)(6) Current portion of long-term debt ........ -- 262 404 (9) 666 ------------ --------- ------------ --------- Total current liabilities ............... -- 14,902 (1,076) 13,826 Long-term debt ............................ -- 54,083 (44,175) (8) 11,049 1,141 (9) Other long-term liabilities ............... -- 189 -- 189 Redeemable cumulative preferred stock...... (31,823)(11) -- -- -- Stockholders' equity (deficit): Preferred Stock .......................... -- -- -- -- Common Stock ............................. 27 (11) 85 42 (8) 127 1 (13) Additional paid-in capital ............... 31,796 (11) 59,316 44,758 (8) 104,074 (1)(13) Accumulated deficit ...................... -- (51,328) (1,558)(10) (52,874) ------------ --------- ------------ --------- Total stockholders' equity (deficit) . 31,823 8,073 43,255 51,328 ------------ --------- ------------ --------- Total ..................................... $ -- $ 77,247 $ (855) $ 76,392 ============ ========= ============ =========
26 - ---------- (1) Represents the historical balance sheet of HII as of September 30, 1998. (2) Represents the write-off of inventory. (3) The following adjustments to HII's historical balance sheet reflect those assets and liabilities excluded from the entity being acquired prior to consummation of the acquisition (in thousands). Net assets of discontinued operations retained .......... $ 169 Other assets retained ................................... 11 Current portion of long-term debt retained .............. (2,325) Accounts payable retained(*) ............................ (1,131) -------- $ (3,276) ========
* The closing agreement requires working capital to be at least one dollar at closing. (4) Represents goodwill resulting from the HII acquisition. (5) Represents the amount allocated to purchased client lists, which is the estimated fair value of the asset acquired. (6) Represents the payment of accounts payable and accrued Offering expenses and the reclassification of these costs to additional paid-in capital. (7) Represents an accrual for severence payments. (8) Represents the sale by the Company of 4,166,667 shares of Common Stock at an assumed public offering price of $12.00 per share and the application of the net proceeds to the Company as follows (in thousands): PROCEEDS Gross proceeds from Offering ............................... $ 50,000 Underwriting discount and commissions ...................... (3,500) Estimated Offering expenses ................................ (1,700) --------- Net proceeds .............................................. $ 44,800 ========= USES Repay Senior Subordinated Note ............................. $ (25,000) Repay borrowings under the Credit Facility ................. (19,175) Repay accrued interest on Senior Subordinated Note ......... (625) --------- Total uses ................................................ $ (44,800) =========
(9) Represents the write-off of the remaining discount on the Senior Subordinated Note of $1,545,000 which will be recorded as an extraordinary item upon the consummation of the Offering. (10) Represents borrowings under the Credit Facility used to finance the HII acquisition. (11) Represents the conversion of outstanding Preferred Stock and $7,827,000 of accrued dividends on the Preferred Stock into Common Stock in connection with the Recapitalization. (12) Represents the elimination of HII's historical stockholders' deficit. (13) Represents the exercise of all Common Stock purchase warrants in connection with the Recapitalization. 27 SELECTED CONSOLIDATED FINANCIAL DATA The statement of operations data presented below for the years ended June 30, 1996, 1997 and 1998 and the balance sheet data as of June 30, 1997 and 1998 are derived from, and qualified by reference to, the audited consolidated financial statements of the Company included elsewhere herein. The statement of operations data for the year ended June 30, 1995 and the balance sheet data as of June 30, 1995 and 1996 are derived from, and qualified by reference to, the audited consolidated financial statements of the Company not included herein. The statement of operations data for the three months ended September 30, 1997 and 1998 and the balance sheet data as of September 30, 1997 and 1998 are derived from, and qualified by reference to, the unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such periods. The results for the interim period are not necessarily indicative of the results for the full fiscal year. The selected consolidated financial data should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements of the Company, the notes thereto and the other financial information included elsewhere in this Prospectus.
YEAR ENDED JUNE 30, ----------------------------------------------------------------- 1995 1996 1997(1) 1998(1) ---------------- ---------------- ------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(2) ......................................... $ 16,246 $ 31,768 $ 35,279 $ 42,290 Operating expenses: Operations ......................................... 9,753 19,174 16,817 16,958 Sales, marketing and client services ............... 3,615 7,064 8,769 10,765 Research and development ........................... 2,051 2,132 3,278 3,941 General and administrative ......................... 3,119 6,059 5,263 4,865 Depreciation and amortization ...................... 2,995 5,176 5,460 7,143 Write-down of intangible assets .................... 8,191 (3) 9,965 (4) -- -- Acquired in-process research and development (5) ............................................... -- -- 1,556 -- Other charges (6) .................................. 2,864 538 2,301 -- --------- --------- --------- -------- Total operating expenses ............................ 32,588 50,108 43,444 43,672 --------- --------- --------- -------- Loss from operations ................................ (16,342) (18,340) (8,165) (1,382) Other (income) expense .............................. -- 313 (893) (12) Interest expense, net ............................... 189 584 1,504 3,623 --------- --------- --------- -------- Loss before provision for income taxes .............. (16,531) (19,237) (8,776) (4,993) Provision for income taxes .......................... 70 93 57 42 --------- --------- --------- -------- Net loss ............................................ (16,601) (19,330) (8,833) (5,035) Preferred stock dividends ........................... (27) (2,400) (2,400) (2,400) --------- --------- --------- -------- Net loss applicable to common stockholders .......... $(16,628) $(21,730) $ (11,233) $ (7,435) ========= ========= ========= ======== Basic and diluted net loss per common share ......... $ (3.17) $ (4.14) $ (2.07) $ (1.31)(7) Weighted average common shares outstanding- Basic and diluted .................................. 5,238 5,245 5,425 5,679 THREE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1997(1) 1998 ----------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(2) ......................................... $ 9,241 $ 12,006 Operating expenses: Operations ......................................... 4,285 4,793 Sales, marketing and client services ............... 2,385 2,930 Research and development ........................... 806 1,106 General and administrative ......................... 1,061 1,263 Depreciation and amortization ...................... 1,698 1,894 Write-down of intangible assets .................... -- -- Acquired in-process research and development (5) ............................................... -- -- Other charges (6) .................................. -- -- -------- -------- Total operating expenses ............................ 10,235 11,986 -------- -------- Loss from operations ................................ (994) 20 Other (income) expense .............................. -- -- Interest expense, net ............................... 655 1,089 -------- -------- Loss before provision for income taxes .............. (1,649) (1,069) Provision for income taxes .......................... 12 16 -------- -------- Net loss ............................................ (1,661) (1,085) Preferred stock dividends ........................... (600) (600) -------- -------- Net loss applicable to common stockholders .......... $ (2,261) $ (1,685) ======== ======== Basic and diluted net loss per common share ......... $ (0.40) $ (0.30)(7) Weighted average common shares outstanding- Basic and diluted .................................. 5,674 5,685
AS OF JUNE 30, AS OF SEPTEMBER 30, -------------------------------------------------- ------------------------- 1995 1996 1997(1) 1998(1) 1997(1) 1998 --------- ------------- ------------- ------------ ------------ ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital ................................... $ 504 $ (4,207) $ (2,567) $ 2,345 (378) $ 2,232 Total assets ...................................... 59,511 43,031 48,090 59,394 48,041 64,726 Long-term debt, including current portion ......... 5,805 11,601 25,161 41,324 27,995 42,627 Redeemable cumulative preferred stock ............. 24,023 26,423 28,823 31,223 29,423 31,823 Stockholders' equity (deficit) .................... 12,942 (8,472) (17,438) (24,692) (19,666) (23,750)
(Footnotes on following page) 28
THREE MONTHS YEAR ENDED JUNE 30, ENDED SEPTEMBER 30, ----------------------------------------------------- ---------------------- 1995 1996 1997(1) 1998(1) 1997(1) 1998 ------------- ------------- ------------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER TRANSACTION DATA) OTHER DATA: EBITDA (8) ................................. $ (13,347) $ (13,164) $ (2,705) $ 5,761 $ 704 $ 1,914 Adjusted EBITDA (8) ........................ (2,292) (2,052) 2,211 5,761 $ 704 $ 1,914 Cash flows from operating activities ....... (3,561) (1,653) (4,020) (2,500) (1,616) 447 Cash flows from investing activities ....... (22,074) (4,919) (12,221) (12,104) (519) (869) Cash flows from financing activities ....... 33,434 657 15,521 15,635 2,781 1,023 Transactions processed (9) Pharmacy .................................. -- 107,032 126,211 188,114 38,513 53,608 Medical ................................... -- 15,687 23,075 31,564 7,762 8,348 Dental .................................... -- 6,021 12,188 14,681 3,546 4,135 --------- --------- --------- --------- -------- ------- Total transactions processed ............. -- 128,740 161,474 234,359 49,821 66,091 Transactions per FTE (9)(10) ............... -- 321 415 642 137 174 Revenue per FTE (10) ....................... $ 48 $ 79 $ 91 $ 116 $ 25 $ 32 Operating expenses per transaction (9) ..... -- 0.39 0.27 0.19 0.21 0.18
- ---------- (1) As restated, to adjust the write-off of acquired in-process research and development and the amortization of goodwill resulting from the TCS acquisition. See Note 13 to Notes to Consolidated Financial Statements. (2) During the periods presented, the Company made a series of acquisitions and divested certain non-core or unprofitable operations. Revenues attributable to these divested operations, which are included in the statement of operations data, were $1,709,000, $3,617,000, $2,252,000, $241,000 and $190,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months ended September 30, 1997, respectively. (3) Reflects the write-off of goodwill related to the acquisitions of MPC and Wellmark. (4) Reflects the write-down of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. (5) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (6) Reflects (i) expenses of $2,864,000 relating to the spin-off of the Company by CES in the fiscal year ended June 30, 1995 and (ii) expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000 and $2,301,000 in the fiscal years ended June 30, 1996 and 1997, respectively. (7) Supplemental net loss per share, giving effect to the Recapitalization, would be $(0.62) and $(0.13) for the fiscal year ended June 30, 1998 and the three months ended September 30, 1998, respectively. (8) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with GAAP and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described below. The following table summarizes EBITDA and adjusted EBITDA for all periods presented:
THREE MONTHS YEAR ENDED JUNE 30, ENDED SEPTEMBER 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1997 1998 -------------- -------------- ------------ --------- -------- ---------- (IN THOUSANDS) EBITDA .............................................. $ (13,347) $ (13,164) $ (2,705) $5,761 $ 704 $ 1,914 Contingent consideration paid to former owners of acquired businesses ................................ -- 538 2,301 -- -- -- Write-down of intangible assets ..................... 8,191 9,965 -- -- -- -- Acquired in-process research and development ........ -- -- 1,556 -- -- -- Expenses related to the CES spin-off ................ 2,864 -- -- -- -- -- Contract and legal settlement provisions ............ -- 609 1,059 -- -- -- ---------- ---------- -------- ------ ----- ------- Adjusted EBITDA ..................................... $ (2,292) $ (2,052) $ 2,211 $5,761 $ 704 $ 1,914 ========== ========== ======== ====== ===== =======
(9) Transaction volumes are not available for the fiscal year ended June 30, 1995. (10) Full-time equivalents ("FTE") represents the number of full-time employees and part-time equivalents of full-time employees as of the end of the period shown. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements, including the notes thereto, of the Company included elsewhere in this Prospectus. This Prospectus contains forward-looking statements relating to future events or future financial performance of the Company. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the risk factors set forth under "Risk Factors" and the matters set forth in this Prospectus generally. OVERVIEW MEDE AMERICA is a leading provider of EDI products and services to a broad range of providers and payors in the healthcare industry. The Company's integrated suite of EDI solutions and services allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. Currently, the Company processes over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., MPC and Wellmark, which comprised the heathcare services business of CES, historically provided EDI services to hospitals and physicians. Their combined financial results were reflected in the fiscal 1995 financial statements on a full year basis. Since its formation, the Company has expanded both through internal growth and the acquisition of six healthcare transaction processing businesses. As part of its strategy of providing an integrated suite of EDI products to a broad range of healthcare providers, the Company has focused on acquisitions that provide entry into new markets or expand the Company's product suite. All acquisitions have been accounted for under the purchase method of accounting. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or modified various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. These integration activities impacted the Company's financial results in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and are ongoing. 30 The following table summarizes the Company's acquisitions and divested products and operations:
PRIMARY PRODUCTS DIVESTED PRODUCTS DATE OF FOUNDING/ OF FOUNDING/ DATE FOUNDING COMPANIES ACQUIRED MARKET ACQUIRED COMPANY ACQUIRED COMPANY DIVESTED MEDE AMERICA, Inc. 4/94(1) Medical Eligibility Verification, -- -- Enrollment MPC 5/94(1) Medical Hospital Claims, Data Entry 1/97 Physician Billing Physician Billing 12/96 Physician Billing 8/97 Wellmark 5/94(1) Medical Hospital Claims, -- -- Physician Billing COMPANIES ACQUIRED BY MEDE AMERICA MEDE OHIO 3/95 Pharmacy Switching, PBM, Practice Management 2/96 Third Party Billing Software Practice Management 12/97 Software Latpon 6/95 Medical Hospital Claims Physician Billing 3/96 EC&F/Premier 10/95 Dental Dental Claims, Practice Practice Management 3/97 Management Software Software TCS 2/97 Pharmacy/ PBM, Switching, -- -- Medical Eligibility Verification Stockton 11/97 Pharmacy PBM -- -- HII 10/98 Medical Hospital Claims -- -- Physician Claims
(1) Represents date acquired by CES. In March 1995, the largest stockholder of the Company acquired all of the outstanding shares of MEDE OHIO (formerly known as General Computer Corporation) for a cash purchase price of approximately $22,593,000, including transaction expenses. The largest stockholder subsequently merged MEDE OHIO into the Company. The purchase price paid by the Company for MEDE OHIO to its largest stockholder was equal to the purchase price paid by the largest stockholder. MEDE OHIO develops EDI systems for the pharmacy market and provides transaction switching/routing services. At the time of its acquisition, MEDE OHIO had been incurring significant losses for over two years and was in very poor financial condition. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $25,814,000, consisting of $892,000 of software (which was completed and not in-process at the time of the acquisition), $2,527,000 of client lists and $22,395,000 of goodwill. During fiscal year 1996, the Company wrote-down $9,965,000 of costs relating to client lists and related allocable goodwill due to a loss of approximately 25% of the acquired MEDE OHIO client base. The loss of this significant portion of MEDE OHIO's client base was primarily due to problems experienced by the Company in the post-merger integration of MEDE OHIO's operations into the Company's operations. This post-merger integration process took place during the same general time period in which the Company was spun-off from CES and a new management team was installed at the Company. The Company generally is amortizing the software over three years and the remaining value of client lists is being amortized over five years. The goodwill is being amortized over 20 years. In June 1995, the Company acquired substantially all of the assets of Latpon for a cash purchase price of approximately $2,470,000, plus the assumption of approximately $963,000 of liabilities (primarily long-term debt). Latpon, a developer of claims processing software, provided EDI transaction process- 31 ing services to hospitals and hospital-based physician groups. Latpon also provided electronic and manual business office administrative services. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $2,291,000, consisting of $993,000 of software and client lists and $1,298,000 of goodwill. The Company generally is amortizing the software over five years and is amortizing the client lists and goodwill over five years and 20 years, respectively. In October 1995, the Company acquired two commonly-owned companies, EC&F, an all payor EDI dental claims processor, and Premier, a dental practice management software vendor. The acquisitions were funded with an initial cash payment of $4,050,000, including transaction expenses, and contingent earn-out payments based on the achievement of certain EBITDA growth targets by the EC&F business over three one-year periods ending on September 30, 1998. The Company recorded expenses of $538,000 during fiscal year 1996 relating to the first such period and an aggregate $2,301,000 during fiscal year 1997 primarily relating to the second and third such periods. The Company does not believe that any additional amounts will be payable pursuant to this earn-out arrangement. The acquisitions of EC&F and Premier were accounted for under the purchase method and the Company recorded total intangible assets of $4,350,000, consisting of $764,000 of software, and $3,586,000 of goodwill. The Company generally is amortizing the software over three years and is amortizing the goodwill over 20 years. The Company sold Premier in January 1997 for a cash payment of $388,000. There was no gain or loss on the sale of Premier. In February 1997, the Company acquired TCS, a provider of pharmacy switching and PBM transaction processing systems and services for pharmacies and eligibility verification services for physicians, for a total cash payment of $11,465,000, including transaction expenses. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $11,065,000, consisting of $1,556,000 of in-process research and development, $2,984,000 of software and $6,525,000 of goodwill. As of the date of the acquisition, the Company wrote off the acquired in-process research and development which had not reached technological feasibility and had no alternative future use. The Company generally is amortizing the software over three years and is amortizing the goodwill over seven years. The in-process research and development acquired from TCS consisted of advanced Windows software technology for PC and client server platforms for healthcare EDI transactions. Products under development included: (1) a plan member eligibility verification product for workers compensation; (2) a medical claims processing system to meet the HCFA 1500 EDI industry standard; and (3) a switching system for internet claims from retail pharmacies. At the time of the acquisition, the Company estimated that continued development activities for six months to one year resulting in additional estimated research and development costs of $460,000 would be required in order to prove feasibility and bring the project to commercial viability. It was the opinion of management that such projects had an above average probability of successful completion and could contribute to revenue, profit and cash flow within 18 to 24 months from the date of purchase. At this time, all three projects are substantially complete. However, any or all of these projects could fail to produce an economic gain. Such failure, if encountered, would not affect the Company's current product suite and financial results, but would decrease the Company's opportunities for growth. Estimated costs to complete the acquired in-process research and development projects as of the date of acquisition were as follows: ESTIMATED RESEARCH AND DEVELOPMENT EXPENSE (IN THOUSANDS)
WORKERS COMP. HCFA 1500 PHARMACY TOTAL --------------- ----------- ---------- ------ Fiscal 1997 .......... $ 58 $ 70 $ 65 $193 Fiscal 1998 .......... 80 97 90 267 ---- ---- ---- ---- Total ............... $138 $167 $155 $460 ==== ==== ==== ====
Prior to the consummation of the acquisition, TCS had incurred development costs of $67,000, $125,000 and $56,000, respectively, for the workers compensation eligibility product, HCFA 1500 and the internet pharmacy claims product, the three in-process research and development projects shown above. 32 The Company determined the value of the purchased in-process technologies by estimating the projected net cash flows related to each of the in-process products. The resulting net cash flows were then discounted back to their net present values. The amount of the write-off of in-process research and development costs was then limited to the portion allocable to pre-acquisition development costs incurred by TCS versus post-acquisition costs incurred by the Company. The net cash flows were based on management's estimates of the costs necessary to complete the development of the products, the revenues that would be earned after commercial availability and the estimated operating expenses associated therewith. The projections were based on the following principal assumptions: For the workers compensation eligibility product, the projections assumed commercial availability in January 1998 and revenue growth from $431,000 in fiscal 1998 to $1.3 million in fiscal 2002, an annual rate increase of approximately 25%. For HCFA 1500, the projections assumed commercial availability in March 1998. It was assumed that revenues from the product would grow from $1.4 million in fiscal 1998 to $5.5 million in fiscal 2002, increasing at an annual rate of 50% in the first year of commercial availability, 35% in the second year and at a rate of 25% per year thereafter. For the internet pharmacy claims product, the projections assumed commercial availability in December 1997. It was assumed that revenues from the product would grow from $41,000 in fiscal 1997 to approximately $3.2 million in fiscal 2002, increasing at an annual rate of approximately 35% in the first year of commercial availability, 30% in the second year and at a rate of 25% per year thereafter. In all three cases, post-development operating expenses, including sales, advertising and promotion and general and administrative costs, were projected to grow at the rate of 10% per annum between fiscal 1999 and 2002. No significant synergies were projected for any of the three in-process products because the Company had no comparable products in the market or in development and no penetration in the products' prospective user bases. The projected net cash flows for the in-process products were discounted to their present values using a discount rate of 18%. Such discount rate was composed of two factors: the Company's estimated weighted average cost of capital (the "WACC") (the rate of return an investment would have to generate in order to provide the required rate of return to the Company's equity and long-term debt capital), which was calculated to be approximately 13%, and a 5% risk factor reflecting the uncertainty of successful completion and market acceptance of the in-process products. Together, the WACC and risk factor yield a discount factor of 18%. A 13% discount rate factor was used by the Company to value fully developed software, as it faces substantially the same risks as the business as a whole. The 5% risk factor reflected the fact that the in-process products did not involve complex or innovative technologies, and primarily reflected the risk of market acceptance once the developed products were released to customers. Since the TCS acquisition, all three in-process products have been completed and two are in the early stages of commercialization. As of September 30, 1998, none of these products had generated significant revenues, and, given the results of the Company's marketing efforts to date, management currently believes that the revenues derived from these three products will be lower than projected. The market for the workers compensation eligibility product has been less receptive than had been anticipated and this product did not generate any revenues as of September 30, 1998. However, the Company believes that, over time and with increased marketing effort, this product will achieve commercial viability. The HCFA 1500 product experienced roll out delays and is expected to be commercially introduced in the Spring of 1999. The Company believes that, in time, this product will achieve commercial viability. The internet pharmacy product is the only one of the three-in-process products acquired from TCS that had generated revenues by the end of fiscal 1998. However, the revenues produced were approximately 22% of the revenues projected for it at the time of the acquisition. The commercial introduction of this product was adversely affected by recent revisions in regulatory standards which limit the use of the internet to process pharmacy claims. The Company is currently processing transactions with this product for a small number of pharmacy clients. Although any or all of these projects could fail to generate significant returns for the Company and such failure could render the TCS acquisition less valuable to the Company than had been anticipated, 33 such failure would not affect the Company's current suite of products or, in management's opinion, have a material impact on the Company's results of operations or overall financial condition. In November 1997, the Company acquired Stockton, a provider of PBM transaction processing systems and related services for the pharmacy market. Stockton was purchased for an initial cash payment of $10,674,000 including transaction expenses, and a contingent earnout payment based upon the achievement of certain revenue growth targets. If such revenue targets are achieved over the 12-month period ending September 30, 1998, a maximum payment of $2,600,000 (plus interest at an annual rate of 7.25%) will be made. Based on revenues recorded through September 30, 1998 by Stockton, the Company has accrued additional contingent consideration of $2,022,000 as of September 30, 1998 which was treated as additional purchase price and was, therefore, added to goodwill. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $10,414,000, consisting of $2,133,000 of software and client lists and $8,281,000 of goodwill. The Company generally is amortizing the software over five years and is amortizing the client lists and goodwill over five years and 20 years, respectively. In October 1998, the Company acquired HII, a provider of EDI transaction processing services to hospitals and physician groups in Missouri, Kansas and Illinois. Prior to the purchase of HII, Intercare and Telemedical, two unrelated healthcare services divisions, were divested from HII in separate transactions. HII was purchased for a total cash payment of approximately $11,718,000, including transaction expenses. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $10,963,000, consisting of $2,713,000 of client lists and $8,250,000 of goodwill. The Company is amortizing the client lists over five years and goodwill over 20 years. Revenues Revenues are derived from the sale of transaction processing products and services primarily on a fee-for-transaction basis. Transaction fees vary depending upon transaction type and service provided. The Company currently receives fees from providers for the majority of its transactions including claims processing, eligibility verification, claims switching, pharmacy script processing and tracking and Medicaid enrollment. The Company also receives fees from payors for the transmission of electronic claims and formulary payments from pharmaceutical manufacturers relating to the Company's PBM script processing and management reporting services. These transaction-based revenues comprise the predominant portion of the Company's total revenues and tend to be recurring. Other revenue is derived from one-time payments related to installation and implementation services, software license fees and EDI systems equipment sales. See "Business -- Suite of EDI Products and Services." Transaction-based revenues and related formulary services revenues (if applicable), which constitute the majority of the Company's total revenues, are recognized at the time the transactions are processed and the services are provided. Revenues associated with software support and implementation fees, each constituting less than 3% of the Company's revenues for the fiscal year ended June 30, 1998, are recognized ratably over the contract period or as the service is provided. Revenue from licensing of software, which also constitutes less than 3% of the Company's total revenues for the fiscal year ended June 30, 1998, is recognized upon installation if it is determined that the Company has no significant remaining obligations and collectibility of the resulting receivable is probable. Operating Expenses Operations Expense. Operations expense consists of data and voice telecommunications expense, salaries and benefits for operations employees and other costs associated with transaction processing and services provided to clients, such as network and telecommunications, maintenance, computer operations and systems administration, facilities and other additional indirect expenses. Since 1996, operations expense as a percentage of revenues and operations expense per transaction have declined as a result of the Company's integration and restructuring efforts and increased operating leverage. Restructuring charges recorded in connection with the Company's integration activities have resulted in variability in the Company's quarterly operating results. 34 Sales, Marketing and Client Services Expense. Sales, marketing and client services expense consists primarily of salaries, benefits, commissions and related indirect costs and expenditures for marketing programs, trade shows, advertising, help desk software and related client communications. As the Company continues to implement its growth strategy, sales, marketing and client services expenses are expected to continue to increase. Research and Development Expense. Research and development expense consists primarily of salaries, benefits and related indirect expenses associated with the design, research and development of new products and enhancements to existing current products. The development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility has been established, any additional software development costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." Amortization of purchased software and technology and of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of three to five years is assigned to purchased software and technology and an original estimated economic life of five years is assigned to capitalized software development costs. Amortization begins in the period in which the related product is available for general release to customers. During the fiscal year ended June 30, 1998 and the three months ended September 30, 1998, the Company capitalized $462,000 and $238,000, respectively, of software development costs for projects for which technological feasibility has been established but were not yet available for client release. Prior to July 1, 1997, the Company did not have any software development projects for which significant development costs were incurred between the establishment of technological feasibility and general client release of the product. The Company believes that the development of enhanced and new product offerings are essential to remaining competitive and it expects that development expenses will increase in the future. General and Administrative Expense. General and administrative expense primarily consists of salaries, benefits and related indirect costs for the administrative, executive, finance, legal, human resources and internal systems personnel, as well as accounting and legal fees. As the Company implements its growth strategy, general and administrative expenses are expected to increase. Depreciation and Amortization Expense. The Company depreciates the cost of its tangible capital assets on a straight-line basis over the estimated economic life of the asset: three to five years for computer equipment, five years for furniture and fixtures, and 20 to 25 years for buildings and improvements. Acquisition-related intangible assets, which include the value of software and client lists, are amortized based on the estimated useful economic life of the asset at the time of acquisition, and therefore will vary among acquisitions. The Company recorded amortization expense relating to goodwill and other intangible assets of $3,708,000 and $5,064,000 during the fiscal years ended June 30, 1997 and 1998, respectively. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations of the Company expressed as a percentage of total revenues.
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------ ------------------ 1996 1997 1998 1997 1998 ---- ---- ---- ---- ---- Revenues ............................... 100% 100% 100% 100% 100% Operating Expenses: Operations ............................ 60 48 40 46 40 Sales, marketing and client services. 22 25 25 26 24 Research and development .............. 7 9 9 9 9 General and administrative ............ 19 15 12 11 11 Depreciation and amortization ......... 16 15 17 18 16
35 Subsequent to the issuance of the Company's consolidated financial statements for the fiscal year ended June 30, 1998, the Company's management determined that it was necessary to revise the valuation of the write-off of in-process research and development incurred in connection with the TCS acquisition in February 1997. As a result, the Company's financial statements for the fiscal years ended June 30, 1997 and 1998 and the three months ended September 30, 1997 have been restated from the amounts previously reported in order to reflect the effects of the adjustment to the write-off of in-process research development. See Note 13 to Notes to Consolidated Financial Statements. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Revenues Revenues for the three months ended September 30, 1998 were $12.0 million compared to $9.2 million in the corresponding period of fiscal 1998, representing an increase of 30%. The increase was primarily attributable to growth of the existing business and to incremental revenue from the acquisition of Stockton in November 1997, partially offset by the loss of revenues from operations that were divested. The Company processed 66 million transactions in the three months ended September 30, 1998, compared to 50 million transactions processed in the corresponding period of fiscal 1998, representing an increase of 33%. The increase resulted from the addition of new clients, increased transaction volume from existing clients and to a lesser extent the acquisition of Stockton. The average price per transaction received by the Company declined by 8% between such periods, as a result of a relatively higher proportion of lower priced Pharmacy division switching transactions compared to the other divisions' higher priced transactions, and a greater portion of transactions that were processed under contracts with volume-based pricing terms. Operating Expenses Operations expense was $4.8 million for the three months ended September 30, 1998, compared to $4.3 million in the corresponding period of fiscal 1998, representing an increase of 12%. As a percentage of revenues, operations expense decreased from 46% for the first three months of fiscal 1998 to 40% in the corresponding period of fiscal 1999. The increase in operations expense was primarily due to the acquisition of Stockton in November of 1997, the results of which were included in the current quarter but not in the prior year's quarter, and to a lesser extent the higher volume of transactions processed. The decrease in operations expense as a percentage of revenues was primarily due to operations leverage from systems consolidation for recent acquisitions, the effects of ongoing cost reduction programs, and the impact of the divested operations, which results were included in the 1998 period but not the 1999 period. Sales, marketing and client services expense was $2.9 million for the three months ended September 30, 1998, compared to $2.4 million in the corresponding period of fiscal 1998, representing an increase of 23%. As a percentage of revenues, sales, marketing and client services expense decreased from 26% for the first three months of fiscal 1998 to 24% in the corresponding period of fiscal 1999. The increase in sales, marketing and client services expense was primarily due to the inclusion of the Stockton acquisition, the hiring of new employees in sales and marketing to support expansion of the Company's business into new markets, as well as client support and help desk services to serve an expanded customer base. Research and development expense was $1.1 million for the three months ended September 30, 1998, compared to $806,000 in the corresponding period of fiscal 1998, representing an increase of 37%. As a percentage of revenues, research and development expense was 9% for each such period. The increase in research and development costs in the period was primarily due to development of new and enhanced EDI transaction products and services, development associated with major customer contracts currently expected to roll out in calendar 1999 and the establishment of additional direct payor connections. In addition, Year 2000 compliance expenditures amounted to $132,000 for the three months ended September 30, 1998; there were no such expenditures in the corresponding period of fiscal 1998. The Company capitalized $238,000 of software development costs in the first three months of fiscal 1999, compared to $93,000 in the corresponding period of fiscal 1998. 36 General and administrative expense was $1.3 million for the three months ended September 30, 1998, compared to $1.1 million in the corresponding period of fiscal 1998, representing an increase of 19%. As a percentage of revenues, general and administrative expense was 11% for each such period. Depreciation and amortization expense was $1.9 million for the three months ended September 30, 1998, compared to $1.7 million in the corresponding period of fiscal 1998, representing an increase of 12%. As a percentage of revenues, depreciation and amortization expense decreased from 18% for the first three months of fiscal 1998 to 16% in the corresponding period of fiscal 1999. YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997 Revenues Revenues for the fiscal year ended June 30, 1998 were $42.3 million compared to $35.3 million in fiscal 1997, representing an increase of 20%. The increase was primarily attributable to incremental revenue from the acquisitions of TCS and Stockton in February 1997 and November 1997, respectively, and to the growth of the existing business, partially offset by the loss of revenues from operations that were divested. The Company processed 234 million transactions in the fiscal year ended June 30, 1998, compared to 161 million transactions processed in fiscal 1997, representing an increase of 45%. The increase resulted from the addition of new clients, increased transaction volume from existing clients and the acquisitions of TCS and Stockton. The average price per transaction received by the Company in fiscal 1998 declined by 13% from 1997, as a result of the greater proportion of transactions processed under contracts with volume-based terms and pricing and a larger proportion of lower priced eligibility verification transactions as a result of the acquisition of TCS. Operating Expenses Operations expense was $17.0 million for the fiscal year ended June 30, 1998 compared to $16.8 million in fiscal 1997, representing an increase of 1%. As a percentage of revenues, operations expense decreased from 48% in fiscal 1997 to 40% in fiscal 1998. The containment of operations expense in fiscal 1998 was a result of ongoing cost reduction programs, systems consolidation for recent acquisitions and the impact of the divested operations, which results are included in fiscal 1997 but not in fiscal 1998. Sales, marketing and client services expense was $10.8 million for the fiscal year ended June 30, 1998 compared to $8.8 million in fiscal 1997, representing an increase of 23%. As a percentage of revenues, sales, marketing and client services expense was 25% for each such fiscal year. The increase in such expenses was primarily due to the inclusion of TCS and Stockton in the results of operations for the fiscal year ended June 30, 1998 and, to a lesser extent, increases in expenses relating to the hiring of new employees for client support and help desk service, the installation of help desk tracking software and resources devoted to telesales. Research and development expense was $3.9 million for the fiscal year ended June 30, 1998 compared to $3.3 million in fiscal 1997, representing an increase of 20%. As a percentage of revenues, research and development expense was 9% for each such fiscal year. The Company capitalized $462,000 of software development costs in fiscal 1998; however, no software development costs were capitalized in fiscal 1997. Prior to July 1, 1997, the Company did not have any software development projects for which significant development costs had been incurred between the establishment of technological feasibility and general client release of the product. General and administrative expense was $4.9 million for the fiscal year ended June 30, 1998 compared to $5.3 million in fiscal 1997, representing a decrease of 8%. As a percentage of revenues, general and administrative expense decreased from 15% in fiscal 1997 to 12% in fiscal 1998. This decrease was primarily a result of cost controls and the consolidation and integration activities related to the Company's recent acquisitions. 37 Depreciation and amortization expense was $7.1 million for the fiscal year ended June 30, 1998 compared to $5.5 million in fiscal 1997, representing an increase of 31%. As a percentage of revenues, depreciation and amortization expense increased from 15% in fiscal 1997 to 17% in fiscal 1998. These increases reflect the increased amortization expense related to the acquisitions of TCS in February 1997 and Stockton in November 1997. There were no acquisition-related expenses for the fiscal year ended June 30, 1998, as compared to $3.9 million of such expenses in fiscal 1997. Included in the amount for fiscal 1997 was a $1.6 million write-off related to in-process research and development from the acquisition of TCS (for software that had not achieved technological feasibility and had no alternative use), and a contingent earnout charge of $2.3 million recorded by the Company in connection with the EC&F purchase agreement. In addition, in fiscal 1997, the Company recorded a gain of $885,000 from a sale of securities. See Note 12 of "Notes to Consolidated Financial Statements." YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 Revenues Revenues for the fiscal year ended June 30, 1997 were $35.3 million compared to $31.8 million in fiscal 1996, representing an increase of 11%. The increase was primarily attributable to revenue from the acquisition of TCS in February 1997, partially offset by the loss of revenues from operations that were divested. The increase was also due to the growth of the existing business. The Company processed 161 million transactions in the fiscal year ended June 30, 1997 compared to 129 million transactions processed in fiscal 1996, representing an increase of 25%. The increase resulted from the addition of new clients, the growth of business from existing clients and the TCS acquisition. The average price per transaction in fiscal 1997 declined by 4% from fiscal 1996, primarily as a result of the divested operations having higher claims pricing. Operating Expenses Operations expense was $16.8 million for the fiscal year ended June 30, 1997 compared to $19.2 million in fiscal 1996, representing a decrease of 12%. As a percentage of revenues, operations expense decreased from 60% in fiscal 1996 to 48% in fiscal 1997. The operations expense improvement was a result of ongoing cost reduction programs, systems consolidation for recent acquisitions and the divestitures of non-core or unprofitable operations. Sales, marketing and client services expense was $8.8 million for the fiscal year ended June 30, 1997 compared to $7.1 million in fiscal 1996, representing an increase of 24%. As a percentage of revenues, sales, marketing and client service expense increased from 22% in fiscal 1996 to 25% in fiscal 1997. These increases reflect the inclusion of the TCS acquisition in the results for five months and, to a lesser extent, the addition of client support personnel and the increase in help desk tracking software expenses. Research and development expense was $3.3 million for the fiscal year ended June 30, 1997 compared to $2.1 million in fiscal 1996, representing an increase of 54%. As a percentage of revenues, research and development expense increased from 7% in fiscal 1996 to 9% in fiscal 1997. These increases were due to the hiring of new employees and other expenses related to the expansion of the Company's processing capacity and the implementation of new technology processing platforms throughout its data processing centers. General and administrative expense was $5.3 million for the fiscal year ended June 30, 1997 compared to $6.1 million in fiscal 1996, representing a decrease of 13%. As a percentage of revenues, general and administrative expense decreased from 19% in fiscal 1996 to 15% in fiscal 1997. These decreases were primarily a result of consolidation and integration activities. Depreciation and amortization expense was $5.5 million for fiscal year ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an increase of 5%. As a percentage of revenues, depreciation and amortization expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997. 38 Acquisition-related expenses for the fiscal year ended June 30, 1997 included a $1.6 million write-off related to in-process research and development from the acquisition of TCS (for software that had not achieved technological feasibility and had no alternative use) and a contingent earnout charge of $2.3 million recorded by the Company in connection with the EC&F purchase agreement. In addition, in fiscal 1997, the Company recorded a gain of $885,000 from a sale of securities. See Note 12 of "Notes to Consolidated Financial Statements." During the fiscal year ended June 30, 1996, the Company wrote down approximately $10.0 million of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. Such intangible assets were written down to the net present value of the estimated future cash flows to be derived from these clients as of June 30, 1996. The write-down was required due to a loss of approximately 25% of the acquired MEDE OHIO client base. In addition, a contingent earnout charge of $538,000 was recorded in connection with the EC&F purchase agreement during the fiscal year ended June 30, 1996. 39 QUARTERLY OPERATING RESULTS
THREE MONTHS ENDED -------------------------------------------------- 9/30/96 12/31/96 3/31/97 6/30/97 ----------- ------------ ----------- ------------- (IN THOUSANDS) Revenues ................................. $ 8,179 $ 7,831 $ 8,954 $10,315 Operating Expenses: Operations .............................. 4,298 3,683 4,123 4,713 Sales, marketing and client services .... 1,925 1,957 2,261 2,626 Research and development ................ 783 754 918 823 General and administrative .............. 1,042 1,171 1,127 1,923 Depreciation and amortization ........... 1,102 1,044 1,423 1,891 Acquired in-process research and development ............................ -- -- 1,556 -- Payment to former owners of acquired businesses .................... 330 330 330 1,311 -------- -------- -------- ------- Total operating expenses ................. 9,480 8,939 11,738 13,287 -------- -------- -------- ------- Income (loss) from operations ............ (1,301) (1,108) (2,784) (2,972) Other (income) expense ................... -- -- (885) (8) Interest expense, net .................... 150 202 427 725 -------- -------- -------- --------- Loss before provision for income taxes ... (1,451) (1,310) (2,326) (3,689) Provision for income taxes ............... 14 14 15 14 -------- -------- -------- --------- Net loss ................................. $ (1,465) $ (1,324) $ (2,341) $(3,703) ======== ======== ======== ========= THREE MONTHS ENDED ------------------------------------------------------------- 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 ----------- ------------ ----------- ----------- ------------ (IN THOUSANDS) Revenues ................................. $ 9,241 $ 9,849 $ 11,099 $ 12,101 $ 12,006 Operating Expenses: Operations .............................. 4,285 3,942 4,258 4,473 4,793 Sales, marketing and client services .... 2,385 2,432 2,952 2,996 2,930 Research and development ................ 806 1,059 1,021 1,055 1,106 General and administrative .............. 1,061 1,107 1,139 1,558 1,263 Depreciation and amortization ........... 1,698 1,698 1,852 1,895 1,894 Acquired in-process research and development ............................ -- -- -- -- -- Payment to former owners of acquired businesses .................... -- -- -- -- -- -------- -------- -------- -------- -------- Total operating expenses ................. 10,235 10,238 11,222 11,977 11,986 -------- -------- -------- -------- -------- Income (loss) from operations ............ (994) (389) (123) 124 20 Other (income) expense ................... -- -- 13 (25) -- Interest expense, net .................... 655 915 900 1,153 1,089 -------- -------- -------- -------- -------- Loss before provision for income taxes ... (1,649) (1,304) (1,036) (1,004) (1,069) Provision for income taxes ............... 12 12 13 5 16 -------- -------- -------- -------- -------- Net loss ................................. $ (1,661) $ (1,316) $ (1,049) $ (1,009) $ (1,085) ======== ======== ======== ======== ========
The quarterly operating results for the three months ended March 31, 1997, June 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998 have been restated in order to adjust the write-off of acquired in-process research and development and the amortization of the goodwill resulting from the TCS acquisition. See Note 13 to Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has used capital from external sources to fund its internal growth and operations and to make acquisitions. Such capital requirements have been provided by (i) the Company's four principal stockholders, through periodic purchases of the Company's debt and equity securities and (ii) the Credit Facility. Since June 30, 1995 an investment fund affiliated with WCAS has purchased a Senior Subordinated Note in the principal amount of $25.0 million and 370,993 shares of Common Stock from the Company for an aggregate $25.0 million, which was used in connection with the acquisition of TCS, to repay borrowings under the Credit Facility and for general working capital purposes. See "Certain Transactions." As of September 30, 1998, the Company had outstanding borrowings of $18.0 million under the Credit Facility. Such borrowings bear interest at a weighted average rate of 7.0% per annum (as of September 30, 1998). The Company was not in compliance with the leverage and interest coverage covenants as of September 30, 1998. The bank has granted a waiver relating to the noncompliance with these covenants and has amended these covenants on a prospective basis such that the Company anticipates it will be in compliance with such covenants at least through September 30, 1999. The total availability under the Credit Facility was 20.0 million. In October 1998, the total availability under the Credit Facility was increased to $36.0 million, and the Company drew down an additional $11.7 million to pay the purchase price of the HII acquisition. All indebtedness under the Credit Facility has been, and currently is, guaranteed by the Company's four principal stockholders. See "Certain Transactions." During July 1998, the Company received a letter from the lender under the Credit Facility committing to provide an amended credit facility with total available credit of $15.0 million. This facility would be comprised of a $7.5 million term loan to be used for acquisitions and a $7.5 million revolving credit 40 loan to be used for working capital purposes, each with a maximum term of two years from October 31, 1998. Interest for the term and revolver loans would be computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based rate. Such borrowing rates would be at the option of the Company for any particular period during which borrowings exist. The Company is currently negotiating with the lender to increase such total available credit to $20.0 million. Covenants under the existing agreement include: customary covenants and restrictions on additional liabilities and disposition of assets, achieving year 2000 compliance by August 1999, maintaining financial records and reporting, a maximum quarterly leverage ratio, a minimum interest coverage ratio, restrictions on the payment of dividends, as well as prior approval for acquisitions. Borrowings under the Amended Credit Facility will not be guaranteed by any third party, but will be secured by substantially all of the Company's assets, including the stock of the Company's subsidiary. The Amended Credit Facility will contain covenants similar to those under the existing agreement, including restrictions on the payment of dividends on the Common Stock. See "Dividend Policy." It is anticipated that the Amended Credit Facility will take effect upon the consummation of the Offering. As of September 30, 1998, the Company had cash and cash equivalents of $3.6 million and net working capital of $2.2 million. Net cash used in operations was $1.7 million, $4.0 million and $2.5 million for the fiscal years ended June 30, 1996, 1997 and 1998, respectively. Net cash provided by operating activities was $447,000 for the three months ended September 30, 1998. The $2.5 million net cash used in operations for the fiscal year ended June 30, 1998 was used primarily for contingent earnout charges on acquisitions made in prior fiscal years which resulted in a net decrease in accounts payable and accrued expenses of $1.4 million. In addition, $1.9 million of the net cash used was attributable to an increase in formulary accounts receivable relating to Stockton (formulary receivables normally have a 7-12 month collection cycle) and $2.1 million was attributable to an increase in accounts receivable resulting from an increase in revenues. The $447,000 net cash provided by operating activities for the three months ended September 30, 1998 resulted primarily from the $1.1 million of income from operations (after adding back non-cash charges) resulting from increased revenues and operating margins. The net cash provided from operations also reflected increased investments in formulary receivables ($729,000), accounts receivables ($942,000) and other assets ($625,000), which were partially offset by an increase in accounts payable and accrued expenses ($1,853,000). Cash used for investment purposes was $4.9 million, $12.2 million, $12.1 million and $869,000 for the fiscal years ended June 30, 1996, 1997 and 1998 and the three months ended September 30, 1998, respectively. Cash used for investment purposes during the fiscal year ended June 30, 1998 was primarily used to acquire Stockton for $10.7 million and also to fund capital expenditures (predominantly computer and network hardware and software) in the amount of $913,000. Cash used for investment purposes for the three months ended September 30, 1998 was used to fund capital expenditures of $466,000 and additions to intangible assets of $403,000. The Company expects to pay $1.7 million of additional contingent consideration relating to the Stockton acquisition by the end of the March 31, 1999 quarter and at least $2.0 million per annum for the foreseeable future for capital investment to support growth in transaction processing. Cash provided by financing activities was $657,000, $15.5 million, $15.6 million and $1.0 million for the fiscal years ended June 30, 1996, 1997 and 1998 and the three months ended September 30, 1998, respectively. Cash provided by financing activities during the fiscal year ended June 30, 1998 and the three months ended September 30, 1998 was primarily provided from borrowings under the Credit Facility which was partially offset by principal repayments of debt and capital lease obligations. In the fiscal year ended June 30, 1997, cash was provided by the issuance of a Senior Subordinated Note in the principal amount of $25,000,000 and 370,993 shares of Common Stock for aggregate proceeds of $25.0 million, which proceeds were partially offset by the repayment of outstanding borrowings under the Credit Facility and principal repayments of debt and capital lease obligations. Approximately $25.0 million of the net proceeds of the Offering will be used to prepay all then outstanding principal and accrued interest on the Senior Subordinated Note and approximately $19.8 million of the net proceeds will be used to repay all but $13.0 million of the outstanding indebtedness and accrued interest under the Company's current Credit Facility. In connection with the repayment of 41 the Senior Subordinated Note, the Company will record an extraordinary charge of approximately $1.4 million relating to the write-off of the remaining discount on the Senior Subordinated Note. The Company expects to use the Amended Credit Facility to finance the Company's future acquisitions and general working capital needs. The Company also expects to finance acquisitions through the issuance of additional equity and debt securities. The Company believes that the proceeds of the Offering, together with existing cash balances and cash generated by operations in the near term, and the borrowings expected to be made available under the Amended Credit Facility, will be sufficient to finance the Company's operations for at least 18 months. However, future acquisitions may require funding beyond the Company's cash resources and currently anticipated capital or operating requirements could change, with the result that the Company may be required to raise additional funds through the public or private sale of additional securities. See "Risk Factors -Acquisition Strategy; Need for Additional Capital." YEAR 2000 COMPLIANCE The Company has completed its assessment of whether it will have to modify or replace portions of its software and its products, services and internal systems so that they will function properly with respect to dates in the year 2000 and thereafter. In addition to its general Year 2000 compliance review, the Company has specifically identified several areas which are not Year 2000 compliant as of November 30, 1998: (i) the Company's PBM system in Ohio, (ii) the UNIX operating platform software used in connection with the Company's pharmacy practice management system, and (iii) the UNIX operating platform software utilized in its pharmacy transaction switching. With the exception of the Ohio PBM system, the Company believes its internally developed software and systems are Year 2000 compliant. The Company has developed a remediation program to correct the Year 2000 problems it has identified. PBM clients who utilize the Company's PBM system in Ohio are being migrated to the PBM system acquired by the Company from Stockton, which the Company considers to be Year 2000 compliant. A testing and migration timetable for all such clients has been developed, with migration activities scheduled for completion in mid-1999. For retail pharmacy practice management clients, the Company's remediation program consists of providing software upgrades, with discounted hardware packages to enable such clients to utilize Year 2000 compliant systems. The Company is currently contacting retail pharmacy customers and expects that the implementation of such program will extend throughout calendar 1999. A version of the UNIX operating platform software used in pharmacy transaction switching, which the manufacturer represents to be Year 2000 compliant, was released in December 1998. Testing of that operating platform software on the Company's hardware, with the Company's pharmacy transaction switching software, is scheduled for January and February of 1999. In October 1998 the Company acquired HII. HII's EDI products and services fall into three categories: physician claims processing (small and large-group), hospital claims processing and claims data transmission (extraction and transmission of claim data to a third party data analyst). Based on its review at the time of the acquisition, the Company determined that none of these products is Year 2000 compliant. The Company intends to modify HII's common carrier and internet-based claims processing system for small physician groups to make it Year 2000 compliant. The Company also intends to modify HII's payor data transmission products to make such products Year 2000 compliant. These modifications are scheduled to be completed by spring 1999. The Company intends to migrate HII's claims processing for hospitals and large physician groups to the Company's MedE Claim product; this migration is scheduled to start in spring 1999 and be completed by mid-1999. The Company can, if necessary, process claims for hospitals and large physician groups through its common carrier and internet-based claims processing system. Some or all of the Company's revenues from each of the three areas in which Year 2000 problems have been identified, as well as those of HII's clients, are subject to the risk of Year 2000 noncompliance. The total revenue from the Company's PBM services clients was $6,245,000 in fiscal 1998. The total revenue from Pharmacy retail system sales was $511,000 in fiscal 1998. The total revenue derived from Pharmacy switching was $8,004,000 in fiscal 1998. The total claims and related revenue derived from HII was $4,950,000 for the twelve months ended June 30, 1998. Excluding anticipated expenditures associated with ordinary product development, the Company has budgeted approximately $1,210,000 through December 1999 for Year 2000 compliance costs, of which approximately $350,000 had been expended through November 30, 1998. The Company believes that this amount will be sufficient to execute its plan and cover contingency plan costs. The Company believes that it has sufficient resources to implement its plan. However, there can be no assurance that expenditures required to achieve compliance with Year 2000 requirements will not exceed the budgeted amounts. 42 The Company's client base consists of over 65,000 health-care providers and over 1,000 payors. While the Company has not attempted to assess the readiness of each of these entities, the Company has begun to work with major customers and suppliers to insure that Year 2000 compliance issues will not interrupt in the normal activities supported by these relationships. The Company's Medicare/Medicaid Payors are subject to a Year 2000 compliance program undertaken by the Health Care Financing Administration. Under the HCFA plan, all mission critical systems have been identified, and an Independent Verification and Validation consultant has been retained to perform inspections and testing of all public payors. This plan includes both random and announced system and site testing. The Company believes that the most likely worst case Year 2000 scenario would include the following: (i) one or more parts of the Company's software and operating systems will operate incorrectly; (ii) one or more of the Company's payors would be unable to receive transactions; and (iii) one or more of the Company's providers/clients would not have completed internal Year 2000 conversions. The Company has completed the assessment of its critical hardward and software and believes that the assessment has revealed all significant Year 2000 problems, that such problems will be capable of remediation, and that the Company's software and hardware will perform substantially as planned when Year 2000 processing begins. As contingency planning, the Company has three available options should certain functions not operate properly on January 1, 2000. The Company has developed its internal systems in such a manner as to allow such systems to accept non-Year 2000 compliant data, and convert such data based on defaults and algorithms developed in conjunction with the providers to Year 2000 compatible formats. This methodology is applicable for claims, eligibility and enrollment transactions. Second, for payors, in the event a payor is unable to accept EDI claims, the Company currently has the capability, internally and, if necessary with support from an outside vendor, to print paper claims forms from the supplied provider data, and to send those claims in paper form to non-Year 2000 compliant payors. In addition, for medical claims, a bulletin board system acquired in the HII transaction could be utilized by clients, with minimal programming set up, as a means of transmitting claims to the Company via the internet. IMPACT OF INFLATION Inflation has not had a material impact on the Company's historical operations or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS Recent pronouncements of the Financial Accounting Standards Board, which are not required to be adopted at this date, include SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". These pronouncements are not expected to have a material impact on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is not required to be adopted at this date. The Company is currently evaluating the impact of this statement on its financial statements. NET OPERATING LOSSES As of June 30, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $36.4 million. Such loss carryforwards expire in the fiscal years 2005 through 2013. Because of certain changes in ownership, as defined in the Internal Revenue Code, which occurred during 1996 and 1995, certain of these net operating loss carryforwards are subject to annual limitations. See Note 7 of "Notes to Consolidated Financial Statements." 43 BUSINESS GENERAL MEDE AMERICA is a leading provider of EDI products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products and services reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. As of November 30, 1998, the Company processed over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., MPC, and Wellmark, which comprised the healthcare services business of CES, historically provided EDI services to hospitals and physicians. Since its formation, the Company has expanded both through internal growth and the acquisition of six healthcare transaction processing businesses. As part of its strategy of providing an integrated suite of EDI products and services to a broad range of healthcare providers, the Company has focused on acquisitions that provided entry into new markets or expanded the Company's product suite. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or restructured various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. INDUSTRY OVERVIEW Innovations over the past decade in computer and telecommunications technologies have resulted in the development of EDI systems to electronically process and transmit information among the various participants in the healthcare industry. These systems were designed to replace paper-based recording and transmission of information, enabling greater processing speed, reduced processing costs and more accurate data interchange. Electronic processing enables providers to verify patient eligibility or obtain authorization for services at the time of appointment, registration or at the time of claim submission. The healthcare EDI processor then interfaces with the payor to obtain an eligibility or authorization confirmation, which is transmitted back to the provider. To obtain payment, providers must submit claims information in formats specified by the respective payors. Healthcare EDI processors can facilitate this process by utilizing customized software programs that can perform "edits" to the data supplied by providers and re-format that data to meet the data specifications of payors. Electronically transmitted claims are sent either directly from the provider to the payor, or through the healthcare EDI processor (which in turn transmits the claims to the payor directly or through one or more intermediaries). The claim is received and reviewed by the payor and the remittance response is communicated (usually not electronically) back to the provider. Each of these steps in the healthcare delivery process gives rise to a current or potential EDI transaction. Health Data Directory estimates that in 1998 over 4.4 billion electronic and paper claims will be paid in all sectors of the healthcare services market, and over the past five years healthcare claims increased at an average rate of 6.25% per year. The Company expects the volume of healthcare claims to continue to grow as the U.S. population ages and life expectancy of the U.S. population increases. The increase in claims has been accompanied by an increase in the proportion of claims that are electronically processed. From 1994 to 1998 (estimated), the proportion of total healthcare claims that were electronically processed increased from 47% to approximately 62%. During such period the number of 44 claims processed electonically increased at an average rate of 14% per year. The Company expects the electronic processing of healthcare claims to continue to increase as a result of increased reliance on electronic commerce and increased emphasis on cost containment in the healthcare industry. The penetration of electronic processing varies significantly among the different markets within the healthcare industry. Health Data Directory estimates that in 1998 electronic processing will account for approximately 16% of total dental claims, 38% of total physician medical claims, 83% of total hospital medical claims and 86% of total pharmacy claims. In addition to the remaining opportunity to convert paper-based claims to electronic processing, the Company believes that there is significant market potential for EDI processing in the non-claim area, including eligibility verification, remittance transactions and other data exchange transactions such as claims tracking, referrals and physician scripting. The Company believes that EDI penetration in these non-claim transaction categories is low, and as a result, the EDI transaction growth in these areas will exceed that of the EDI claims processing market. As compared to claims processing, the electronic processing of non-claim information transactions in the healthcare industry, such as eligibility inquiries, enrollment in Medicare and Medicaid programs, referrals, formulary inquiries to pharmacy benefit managers and prescription delivery, has emerged only recently and is less pervasive. The Company believes that only a small percentage of non-claim information transactions are managed electronically. In addition to opportunities to expand its claims processing business, the Company believes that there are significant possibilities to expand electronic processing to non-claim areas in the healthcare market, for the following reasons: o As advanced technology continues to penetrate the healthcare industry, an increasing amount of healthcare data will be managed electronically. For example, healthcare providers are implementing practice management software systems to manage the clinical, financial and administrative aspects of their businesses. Increasingly, these software systems incorporate EDI processing capabilities. o Efforts by government and private insurers to contain healthcare costs are expected to motivate hospitals and physicians to use EDI not only to lower costs, but also to improve operating efficiencies and increase accuracy. For example, state Medicaid programs and some private insurance companies now encourage providers to verify patients' medical benefits eligibility electronically. o As the healthcare industry continues to undergo consolidation, the larger scale of the resulting entities may result in increased EDI use. For example, various managed care companies have encouraged their provider networks to utilize EDI for authorizations, enrollment verification, encounter reports and referrals. Currently, the EDI market is fragmented and consists of several nationally prominent EDI claims processors and several hundred regional EDI service providers who occupy selected niches in specialized markets and geographical sectors. Over the past several years, many of the regional EDI service providers have been acquired by national organizations. The Company believes that competitive conditions in the healthcare information industry will continue to favor consolidation as larger, more diversified organizations are able to reduce costs and offer an integrated package of standardized products and services. COMPETITIVE STRENGTHS The Company believes that it has several competitive strengths which will enable it to capitalize on the significant growth opportunities in the healthcare EDI marketplace. COMPREHENSIVE SUITE OF EDI PRODUCTS AND SERVICES. The Company has followed a strategy of developing or acquiring EDI products and services that may be provided to a broad range of healthcare clients. The Company's products incorporate open architecture designs and what the Company regards as "best of breed" technology and may be purchased as modular additions to the client's existing data storage and retrieval system, or as part of a comprehensive EDI processing system. These products also provide to the client the capability and the required security to transmit or receive EDI transactions across the Internet. They are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice manage- 45 ment and billing systems. In addition, new products can be added to respond to changing client requirements, and the scalability of the Company's products permits the client to accommodate increasing transaction volumes without requiring substantial new investments in software and hardware. Because of these product characteristics, the Company believes it is well positioned to take advantage of the expected growth of EDI in areas such as eligibility, managed care transactions and pharmacy to physician scripting. BROAD AND DIVERSIFIED CLIENT BASE. The Company markets its products and services to a broad range of healthcare providers including the medical market, comprised of hospitals, clinics and physicians, the dental market comprised of small to medium-sized dental practice groups, and the pharmacy market, which includes retail pharmacies (independents and chains) as well as PBMs. In addition, the Company has relationships through practice management system vendors and other intermediaries. As of November 30, 1998, the Company's highly diversified client base consisted of approximately 42,000 pharmacies, 8,000 dental offices, 1,100 hospitals and clinics and 14,000 physicians. The Company's broad and diversified client base provides it with transaction-based revenues that tend to be recurring and positions it to capitalize on the rapid consolidation taking place within the healthcare industry. DIRECT RELATIONSHIPS WITH PROVIDERS AND PAYORS. The Company has developed over 540 direct connections with healthcare payors including Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and commercial insurance companies, and the Company is able to access over 500 additional payors through contractual relationships with multiple claims clearinghouses. Additionally, the Company has direct client relationships with providers such as hospitals, clinics, physicians and pharmacies. The range of MEDE AMERICA's services and the extent of its connectivity with payors provides the opportunity to achieve deeper penetration of its provider base, while at the same time offering more complete solutions to new clients. MEDE AMERICA believes that it is strongly positioned to offer reliable, one-stop shopping to both providers and payors for all their EDI needs. FOCUS ON CLIENT SERVICE. The Company has focused on implementing a wide range of client service and support functions. These support activities include the use of automated client service tracking software, expanded client help desk and account executive support functions, and extensive client feedback mechanisms. This focus has enhanced the Company's awareness of client needs and improved the Company's ability to respond to those needs. As a result of these activities, of the clients that contributed to the Company's revenues in the 1997 fiscal year, approximately 90% continued as clients of the Company and contributed to the Company's revenues in the 1998 fiscal year. The Company believes that its high quality client service enhances the satisfaction of its clients and generates new revenue opportunities in the form of expanded transaction volume and sales of new products and services. LEADING TECHNOLOGY AND PRODUCT PLATFORMS. The Company recognizes the critical role of technology and telecommunications platforms to ensure reliable and high quality service. Over the past two years, MEDE AMERICA has invested significant capital in new hardware and software systems resulting in an estimated three-fold increase in transaction processing capacity. The Company has designed its products on a modular client/server model, using open architecture and commonly available hardware, with redundant processing capabilities. The Company's redundancies in its computing capacity and its dual-site operations enable it to provide uninterrupted processing and data transmission with little if any downtime. As a result of such technology investments, MEDE AMERICA believes it is able to provide high quality service to its clients in the form of high network availability, batch transaction reliability and high rates of payor claims acceptance. MEDE AMERICA also believes that its technology platform, which is operating at approximately one-third of its total capacity, provides it with substantial operating leverage. EXPERIENCED MANAGEMENT TEAM. Each member of the Company's senior management team has over 15 years of experience in the information technology and transaction processing industries and has extensive background in working with emerging companies in the information processing industry. The Company believes that the range and depth of its senior management team position it to address the evolving requirements of its clients and to manage the growth required to meet its strategic goals. 46 GROWTH STRATEGY The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. To achieve this objective, the Company is pursuing a growth strategy comprised of the following elements: o PROVIDE COMPREHENSIVE SUITE OF EDI SOLUTIONS. The Company believes that it is critical to provide a full range of state of the art EDI solutions to clients at every stage of the healthcare transaction spectrum. The Company strives to develop fully modular products with open architecture to allow for easy installation and integration with existing systems. These features enhance the ability of the Company to offer one-stop shopping for a client's EDI needs. o FURTHER PENETRATE EXISTING CLIENT BASE. The Company believes that the market for EDI transaction processing among its current clients has significant potential. As EDI becomes more widespread in the healthcare industry, the use of emerging EDI products and services such as eligibility, enrollment, electronic credit card transactions and electronic statement processing will become increasingly commonplace. The Company believes that it is well positioned to cross sell such emerging products and services to its existing client base. o DEVELOP NEW EDI PRODUCTS AND SERVICES. The Company intends to develop new EDI solutions to meet the evolving electronic transaction processing needs of its existing and future healthcare clients. The Company believes that the use of EDI will expand to encompass an increasing range of services such as referrals, remittances and workers' compensation transactions. The Company has a team of 105 research and development and technical support professionals dedicated to developing, supporting and commercializing new and enhanced EDI solutions. In addition, the Company intends to undertake acquisitions in order to expand its suite of product offerings. o UTILIZE STRATEGIC PARTNERSHIPS TO EXPAND CLIENT BASE. MEDE AMERICA's strategic alliances with vendors, distributors and dealers of practice management software have played an important role in building relationships with small groups of physicians, pharmacists and dentists. These companies promote MEDE AMERICA's EDI products as a modular addition to their practice management software. The Company also has strategic relationships with large hospital groups, Medicaid intermediaries, PBMs and professional organizations. The Company believes that such strategic partnerships provide important opportunities for increasing the Company's revenue base. o PURSUE STRATEGIC ACQUISITIONS. Currently, the EDI market includes several hundred regional EDI service providers which occupy selected niches in specialized markets and geographical areas. The Company intends to capitalize on the fragmented market for the provision of EDI services by aggressively pursuing consolidation opportunities in order to increase its client and revenue base, expand its product suite, enter into new geographic markets, utilize its operating leverage to increase efficiency and add new talent and technical capacity in emerging areas of the EDI processing industry. SUITE OF EDI PRODUCTS AND SERVICES MEDE AMERICA's products and services enable its healthcare clients to process and transmit transactions more efficiently and accurately, reducing costs and increasing overall processing speed. The Company's EDI products incorporate open architecture designs and what the Company regards as "best of breed" technology and may be purchased as modular additions to existing data storage and retrieval systems or as part of a comprehensive EDI processing system. They are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice management and billing systems. In addition, new products can be added to respond to changing client requirements. The scalability of the Company's products permits its clients to accommodate increasing transaction volumes without substantial new investments in software and hardware. The following table illustrates the breadth of the Company's product and service offerings: 47 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 through reconciliation and payor accounts re- faster claim reimbursement. ceivable management. o Reduces administrative expenses. Claims Tracking -- o Tracks and provides a lock box service o Improves accounts receivable manage- Dental for payor reimbursements. ment and accelerates cash flow. ELIGIBILITY VERIFICATION MEDE Eligibility -- o Verifies patients' eligibility for specific o Reduces costs by minimizing fraud. All Markets healthcare benefits for Medicaid and o Ensures patient services are supported commercial payors. by a designated health benefit plan. o Reduces administrative expenses. MEDICAID ENROLLMENT Medicaid o Processes and tracks Medicaid enrollment o Reduces expenses through on-line Enrollment Manage- applications allowing for the verification application process. ment System (MEMS) and processing of Medicaid claims. Uti- o Reduces application processing time. -- Medical lized by hospitals and government agen- o Improves Medicaid claims billing and col- cies in New York, New Jersey and lection. California. o Reduces bad debt. TRANSACTION SWITCHING MEDE Xchange -- o Routes real-time and batch transaction o Reduces costs. All Markets data from clients to facilitate transaction o Increases network availability and transmission to payors. reliability. o Supports a broad array of access methods o Provides extensive payor connectivity. including dial-up, dial to packet, ISDN and frame relay.
48
NAME OF PRODUCT/SERVICE DESCRIPTION OF AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS - ------------------------- --------------------------------------------- -------------------------------------------- REAL-TIME PHARMACY BENEFIT MANAGEMENT ("PBM") MEDE Select -- o Adjudicates on-line claims, incorporat- o Accelerates cash flow through faster All Markets ing patient eligibility and benefit review. claim reimbursement. o Increases cash flow through high level of payor acceptance of edited claims. o Improves accounts receivables management. o Reduces administrative expenses. PHARMACY PRACTICE MANAGEMENT SYSTEMS (PPM) Solution Plus -- o Facilitates dispensing, inventory and o Expands drug pricing and coverage Pharmacy pricing of products for hospital, outpa- capabilities. tient and clinic pharmacies. o Improves cash flow through faster claim o Provides on-line claims adjudication. reimbursement. o Improves efficiency of pharmacy management and operations. OTHER PRODUCTS AND SERVICES Link -- o Connects physicians to pharmacies for the o Reduces costs related to manual genera- Medical and Pharmacy transmission of prescriptions and related tion and transmission of prescriptions. information and approvals. o Increases accuracy and transmission speed of prescriptions. Formulary o Administers and manages formulary pro- o Reduces drug costs and increases PBM Management -- grams for PBMs. revenue through manufacturer incentives, Pharmacy o Promotes the usage by healthcare plans of o Promotes compliance with payor formu- designated drug products. laries. Patient Statements -- o Facilitates patient statement billing. o Reduces costs and improves patient All Markets relations. Credit/Debit Card and o Assists patients in making co-payments or o Reduces bad debt and enhances patient Check Guarantee -- paying other out-of-pocket charges. convenience. All Markets Additional EDI o Processes data relating to referrals, en- o Reduces practice expense and improves Transactions -- counters and benefit pre-certifications. efficiency and patient relations. All Markets
CLIENTS The Company markets its products primarily to hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups (including HMOs, PPOs and healthcare practice management vendors) and processes transactions for providers in all 50 states. The Company believes it is one of the largest pharmacy transaction routers in the U.S. (based on volume) serving more than 42,000 pharmacies in various EDI capacities. MEDE AMERICA has a strong presence in the medical market in New York, New 49 Jersey, California, Florida, Minnesota, and Ohio, currently providing EDI services to more than 1,100 hospitals and clinics, and 14,000 physicians. In the dental market, MEDE AMERICA serves more than 8,000 dental offices. No single client of the Company accounted for more than 3% of the Company's revenues in fiscal year 1998. SALES, MARKETING AND CLIENT SERVICES The Company markets its products through a national sales and marketing organization consisting of 99 associates organized according to market, client type and product category. The Company also has a client services organization consisting of 67 associates dedicated to help desk and client support functions. A significant component of compensation for all sales personnel is performance based, although the Company bases quotas and bonuses on a number of factors in addition to actual sales, such as client satisfaction and collection of receivables. MEDE AMERICA's marketing efforts include direct sales, telesales, strategic partnerships with healthcare vendors, trade shows, direct marketing, telemarketing, the Internet, and specific advertising and marketing campaigns where appropriate. In the medical and pharmacy markets, the Company's current strategic business alliances include relationships with some of the country's largest hospitals, hospital networks, hospital information systems vendors, practice management software vendors, pharmacy chains, healthcare organizations and payors. The Company also maintains strategic alliances with certain state Medicaid programs. MEDE AMERICA's strategic alliances with vendors, distributors and dealers of practice management software have played an important role in building relationships with individual and small groups of physicians, pharmacies and dentists. These companies promote MEDE AMERICA's EDI products as modular additions to their practice management software. MEDE AMERICA has also won endorsements from 18 state dental associations, representing nearly half of all dentists in practice today. The Company's sales channels include targeting dental practice management companies and payor-driven programs aimed at their network providers. Recent significant expansion of MEDE AMERICA's direct connectivity to dental payors has contributed to its ability to generate revenue from this market while at the same time eliminating its dependence on other processors and clearinghouses. RESEARCH AND DEVELOPMENT As of November 30, 1998, the Company employed 76 people in the areas of product design, research and development, and 40 people in the areas of quality assurance and technical support. The Company's product development strategy is focused on continuous enhancement of its existing products to increase their functionality and ease of use, and the development of new products for additional EDI transactions and telecommunications offerings. Particular attention is devoted to the ongoing integration of developed and acquired systems and applications into a consolidated suite of EDI product offerings and supporting services for the markets served by the Company. In the Company's 1996, 1997 and 1998 fiscal years, research and development expenditures totaled $2,132,000, $3,278,000 and $3,941,000, respectively, representing approximately 7%, 9% and 9%, respectively, of the Company's total revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." TECHNOLOGY AND OPERATIONS MEDE AMERICA recognizes the crucial role of technology and telecommunications in the EDI marketplace. Since the beginning of fiscal 1996, the Company has acquired new hardware and software and made data center improvements costing more than $5.0 million. As a result, the Company is currently operating at approximately one-third of its operating capacity. The continuing use of newer emerging technologies and platforms has contributed significantly to the Company's current operational position. Examples of such innovations include the use of Internet technologies for data transmissions, on-line transaction monitoring tools and development of Windows-based front-end applications for clients. 50 Advanced Open Architecture MEDE AMERICA's products and applications offer clients the benefits of an "open architecture" EDI system. As a result, a client's system can expand or change without incurring significant incremental capital expenditures for hardware or software. The open architecture of the Company's systems also improves reliability and connectivity, and facilitates the cross selling of MEDE AMERICA's products, in part because of the following characteristics: o SCALABILITY. The Company's systems are designed to take full advantage of the client/server environment, UNIX operating systems and Redundant Array of Inexpensive Disks ("RAID") technology, allowing clients to expand their processing capacity in order to accommodate the growth of their businesses. o MODULARITY. The Company's client/server systems have been developed with discrete functionality that can be replicated and utilized with additional hardware. This modularity enables MEDE AMERICA to optimize application and hardware performance. o REDUNDANCY. The implementation of a dual site, geographically dispersed On-Line Transaction Processing ("OLTP") switch (Twinsburg, Ohio and Mitchel Field, New York) and RAID technology for batch processing significantly reduces the risk of business interruption. Each site is designed to be entirely self-supporting. o OPEN SYSTEMS. Through the use of an open systems architecture MEDE AMERICA is able to add new functionality to applications without re-designing its applications or architecture. o INDUSTRY STANDARDS. Through the adoption and active use of pertinent standards for healthcare EDI processing, MEDE AMERICA can support client and payor processing requirements and provide standard interfaces to other EDI processing organizations. o EASE OF USE. The Company's products are either Windows-based or GUI-based and function in UNIX, Novell and Windows NT operating environments, thereby enhancing ease of use by MEDE AMERICA's clients. o TELECOMMUNICATIONS OFFERINGS. MEDE AMERICA is an early adopter of emerging telecommunications systems enabling the Company to migrate to newer services, such as ISDN, dial to packet, frame relay, virtual private networks and Internet communications. These new offerings provide the Company with a competitive advantage through improved service levels or pricing. To ensure reliable connectivity to its EDI clients, the Company has established relationships with multiple telecommunications vendors. COMPETITION Competition in the market for the Company's products and services is intense and is expected to increase. The EDI market is characterized by rapidly changing technology, evolving user needs and frequent introduction of new products. Many of the Company's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and market recognition than the Company. In addition, many of the Company's competitors also currently have, or may develop or acquire, substantial installed client bases in the healthcare industry. As a result of these factors, the Company's competitors may be able to respond more quickly to new or emerging technologies, changes in client requirements and political, economic or regulatory changes in the healthcare industry, and may be able to devote greater resources to the development, promotion and sale of their products than the Company. The Company's principal competitors include National Data Corporation, Envoy Corporation and SSI, Inc. in claims processing and eligibility verification; QuadraMed Corporation in claims processing; Medifax, Inc. and HDX Healthcare Data Exchange Corporation in eligibility verification; and Envoy Corporation in the dental market. MEDE AMERICA also may face potential competition from other companies not currently involved in healthcare electronic data transmission, which may enter the market as EDI becomes more established. The Company believes that existing and potential clients in the 51 healthcare EDI market evaluate the products and services of competing EDI providers on the basis of the compatibility of the provider's software, cost, ease of installation, the range of applications available, the quality of service and the degree of payor connectivity. See "Risk Factors -- Competition." GOVERNMENT REGULATION The healthcare industry in the United States is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare organizations. During the past several years, the healthcare industry has been subject to increasing levels of governmental regulation of, among other things, reimbursement rates and certain capital expenditures. For example, legislation has been proposed that would mandate standards and impose restrictions on the Company's ability to transmit healthcare data and recently, Congress has had under consideration proposals to reform the healthcare system. While some of these proposals, if enacted, could increase the demand for EDI products and services in the healthcare industry by emphasizing cost containment, they might change the operating environment for the Company's clients in ways that cannot be predicted. Healthcare organizations could react to these proposals by curtailing or deferring investments, including those for the Company's products and services. The confidentiality of patient records and the circumstances under which such records may be released for inclusion in the Company's databases are subject to substantial regulation. State laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. The Health Insurance Portability and Accountability Act, passed in 1997, mandates the establishment of national standards for the confidentiality of patient data, as well as record keeping, data format and data security obligations that will apply to transaction processors, among others. It is possible that standards so developed will necessitate changes to the Company's operations. Additional legislation governing the dissemination of medical record information has been proposed at both the federal and state levels. This legislation may require holders of such information to implement security measures that may require substantial expenditures by the Company. There can be no assurance that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using the Company's products. See "Risk Factors -- Proposed Healthcare Data Confidentiality Legislation." YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, prior to January 1, 2000, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential consequences of the Year 2000 phenomenon. The Company believes that some systems with which its own computers interact (for example, some payor and practice management systems) are not yet Year 2000 compliant. In addition, certain of the Company's internally developed software and software on which its systems operate are not yet Year 2000 compliant. The applications running on these systems are expected to be discontinued, migrated to other systems or corrected before 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." However, there can be no assurance that the Company's systems will achieve Year 2000 compliance in a timely manner, if at all. See "Risk Factors -- Year 2000 Compliance." EMPLOYEES As of November 30, 1998, the Company employed 406 people, including 110 in operations, 99 in sales and marketing, 67 in client services, 86 in research and development, 34 in finance and administration and ten in corporate. None of the Company's employees is represented by a union or other collective bargaining group. The Company believes its relationship with its employees to be satisfactory. FACILITIES The following chart summarizes the Company's facilities and their monthly transaction capacities: 52
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 Claims 3,000,000 New York (Secondary Medical 33 Eligibility Enrollment 2,000,000 January 2003 and Pharmacy Data Center) 25,000 Georgia (Dental Data Center) 56 Dental Claims 1,600,000 January 2001 Corporate Headquarters, 115 Real-Time Benefit Management 2,000,000 Various dates between Sales & Development January 1999 and Feb- Offices (5 sites) and ruary 2003. PBM Processing St. Louis (HII Facility) 23 Claims N/A1 May 2005
- ---------- 1 All claims of this facility are outsourced to a third party mainframe processor. INTELLECTUAL PROPERTY The Company considers its methodologies, computer software and many of its databases to be proprietary. The Company relies on a combination of trade secrets, copyright and trademark laws, contractual provisions and technical measures to protect its rights in various methodologies, systems, products and databases. The Company has no patents covering its software technology. Due to the nature of its application software, the Company believes that patent and trade secret protection are less significant than the Company's ability to further develop, enhance and modify its current products. However, any infringement or misappropriation of the Company's proprietary software and databases could disadvantage the Company in its efforts to retain and attract new clients in a highly competitive market and could cause the Company to lose revenues or incur substantial litigation expense. The Company seeks to protect its proprietary information through nondisclosure agreements with its consultants, clients and potential clients, and limits access to, and distribution of, its proprietary information. See "Risk Factors -- Dependence on Intellectual Property; Risk of Infringement." Substantial litigation regarding intellectual property rights exists in the software industry, and the Company expects that software products may be increasingly subject to third-party infringement claims as the number of competitors in the Company's industry segment grows and the functionality of products overlaps. Although the Company believes that its products do not infringe on the intellectual rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future, or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. See "Risk Factors -- Dependence on Intellectual Property; Risk of Infringement." LEGAL PROCEEDINGS In June 1995, the Company acquired substantially all of the assets of Latpon for a purchase price of $2,470,000, plus the assumption of approximately $963,000 of liabilities. On June 6, 1998, Curtis J. Oakley filed a complaint with the Supreme Court of the State of New York, County of Nassau asserting multiple causes of action against several persons, including a cause of action naming the Company as a defendant, based on his alleged ownership of a 22% interest in Latpon. According to the complaint, Mr. Oakley's claim against the Company is for $2 million or such other amount as may be equivalent to the present value of his alleged ownership interest in Latpon's predecessor. The Company believes that it is fully indemnified by the former owners of Latpon under the Latpon acquisition agreement against any costs or damages arising from this claim. By letter dated July 10, 1998, one of the former owners of Latpon confirmed that he would indemnify the Company in accordance with the terms of the acquisition agreement. On August 25, 1998, the Company filed a motion to dismiss this claim. That motion is currently pending. 53 RECENT DEVELOPMENTS On July 17, 1998, the Company entered into a Transaction Processing Agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, MSOs and PPMs. Under the Processing Agreement, the Company will undertake certain software development obligations, and on July 1, 1999 it will become the exclusive processor (subject to certain exceptions) of medical reimbursement claims for Medic's subscribers submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to revenues to be paid by payors (in respect of which a commission is payable to Medic) as well as fees to be paid by Medic. The Processing Agreement sets forth detailed performance criteria and development and implementation timetables; inability to meet these criteria may result in financial penalties or give Medic a right to terminate this agreement. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter (unless either party elects to terminate). Contemporaneously, to ensure a close working relationship between the parties, on July 19, 1998 the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The difference between the two alternative prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The Medic Warrant vests over a two year period and may be exercised up to five years from the date of grant. The Medic Warrant contains customary weighted average antidilution provisions. The Company and the principal stockholders associated with WCAS and WBCP have agreed that following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. On October 30, 1998, the Company acquired all the outstanding shares of stock of HII, a St. Louis, Missouri based provider of EDI transaction processing services to hospitals and physician groups in the midwest. Prior to such acquisition, HII was a subsidiary of RightCHOICE and General American. The Company acquired HII for a total cash payment of approximately $11.7 million, including transaction expenses. Immediately prior to the acquisition, HII's "Intercare" and "Telemedical" businesses were divested in separate transactions. The HII acquisition was financed by an amendment to the Credit Facility increasing the facility to $36,000,000. To induce investment funds affiliated with WCAS, and WBCP to guarantee this increase, on October 7, 1998 the Company granted to such funds the 1998 Guaranty Warrants to purchase an aggregate 84,050 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The difference between the two prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The 1998 Guaranty Warrants are immediately exercisable and may be exercised up to five years from the date of grant. 54 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 ................. 46 President and Chief Executive Officer, Director Richard P. Bankosky .............. 56 Chief Financial Officer, Treasurer and Secretary James T. Stinton ................. 48 Chief Information Officer William M. McManus ............... 43 Senior Vice President and General Manager -- Pharmacy Linda K. Ryan .................... 51 Senior Vice President and General Manager -- Medical Roger L. Primeau ................. 55 Senior Vice President and General Manager -- Dental Anthony J. de Nicola(1) .......... 34 Director Timothy M. Murray(1)(2) .......... 46 Director
- ---------- (1) Member of Audit Committee (2) Member of Compensation Committee Set forth below is information about each of the Company's executive officers and directors. THOMAS E. MCINERNEY has been Chairman of the Board of Directors of the Company since March 1995 and a general partner of WCAS, an investment firm which specializes in the acquisition of companies in the information services and healthcare industries, since September 1986. Prior to joining WCAS, Mr. McInerney was President and Chief Executive Officer of Dama Telecommunications Corporation, a voice and data communications services company which he co-founded in 1982. Mr. McInerney has also been President of the Brokerage Services Division and later Group Vice President-Financial Services of ADP, with responsibility for the ADP divisions that serve the securities, commodities, bank, thrift and electronic funds transfer industries, and has held positions with the American Stock Exchange, Citibank and American Airlines. Mr. McInerney holds a B.A. degree from St. Johns University, and attended New York University Graduate School of Business Administration. He is a director of Aurora Electronics, Inc., The BISYS Group, Inc. and several private companies. THOMAS P. STAUDT has been a director and the President and Chief Executive Officer of the Company since March 1995. He served as President and Chief Operating Officer of CES from May 1993, and as a director from August 1994, until the sale of CES to First Data Corporation and the formation of the Company in March 1995. At CES, Mr. Staudt was responsible for credit card and healthcare transaction processing operations. Prior to joining CES, Mr. Staudt was President and Chief Operating Officer of Harbridge Merchant Services, Inc., which he joined in December 1991. Mr. Staudt has also held positions with A.C. Nielsen, a subsidiary of Dun & Bradstreet Corporation, and Wells Fargo Bank. Mr. Staudt holds a B.S. degree from the U.S. Naval Academy and an M.B.A. from San Francisco State University. RICHARD P. BANKOSKY has been Chief Financial Officer, Treasurer and Secretary of the Company since May 1996. He served as Chief Financial Officer and Treasurer for TII Industries, Inc. from April 1995 to February 1996. Prior to joining TII, he was Chief Financial Officer, Treasurer and Secretary for TSI International Software Ltd from February 1989 to April 1995. Mr. Bankosky also served as Chief Financial Officer and Secretary for V Band Systems Inc., was founder and Chief Operating Officer of NCR Credit Corporation and served as Director of Corporate Development at NCR Corporation. He holds a B.E.E. degree in Computers and Electrical Engineering from Rensselaer Polytechnic Institute and an M.B.A. from Adelphi University. 55 JAMES T. STINTON has been Chief Information Officer of the Company since October 1995. He served as Release Manager at Charles Schwab & Company from April 1992 to September 1995. In that position he was responsible for the development, coordination, testing and implementation for the Microsoft NT and UNIX Client Server software. Prior to joining Charles Schwab & Company, he was POS Systems Architect and Vice President at Wells Fargo Bank from February 1982 to April 1992. Mr. Stinton holds a degree from ONC Business Studies, Coventry Technical College, Coventry, England, and a graduate certificate from Consumer Banking Association, Retail Banking Management, McIntire Business School of the University of Virginia. WILLIAM M. MCMANUS has been Senior Vice President and General Manager -- Pharmacy of the Company since February 1996. From February 1996 through July 1998 he was Senior Vice President and General Manager -- Pharmacy and Medical, and from April 1994 through February 1996 he was head of pharmacy system sales for National Data Corporation. In that position he had overall responsibility for sales, marketing and product management programs. Prior to April 1994, Mr. McManus held senior level positions at OmniSYS, Inc., Healthcare Computer Corporation, PDX, Inc., and the computer division of Foxmeyer Corporation. Mr. McManus holds a B.S. degree in Health and Physical Education from the University of South Carolina and completed postgraduate courses in education and pharmacy at the University of South Carolina. LINDA K. RYAN has been Senior Vice President and General Manager -- Medical of the Company since July 1998. In April 1995 she joined the Company as Vice President of Marketing and Product Management. From June 1990 through April 1995 she served as the Director of the Single Payor Demonstration Program at the New York State Department of Health. The program was responsible for introducing healthcare EDI in New York State. Ms. Ryan has also served as Director of New York's Community Health Management Information System and held several key positions in New York State's Medicaid program and as a health care researcher at Johns Hopkins and Albany Medical College. Ms. Ryan holds a Bachelor's Degree from the University at Stony Brook in New York and a Master of Arts degree from the College of William and Mary in Virginia. ROGER L. PRIMEAU has been Senior Vice President and General Manager -- Dental of the Company since October 1996. From August 1989 through June 1996 he was Vice President, Administration and Customer Relations of National Electronic Information Corporation ("NEIC"). Prior to joining NEIC, Mr. Primeau worked at Columbia Life Insurance Co. and Aetna Life & Casualty in a variety of management positions. Mr. Primeau holds a B.S. degree in Biology from Holy Cross College. ANTHONY J. DE NICOLA has been a director of the Company since March 1995 and has been a general partner of WCAS since April 1994. Prior to joining WCAS, Mr. de Nicola was an associate at William Blair & Company, L.L.C., an investment banking firm with which he had been affiliated since 1990. Previously, Mr. de Nicola worked in the Mergers and Acquisitions Department of Goldman Sachs & Co. and held positions at McKinsey & Company and IBM. Mr. de Nicola holds a B.A. degree from DePauw University and an M.B.A. from Harvard Business School. He is a director of SEER Technologies, Inc. and several private companies. TIMOTHY M. MURRAY has been a director of the Company since March 1995 and is a principal of William Blair & Company, L.L.C., an investment banking firm with which he has been associated since 1979. He has also been the managing partner of William Blair Leveraged Capital Fund since its formation in 1988 and is a Managing Director of WBCP. Mr. Murray holds a B.A. degree from Duke University and an M.B.A. from the University of Chicago. He is a director of Daisytek International Corporation and several private companies. THE BOARD OF DIRECTORS COMMITTEES OF THE BOARD OF DIRECTORS The only standing committees of the Board of Directors of the Company are the Audit Committee and the Compensation Committee. The Audit Committee reviews the results and scope of audits and other services provided by the Company's independent public accountants. Its members are Messrs. de 56 Nicola and Murray. In May 1998, the Board of Directors constituted a Compensation Committee composed of Messrs. McInerney and Murray which will be responsible for making recommendations concerning salaries and incentive compensation for executive officers of the Company. Prior to May 1998, the Board of Directors had sole responsibility for establishing executive officer compensation. Thomas E. Staudt, the Company's President and Chief Executive Officer, participated in the deliberations of the Board concerning executive compensation. COMPENSATION OF DIRECTORS Prior to the Offering, the directors of the Company received no compensation in respect of their service on the Board of Directors. Following the Offering, under the "New Stock Plan" (as defined in, and described more fully under, "-- Employee Benefit Plans"), each director who is not an employee of the Company or any parent, subsidiary or affiliate of the Company and is not (and is not affiliated with) a beneficial owner of 5% or more of the voting stock of the Company (a "non-employee director") will be paid an annual retainer of $7,500, plus $1,000 for each Board of Directors or committee meeting attended, and will receive annually a non-qualified stock option to purchase up to 1,000 shares of Common Stock at the fair market value of the Common Stock on the date of grant. Directors are entitled to reimbursement for out-of-pocket expenses incurred while attending meetings of the Board of Directors or committee meetings. DESIGNATED DIRECTOR The Company and the principal stockholders associated with WCAS and WBCP have agreed that, following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and each of the four other most highly paid executive officers of the Company (the "Named Executive Officers") in the 1998 fiscal year: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------- --------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#)(2) COMPENSATION($) - --------------------------------------- ----------- ------------- ----------------- --------------- ---------------- Thomas P. Staudt ...................... 185,833 150,000 -- 229,141 -- President and Chief Executive Officer Richard P. Bankosky ................... 136,969 55,000 -- 34,915 -- Chief Financial Officer, Treasurer and Secretary William M. McManus .................... 133,269 55,000 -- 39,279 -- Senior Vice President and General Manager -- Pharmacy and Medical Roger L. Primeau ...................... 121,050 25,000 27,900 23,567 -- Senior Vice President and General Manager -- Dental James T. Stinton ...................... 158,878 50,000 -- 40,371 -- Chief Information Officer ............
57 - ---------- (1) Bonuses are granted under a bonus formula annually established by the Board of Directors, based upon the performance (measured by EBITDA) of the Company (or certain operating divisions thereof). Unless a specified percentage of the EBITDA target is achieved, no bonus is paid. EBITDA targets are adjusted to reflect accounting changes, acquisitions and other significant, one-time events. (2) Total number granted through June 30, 1998 (exercised and unexercised). OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding grants of options to purchase Common Stock in fiscal 1998 to each of the Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(1) -------------------------------------------------------------- ------------------ NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION GRANTED(#) FISCAL YEAR(2) ($/SHARE) DATE 5%($) 10%($) -------------------- ----------------- ----------- ----------- -------- --------- Thomas P. Staudt ............ 8,729 10.65% 5.73 3/5/08 31,424 79,696 Richard P. Bankosky ......... 5,455 6.66% 5.73 3/5/08 19,638 49,804 William M. McManus .......... 12,001 14.65% 5.73 (3) 43,204 109,569 Roger L. Primeau ............ 5,455 6.66% 5.73 (4) 19,638 49,804 James T. Stinton ............ 5,455 6.66% 5.73 3/5/08 19,638 49,804
- ---------- (1) Potential realizable value is based on the assumption that the price per share of Common Stock appreciates at the assumed annual rate of stock appreciation for the option term. The assumed 5% and 10% annual rates of appreciation (compounded annually) over the term of the option are set forth in accordance with the rules and regulations adopted by the Securities and Exchange Commission and do not represent the Company's estimate of stock price appreciation. (2) Based upon total grants of options to purchase 81,926 shares in fiscal year 1998. (3) Of such options, 2,182 expire July 31, 2007, 3,273 expire December 30, 2007 and 6,546 expire March 5, 2008. (4) Of such options, 2,182 expire July 31, 2007 and 3,273 expire March 5, 2008. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT JUNE 30, 1998(#) JUNE 30, 1998($) ------------------------------- ------------------------------ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------- --------------- ------------- -------------- Thomas P. Staudt ............ 109,551 97,767 $373,908 $322,136 Richard P. Bankosky ......... 0 23,567 0 72,286 William M. McManus .......... 15,711 23,568 45,688 68,544 Roger L. Primeau ............ 3,622 19,945 11,976 60,310 James T. Stinton ............ 13,529 26,842 45,732 83,486
SEVERANCE AGREEMENTS The Company maintains severance agreements with each of its executive officers providing for salary continuation for a period of six months (twelve months in the case of Mr. Staudt) if the executive is terminated for any reason other than malfeasance, misconduct or moral turpitude. NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY AGREEMENTS Each executive officer and certain other employees of the Company have entered into a Non-Competition, Non-Solicitation and Confidentiality Agreement with the Company, the terms of which are as follows. For a term of 12 months following the cessation of such employee's employment with the 58 Company, the employee will neither compete with the Company in the United States nor solicit any customer or employee of the Company. In addition, the employee will not disclose any trade secrets (as defined in the agreement) and, for a term of 12 months following the cessation of his or her employment by the Company, will not disclose any confidential information (as defined in the agreement). EMPLOYEE BENEFIT PLANS Under the MEDE AMERICA Corporation and its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Stock Plan"), up to 655,000 shares of Common Stock are reserved for issuance to the officers and employees of the Company. These shares may be issued either outright, as restricted stock awards, or they may be issued pursuant to either "incentive stock options" under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), or "non-qualified" stock options. As of November 30, 1998, options to purchase up to an aggregate 482,823 shares of Common Stock were outstanding, of which 228,917 options were exercisable. The weighted average exercise price for all options granted under the Stock Plan is $4.84 per share. Following the Offering, the Board of Directors has provided that no additional grants or awards will be made under the Stock Plan. Under the MEDE AMERICA Corporation and its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan (the "New Stock Plan"), a variety of awards, including incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), "non-qualified" stock options, restricted stock awards and other stock-based awards, may be granted to officers, employees, directors, consultants and advisors of the Company and its subsidiaries. An aggregate 1,500,000 shares of Common Stock are currently reserved for issuance under the New Stock Plan. The Board of Directors will initially administer the New Stock Plan, but may delegate such responsibility to a committee of the Board (the "Plan Administrator"). The terms and conditions of individual awards made to employees and consultants and, except as described below, non-employee directors, may vary, subject to the following guidelines: (i) the exercise price of options may not be less than 85% of the fair market value of the Common Stock on the date of grant provided, however, that neither (a) the exercise price of incentive stock options nor (b) the exercise price of non-qualified stock options intended to qualify as "performance-based compensation" within the meaning of the Code may be less than 100% of the fair market value of the Common Stock on the date of grant (or, in the case of incentive stock options granted to a stockholder owning in excess of 10% of the total combined voting power of all classes of Company stock, 110% of the fair market value); (ii) the maximum number of shares of Common Stock which may be the subject of awards granted to any employee under the New Stock Plan during any calendar year may not exceed 300,000; (iii) the term of incentive stock options may not exceed ten years from the date of grant; and (iv) no awards may be granted after June 30, 2008. Except as described below with respect to non-employee directors, the Plan Administrator determines, within the guidelines set forth above, the amount of each award, the conditions and limitations applicable to the exercise of an option, the exercise price therefor and the form of payment that may be used to exercise the award, which may include cash, check, shares of Common Stock and promissory notes. Each non-employee director automatically receives non-qualified stock options to purchase up to 1,000 shares of Common Stock upon his or her initial election to the Board of Directors and upon each anniversary thereof upon which he or she is still serving as a director. The exercise price for each such option is the fair market value on the date of grant. Non-employee director options vest six months after grant and the exercise period may not exceed ten years, provided that, subject to certain exceptions in the event of death or disability, no non-employee director options may be exercised more than 90 days after such director ceases to serve as a director. The Board of Directors may grant restricted and unrestricted share awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or a part of such shares at their purchase price from the recipient in the event that conditions specified by the Plan Administrator are not satisfied prior to the end of the applicable restricted period. Shares of restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered during the applicable 59 restricted period. The Plan Administrator may, in its sole discretion, grant or sell (at a purchase price per share equal to at least 85% of the fair market value) shares of Common Stock free of any restrictions under the New Stock Plan. In the event of a merger or sale of all or substantially all the assets of the Company, the Board of Directors may, in its discretion, take any one or more of certain actions including accelerating all unvested or unrealizable awards, terminating all unexercised options and requiring the acquiring company to assume all outstanding awards. While the Company currently anticipates that most grants under the New Stock Plan will consist of stock options, the Company may also grant restricted stock awards, which entitle recipients to acquire shares of Common Stock subject to certain conditions. Options or other awards that are granted under the New Stock Plan but expire unexercised are available for future grants. Vesting of options under the New Stock Plan would be subject to acceleration at the discretion of the Board of Directors under certain circumstances. Under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan"), employees of the Company, including directors of the Company who are employees, are eligible to participate in semi-annual plan offerings in which payroll deductions may be used to purchase shares of Common Stock. The purchase price of such shares is the lower of 85% of the fair market value of the Common Stock on the day the offering commences and 85% of the fair market value of the Common Stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the Offering. On July 23, 1998, the Board of Directors determined to grant options to purchase an aggregate 400,000 shares of Common Stock under the New Stock Plan to certain employees of the Company (including the Named Executive Officers) contingent upon consummation of the Offering. Such options, which include both incentive and non-qualified stock options, will have an exercise price equal to the price to the public in the Offering and generally will vest ratably over four years from the date of grant except that the initial installment of options to be granted to certain executive officers, including the Named Executive Officers, will vest immediately upon consummation of the Offering. The grants to be received by each of the Named Executive Officers are as follows: 160,000 shares for Mr. Staudt, 40,000 shares for each of Messrs. Bankosky and McManus, 16,000 shares for Mr. Primeau and 30,000 shares for Mr. Stinton. On November 15, 1998, the Board of Directors determined to grant options (such grant to be effective as of the date of the Offering) to purchase an aggregate 50,500 shares of Common Stock under the New Stock Plan to certain employees of the Company, most of whom were formerly employed by HII. Such options will be incentive stock options, will have an exercise price equal to the price to the public in the Offering and generally will vest ratably over four years from the date of grant. 60 CERTAIN TRANSACTIONS In June 1995, the Company acquired MEDE OHIO, through a merger between the Company and the parent of MEDE OHIO ("Parent"). Parent was owned by Welsh, Carson, Anderson & Stowe V, L.P. ("WCAS V"), which had formed Parent to acquire MEDE OHIO in an all cash merger that was consummated in March 1995. The acquisition price of MEDE OHIO, including amounts required to finance the merger and to provide MEDE OHIO with working capital and pre-merger bridge financing, was approximately $22.6 million. The exchange ratio in the merger between Parent and the Company was based on the acquisition cost of MEDE OHIO and an independent valuation of the Company that was performed in connection with the spin-off of the Company by CES. In the merger and a related offering to raise working capital for the Company, the Company issued an aggregate 1,772,351 shares of Common Stock and 171,889 shares of Preferred Stock to investment funds and individuals affiliated with WCAS, and an aggregate 189,465 shares of Common Stock and 28,987 shares of Preferred Stock to investment funds affiliated with WBCP. In October 1995, WCAS V and Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), each advanced the Company $1.75 million as bridge financing for the Company's acquisition of EC&F and Premier. The loan bore interest at the rate of 10% per annum and matured on December 31, 1995. The Company repaid the loan in December 1995. On December 18, 1995, the Company issued to its four principal stockholders, WCAS V, WCAS VI, William Blair Capital Partners V, L.P. ("Blair V"), and William Blair Leveraged Capital Fund, Limited Partnership ("Blair LCF"), warrants to purchase an aggregate 52,532 shares of Common Stock at an exercise price of $4.58 per share in connection with their agreement to guarantee the Company's obligations under the Credit Facility. On January 10, 1997, the Company increased the amount of available borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS VI, Blair V and Blair LCF, each agreed to guarantee payment of a portion of the additional debt to be incurred under the increased credit line. In consideration for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 18,330 shares of Common Stock. The warrants have a ten-year term and the exercise price thereunder is $5.73 per share. On October 31, 1997, the Company increased the amount of available borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS VI, Blair V and Blair LCF each agreed to guarantee payment of a portion of the additional debt to be incurred under the increased credit line. In consideration for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 34,200 shares of Common Stock. The warrants have a ten year term and the exercise price thereunder is $5.73 per share. On February 14, 1997 the Company issued a 10% Senior Subordinated Note due February 14, 2002 in the principal amount of $25,000,000, plus an aggregate 370,993 shares of Common Stock, to WCAS Capital Partners II, L.P. ("WCAS CP II"), for an aggregate purchase price of $25,000,000. WCAS CP II is an affiliate of each of WCAS V and WCAS VI, and Thomas McInerney and Anthony de Nicola, both directors of the Company, are general partners of the sole WCAS CP II general partner. The Company intends to use a portion of the proceeds of the Offering to repay in full the Credit Facility and the 10% Senior Subordinated Note. See "Use of Proceeds." The Company does not anticipate further borrowing from or seeking further loan guarantees from any of the entities referred to above. In connection with the issuance and sale of its 10% Senior Subordinated Note to WCAS CP II, the Company granted to WCAS CP II certain demand and "piggyback" registration rights pursuant to a Registration Rights Agreement, dated as of February 14, 1997 between the Company and WCAS CP II. In addition, the Company has granted demand and piggyback registration rights to Medic with respect to the shares of Common Stock issuable upon exercise of the Medic Warrant. On July 17, 1998 the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, 61 at an exercise price equal to $8.00 per share. The difference between the two alternative prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The Medic Warrant vests over a two year period and may be exercised up to five years after the date of grant. The Company and the principal stockholders associated with WCAS and WBCP have agreed that, following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. The terms of the Preferred Stock have been amended to provide for conversion of the aggregate liquidation value of the Preferred Stock including accrued but unpaid dividends into Common Stock at the price per share received by the Company upon the consummation of its initial public offering; provided further, however, that cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into Common Stock. In addition, in connection with the Offering, the holders of the outstanding warrants (other than the Medic Warrant and the 1998 Guaranty Warrants) agreed to exercise all such warrants by the net issuance exercise method for an aggregate 59,926 shares of Common Stock. WCAS V, WCAS VI, Blair V and Blair LCF are the owners of an aggregate 193,100 shares of Preferred Stock, and warrants to purchase 52,532 and 52,530 shares of Common Stock at exercise prices of $4.58 and $5.73 per share, respectively. On October 7, 1998, in connection with their agreement to extend their guaranty of the Company's obligations under the Credit Facility to cover an additional $16 million of indebtedness, the Company issued to WCAS V and Blair V warrants to purchase an aggregate 84,050 shares of Common Stock at a per share price equal to the price of the Common Stock to the public in the Offering, or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The warrants are immediately exercisable and may be exercised up to five years from the date of grant. Blair V and Blair LCF, and Timothy Murray, a director of the Company, are each affiliates of William Blair & Company, L.L.C., an underwriter of the Offering. See "Underwriting." PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of November 30, 1998, and as adjusted to reflect the sale of Common Stock offered hereby, by (i) each person (or group of affiliated persons) known by the Company to own beneficially more than five percent of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. The numbers of shares set forth below (i) give effect to the Recapitalization and the Reverse Stock Split, (ii) assume an Offering price of $12.00 per share of Common Stock and (iii) assume a sale of 4,166,667 shares of Common Stock in the Offering. Unless otherwise indicated, the address for each stockholder is c/o the Company, 90 Merrick Avenue, Suite 501, East Meadow, New York 11554. 62
SHARES BENEFICIALLY OWNED(1) -------------------------------------- PERCENTAGE OWNED(2) ------------------------ BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING - ------------------------------------------------- ----------- ---------- ----------- Welsh, Carson, Anderson & Stowe (3) ............. 6,141,252 72.28% 48.50% 320 Park Avenue, 25th Floor New York, NY 10019 William Blair & Co., L.L.C. (4) ................. 989,126 11.71% 7.84% 222 West Adams Street Chicago, Illinois 60606 Southlake & Co., as Nominee ..................... 646,612 7.67% 5.13% c/o State Street Bank & Trust Co. 222 Franklin Street -- Concourse Boston, MA 02110 ............................... Thomas P. Staudt (5) ............................ 168,768 1.98% 1.33% Richard P. Bankosky (6) ......................... 11,782 - - James T. Stinton (7) ............................ 20,512 - - William M. McManus (8) .......................... 20,948 - - Linda K. Ryan (9) ............................... 1,918 - - Roger L. Primeau (10) ........................... 7,680 - - Thomas E. McInerney (11) ........................ 6,000,945 70.62% 47.39% 320 Park Avenue, 25th Floor New York, NY 10019 Anthony J. de Nicola (12) ....................... 5,975,632 70.33% 47.19% 320 Park Avenue, 25th Floor New York, NY 10019 Timothy M. Murray (13) .......................... 985,788 11.67% 7.82% 222 West Adams Street Chicago, Illinois 60606 All current directors and executive officers as a 7,224,004 83.25% 56.24% group (9 persons) ..............................
- ---------- - - Represents beneficial ownership of less than 1% of the Common Stock. (1) Gives effect to the Recapitalization and the Reverse Stock Split. Unless otherwise indicated, the entities and individuals identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws, where applicable. (2) The percentages shown are based on 8,429,707 shares of Common Stock outstanding on November 30, 1998, plus, as to each entity or group listed unless otherwise noted, the number of shares of Common Stock deemed to be owned by such holder pursuant to Rule 13d-3 under the Exchange Act as of such date, assuming exercise of options held by such holder that are exercisable within 60 days of the date of this Prospectus. (3) Includes 2,725,706 shares of Common Stock held by WCAS V, 2,740,006 shares of Common Stock held by WCAS VI, 66,024 shares of Common Stock held by WCAS Information Partners L.P. ("WCAS Info."), 370,993 shares of Common Stock held by WCAS CP II, 171,283 shares of Common Stock held by individual partners of WCAS, and warrants to purchase up to 67,240 shares of Common Stock held by WCAS V. Such partners are also partners of the sole general partner of each of the foregoing limited partnerships. The respective general partners of WCAS V, WCAS VI, WCAS Info. and WCAS CP II are WCAS V Partners, L.P., WCAS VI Partners, L.P., WCAS INFO Partners and WCAS CP II Partners. The individual partners of each of these partnerships include some or all of Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A. Minicucci, Anthony J. de Nicola and Laura M. VanBuren. The partners of WCAS who are also directors of the Company are Thomas E. McInerney (who is also Chairman of the Board of Directors) and Anthony J. de Nicola. Each of the foregoing persons may be deemed to be the beneficial owner of the Common Stock owned by WCAS. (4) Includes 636,491 shares of Common Stock held by Blair V, 332,487 shares of Common Stock held by Blair LCF, 3,338 shares of Common Stock held by an individual affiliated with WBCP, and warrants to purchase up to 16,810 shares of Common 63 Stock held by Blair V. Timothy M. Murray, a partner of WBCP, is also a director of the Company and may be deemed to be a beneficial owner of the Company's Common Stock owned by WBCP. (5) Includes options to purchase up to 109,987 shares of Common Stock. (6) Includes options to purchase up to 436 shares of Common Stock. (7) Includes options to purchase up to 20,512 shares of Common Stock. (8) Includes options to purchase up to 20,948 shares of Common Stock. (9) Includes options to purchase up to 1,613 shares of Common Stock. (10) Includes options to purchase up to 10,255 shares of Common Stock. (11) Includes 2,725,706 shares of Common Stock held by WCAS V, 2,740,006 shares of Common Stock held by WCAS VI, 66,024 shares of Common Stock held by WCAS Info., 370,993 shares of Common Stock held by WCAS CP II, and warrants to purchase up to 67,240 shares of Common Stock held by WCAS V. Mr. McInerney disclaims beneficial ownership of such shares. (12) Includes 2,725,706 shares of Common Stock held by WCAS V, 2,740,006 shares of Common Stock held by WCAS VI, 66,024 shares of Common Stock held by WCAS Info., 370,993 shares of Common Stock held by WCAS CP II, and warrants to purchase up to 67,240 shares of Common Stock held by WCAS V. Mr. de Nicola disclaims beneficial ownership of such shares. (13) Includes 636,491 shares of Common Stock held by Blair V, 332,487 shares of Common Stock held by Blair LCF, and warrants to purchase up to 16,810 shares of Common Stock held by Blair V. Mr. Murray disclaims beneficial ownership of such shares. 64 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 30,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock. Upon completion of this Offering, and after giving effect to the Recapitalization and the Reverse Stock Split, there will be 12,596,374 shares of Common Stock (13,221,374 shares if the Underwriters' over-allotment option is exercised) and no shares of Preferred Stock outstanding. As of November 30, 1998, before giving effect to the Recapitalization but after giving effect to the Reverse Stock Split, there were 5,684,847 shares of Common Stock outstanding and 239,956 shares of Preferred Stock outstanding, held of record by 126 stockholders. In addition, as of November 30, 1998, before giving effect to the Recapitalization but after giving effect to the Reverse Stock Split, there were outstanding options to purchase 482,823 shares of Common Stock and warrants to purchase 105,062 shares of Common Stock. Pursuant to the Recapitalization, all such warrants will be exercised (on a "net exercise" basis) (for an aggregate 59,926 shares), and all shares of Preferred Stock will be converted into an aggregate 2,684,933 shares of Common Stock (based on the aggregate liquidation preference of the Preferred Stock as of November 30, 1998, assuming no exercise of the Underwriters' over-allotment option) prior to the consummation of the Offering. On July 17, 1998, the Company issued to Medic a warrant to purchase 1,250,000 shares of the Company's Common Stock. On October 7, 1998 the Company issued to WCAS V and Blair V warrants to purchase an aggregate 84,050 shares of Common Stock. See "Prospectus Summary -- Recent Developments." COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends as are declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock have the right to a ratable portion of assets remaining after the payment of all debts and other liabilities, subject to the liquidation preferences of the holders of any outstanding Preferred Stock. Holders of Common Stock have neither preemptive rights nor rights to convert their Common Stock into any other securities and are not subject to future calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the shares offered hereby upon issuance and sale will be, fully paid and non-assessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of Preferred Stock that the Company may designate and issue in the future. PREFERRED STOCK Upon the closing of this Offering and assuming no exercise of the Underwriters' over-allotment option, all of the outstanding shares of the Preferred Stock together with accrued but unpaid dividends thereon will be automatically converted at the public offering price into 2,684,933 shares of Common Stock. The Board of Directors is authorized, subject to certain limitations prescribed by Delaware law, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock, $.01 par value, in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series. The Company believes that the power to issue Preferred Stock will provide flexibility in connection with possible corporate transactions. The issuance of Preferred Stock, however, could adversely affect the voting power of holders of Common Stock and restrict their rights to receive payments upon liquidation. It could also have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any shares of Preferred Stock. WARRANTS As of November 30, 1998, four investors owned warrants to purchase 59,926 shares of Common Stock (on a "net exercise" basis), which will be exercised in full upon the closing of this Offering. See "Certain Transactions." 65 On July 17, 1998 the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering. The Medic Warrant vests over a two year period and may be exercised up to five years after the date of grant. On October 7, 1998, in connection with their agreement to extend their guaranty of the Company's obligations under the Credit Facility to cover an additional $16 million of indebtedness, the Company issued to WCAS V and Blair V warrants to purchase an aggregate 84,050 shares of Common Stock at a per share price equal to the price of the Common Stock to the public in the Offering, or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The warrants are immediately exercisable and may be exercised up to five years from the date of grant. DELAWARE LAWS AND CERTAIN CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER MEASURES Upon the consummation of this Offering made hereby, the Company will be subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a "business combination" is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. All directors elected to the Company's Board of Directors serve until the next annual meeting of the stockholders and the election and qualification of their successors or their earlier death, resignation or removal. The Board of Directors is authorized to create new directorships and to fill such positions so created. The Board of Directors (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board of Directors occurring for any reason for the remainder of the term of the vacant directorship. The Company's Bylaws provide that, for nominations to the Board of Directors or for other business to be properly brought by a stockholder before an annual meeting of stockholders, the stockholder must first have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice generally must be delivered not less than 90 days nor more than 120 days prior to the anniversary of the immediately preceding annual meeting. The notice by a stockholder must contain, among other things, certain information about the stockholder delivering the notice and a description of the proposed business to be brought before the meeting. Certain of the provisions of the Amended and Restated Certificate of Incorporation and Bylaws discussed above could make more difficult or discourage a proxy contest or other change in the management of the Company or the acquisition or attempted acquisition of control by a holder of a substantial block of the Company's stock. It is possible that such provisions could make it more difficult to accomplish, or could deter, transactions which stockholders may otherwise consider to be in their best interests. As permitted by the DGCL, the Amended and Restated Certificate of Incorporation provides that Directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as Directors, except for liability (i) for any breach of their duty of loyalty to the Company and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 or successor provisions of the DGCL or (iv) for any transaction from which the Director derives an improper personal benefit. The Amended and Restated Certificate of Incorporation and Bylaws provide that the Company shall indemnify its Directors and officers to the fullest extent permitted by Delaware law (except in some circumstances, with respect to suits initiated by the Director or officer) and advance expenses to such Directors or 66 officers to defend any action for which rights of indemnification are provided. In addition, the Amended and Restated Certificate of Incorporation and Bylaws also permit the Company to grant such rights to its employees and agents. The Bylaws also provide that the Company may enter into indemnification agreements with its Directors and officers and purchase insurance on behalf of any person whom it is required or permitted to indemnify. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as Directors, officers and employees. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services. 67 SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering there has been no market for the Common Stock of the Company. The Company can make no prediction as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. See "Risk Factors -- Shares Eligible for Future Sale." Upon completion of this Offering, the Company expects to have 12,596,374 shares of Common Stock outstanding (excluding 482,823 shares reserved for issuance upon the exercise of outstanding stock options, 1,250,000 shares reserved for issuance upon the exercise of the Medic Warrant and 84,050 shares reserved for issuance upon the exercise of the 1998 Guaranty Warrants) (13,221,374 shares of Common Stock outstanding if the Underwriters' over-allotment option is exercised in full). Of these shares, the 4,166,667 shares offered hereby will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act, which will be subject to the resale limitations imposed by Rule 144, as described below. All of the remaining 8,429,707 shares of Common Stock outstanding will be "restricted securities" within the meaning of Rule 144 and may not be resold in the absence of registration under the Securities Act, or pursuant to exemptions from such registration including, among others, the exemption provided by Rule 144 under the Securities Act. Of the restricted securities, 625,484 shares are eligible for sale in the public market immediately after this Offering pursuant to Rule 144(k) under the Securities Act. A total of 7,804,223 additional restricted securities will be eligible for sale in the public market in accordance with Rule 144 or 701 under the Securities Act beginning 90 days after the date of this Prospectus. Taking into consideration the effect of the lock-up agreements described below and the provisions of Rules 144 and 144(k), restricted shares will be eligible for sale in the public market immediately after this Offering, restricted shares (excluding shares issuable upon the exercise of outstanding stock options) will be eligible for sale beginning 90 days after the date of this Prospectus, and the remaining restricted shares will be eligible for sale upon the expiration of the lock-up agreements 180 days after the date of this Prospectus, subject to the provisions of Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are required to be aggregated) whose restricted securities have been outstanding for at least one year, including a person who may be deemed an "affiliate" of the Company, may only sell a number of shares within any three-month period which does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock (approximately 125,964 shares after this Offering) or (ii) the average weekly trading volume in the Company's Common Stock in the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. A person who is not an affiliate of the issuer, has not been an affiliate within three months prior to the sale and has owned the restricted securities for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. In addition, the Company has granted demand and piggyback registration rights to WCAS CP II with respect to 370,993 shares of Common Stock and to Medic with respect to 1,250,000 shares of Common Stock issuable upon the exercise of the Medic Warrant. All or part of such shares may be sold in the public market following the exercise of such rights subject to the lock-up arrangements described below with respect to WCAS CP II and to vesting and exercise requirements with respect to the Medic Warrant. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, shares of Common Stock and options to purchase shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this 68 Prospectus without the prior written consent of Salomon Smith Barney Inc. Upon expiration of the lock-up agreements, all shares of Common Stock currently outstanding will be immediately eligible for resale, subject to the requirements of Rule 144. The Company is unable to predict the effect that sales may have on the then prevailing market price of the Common Stock. See "Management -- Employee Benefit Plans" and "Description of Capital Stock." 69 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, shares of Common Stock which equal the number of shares set forth opposite the name of such Underwriter below.
UNDERWRITER NUMBER OF SHARES - ----------------------------------------------- ----------------- Salomon Smith Barney Inc. .................. 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 Salomon Smith Barney Inc., William Blair & Company, L.L.C. and Volpe Brown Whelan & Company, LLC are acting as representatives (the "Representatives"), propose initially to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain other dealers. After the initial public offering, the public offering price and such concessions may be changed by the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 625,000 additional shares of Common Stock at the public offering price set forth on the cover page hereof less underwriting discounts and commissions. The Underwriters may exercise such option to purchase additional shares solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares in such table. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company and its executive officers and directors and certain other holders of Common Stock and securities convertible into or exercisable or exchangeable for Common Stock have agreed that for a period of 180 days after the date of this Prospectus they will not, without the prior written consent of Salomon Smith Barney Inc., sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge or otherwise dispose of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock except in certain limited circumstances. See "Shares Eligible for Future Sale." 70 In connection with this Offering and in accordance with applicable law and industry practice, the Underwriters may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of a security. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits Salomon Smith Barney Inc., as managing underwriter, to reclaim a selling concession from a syndicate member in connection with the Offering when shares of Common Stock originally sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. The Underwriters are not required to engage in any of these activities. Any such activities, if commenced, may be discontinued at any time. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company and the Representatives. Among the factors considered in determining the initial public offering price were the history of, and the prospects for, the Company's business and the industry in which it competes, an assessment of the Company's management, its past and present operations, the past and present results of operations of the Company and the trend of such results of operations, the prospects for earnings of the Company, the present state of the Company's development, the general condition of the securities market at the time of this Offering and the market prices of similar securities of comparable companies at the time of this Offering. William Blair & Company, L.L.C., one of the Representatives of the Underwriters, is affiliated with Blair V and Blair LCF, two of the Company's principal stockholders and, by virtue of such affiliation, is, prior to the Offering, an "affiliate" of the Company within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, the Offering is being made in conformity with certain applicable provisions of Rule 2720. Salomon Smith Barney Inc., another Underwriter of the Offering (the "Independent Underwriter"), will act as a "qualified independent underwriter," as defined in Rule 2720, in connection with the Offering. The Independent Underwriter, in its role as qualified independent underwriter, has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. The Independent Underwriter will not receive any additional fees for serving as a qualified independent underwriter in connection with the Offering. The price of shares of Common Stock sold to the public will be no higher than that recommended by the Independent Underwriter. Timothy M. Murray, a director of the Company, is a managing director of WBCP and a principal of William Blair & Company, L.L.C. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Reboul, MacMurray, Hewitt, Maynard & Kristol and for the Underwriters by Dewey Ballantine LLP, New York, New York. EXPERTS The consolidated financial statements of the Company as of June 30, 1997 and 1998 and for each of the three years in the period ended June 30, 1998 included in this Prospectus, and the related financial statement schedule included elsewhere in this Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement, and have been so included in reliance upon such report given upon their authority as experts in accounting and auditing. 71 The statement of operations of Stockton for the year ended June 30, 1997 included in this Prospectus has been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and has been so included in reliance upon such report given upon their authority as experts in accounting and auditing. The consolidated financial statements of Healthcare Interchange, Inc. and subsidiary as of June 30, 1998 and for the nine-month period ended June 30, 1998, included herein and elsewhere in the registration statement have been audited and reported upon by KMPG Peat Marwick LLP, independent certified public accountants. Such financial statements have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, appearing herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1, including amendments thereto (the "Registration Statement"), under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being deemed to be qualified in its entirety by such reference. The Registration Statement, including all exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: the New York regional office located at 7 World Trade Center, Suite 1300, New York, New York 10048, and the Chicago regional office located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this material may also be obtained from the Commission's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, such material may also be accessed electronically at the Commission's Internet home page: (http:// www.sec.gov). The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent public accountants, and will make available quarterly reports for the first three quarters of each fiscal year containing unaudited financial information and such other periodic reports as the Company may determine to be appropriate or as may be required by law. 72 INDEX TO FINANCIAL STATEMENTS
PAGE ----- MEDE AMERICA CORPORATION: Independent Auditors' Report ............................................................ F-2 Consolidated Balance Sheets as of June 30, 1997 and 1998 and September 30, 1998 (Unaudited) ........................................................................... F-3 Consolidated Statements of Operations for the Years Ended June 30, 1996, 1997 and 1998 and the Three Months Ended September 30, 1997 (Unaudited) and 1998 (Unaudited) ........ F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30, 1996, 1997 and 1998 and the Three Months Ended September 30, 1998 (Unaudited) ......... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1997 and 1998 and the Three Months Ended September 30, 1997 (Unaudited) and 1998 (Unaudited) ........ F-6 Notes to Consolidated Financial Statements .............................................. F-7 THE STOCKTON GROUP, INC.: Independent Auditors' Report ............................................................ F-21 Statements of Income for the Year Ended June 30, 1997 and the Three Months Ended September 30, 1997 (Unaudited) ........................................................ F-22 Notes to Financial Statement ............................................................ F-23 HEALTHCARE INTERCHANGE, INC.: Independent Auditors' Report ............................................................ F-25 Consolidated Balance Sheets as of June 30, 1998 and September 30, 1998 (Unaudited) ...... F-26 Consolidated Statements of Operations for the Nine Month Period Ended June 30, 1998 and the Three Month Period Ended September 30, 1998 (Unaudited) ........................... F-27 Consolidated Statements of Stockholders' Equity (Deficit) for the Nine Month Period Ended June 30, 1998 and the Three Month Period Ended September 30, 1998 (Unaudited) ......... F-28 Consolidated Statements of Cash Flows for the Nine Month Period Ended June 30, 1998 and the Three Month Period Ended September 30, 1998 (Unaudited) ........................... F-29 Notes to Consolidated Financial Statements .............................................. F-30
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, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MEDE America Corporation and subsidiaries as of June 30, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. As discussed in Note 13, the accompanying 1997 and 1998 consolidated financial statements have been restated. DELOITTE & TOUCHE LLP Jericho, New York August 5, 1998 (October 7, 1998 as to Note 6.b., October 30, 1998 as to Note 14 and December 11, 1998 as to Note 13) F-2 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' EQUITY JUNE 30, SEPTEMBER 30, SEPTEMBER 30, ------------------------- --------------- -------------- 1997 1998 1998 1998 ------------ ------------ --------------- -------------- (AS RESTATED, (UNAUDITED) (UNAUDITED) SEE NOTE 13) (NOTE 1.P.) ASSETS CURRENT ASSETS: Cash and cash equivalents ......................................... $ 1,919 $ 2,950 $ 3,551 Accounts receivable, less allowance for doubtful accounts of $1,716, $997 and $983, respectively.............................. 6,318 7,920 8,579 Formulary receivables ............................................. 405 2,341 3,283 Inventory ......................................................... 172 211 250 Prepaid expenses and other current assets ......................... 486 537 668 --------- --------- --------- Total current assets ............................................ 9,300 13,959 16,331 PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6) ...................... 5,517 4,711 4,885 GOODWILL -- Net (Notes 1 and 2) .................................... 27,465 34,753 34,735 OTHER INTANGIBLE ASSETS -- Net (Notes 1 and 4) ..................... 5,357 5,501 5,143 OTHER ASSETS (Note 11) ............................................. 451 470 3,632 --------- --------- --------- TOTAL .............................................................. $ 48,090 $ 59,394 $ 64,726 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Accounts payable .................................................. $ 2,134 $ 3,630 $ 3,096 Accrued expenses and other current liabilities (Note 5) ........... 9,195 7,715 10,741 Current portion of long-term debt (Note 6) ........................ 538 269 262 --------- --------- --------- Total current liabilities ....................................... 11,867 11,614 14,099 --------- --------- --------- LONG-TERM DEBT (Note 6) ............................................ 24,623 41,055 42,365 --------- --------- --------- OTHER LONG-TERM LIABILITIES ........................................ 215 194 189 --------- --------- --------- REDEEMABLE CUMULATIVE PREFERRED STOCK: $.01 par value; 250 shares authorized; 240 shares issued and outstanding (aggregate liquidation value of $23,996 plus accrued dividends) (Note 9)........................................................... 28,823 31,223 31,823 $ -- --------- --------- --------- --------- COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' (DEFICIT) EQUITY: Common stock, $.01 par value; 6,329 shares authorized; 5,671, 5,685 and 5,685 shares issued and outstanding, respectively. 57 57 57 84 Additional paid-in capital ........................................ 27,713 25,584 27,521 59,317 Accumulated deficit ............................................... (45,208) (50,243) (51,328) (51,328) Deferred compensation (Note 8) .................................... -- (90) -- -- --------- --------- --------- --------- Total stockholders' (deficit) equity ............................ (17,438) (24,692) (23,750) $ 8,073 --------- --------- ========= --------- TOTAL .............................................................. $ 48,090 $ 59,394 $ 64,726 ========= ========= =========
See notes to consolidated financial statements. F-3 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, --------------------------------------- --------------------------- 1996 1997 1998 1997 1998 ------------ ------------- ------------ -------------- ------------ (AS RESTATED, (AS RESTATED, SEE NOTE 13) SEE NOTE 13) (UNAUDITED) REVENUES .................................................. $ 31,768 $ 35,279 $ 42,290 $ 9,241 $ 12,006 OPERATING EXPENSES: Operations ............................................... 19,174 16,817 16,958 4,285 4,793 Sales, marketing and client services ..................... 7,064 8,769 10,765 2,385 2,930 Research and development (Note 1) ........................ 2,132 3,278 3,941 806 1,106 General and administrative ............................... 6,059 5,263 4,865 1,061 1,263 Depreciation and amortization ............................ 5,176 5,460 7,143 1,698 1,894 Contingent consideration paid to former owners of acquired businesses (Note 2) ........................... 538 2,301 -- -- -- Write-down of intangible assets (Note 1) ................. 9,965 -- -- -- -- Acquired in-process research and development (Note 2)..... -- 1,556 -- -- -- --------- --------- -------- -------- -------- Total operating expenses ................................. 50,108 43,444 43,672 10,235 11,986 --------- --------- -------- -------- -------- (LOSS) INCOME FROM OPERATIONS ............................. (18,340) (8,165) (1,382) (994) 20 OTHER (INCOME) EXPENSE (Note 12) .......................... 313 (893) (12) -- -- INTEREST EXPENSE, Net ..................................... 584 1,504 3,623 655 1,089 --------- --------- -------- -------- -------- LOSS BEFORE PROVISION FOR INCOME TAXES .................................................... (19,237) (8,776) (4,993) (1,649) (1,069) PROVISION FOR INCOME TAXES (Note 7) ....................... 93 57 42 12 16 --------- --------- -------- -------- -------- NET LOSS .................................................. (19,330) (8,833) (5,035) (1,661) (1,085) PREFERRED STOCK DIVIDENDS ................................. (2,400) (2,400) (2,400) (600) (600) --------- --------- -------- -------- -------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ............................................. $ (21,730) $ (11,233) $ (7,435) $ (2,261) $ (1,685) ========= ========= ======== ======== ======== BASIC AND DILUTED NET LOSS PER COMMON SHARE .................................................... $ (4.14) $ (2.07) $ (1.31) $ (0.40) $ (0.30) ========= ========= ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC AND DILUTED ......................... 5,245 5,425 5,679 5,674 5,685 ========= ========= ======== ======== ========
See notes to consolidated financial statements. F-4 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ----------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY (DEFICIT) -------- -------- ------------ ------------- ------------- ----------------- BALANCE, JULY 1, 1995 .......................... 5,237 $ 52 $ 29,935 $ (17,045) $ -- $ 12,942 Net loss ...................................... -- -- -- (19,330) -- (19,330) Preferred stock dividends ..................... -- -- (2,400) -- -- (2,400) Issuance of warrants .......................... -- -- 121 -- -- 121 Exercise of stock options ..................... 43 1 194 -- -- 195 ----- ---- -------- --------- ------ --------- BALANCE, JUNE 30, 1996 ......................... 5,280 53 27,850 (36,375) -- (8,472) Net loss (as restated, see Note 13) ........... -- -- -- (8,833) -- (8,833) Preferred stock dividends ..................... -- -- (2,400) -- -- (2,400) Issuance of common stock ...................... 371 4 2,121 -- -- 2,125 Issuance of warrants .......................... -- -- 52 -- -- 52 Exercise of stock options ..................... 20 -- 90 -- -- 90 ----- ---- -------- --------- ------ --------- BALANCE, JUNE 30, 1997 (as restated, see Note 13) ...................................... 5,671 57 27,713 (45,208) -- (17,438) Net loss (as restated, see Note 13) ........... -- -- -- (5,035) -- (5,035) Preferred stock dividends ..................... -- -- (2,400) -- -- (2,400) Issuance of warrants .......................... -- -- 98 -- -- 98 Exercise of stock options ..................... 14 -- 65 -- -- 65 Issuance of stock options (Note 8) ............ -- -- 108 -- (108) -- Amortization of deferred compensation ......... -- -- -- -- 18 18 ----- ---- -------- --------- ------ --------- BALANCE, JUNE 30, 1998 (as restated, see Note 13) ...................................... 5,685 57 25,584 (50,243) (90) (24,692) Net loss (unaudited) .......................... -- -- -- (1,085) -- (1,085) Preferred stock dividends (unaudited) ......... -- -- (600) -- -- (600) Issuance of warrants (unaudited) (Note 11)..... -- -- 2,537 -- -- 2,537 Amortization of deferred compensation (unaudited) (Note 8) ........................ -- -- -- -- 90 90 ----- ---- -------- --------- ------ --------- BALANCE, SEPTEMBER 30, 1998 (UNAUDITED) ................................... 5,685 $ 57 $ 27,521 $ (51,328) $ -- $ (23,750) ===== ==== ======== ========= ====== =========
See notes to consolidated financial statements. F-5 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) (IN THOUSANDS)
YEAR ENDED JUNE 30, ------------------------------------------ 1996 1997 1998 ------------- --------------- ------------ (AS RESTATED, SEE NOTE 13) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................... $ (19,330) $ (8,833) $ (5,035) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............................................. 5,176 5,585 7,502 Provision for doubtful accounts ............................................ 406 316 464 Write-down of intangible assets ............................................ 9,965 -- -- Acquired in-process research and development ............................... -- 1,556 -- (Gain) loss on sale of assets .............................................. 313 (8) 13 Non-cash compensation expense .............................................. -- -- 18 Changes in operating assets and liabilities net of effects of businesses acquired: Accounts receivable ....................................................... 977 (861) (2,065) Formularly receivables .................................................... (74) (331) (1,936) Inventory ................................................................. 262 (45) (40) Prepaid expenses and other current assets ................................. (179) 175 (51) Other assets .............................................................. 243 13 19 Accounts payable and accrued expenses and other current liabilities ....... 997 (629) (1,368) Other long-term liabilities ............................................... (409) (958) (21) --------- ---------- --------- Net cash provided by (used in) operating activities ...................... (1,653) (4,020) (2,500) --------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired ................................. (3,648) (11,450) (10,674) Purchases of property and equipment ......................................... (1,271) (1,477) (913) Additions to goodwill and other intangible assets ........................... -- (143) (699) Proceeds from sale of property and equipment ................................ -- 461 182 Proceeds from sale of net assets of Premier ................................. -- 388 -- --------- ---------- --------- Net cash used in investing activities .................................... (4,919) (12,221) (12,104) --------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Due to stockholders ......................................................... (4,484) -- -- Issuance of Senior Subordinated Note ........................................ -- 22,875 -- Issuance of common stock .................................................... -- 2,125 -- Net proceeds (repayments) under Credit Facility ............................. 8,250 (8,250) 16,725 Principal repayments of debt ................................................ (2,852) (801) (588) Principal repayments of capital lease obligations ........................... (452) (518) (567) Exercise of stock options ................................................... 195 90 65 --------- ---------- --------- Net cash provided by financing activities ................................ 657 15,521 15,635 --------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... (5,915) (720) 1,031 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 8,554 2,639 1,919 --------- ---------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 2,639 $ 1,919 $ 2,950 ========= ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ................................................................... $ 394 $ 1,541 $ 3,018 ========= ========== ========= Income taxes ............................................................... $ 69 $ 111 $ 102 ========= ========== ========= Non-cash investing and financing activities: Assets acquired under capital leases or by incurring debt .................. $ 205 $ 129 $ 278 ========= ========== ========= Issuance of warrants ....................................................... $ 121 $ 52 $ 98 ========= ========== ========= THREE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1997 1998 -------------- -------------- (AS RESTATED, SEE NOTE 13) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................... $(1,661) $(1,085) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............................................. 1,784 1,990 Provision for doubtful accounts ............................................ 57 70 Write-down of intangible assets ............................................ -- -- Acquired in-process research and development ............................... -- -- (Gain) loss on sale of assets .............................................. -- -- Non-cash compensation expense .............................................. -- 90 Changes in operating assets and liabilities net of effects of businesses acquired: Accounts receivable ....................................................... (464) (729) Formularly receivables .................................................... (9) (942) Inventory ................................................................. (21) (39) Prepaid expenses and other current assets ................................. 13 (131) Other assets .............................................................. (60) (625) Accounts payable and accrued expenses and other current liabilities ....... (1,254) 1,853 Other long-term liabilities ............................................... (1) (5) ---------- ---------- Net cash provided by (used in) operating activities ...................... (1,616) 447 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired ................................. -- -- Purchases of property and equipment ......................................... (212) (466) Additions to goodwill and other intangible assets ........................... (307) (403) Proceeds from sale of property and equipment ................................ -- -- Proceeds from sale of net assets of Premier ................................. -- -- --------- --------- Net cash used in investing activities .................................... (519) (869) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Due to stockholders ......................................................... -- -- Issuance of Senior Subordinated Note ........................................ -- -- Issuance of common stock .................................................... -- -- Net proceeds (repayments) under Credit Facility ............................. 3,025 1,225 Principal repayments of debt ................................................ (172) (83) Principal repayments of capital lease obligations ........................... (105) (119) Exercise of stock options ................................................... 33 -- --------- --------- Net cash provided by financing activities ................................ 2,781 1,023 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 646 601 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 1,919 2,950 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 2,565 $ 3,551 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ................................................................... $ 641 $ 1,075 ========= ========= Income taxes ............................................................... $ 10 $ 7 ========= ========= Non-cash investing and financing activities: Assets acquired under capital leases or by incurring debt .................. -- $ 184 ========= ========= Issuance of warrants ....................................................... -- $ 2,537 ========= =========
See notes to consolidated financial statements. F-6 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Description of Business -- MEDE America Corporation and subsidiaries (the "Company") is a leading provider of electronic data interchange ("EDI") products and services to a broad range of providers and payors in the healthcare industry. The Company's integrated suite of EDI products and services permits hospitals, pharmacies, physicians, dentists, and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions through the claims payment process and obtain faster reimbursement for their services. The accompanying consolidated financial statements include the accounts of MEDE America Corporation and its wholly-owned subsidiaries: MEDE America, Inc. ("MEDE"), Medical Processing Center, Inc. ("MPC"), Wellmark Incorporated ("Wellmark"), Electronic Claims and Funding, Inc. ("EC&F"), Premier Dental Systems Corp. ("Premier"), and MEDE America Corporation of Ohio, Inc. ("MEDE OHIO") (formerly General Computer Corporation). MPC, Wellmark, and MEDE formerly constituted the healthcare information services business unit of Card Establishment Services ("CES"). On March 9, 1995, CES was acquired by First Data Corporation. Prior to this transaction, the former owners of CES spun off the healthcare information services business unit as a new company with MEDE America Corporation formed to serve as the holding company (the "Spin-off"). Because there was no change in ownership as a result of this Spin-off, the accompanying consolidated financial statements accounted for MEDE, MPC, and Wellmark on an historical cost basis. Effective July 1, 1997, MEDE, MPC, Wellmark and EC&F were merged into MEDE America Corporation. The Company has instituted certain cost reduction programs. The Company anticipates that these programs, when coupled with the Company's revolving credit facility, will enable the Company to satisfy its short-term cash flow and working capital requirements at least through fiscal 1999. Additionally, the Company has received support from certain of its stockholders in the past and believes that continued support would be available if necessary to meet cash flow and working capital requirements. However, such stockholders are under no legal obligation to provide such support and, if the IPO (as herein defined) is consummated as proposed, such stockholders may elect not to do so. (see Note 8). b. Principles of Consolidation -- All significant intercompany transactions and balances are eliminated in consolidation. c. Revenue Recognition -- Transaction and related formularly services revenues (if applicable) are recognized at the time the transactions are processed and the services are rendered. Other service revenues (including post-contract customer support) and other revenues (including revenues relating to insignificant obligations at the time sales are recorded) are recognized ratably over applicable contractual periods or as service is provided. Revenue from the licensing of software is recognized only after it is determined that the Company has no significant remaining obligations and that collectibility of the resulting receivable is probable. Revenue from hardware sales is recognized when the hardware is shipped. d. Cash and Cash Equivalents -- The Company considers all highly liquid instruments with original maturity dates of three months or less to be components of cash and cash equivalents. e. Accounts Receivable -- Accounts receivable are due primarily from companies in the healthcare industry. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. F-7 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) f. Formularly Receivables -- Formularly receivables represent amounts due for pharmacy related services provided to Practice Benefit Management ("PBM") clients. Services include prescription processing from EDI transactions and collecting and distributing pharmaceutical company fees for sponsored programs to the PBM client. The Company submits processed transactions qualifying for formulary incentive fees to various intermediaries who have PBM program services contracts with pharmaceutical manufacturers on a quarterly basis, in arrears. The intermediaries consolidate formulary transactions from various processors and, in turn, submit such transactions to the pharmaceutical manufacturers for payment. The additional processing and reconciliation time of the consolidators and pharmaceutical companies results in a collection cycle for the Company of 7-12 months. g. Inventory -- Inventory is stated at the lower of cost (first-in, first-out) or market. h. Property and Equipment -- Property and equipment is stated at cost less accumulated depreciation and amortization, and is depreciated using the straight-line method over the estimated useful lives of the related assets. i. Goodwill -- Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over 7 to 20 years. Accumulated amortization amounted to $3,451,000 and $5,864,000 as of June 30, 1997 and 1998, respectively. j. Other Intangible Assets -- Other intangible assets include purchased client lists, purchased software and technology, and capitalized software development costs. Purchased client lists are amortized on a straight-line basis over three to five years. Amortization of purchased software and technology and of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of three to five years is assigned to purchased software and technology and an original estimated economic life of five years is assigned to capitalized software development costs. Amortization begins in the period in which the related product is available for general release to customers. k. Software Development Costs -- The development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." During the year ended June 30, 1998, the Company capitalized $462,000 of software development costs on a project for which technological feasibility had been established but was not yet available for customer release. Prior to July 1, 1997, the Company did not have any software development projects for which significant development costs were incurred between the establishment of technological feasibility and general customer release of the product. l. Impairment of Long-Lived Assets -- In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill and/or other intangible assets may warrant revision or that all or a portion of the remaining balance may not be recoverable. As a result of this evaluation process, during the fiscal year ended June 30, 1996, the Company wrote-down approximately $9,965,000 of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. Such intangible assets were written down to the net present value of the estimated future cash flows to be derived from these clients as of June 30, 1996. The write-down was required due to a loss of approximately 25% of the acquired MEDE OHIO client base. F-8 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) m. Income Taxes -- The Company accounts for income taxes under SFAS No. 109, "Accounting For Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. n. Use of Estimates in the Preparation of Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. o. Unaudited Interim Financial Statements -- In the opinion of management, the unaudited consolidated financial statements for the three months ended September 30, 1997 and 1998 are presented on a basis consistent with the audited consolidated financial statements and reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results thereof. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. p. Pro Forma Stockholders' Equity -- Pro forma stockholders' equity as of September 30, 1998 reflects the conversion of 239,956 shares of preferred stock plus $7,827,000 of accrued preferred stock dividends at the assumed initial public offering ("IPO") price of $12.00 per share. See Note 8. q. Reclassifications -- Certain amounts in prior years' financial statements have been reclassified to conform with the 1998 presentation. 2. ACQUISITIONS a. EC&F and Premier -- In October 1995, the Company acquired all of the outstanding shares of EC&F and Premier, which companies had common ownership, for a cash purchase price of approximately $4,050,000, including transaction expenses. The transaction was financed through loans obtained from the Company's majority stockholder. Such loans were subsequently repaid with borrowings under the Company's Credit Facility (as herein defined). In addition, the Company is contingently liable for additional consideration if certain earnings levels are attained relating to EC&F during the three-year period following the consummation of the transaction. At June 30, 1996, the Company accrued $538,000 in connection with the contingent liability relating to earnings levels attained during the first year. At June 30, 1997, the Company accrued a settlement totaling $2,216,000 relating to the contingent liability for the second and third years. Such accruals of contingent considerations were recorded as compensation expense as these contingent payments were made to former shareholders of EC&F and Premier who were required by the stock purchase agreement to remain in the Company's employ during the period in which the contingent consideration was to be earned. Purchased software and technology was valued at $764,000 and generally is being amortized over three years. EC&F and Premier are developers of electronic systems which provide EDI services to the dental industry. In March 1997, the Company sold the operating net assets of Premier for $540,000, including the buyer's assumption of $152,000 of Premier liabilities. There was no gain or loss on the sale of such net assets. b. TCS -- In February 1997, the Company purchased certain assets of Time-Share Computer Systems, Inc. ("TCS") for $11,465,000, including transaction expenses. Purchased in-process research and development, which had not reached technological feasibility and had no alternative future use amounted to $1,556,000 and was charged to operations at the acquisition date. Purchased software and technology was valued at $2,984,000 and generally is being amortized over three years. TCS provides data processing and information management services to healthcare providers and pharmacies through inte- F-9 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) grated electronic data interchange systems. The acquisition was financed by a portion of the proceeds from the Senior Subordinated Note and Share Purchase Agreement (as hereinafter defined) (Note 6). c. Stockton -- In November 1997, the Company purchased certain assets and assumed certain liabilities of The Stockton Group, Inc. ("Stockton") for a cash purchase price of $10,674,000, including transaction expenses. In addition, the Company is contingently liable for additional consideration of up to $2,600,000 (plus interest at an annual rate of 7.25%) if Stockton's revenue during the 12-month period ended September 30, 1998 is at least $5,000,000. Based on revenues recorded through September 30, 1998 by Stockton, the Company has accrued additional contingent consideration of $2,022,000 as of September 30, 1998, which was treated as additional purchase price and was, therefore, added to goodwill. Purchased software and technology and client lists were valued at $1,230,000 and $903,000, respectively, and generally are being amortized over five years. Stockton is engaged in the business of providing EDI and transaction processing services to the healthcare industry. The transaction was financed through borrowings under the Company's Credit Facility. These acquisitions were recorded using the purchase method of accounting and, accordingly, the results of operations of these acquired companies are included in the consolidated results of operations of the Company since the dates of their respective acquisitions. The purchase price of each acquisition has been allocated to the respective net assets acquired based upon their fair values. Goodwill, which represents the excess of cost over the estimated fair value of the net assets acquired, for these transactions were as follows: EC&F and Premier -- $3,586,000; TCS -- $6,525,000 and Stockton -- $8,281,000. Goodwill is being amortized over 20 years except for the goodwill recorded in connection with the acquisition of TCS which is being amortized over seven years. The following unaudited pro forma information for the year ended June 30, 1997 and 1998 includes the operations of the Company, inclusive of the operations of both TCS and Stockton as if the acquisitions had occurred at July 1, 1996. This pro forma information gives effect to the amortization expense associated with goodwill and other intangible assets acquired, adjustments related to the fair market value of the assets and liabilities acquired, interest expense relating to financing the acquisitions, and related income tax effects.
1997 1998 ------------ ------------ (IN THOUSANDS) Revenues ..................................... $ 41,824 $ 43,936 ========= ======== Loss from operations ......................... $ (8,855) $ (430) ========= ======== Net loss ..................................... $ (11,206) $ (4,320) ========= ======== Net loss applicable to common stock .......... $ (13,606) $ (6,720) ========= ======== Basic and diluted net loss per share ......... $ (2.51) $ (1.18) ========= ========
3. PROPERTY AND EQUIPMENT
USEFUL LIVES (IN YEARS) 1997 1998 ------------- -------- --------- (IN THOUSANDS) Land ................................................... $ 210 $ 104 Building and improvements .............................. 20-25 2,190 2,193 Furniture and fixtures ................................. 5 1,150 1,240 Computer equipment ..................................... 3-5 5,696 6,747 ------ ------- 9,246 10,284 Less accumulated depreciation and amortization ......... 3,729 5,573 ------ ------- Property and equipment -- net .......................... $5,517 $ 4,711 ====== =======
F-10 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) 4. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following: 1997 1998 --------- --------- (IN THOUSANDS) Purchased client lists .................... $2,989 $3,893 Less, accumulated amortization ............ 1,518 2,220 ------ ------ 1,471 1,673 ------ ------ Purchased software and technology ......... 6,859 8,288 Less, accumulated amortization ............ 2,973 4,922 ------ ------ 3,886 3,366 ------ ------ Software development costs ................ -- 462 ------ ------ Other intangible assets -- net ............ $5,357 $5,501 ====== ======
Subsequent to the issuance of the June 30, 1997 financial statements, the Company's management determined that a lower discount rate should have been utilized to value purchased software and technology acquired in the TCS acquisition. As a result, the Company reclassified $343,000 from goodwill to purchased software and technology. 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
1997 1998 --------- --------- (IN THOUSANDS) Accrued wages and related employee benefits ......... $1,010 $1,609 Rebate liability .................................... 488 291 Pharmacy claims liability ........................... 576 604 Accrued professional fees ........................... 795 364 Deferred revenue .................................... 749 614 Accrued reorganization costs (a) .................... 1,005 -- Due to former owners of acquired business ........... 2,216 1,945 Accrued litigation settlement ....................... 860 -- Accrued interest .................................... 5 864 Other ............................................... 1,491 1,424 ------ ------ Total ............................................... $9,195 $7,715 ====== ======
- ---------- (a) As a result of the Spin-off (Note 1), the Company recorded a charge amounting to $2,864,000 during the year ended June 30, 1995. Such charge represented amounts to be paid to former stockholders of MedE (who remained as executives of MedE) pursuant to contractual agreements which require such payments to be made upon a change in control. The net present value of remaining payments totaled $1,005,000 as of June 30, 1997, which was included in accrued reorganization costs. F-11 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) 6. LONG-TERM DEBT Long-term debt consists of the following:
1997 1998 ---------- ---------- (IN THOUSANDS) Senior subordinated note less unamortized discount of $2,000,000 and $1,641,000 at June 30, 1997 and 1998, respectively (a) ...................................... $23,000 $23,359 Credit Facility (b) ............................................................... -- 16,725 Obligations under capital leases (c) .............................................. 769 436 Loan payable relating to an acquisition, collateralized by $224,000 of certifi- cates of deposits at June 30, 1998 due in quarterly payments ranging from $15,000 to $25,000 through February 2002, interest at 6.7 percent................. 342 271 Note payable, in connection with the sale of certain assets due in monthly installments of $6,000 through January 2000, interest at 6.8 percent.............. 180 114 Notes payable to former shareholders of EC&F, repaid in 1998 ...................... 95 -- Note payable, collateralized by land and building of MEDE OHIO, due in monthly installments of $19,000 through July 2000, interest at 12.5 percent....... 592 419 Note payable to bank, repaid in 1998 .............................................. 173 -- Other ............................................................................. 10 -- ------- ------- 25,161 41,324 Less current portion .............................................................. 538 269 ------- ------- Total ............................................................................. $24,623 $41,055 ======= =======
(a) On February 14, 1997, the Company entered into an agreement with an affiliate of certain shareholders of the Company under which the Company issued a $25,000,000 senior subordinated note (the "Senior Subordinated Note") and 370,993 shares of its common stock valued at $2,125,000 (representing the estimated fair value of the common stock) for total consideration of $25,000,000 (the "Senior Subordinated Note and Share Purchase Agreement"). The $2,125,000 relating to the shares of common stock was recorded as a discount on the Senior Subordinated Note and is being amortized over the term of the Senior Subordinated Note. The Senior Subordinated Note bears interest at the rate of 10% per annum, payable quarterly. One half of the principal sum is due on February 14, 2001, and the second half is due on February 14, 2002. The terms of the Senior Subordinated Note and Share Purchase Agreement place restrictions on the consolidation, merger, or sale of the Company, indebtedness, and the payment of any cash dividends. (b) The revolving line of credit from a bank (the "Credit Facility"), as currently amended on October 7, 1998, provides for maximum borrowings of $36,000,000 and expires on October 31, 1999. Borrowings under the agreement bear interest at either the bank's base rate, as defined, plus .25% or an offshore rate, as defined, plus 1.25%. The weighted average interest rate on outstanding borrowings at October 31, 1998 was 6.41%. The Company is required to pay a commitment fee of .375% per annum on the unused portion of the Credit Facility. All borrowings under the agreement are guaranteed by certain stockholders of the Company. In consideration for the granting of such guarantees, the stockholders were issued warrants to purchase 52,530 shares (valued at $121,000), 18,330 shares (valued at $52,000) and 34,200 shares (valued at $98,000) of the Company's common stock during the years ended June 30, 1996, 1997 and 1998, respectively. In addition, the stockholders were issued warrants to purchase 84,050 shares on October 7, 1998 in consideration for the granting of the most recent guaranty. All warrants issued were valued using the Black-Scholes Option Pricing Model. The aggregate fair value of these warrants is recorded in other assets as deferred financing costs and is being amortized over the life of the agreement. The terms of the agreement, among F-12 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) other matters, require the Company to maintain certain leverage and interest coverage ratios and place restrictions on additional investments, indebtedness and the payment of any cash dividends. The Company was not in compliance with the leverage and interest coverage covenants as of September 30, 1998. The bank has granted a waiver relating to the noncompliance with these covenants and has amended these covenants on a prospective basis such that the Company anticipates it will be in compliance with such covenants at least through September 30, 1999. (c) The Company leases certain computer and office equipment under capital lease arrangements expiring through July 2000. The gross value of the equipment held under capital leases was $2,110,000 and $2,406,000 as of June 30, 1997 and 1998, respectively, and the related accumulated amortization was $1,524,000 and $2,211,000, respectively.
Maturities of long-term debt as of June 30, 1998 are as follows: DISCOUNT YEAR ENDING JUNE 30, GROSS ON NOTE NET - ---------------------- --------- --------- --------- (IN THOUSANDS) 1999 ................. $ 664 $ 395 $ 269 2000 ................. 17,164 437 16,727 2001 ................. 12,594 483 12,111 2002 ................. 12,543 326 12,217 ------- ------ ------- Total ................ $42,965 $1,641 $41,324 ======= ====== =======
Based upon the borrowing rates currently available to the Company for loans with similar terms, the fair value of the Company's debt approximates the carrying amounts. 7. INCOME TAXES The provision for income taxes for the fiscal years ended June 30, 1996, 1997 and 1998 consists entirely of current state income taxes. The provision for income taxes varies from the amount computed by applying the statutory U.S. Federal income tax rate to the loss before provision for income taxes as a result of the following:
1996 1997 1998 ------------ ------------ ------------ (IN THOUSANDS) U.S. Federal statutory rate ................... $ (6,541) $ (2,984) $ (1,698) Increases (reductions) due to: Nondeductible expenses ....................... 3,674 293 238 State taxes .................................. 93 57 42 Net operating losses not producing current tax benefits ................................... 2,867 2,691 1,460 -------- -------- -------- Total ........................................ $ 93 $ 57 $ 42 ======== ======== ========
The net deferred tax asset is comprised of the following:
1997 1998 ------------ ------------ (IN THOUSANDS) Accounts receivable .................................... $ 685 $ 399 Property and equipment ................................. (61) 176 Goodwill ............................................... 2,488 2,786 Other intangible assets ................................ 366 459 Accrued expenses and other current liabilities ......... 1,264 617 Net operating loss carryforwards ....................... 12,656 14,552 --------- --------- 17,398 18,989 Less valuation allowance ............................... (17,398) (18,989) --------- --------- Total .................................................. $ -- $ -- ========= =========
F-13 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) The valuation allowance increased during the years ended June 30, 1997 and 1998 primarily as a result of additional net operating loss carryforwards and net deductible temporary differences, for which realization was not considered to be more likely than not. In the event that the tax benefits relating to the valuation allowance are subsequently realized, approximately $5,600,000 of benefits would reduce goodwill. As of June 30, 1998, the Company had Federal net operating loss carryforwards of approximately $36,380,000. Such loss carryforwards expire in the fiscal years 2005 through 2013. Because of the changes in ownership, as defined in the Internal Revenue Code, which occurred during 1995 and 1996, certain net operating loss carryforwards are subject to annual limitations. 8. STOCKHOLDERS' EQUITY a. Stock Option and Restricted Stock Purchase Plan -- In March 1995, the Company established a stock option and restricted stock purchase plan (the "Stock Plan"). The Stock Plan permits the granting of any or all of the following types of awards: incentive stock options ("ISOs"); nonqualified stock options ("NQSO"); or restricted stock. The Stock Plan authorizes the issuance of 655,000 shares of common stock. ISOs may not be granted at a price less than the fair market value of the Company's common stock on the date of grant (or 110 percent of the fair market value in the case of persons holding ten percent or more of the voting stock of the Company) and expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding ten percent or more of the voting stock of the Company). The vesting period relating to the ISOs is determined by the Option Committee of the Board of Directors at the date of grant. The exercise price, expiration date, and vesting period relating to NQSOs are determined by the Option Committee of the Board of Directors at the date of grant. The table below summarizes the activity of the Stock Plan for the years ended June 30, 1996, 1997 and 1998.
WEIGHTED NUMBER EXERCISE AVERAGE OF PRICE EXERCISE SHARES RANGE PRICE ------------ --------------- ----------- Balance, July 1, 1995 .......... 480,316 $ 4.58 $ 4.58 Options granted .............. 117,950 $ 4.58 $ 4.58 Options exercised ............ (42,556) $ 4.58 $ 4.58 Canceled/lapsed .............. (91,217) $ 4.58 $ 4.58 ------- ------------ ------- Balance, June 30, 1996 ......... 464,493 $ 4.58 $ 4.58 Options granted .............. 51,059 $ 4.58-$5.73 $ 5.17 Options exercised ............ (19,642) $ 4.58 $ 4.58 Canceled/lapsed .............. (65,684) $ 4.58 $ 4.58 ------- ------------ ------- Balance, June 30, 1997 ......... 430,226 $ 4.58-$5.73 $ 4.64 Options granted .............. 81,926 $ 5.73 $ 5.73 Options exercised ............ (14,054) $ 4.58-$5.73 $ 4.62 Canceled/lapsed .............. (15,057) $ 4.58-$5.73 $ 4.62 ------- ------------ ------- Balance, June 30, 1998 ......... 483,041 $ 4.58-$5.73 $ 4.84 ======= ============ =======
During March 1998, the Company granted 47,565 options at an exercise price of $5.73 per share. The Company later determined that the value of the Company's stock at the date of grant was $8.00. As a result, the Company recorded a deferred compensation charge of $108,000 relating to the granting of these options, of which $18,000 was amortized during the year ended June 30, 1998. Effective August 31, 1998, the Company accelerated the vesting of these options and, therefore, amortized the remaining balance. F-14 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) Significant option groups outstanding at June 30, 1998 and related weighted average price and life information were as follows:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ---------------- ------------- -------------- ---------- ------------- --------- $ 4.58 375,804 7.4 $ 4.58 202,069 $ 4.58 $ 5.73 107,237 9.6 $ 5.73 10,689 $ 5.73 ------- ------- 483,041 7.9 $ 4.84 212,758 $ 4.64 ======= =======
The Company applies APB opinion No. 25 and related interpretations in accounting for its Option Plan. Accordingly, no compensation cost has been recognized. If compensation cost for the Company's stock options had been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and net loss per share for the years ended June 30, 1996, 1997 and 1998 would have been as follows:
1996 1997 1998 ------------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss -- as reported ........................... $ (19,330) $ (8,833) $ (5,035) Net loss -- pro forma ............................. (19,345) (8,887) (5,105) Basic and diluted net loss per share -- as reported (4.14) (2.07) (1.31) Basic and diluted net loss per share -- pro forma. (4.15) (2.08) (1.32)
The weighted average fair value of the options granted for the years ended June 30, 1996, 1997, and 1998 is estimated at $1.56, $1.83, and $1.92 on the date of grant (using the minimum value option pricing model) with the following weighted average assumptions for the years ended June 30, 1996, 1997, and 1998, respectively: a risk-free interest rate of 5.93%, 6.39%, and 5.86%; an expected option life of seven years and no expected volatility or dividend yield. As required by SFAS No. 123, the impact of outstanding nonvested stock options granted prior to July 1, 1995 has been excluded from the pro forma calculation; accordingly, the 1996, 1997 and 1998 pro forma adjustments are not indicative of future period pro forma adjustments when the calculation will apply to all applicable stock options. b. Net income (loss) per share -- In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." Basic income per share is determined by using the weighted average number of shares of common stock outstanding during each period. Diluted income per share further assumes the issuance of common shares for all dilutive outstanding stock options and warrants as calculated using the treasury stock method. Basic and diluted earnings per share are the same for all of the periods presented because the effect of including outstanding options and warrants would be antidilutive. The calculation for the years ended June 30, 1996, 1997 and 1998 and the three months ended September 30, 1997 and 1998 was as follows:
YEAR ENDED JUNE 30, 1996 1997 ---------------------------------- --------------------------------- PER-SHARE PER-SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT ------------- -------- ----------- ------------ -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss ......................... $ (19,330) $ (8,833) Less: Preferred dividends ........ (2,400) (2,400) --------- --------- Basic and diluted net loss per share .......................... $ (21,730) 5,245 $(4.14) $ (11,233) 5,425 $(2.07) ========= ===== ====== ========= ===== ====== YEAR ENDED JUNE 30, 1998 -------------------------------- PER-SHARE LOSS SHARES AMOUNT ------------ -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss ......................... $ (5,035) Less: Preferred dividends ........ (2,400) -------- Basic and diluted net loss per share .......................... $ (7,435) 5,679 $(1.31) ======== ===== ======
F-15 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
THREE MONTHS ENDED SEPTEMBER 30, 1997 1998 ------------------------------------- ------------------------------------ PER-SHARE PER-SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT ------------ -------- ----------- ------------ -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss ............................... $ (1,661) $ (1,085) Less: Preferred dividends .............. (600) (600) -------- -------- Basic and diluted net loss per share.... $ (2,261) 5,674 $(0.40) $ (1,685) 5,685 $(0.30) ======== ===== ====== ======== ===== ======
c. Proposed Public Offering -- In 1998, the Company determined to work towards an IPO of the Company's common stock on a firm commitment basis. The proposed IPO contemplates that a total of 4,166,667 shares of common stock will be offered at a price between $11.00 and $13.00 per share. The net proceeds of the IPO will be used to retire its Senior Subordinated Note and a portion of borrowings outstanding under its Credit Facility plus any related accrued interest. d. Reverse Stock Split and Increase in Authorized Common Stock and Preferred Stock -- In anticipation of the proposed IPO, on July 27, 1998 the Company amended and restated its certificate of incorporation in order to, among other things, effect a reverse stock split of all issued and outstanding common shares at the rate of 1 for 4.5823, which decreased the number of issued and outstanding shares as of June 30, 1998 from approximately 26,050,000 to approximately 5,685,000. This stock split has been retroactively reflected in the accompanying financial statements for all periods presented. The Company also increased the number of shares of authorized common stock to 30,000,000 and the number of shares of authorized preferred stock to 5,000,000. e. Recapitalization -- In conjunction with the proposed IPO and as provided for in the Company's July 27, 1998 amendment and restatement of its certificate of incorporation, the Company contemplates a recapitalization of its capital stock (the "Recapitalization"). The Recapitalization involves the conversion of all outstanding preferred stock into common stock (based upon liquidation value as defined in Note 9) and the exercise of all outstanding warrants. However, cash realized by the Company upon any exercise of the underwriters' overallotment option would be applied to the payment of accrued dividends on the preferred stock and the remainder of such accrued dividends would convert into common stock. The preferred stock conversion will be effected based upon the IPO price per share. Assuming an IPO price of $12.00 per share and no exercise of the underwriters' overallotment, the preferred stock will be converted into approximately 2,652,000 shares of common stock. The warrants will be converted, in a cashless exercise, into approximately 60,000 shares of common stock. f. Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has approved the 1998 Employee Stock Purchase Plan (the "Purchase Plan"). Employees of the Company, including directors of the Company who are employees, are eligible to participate in quarterly plan offerings in which payroll deductions may be used to purchase shares of common stock. The purchase price of such shares is the lower of 85 percent of the fair market value of the common stock on the day the offering commences and 85 percent of the fair market value of the common stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the IPO. g. New Stock Option and Restricted Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has approved the 1998 Stock Option and Restricted Stock Purchase Plan (the "New Stock Plan"). The New Stock Plan permits the granting of any or all of the following types of awards: incentive stock options; nonqualified stock options; restricted stock; or other stock-based awards, to officers, employees, directors, consultants and advisors of the Company. To date, no options have been granted under the New Stock Plan, however, the Board determined to grant options to purchase an aggregate 400,000 shares of common stock pursuant to the New Stock Plan to certain employees of the Company (including certain executive officers) contingent upon consummation of the IPO. Such options, which include both incentive and non-qualified stock options, will have an exercise price equal to the price to the public in the IPO and generally will vest ratably over four F-16 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) years from the date of grant except that the initial installment of options to be granted to certain executive officers will vest immediately upon consummation of the IPO. h. On November 15, 1998, the Board determined to grant options (such grant to be effective as of the date of the IPO) to purchase an aggregate 50,500 shares of common stock under the New Stock Plan to certain employees of the Company, most of whom were formerly employed by HII. Such options will be incentive stock options, will have an exercise price equal to the price to the public in the IPO and generally will vest ratably over four years from the date of grant. 9. REDEEMABLE CUMULATIVE PREFERRED STOCK As of June 30, 1997 and 1998, the Company had outstanding 239,956 shares of preferred stock. The preferred stock is subject to mandatory redemption in two equal installments on May 31, 2001 and 2002; however, the Company may redeem the preferred stock in whole at any time or in part from time to time at its option. The Company would also be required to redeem the preferred stock should it consummate a public offering of its common stock pursuant to which the Company receives aggregate net proceeds of at least $15,000,000. (See Note 8). The redemption price, as well as liquidation value, of the preferred stock is $100 per share plus any accrued but unpaid dividends. Dividends on this preferred stock, which are cumulative, are payable, if declared, at $10 per share per annum. No dividends have been declared or paid. At September 30, 1998, cumulative undeclared and unpaid dividends on this preferred stock totaled $7,827,000. 10. COMMITMENTS AND CONTINGENCIES a. Leases -- The Company leases certain offices and equipment under operating leases. The minimum noncancelable lease payments are as follows (in thousands):
YEAR ENDING JUNE 30, - -------------------- 1999 ................................. $1,405 2000 ................................. 1,351 2001 ................................. 919 2002 ................................. 654 Thereafter ........................... 348 ------ Total minimum lease payments ......... $4,677 ======
Rent expense for the years ended June 30, 1996, 1997 and 1998 was $853,000, $1,309,000, and $1,307,000, respectively. b. Litigation -- The Company is engaged in various litigation in the ordinary course of business. Management, based upon the advice of legal counsel, is of the opinion that the amounts which may be awarded or assessed in connection with these matters, if any, will not have a material effect on the consolidated financial position or results of operations. c. Employment Contracts -- The Company has employment contracts with certain of its employees with annual renumeration ranging from $95,000 to $110,000. Future minimum payments under these contracts are as follows (in thousands):
YEAR ENDING JUNE 30, - -------------------- 1999 ................ $206 2000 ................ 79 ---- $285 ====
F-17 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) d. Defined Contribution Plans -- The Company maintained four defined contribution plans (the "Plans") for all eligible employees, as defined by the Plans until April 1, 1996. On April 1, 1996, the Company combined the Plans into one defined contribution plan (the "New Plan"). The Company previously made matching contributions at various percentages to three of the Plans in accordance with the respective Plan documents and currently makes matching contributions to the New Plan in an amount equal to fifty percent of the employee salary deductions to a maximum of four percent of the employees salary in accordance with the New Plan document. The Company incurred $197,000, $227,000, and $194,000 for employer contributions to the Plans/New Plan for the years ended June 30, 1996, 1997 and 1998, respectively. e. Service Agreements -- The Company has entered into service agreements with telecommunications providers which require the Company to utilize certain minimum monthly amounts of the services of such providers. These agreements expire through November 2001. The Company was in compliance with the terms of these agreements as of June 30, 1998. The minimum monthly amounts under these agreements are as follows (in thousands):
YEAR ENDING JUNE 30, - -------------------- 1999 ................. $ 1,795 2000 ................. 1,497 2001 ................. 1,429 2002 ................. 543 ------- Total ................ $ 5,264 =======
11. TRANSACTION PROCESSING AGREEMENT On July 17, 1998, the Company entered into a transaction processing agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, MSOs and PPMs. Under the Processing Agreement, the Company will undertake certain software development obligations, and on July 1, 1999 it will become the exclusive processor (subject to certain exceptions) of medical reimbursement claims for Medic's subscribers submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to revenues to be paid by payors (in respect of which a commission is payable to Medic) as well as fees to be paid by Medic. The Processing Agreement sets forth detailed performance criteria and development and implementation timetables. Inability to meet these criteria may result in financial penalties or give Medic a right to terminate this agreement. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter (unless either party elects to terminate). Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998 the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's common stock, at a per share exercise price equal to the price of the common stock to the public in the IPO or, in the event that the IPO is not completed by March 31, 1999 at an exercise price equal to $8 per share. The Medic Warrant vests over a two year period and may be exercised up to five years after issuance. The Medic Warrant was valued at $2,537,000 using the Black-Scholes Option Pricing Model and is recorded in other assets. The Medic Warrant is being amortized over the life of the Processing Agreement, five years. The Medic Warrant contains customary weighted average antidilution provisions. The Company and certain principal stockholders have agreed that following the completion of the IPO and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of common stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. Medic has not yet named a designee. F-18 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) 12. OTHER INCOME In February 1997, the Company exercised 26,712 options to purchase common shares of First Data Corporation and subsequently sold the common shares resulting in a pre-tax gain of $885,000. Such options were issued to former employees of the Company prior to the Spin-off but reverted to the Company upon the termination of these employees. 13. RESTATEMENT Subsequent to the issuance of the Company's consolidated financial statements for the fiscal year ended 1998, the Company's management determined that it was necessary to revise the valuation of the write-off of in-process research and development incurred in connection with the TCS acquisition in February 1997. As a result, the Company's financial statements for the fiscal years ended June 30, 1997 and 1998 have been restated from the amounts previously reported in order to reflect the effects of the adjustment to the write-off of in-process research and development. Such write-off, which occurred during the year ended June 30, 1997, was reduced from $4,354,000 to $1,556,000. As a result, goodwill was increased by $2,798,000. The effect of the restatement is as follows:
1997 1998 ------------------------------- ----------------------------- AS PREVIOUSLY AS PREVIOUSLY REPORTED AS RESTATED REPORTED AS RESTATED --------------- ------------- -------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) AT JUNE 30: Goodwill ....................................... $ 24,834 $ 27,465 $ 32,522 $ 34,753 Accumulated deficit ............................ (47,839) (45,208) (52,474) (50,243) FOR THE YEAR ENDED JUNE 30: Depreciation and amortization .................. 5,293 5,460 6,743 7,143 Acquired in-process research and development 4,354 1,556 -- -- Net loss ....................................... (11,464) (8,833) (4,635) (5,035) Net loss applicable to common stock ............ (13,864) (11,233) (7,035) (7,435) Basic and diluted net loss per common share..... $ (2.56) $ (2.07) $ (1.24) $ (1.31)
14. SUBSEQUENT EVENTS a. Acquisition -- In October 1998, the Company acquired all the outstanding shares of capital stock of Healthcare Interchange Inc. ("HII") a St. Louis, Missouri-based provider of EDI transaction processing services to hospitals and physician groups in Missouri, Kansas and Illinois. Prior to the acquisition of HII, two unrelated healthcare services divisions, Intercare and Telemedical, were divested from HII in separate transactions. HII was purchased for a total cash payment of approximately $11.7 million, including transaction expenses and was financed with borrowings under the Credit Facility. The acquisition will be accounted for under the purchase method of accounting. The following unaudited pro forma information for the year ended June 30, 1998 includes the operations of the Company, inclusive of the operations of both Stockton and HII as if the acquisitions had occurred as of July 1, 1997. The pro forma information for the three months ended September 30, 1998 includes the operations of the Company, inclusive of the operations of HII as if the acquisition had occurred at July 1, 1997. This pro forma information gives effect to the amortization expense associated with goodwill and other intangible assets acquired, adjustments related to the fair market value of the assets and liabilities acquired interest expense related to financing the acquisitions, and related income tax effects. The allocation of the purchase price is preliminary and subject to change upon review by management of additional evidence relating to the fair value of assets acquired and liabilities assumed at the closing date. Adjustments to the purchase price allocation, if any, would likely relate to amounts assigned to intangible assets. F-19 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
YEAR ENDED THREE MONTHS ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 --------------- -------------------- (IN THOUSANDS) Revenues ..................................... $ 48,880 $ 13,318 ======== ======== Income (Loss) from operations ................ (1,034) 44 ======== ======== Net loss ..................................... (5,695) (1,245) ======== ======== Net loss applicable to common stock .......... (8,095) (1,845) -------- -------- Basic and diluted net loss per share ......... (1.43) (0.32) ======== ========
b. Credit Facility -- During July 1998, the Company received a letter from the lender under the Credit Facility committing to provide an amended credit facility with total available credit of $15.0 million. This facility would be comprised of a $7.5 million term loan to be used for acquisitions and a $7.5 million revolving credit loan to be used for working capital purposes, each with a maximum term of two years from October 31, 1998. Interest for the term and revolver loans would be computed at .25% above the bank's base rate, or 1.25% above a Eurodollar based rate. Such borrowing rates would be at the option of the Company for any particular period during which borrowings exist. The Company is currently negotiating with the lender to increase such total available credit to $20.0 million. F-20 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 INDEPENDENT AUDITORS' REPORT The Board of Directors Healthcare Interchange, Inc.: We have audited the accompanying consolidated balance sheet of Healthcare Interchange, Inc. and subsidiary (Company) as of June 30, 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the nine-month period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in notes 3 and 15, on October 30, 1998, the Company completed the sale of it financial transactions business to MEDE America and the disposal of the assets and operations of the discontinued Telemedical and Intercare segments. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Interchange, Inc. and subsidiary as of June 30, 1998, and the results of their operations and their cash flows for the nine-month period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP St. Louis, Missouri September 8, 1998, except as to notes 3 and 15, which is as of October 30, 1998 F-25 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 1998 1998 --------------- -------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................................... $ 140,042 $ 38,083 Service accounts receivable, less allowance for doubtful accounts of $30,709 and $32,207 (unaudited), respectively.......................... 616,044 556,025 Due from stockholders ................................................... 105,483 104,505 Inventories ............................................................. 13,286 12,822 Net current assets of discontinued operations ........................... 236,772 243,960 Prepaid expenses ........................................................ 62,472 16,929 ------------ ------------ Total current assets ............................................... 1,174,099 972,324 Property, equipment and computer software, net ........................... 611,578 576,559 Other assets ............................................................. 26,246 25,537 Net non-current assets of discontinued operations ........................ 176,455 176,455 ------------ ------------ $ 1,988,378 1,750,875 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Revolving credit facilities ............................................. $ 2,260,000 $ 2,260,000 Notes payable ........................................................... 73,751 64,701 Accounts payable ........................................................ 1,162,125 956,320 Accounts payable to stockholders ........................................ 151,705 183,376 Dividends payable ....................................................... 70,313 93,750 Accrued expenses and other liabilities .................................. 865,935 612,745 ------------ ------------ Total current liabilities .......................................... 4,583,829 4,170,892 ============ ============ Stockholders' equity (deficit): Cumulative redeemable convertible preferred stock, $1 par value; ........ 62,500 shares authorized, issued, and outstanding ..................... 62,500 62,500 Common stock: Class A - $1 par value; 66,250 shares authorized, 35,000 shares issued and outstanding ............................................. 35,000 35,000 Class B - $1 par value; 66,250 shares authorized, 35,000 shares issued and outstanding ............................................. 35,000 35,000 Class C - $1 par value; 30,000 shares authorized, 20,001 shares issued and outstanding ............................................. 20,001 20,001 Additional paid-in capital ........................................... 3,016,898 2,993,461 Accumulated deficit .................................................. (5,764,850) (5,565,979) ------------ ------------ Total stockholders' equity (deficit) ............................... (2,595,451) (2,420,017) ------------ ------------ $ 1,988,378 $ 1,750,875 ============ ============
See accompanying notes to consolidated financial statements. F-26 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
NINE-MONTH THREE-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 --------------- ------------------- (UNAUDITED) Revenues: Claims service revenue .............................................. $ 2,814,030 $1,032,672 Claim service revenue from stockholders ............................. 843,787 258,506 Other revenue ....................................................... 69,137 20,597 ------------ ---------- 3,726,954 1,311,775 ------------ ---------- Operating expenses: Operating expenses .................................................. 1,285,832 479,003 Sales, marketing and client service ................................. 993,512 263,320 General and administrative .......................................... 752,033 248,032 Depreciation and amortization ....................................... 131,806 43,761 Provision for doubtful accounts ..................................... 2,000 14,896 ------------ ---------- 3,165,183 1,049,012 ------------ ---------- Operating income .................................................. 561,771 262,763 Interest expense ..................................................... 148,213 63,892 ------------ ---------- Income from continuing operations ................................. 413,558 198,871 Discontinued operations: Loss from operations of discontinued segments ....................... (2,026,784) -- Loss on disposal of segments (including $342,971 for operating losses during phase-out period) .......................................... (2,073,601) -- ------------ ---------- Net income (loss) ................................................. (3,686,827) 198,871 Preferred stock dividends declared ................................ (70,313) (23,437) ------------ ---------- Net income (loss) attributable to common stockholders ............. $ (3,757,140) $ 175,434 ============ ==========
See accompanying notes to consolidated financial statements. F-27 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) NINE-MONTH PERIOD ENDED JUNE 30, 1998 AND THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
COMMON STOCK ----------------------------- PREFERRED STOCK CLASS A CLASS B CLASS C ----------- --------- --------- --------- Balance, September 30, 1997 ................ $62,500 $35,000 $35,000 $20,001 Preferred stock dividends declared ......... -- -- -- -- Net loss ................................... -- -- -- -- ------- ------- ------- ------- Balance, June 30, 1998 ..................... 62,500 35,000 35,000 20,001 Preferred stock dividends declared (unaudited) ............................... -- -- -- -- Net income (unaudited) ..................... -- -- -- -- ------- ------- ------- ------- Balance, September 30, 1998 (unaudited) $62,500 $35,000 $35,000 $20,001 ======= ======= ======= ======= TOTAL ADDITIONAL STOCKHOLDERS' PAID-IN ACCUMULATED EQUITY CAPITAL DEFICIT (DEFICIT) ------------- ---------------- ---------------- Balance, September 30, 1997 ................ $3,087,211 $ (2,078,023) $ 1,161,689 Preferred stock dividends declared ......... (70,313) -- (70,313) Net loss ................................... -- (3,686,827) (3,686,827) ---------- ------------ ------------ Balance, June 30, 1998 ..................... 3,016,898 (5,764,850) (2,595,451) Preferred stock dividends declared (unaudited) ............................... (23,437) -- (23,437) Net income (unaudited) ..................... -- 198,871 198,871 ---------- ------------ ------------ Balance, September 30, 1998 (unaudited) $2,993,461 $ (5,565,979) $ (2,420,017) ========== ============ ============
See accompanying notes to consolidated financial statements. F-28 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH THREE-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 --------------- ------------------- (UNAUDITED) Cash flows from operating activities: Net income (loss) ................................................... $ (3,686,827) $ 198,871 Loss on disposal of segments ........................................ 2,073,601 -- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ..................................... 390,821 43,761 Provision for doubtful accounts ................................... 40,013 14,896 Increase (decrease) in cash from changes in assets and liabilities: Service accounts receivable ...................................... 523,789 37,935 Due from stockholders ............................................ 181,781 978 Inventories ...................................................... (19,378) 464 Prepaid expenses ................................................. 32,102 45,543 Accounts payable ................................................. 819,323 (197,571) Accrued expenses and other liabilities ........................... 45,013 (229,753) ------------ ---------- Net cash provided by (used in) operating activities ............ 400,238 (84,876) ------------ ---------- Cash flows from investing activities: Purchases of property and equipment ................................. (276,548) (8,742) Capitalized software development expenditures ....................... (293,442) - Other non-current assets ............................................ 1,297 709 ------------ ---------- Net cash used in investing activities .......................... (568,693) (8,033) ------------ ---------- Cash flows from financing activities: Advances on revolving credit facilities ............................. 350,000 -- Payments on notes payable ........................................... (71,490) (9,050) Dividends paid on cumulative convertible preferred stock ............ (23,437) -- ------------ ---------- Net cash provided by (used in) financing activities ............ 255,073 (9,050) ------------ ---------- Net increase (decrease) in cash and cash equivalents ........... 86,618 (101,959) Cash and cash equivalents, beginning of period ....................... 53,424 140,042 ------------ ---------- Cash and cash equivalents, end of period ............................. $ 140,042 $ 38,083 ============ ========== Noncash investing activities: Write-offs of long-term assets due to disposal of segments .......... $ 1,208,989 $ -- Accrual for operating losses of discontinued segments during phase-out period .................................................. 342,971 -- ============ ========== Supplemental disclosure of cash flow information - cash paid for interest ............................................................ $ 148,212 $ 55,448 ============ ==========
See accompanying notes to consolidated financial statements. F-29 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 1. ORGANIZATION AND BUSINESS Healthcare Interchange, Inc. was incorporated in 1991 and began operations in 1992. Healthcare Interchange, Inc. and subsidiary (Company) is in the business of providing electronic health data network services to a national clientele through three operating segments; financial transactions, medical televideo, and intercare. The financial transactions segment processes electronic claims for health care providers. The medical televideo segment develops, sells, and services televideo and minor medical equipment through a wholly owned subsidiary, HII Telemedical Corp. (Telemedical). The Intercare segment (Intercare) began operations in fiscal 1997, providing electronic claims processing and data analysis for health care providers. Prior to October 1, 1996, Intercare was a development stage enterprise. The consolidated financial statements at June 30, 1998 include the accounts of Healthcare Interchange, Inc. and its wholly owned domestic subsidiary after elimination of intercompany accounts and transactions. Unaudited Interim Consolidated Financial Statements -- The consolidated balance sheet of the Company as of September 30, 1998 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the three-month period ended September 30, 1998 included in the accompanying consolidated financial statements, which are unaudited, include the accounts of Healthcare Interchange, Inc. and its wholly-owned subsidiary. All significant intercompany accounts have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Adjustments consist only of normal recurring items. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Cash and Cash Equivalents -- The Company considers cash equivalents to be securities held for cash management purposes having original maturities of three months or less at the time of investment. b. Inventories -- Inventories are stated at the lower of cost or market. Cost is determined principally using the specific identification method. Inventories at June 30, 1998 are comprised principally of raw materials. c. Property, Equipment and Computer Software -- Property, equipment and computer software are carried at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset. Costs associated with the internal development of software are capitalized once the marketability and technological feasibility of the software have been established. The property, equipment and computer software are depreciated on the straight-line basis over the following useful lives:
YEARS ------ Building ....................................... 28 Leasehold improvements ......................... 10 Furniture ...................................... 7 Communications equipment ....................... 5 Computers and data handling equipment .......... 5 Purchased computer software .................... 5 Developed computer software .................... 3
d. Income Taxes -- Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of exist- F-30 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) ing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those differences are expected to be recovered or settled. e. Revenue Recognition -- The Company recognizes revenue from the sale of its services in the period that the services are delivered or provided. Unearned income on service contracts is amortized by the straight-line method over the term of the contracts. Revenue from the sale of the Company's products is recognized in the period that the products are shipped to the customers. f. Stock-Based Compensation -- The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock options. The Company has adopted the pro forma disclosures-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. g. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the period. Actual results may differ from those estimates. 3. DISCONTINUED OPERATIONS In fiscal 1999, the Company's Board of Directors approved a plan to discontinue the operations of its Televideo and Intercare operating segments; and on September 17, 1998, signed a letter of intent to sell substantially all the assets of the financial transactions business to MEDE America Corporation (MEDE America). See note 15. The Company's consolidated financial statements as of June 30, 1998 and for the nine-month period then ended include a charge of $2,073,601 to provide for an after-tax loss on the disposal of the discontinued operations, including estimated operating losses of $342,971 through the expected date of disposal. Operating results for the nine-month period ended June 30, 1998 and financial position as of June 30, 1998 of the discontinued segments are summarized below: Results of operations:
NINE-MONTH PERIOD ENDED JUNE 30, 1998 -------------------- Net revenues .............................. $ 528,552 Loss from discontinued operations ......... (4,100,385) ============ Financial position: AS OF JUNE 30, 1998 -------------- Current: Accounts receivable, net ......................................... $ 162,271 Inventories ...................................................... 74,501 --------- $ 236,772 ========= Non-current - property, equipment and computer software, net ...... $ 176,455 =========
F-31 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) 4. SERVICE ACCOUNTS RECEIVABLE A summary of activity in the allowance for doubtful accounts of the continuing operations of the Company for the nine-month period ended June 30, 1998 is summarized as follows: Balance at beginning of period .......... $ 52,238 Provision for doubtful accounts ......... 2,000 Accounts written-off .................... (23,529) --------- Balance at end of period ................ $ 30,709 =========
5. PROPERTY, EQUIPMENT AND COMPUTER SOFTWARE Property, equipment and computer software of the continuing operations of the Company as of June 30, 1998 are as follows: Land ................................................... $ 7,652 Building ............................................... 30,610 Leasehold improvements ................................. 64,220 Furniture .............................................. 453,499 Communications equipment ............................... 165,127 Computers and data handling equipment .................. 436,435 Computer software ...................................... 160,724 --------- 1,318,267 Less accumulated depreciation and amortization ......... 706,689 --------- $ 611,578 =========
6. REVOLVING CREDIT FACILITIES On November 4, 1996, the Company entered into a revolving credit facility with a local bank which allows the Company to borrow up to a maximum of $750,000. The revolving credit facility bears interest at a fixed prime plus 1% (9.5% at June 30, 1998) and requires monthly payments of interest. The due date on the revolving credit facility has been extended from the original December 31, 1997 due date and is now due on October 31, 1998. The average outstanding borrowings on the revolving credit facility arrangement was $750,000 at a weighted average interest weight of 9.6% for the nine-month period ended June 30, 1998. The revolving credit facility had a balance of $750,000 at June 30, 1998. On November 4, 1996, the Company entered into a revolving credit facility with a local bank which allows the Company to borrow up to a maximum of $500,000. The revolving credit facility bears interest at a fixed prime less 0.5% (8.0% at June 30, 1998) and requires monthly payments of interest, with the balance due on November 4, 1998. The average outstanding borrowings on the revolving credit facility was $500,000 at a weighted average interest weight of 8.1% for the nine-month period ended June 30, 1998. The revolving credit facility had a balance of $500,000 at June 30, 1998. On June 4, 1997, the Company entered into a revolving credit facility with a local bank which allows the Company to draw up to a maximum of $2,500,000. The revolving credit facility bears an interest rate of prime less 0.625% (7.88% at June 30, 1998), requires monthly payments of interest, and is secured by substantially all assets of the Company with the balance due on December 31, 1999. The average outstanding borrowings on the revolving credit facility was approximately $877,000 at a weighted average interest rate of 8.0% for the nine-month period ended June 30, 1998. The revolving credit facility had a balance of $1,010,000 at June 30, 1998. F-32 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) As of June 30, 1998, the carrying value of the Company's revolving credit facilities approximated fair value based upon borrowing rates currently available for debt instruments with similar remaining terms and maturities. The Company's $750,000 revolving credit facility and notes payable are secured by substantially all of the Company's assets. Additionally, the $500,000 and $2,500,000 revolving credit facilities are guaranteed by two of the Company's stockholders. The Company's commitment agreement with the local bank for the notes payable and revolving credit facilities contains restrictive covenants which include the maintenance of minimum tangible net worth, as defined, and certain financial ratios. The Company failed to meet certain covenant requirements which has placed the Company in technical default. Consequently, the Company has classified the entire outstanding balance of borrowings under the notes payable and revolving credit facilities as a current liability. 7. NOTES PAYABLE On February 28, 1995, the Company entered into a $300,000 note payable with a local bank. The note was paid in full by the Company in February 1998. The note payable accrued interest at a fixed rate of 9.0% and required monthly payments of principal and interest. On May 30, 1995, the Company entered into a $170,000 note payable with a local bank. The note bears interest at a fixed rate of 9.75%, requires monthly payments of principal and interest, with the balance due on May 30, 2000, and is secured by substantially all assets of the Company. The note is payable on demand, and accordingly, is classified as a current liability. The balance at June 30, 1998 was $73,751. 8. RELATED PARTY TRANSACTIONS During the nine-month period ended June 30, 1998, two stockholders provided network and other services to the Company. Total expenses incurred by the Company for these services totaled approximately $116,000 for the nine-month period ended June 30, 1998. At June 30, 1998, the Company owed approximately $152,000, to these stockholders for such services. Revenue received from services provided to stockholders totaled approximately $844,000 for the nine-month period ended June 30, 1998. Due from stockholders represents amounts receivable for services provided to the stockholders. 9. LEASE COMMITMENTS The Company leases certain office space and equipment under various lease agreements. Rent expense of the continuing operations of the Company totaled $183,291 for the nine-month period ended June 30, 1998. Future minimum lease payments under noncancellable operating leases with maturities in excess of one year related to continuing operations are as follows: 1999 ................. $238,240 2000 ................. 240,133 2001 ................. 212,320 2002 ................. 208,969 2003 ................. 199,460 Thereafter ........... 395,841 ========
F-33 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) 10. STOCKHOLDERS' EQUITY Each share of cumulative convertible preferred stock (Preferred Stock) held and issuable to common holders requires a $1.50 annual dividend. Preferred Stock is redeemable, at the option of the Company, for cash of $24 per share plus unpaid dividends quarterly. Each share of Preferred Stock is convertible, at the option of the holder, into a share of common stock (the class of common stock the holder already owns) upon change in control of the Company or sale of substantially all the Company's assets, as defined in the Company's Articles of Incorporation. The Company has reserved 31,250 shares of Class A and Class B common stock for the purpose of effecting the conversion of the Preferred Stock. Pursuant to an agreement between all stockholders and the Company, all preferred and common stock outstanding is subject to certain restrictions on disposition and transfer. The stockholder agreement requires that stockholders must first offer shares to be sold or transferred to other stockholders and/or the Company in accordance with terms specified in the stockholder agreement. 11. EMPLOYEE STOCK OPTION PLANS 1994 Stock Option Plan -- On March 22, 1994, the Board of Directors of the Company adopted the 1994 Stock Option Plan (1994 Plan) pursuant to which incentive stock options may be granted to employees or directors. Under the 1994 Plan, options to purchase 12,000 shares of Class C common stock may be granted for a term not to exceed 10 years (five years with respect to a stockholder who owns more than 10% of the capital stock of the Company) and must be granted within 10 years from the date of adoption of the 1994 Plan. The exercise price of all stock options must be at least equal to the fair market value (110% of fair market value for a stockholder who owns more than 10% of the capital stock of the Company) of the shares on the date granted. 1997 Stock Option Plan -- On October 30, 1997, the Company's Board of Directors adopted a second stock option plan, the 1997 Stock Option Plan (1997 Plan). The purpose of the 1997 Plan is to provide additional employee incentives. Under the 1997 Plan, up to 24,000 options to purchase Class C common stock may be granted. The other significant provisions under the 1997 Plan are similar to those under the 1994 Plan, as described above. Aggregate information relating to stock option activity under the 1994 Plan and 1997 Plan for the nine-month period ended June 30, 1998 is as follows: Number of shares under stock options: Outstanding at beginning of period ......... 9,999 Granted .................................... 12,850 ------ Outstanding at end of period ............... 22,849 ====== Exercisable at end of period ............... 9,999 ====== Weighted average exercise price: Granted .................................... $ 100 Outstanding at end of period ............... 66.74 Exercisable at end of period ............... 24.00 =========
Aggregate information relating to stock options outstanding and stock options exercisable at June 30, 1998 is a follows: F-34 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) OPTIONS OUTSTANDING:
WEIGHTED AVERAGE OUTSTANDING AT REMAINING EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE - ---------------- ---------------- ----------------- $ 24 9,999 6.25 100 12,850 9.25 ====== ====== ==== 22,849 ====== OPTIONS EXERCISABLE: WEIGHTED AVERAGE OUTSTANDING AT REMAINING EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE - ---------------- ---------------- ----------------- $ 24 9,999 3.72 ====== ===== ====
No compensation expense relating to stock option grants was recorded in the nine-month period ended June 30, 1998 as the option exercise prices were equal to the estimated fair value at the dates of grant. Pro forma information regarding loss and loss per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. However, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented below as compensation cost does not reflect options granted prior to October 1, 1996 which vest subsequent to that date. The fair value for options granted in the nine-month period ended June 30, 1998 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
NINE-MONTH PERIOD ENDED JUNE 30, 1998 --------------------- Risk-free interest rate ................ 8.5% Dividend yield ......................... 0.0% Volatility factor ...................... 0.0% Weighted average expected life ......... 10 years
The Company's pro forma net loss compared to reported amounts are as follows:
NINE-MONTH PERIOD ENDED JUNE 30, 1998 -------------------- Net loss: As reported ........................................... $ (3,686,827) Pro forma ............................................. (3,783,647) Weighted average fair value per share of options granted during the year ....................................... 56.31
12. EMPLOYEE BENEFIT PLAN The Company maintains a qualified, contributory, 401(k) profit-sharing plan covering substantially all employees. Employees are allowed to contribute between 1% and 15% of their compensation to the plan, not to exceed the statutory maximum. The plan provides for contributions by the Company of 50% of the first 6% of an employee's salary deferral. The plan also provides for discretionary contributions F-35 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) by the Company in such amounts as the Board of Directors may annually determine. There were no discretionary contributions made in the nine-month period ended June 30, 1998. Expense associated with the plan for continuing operations of the Company totaled $39,371 for the nine-month period ended June 30, 1998. 13. INCOME TAXES No provision for income taxes was recorded for the nine-month period ended June 30, 1998, as substantially all income tax attributable to continuing and discontinued operations was offset by the utilization of net operating loss carryforwards. The difference between the effective income tax rate applied to income from continuing operations for financial statement purposes and the U.S. federal income tax rate of 34% for the nine-month period ended June 30, 1998 is as follows: Expected provision at statutory rate .......... $ 140,610 Nondeductible meals and entertainment ......... 9,894 State income taxes ............................ 5,624 Change in valuation allowance ................. (156,128) ---------- $ -- ========== The tax effects of temporary differences that give rise to the deferred tax assets and liability as of June 30, 1998 are as follows: CURRENT NONCURRENT ------------- --------------- Deferred tax assets: Net operating loss carryforwards .................... $ -- $ 1,362,687 Provision for doubtful accounts ..................... 11,669 -- Deferred income ..................................... 21,563 -- Loss on discontinued operations ..................... 787,968 -- Other ............................................... 2,949 -- ---------- ------------ 824,149 1,362,687 Less valuation allowance ............................ (824,149) (1,332,185) ---------- ------------ -- 30,502 Deferred tax liability - excess of tax over financial statement fixed assets ............................. -- (30,502) ---------- ------------ Net deferred tax asset (liability) .................. $ -- -- ========== ============
SFAS No. 109 requires that a valuation allowance be established for deferred tax assets if, based on the weight of evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company has approximately $3,500,000 of net operating loss carryforwards for income tax purposes, which will begin to expire in the year 2009. 14. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a "00" date" as the year 1900 rather than the year 2000. This could result in computer F-36 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED ) system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Company has developed a Year 2000 remediation plan and has begun testing and converting its computer systems and applications in order to identify and solve significant Year 2000 issues. In addition, the Company is discussing with its vendors the possibility of any communication difficulties or other disruptions that may affect the Company. 15. EVENTS SUBSEQUENT TO BALANCE SHEET DATE Sale of Company's Capital Stock -- On October 30, 1998, the Company completed the sale of its financial transactions business to MEDE America. This transaction was effected through the sale of the Company's capital stock to MEDE America for cash of $11.6 million. Proceeds from the sale were used as follows: Repayment of borrowings under revolving credit facilities and notes payable, including accrued interest ......................... $ 2,339,990 Payment of certain accrued expenses and other liabilities ........... 1,299,982 Deposit into escrow account related to post-sale contingencies ...... 400,000 Distributions to stockholders ....................................... 7,560,028 ------------ $ 11,600,000 ============
Disposition of Discontinued Operations -- Prior to the closing of the sale, the Company disposed of the assets and operations of the discontinued Televideo and Intercare segments. Substantially all assets and a contract of Televideo were transferred to a former employee in settlement of a legal action, and the stock of the Televideo subsidiary was distributed to the Company's stockholders. The assets and operations of Intercare were sold to Providers Edge Incorporated, a corporation formed by certain former Intercare employees. The accounts payable, accrued liabilities, and borrowings related to Televideo and Intercare were retained by the Company. F-37 ================================================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ---------------------------------------- TABLE OF CONTENTS
PAGE --------- Prospectus Summary ............................ 3 Risk Factors .................................. 10 Use Of Proceeds ............................... 19 Dividend Policy ............................... 19 Capitalization ................................ 20 Dilution ...................................... 21 Unaudited Pro Forma Consolidated Financial Information ................................ 22 Selected Consolidated Financial Data .......... 28 Management's Discussion And Analysis Of Fi- nancial Condition And Results Of Operations. 30 Business ...................................... 44 Management .................................... 55 Certain Transactions .......................... 61 Principal Stockholders ........................ 62 Description Of Capital Stock .................. 65 Shares Eligible For Future Sale ............... 68 Underwriting .................................. 70 Legal Matters ................................. 71 Experts ....................................... 71 Additional Information ........................ 72 Index To Financial Statements ................. F-1
---------------------------------------- UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 4,167,667 SHARES [GRAPHIC OMITTED] MEDE AMERICA CORPORATION COMMON STOCK -------------------------- PROSPECTUS -------------------------- SALOMON SMITH BARNEY WILLIAM BLAIR & COMPANY VOLPE BROWN WHELAN & COMPANY JANUARY , 1999 ================================================================================ 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 ...................... 500,000 Blue Sky Fees and Expenses ................... 10,000 Accounting Fees and Expenses ................. 800,000 Printing and Engraving ....................... 300,000 Transfer Agent and Register Fees and Expenses. * Miscellaneous ................................ * ---------- Total ........................................ $1,700,000 ==========
- ---------- * 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 (share data prior to July 1, 1998, do not give effect to the Reverse Stock Split): (a) Issuances of Capital Stock On June 27, 1995, in connection with the acquisition by the Registrant of MEDE Ohio and a related offering, the Registrant issued an aggregate 239,956 shares of Preferred Stock and 13,999,538 shares of Common Stock to the stockholders of the parent company of MEDE Ohio and stockholders of the Registrant. On December 18, 1995, in connection with their agreement to guarantee the Registrant's obligations under a credit agreement between the Registrant and Bank of America Illinois (the "Credit Facility"), the Registrant issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 240,720 shares of Common Stock at an exercise price of $1.00 per share. On July 18, 1996, the Company issued 500 shares of Common Stock to Sharon Hallberg, an employee of the Company, as a performance bonus. On January 10, 1997, in connection with their agreement to guarantee additional obligations of the Registrant under and amendment to the Credit Facility, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 84,000 shares, of Common Stock at an exercise price of $1.25 per share. On February 14, 1997, the Company issued to WCAS CP II, for a purchase price of $25 million, (i) a 10% Senior Subordinated Note due February 14, 2002 in the aggregate principal amount of $25,000,000 and (ii) 1,700,000 shares of Common Stock. On September 9, 1997, the Company issued 500 shares of Common Stock to Ed Feltner, an employee of the Company, as a performance bonus. On October 31, 1997, in connection with their agreement to guarantee additional obligations of the Registrant under the amended Credit Agreement, the Company issued to WCAS VI and Blair V warrants to purchase an aggregate 156,720 shares, of Common Stock at an exercise price of $1.25 per share. On July 17, 1998, the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The difference between the two alternative prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The Medic Warrant vests over a two year period and may be exercised up to five years after the date of grant. II-2 On October 7, 1998, in connection with their agreement to extend their guaranty of the Registrant's obligations under the Credit Facility to cover an additional $16 million of indebtedness, the Registrant issued to WCAS V and Blair V warrants to purchase an aggregate 84,050 shares of Common Stock at a per share price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The warrants are immediately exercisable and may be exercised up to five years from the date of grant. (b) Certain Grants and Exercises of Stock Options The MEDE America Corporation and its Subsidiaries Stock Option and Restricted Stock Purchase Plan was adopted by the Registrant's Board of Directors on March 22, 1995. As of November 30, 1998 and prior to giving effect to the Reverse Stock split, options to purchase up to an aggregate 3,351,000 shares of Common Stock, had been granted to employees of the Registrant and its subsidiaries thereunder, of which options to purchase up to an aggregate 2,212,600 shares of Common Stock, at a weighted average exercise price of $1.09 per share, were outstanding as of such date. The Company has issued an aggregate 349,400 shares of Common Stock upon the exercise of such options. The securities issued in the foregoing transactions in paragraphs (a) and (b) above were offered and sold in reliance upon exemptions from Securities Act registration set forth in Section 4(2) of the Securities Act, or any regulations promulgated thereunder, relating to sales by an issuer not involving a public offering. No underwriters were involved in the foregoing sales of securities. The sale and issuance of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
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+ -- Amended and Restated Certificate of Incorporation of the Registrant. 3.3+ -- Amended Bylaws of the Registrant. 3.4+ -- Agreement and Plan of Merger, dated as of May 17, 1995, between MEDE AMERICA Corporation and GENCC Holdings Corporation. 4.1+ -- Specimen certificate for shares of Common Stock. 4.2+ -- Note and Share Purchase Agreement between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P., dated as of February 14, 1997. 4.3+ -- Warrant Agreement dated as of October 31, 1997 among MEDE AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Part- ners V, L.P., and Warrants issued thereunder.
II-3
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------ 4.4+ -- Warrant Agreement dated as of January 10, 1997 among MEDE AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Part- ners V, L.P., and Warrants issued thereunder. 4.5+ -- Warrant Agreement dated as of December 18, 1995 among MEDE AMERICA Corpora- tion, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Partners V, L.P., and Warrants issued thereunder. 4.6+ -- Registration Rights Agreement, dated as of February 14, 1997 between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P. 4.7+ -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA Corporation to Medic Computer Systems, Inc. 4.8+ -- Registration Rights Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 4.9+ -- Stockholders Agreement, dated as of July 17, 1998 among Medic Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital Partners V, L.P., WCAS Capital Partners II, L.P., and William Blair Leveraged Capital Fund Limited Partnership. 4.10+ -- Investment Agreement, dated as of July 17, 1998 between MEDE AMERICA Corporation and Medic Computer Systems, Inc. 4.11 -- Warrant Agreement dated as of October 7, 1998 among MEDE AMERICA Corporation, Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Partners V.I.P., and Warrants issued thereunder. 5.1* -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1+ -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan as amended. 10.2+ -- Credit Agreement between MEDE AMERICA Corporation and Bank of America Illinois dated as of December 18, 1995 as amended, with accompanying guarantees. 10.3+ -- Form of Indemnification Agreement between MEDE AMERICA Corporation and Directors thereof. 10.4+ -- Agreement of Lease dated as of October 15, 1991 between HMCC Associates and MedE America, Inc. 10.5+ -- Lease Agreement dated as of July 10, 1995 as amended January 3, 1997 between T&J Enter- prises, LLC and Electronic Claims & Funding, Inc. 10.6+ -- Commitment Letter dated July 15, 1998 from Bank of America National Trust & Savings Association to MEDE AMERICA Corporation, regarding amendment to Credit Facility. 10.7+ -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8 + -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan. 10.9** -- Transaction Processing Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 10.10+ -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan. 10.11 -- Fifth Amendment To Credit Agreement dated as of October 7, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.12 -- Sixth Amendment to Credit Agreement dated as of December 15, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.13 -- Stock Purchase Agrement, dated as of October 20, 1998 among MEDE AMERICA Corporation and the Stockholders of Healthcare Interchange, Inc. named in Schedule I thereto. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3 -- Consent of KPMG Peat Marwick LLP, independent accountants. 23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1).
II-4
EXHIBIT NUMBER DESCRIPTION - ---------- ------------------------- 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. (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 December 23, 1998. MEDE AMERICA CORPORATION By: /s/THOMAS P. STAUDT ------------------------------ Thomas P. Staudt President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.
SIGNATURES TITLE DATE - --------------------------- --------------------------------------- ------------------ THOMAS P. STAUDT President and Chief Executive December 23, 1998 - ------------------------- Officer (Principal executive officer); Thomas P. Staudt Director THOMAS P. STAUDT* Chief Financial Officer (Principal December 23, 1998 - ------------------------- financial and accounting officer) Richard P. Bankosky THOMAS P. STAUDT* Director December 23, 1998 - ------------------------- Thomas E. McInerney THOMAS P. STAUDT* Director December 23, 1998 - ------------------------- Anthony J. de Nicola THOMAS P. STAUDT* Director December 23, 1998 - ------------------------- Timothy M. Murray
- ---------- * As attorney-in-fact. 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, 1996 - Allowance for bad debts ......... $1,386 $406 $-- $ 392 (1) $1,400 ====== ==== === ======== ====== Year ended June 30, 1997 - Allowance for bad debts ......... $1,400 $316 $-- $ -- (1) $1,716 ====== ==== === ======== ====== Year ended June 30, 1998 - Allowance for bad debts ......... $1,716 $464 $-- $ 1,183 (1) $ 997 ====== ==== === ======== ======
- ---------- (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+ -- Amended and Restated Certificate of Incorporation of the Registrant. 3.3+ -- Amended Bylaws of the Registrant. 3.4+ -- Agreement and Plan of Merger, dated as of May 17, 1995, between MEDE AMERICA Corporation and GENCC Holdings Corporation. 4.1+ -- Specimen certificate for shares of Common Stock. 4.2+ -- Note and Share Purchase Agreement between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P., dated as of February 14, 1997. 4.3+ -- Warrant Agreement dated as of October 31, 1997 among MEDE AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Part- ners V, L.P., and Warrants issued thereunder.
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------ 4.4+ -- Warrant Agreement dated as of January 10, 1997 among MEDE AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Part- ners V, L.P., and Warrants issued thereunder. 4.5+ -- Warrant Agreement dated as of December 18, 1995 among MEDE AMERICA Corpora- tion, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Partners V, L.P., and Warrants issued thereunder. 4.6+ -- Registration Rights Agreement, dated as of February 14, 1997 between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P. 4.7+ -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA Corporation to Medic Computer Systems, Inc. 4.8+ -- Registration Rights Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 4.9+ -- Stockholders Agreement, dated as of July 17, 1998 among Medic Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital Partners V, L.P., WCAS Capital Partners II, L.P., and William Blair Leveraged Capital Fund Limited Partnership. 4.10+ -- Investment Agreement, dated as of July 17, 1998 between MEDE AMERICA Corporation and Medic Computer Systems, Inc. 4.11 -- Warrant Agreement dated as of October 7, 1998 among MEDE AMERICA Corporation, Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Partners V.I.P., and Warrants issued thereunder. 5.1* -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1+ -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan as amended. 10.2+ -- Credit Agreement between MEDE AMERICA Corporation and Bank of America Illinois dated as of December 18, 1995 as amended, with accompanying guarantees. 10.3+ -- Form of Indemnification Agreement between MEDE AMERICA Corporation and Directors thereof. 10.4+ -- Agreement of Lease dated as of October 15, 1991 between HMCC Associates and MedE America, Inc. 10.5+ -- Lease Agreement dated as of July 10, 1995 as amended January 3, 1997 between T&J Enter- prises, LLC and Electronic Claims & Funding, Inc. 10.6+ -- Commitment Letter dated July 15, 1998 from Bank of America National Trust & Savings Association to MEDE AMERICA Corporation, regarding amendment to Credit Facility. 10.7+ -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8 + -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan. 10.9** -- Transaction Processing Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 10.10+ -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan. 10.11 -- Fifth Amendment To Credit Agreement dated as of October 7, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.12 -- Sixth Amendment to Credit Agreement dated as of December 15, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.13 -- Stock Purchase Agrement, dated as of October 20, 1998 among MEDE AMERICA Corporation and the Stockholders of Healthcare Interchange, Inc. named in Schedule I thereto. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3 -- Consent of KPMG Peat Marwick LLP, independent accountants. 23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1).
EXHIBIT NUMBER DESCRIPTION - ---------- ------------------------- 24.1+ -- Power of Attorney. 27.1+ -- Financial Data Schedule.
- ---------- * To be filed by amendment. ** Confidential treatment requested. + Previously filed. EX-4.11 2 EXHIBIT 4.11 EXHIBIT 4.11 AGREEMENT AGREEMENT dated as of October 7, 1998, among MEDE AMERICA CORPORATION, a Delaware corporation (the "Company"), WELSH, CARSON, ANDERSON & STOWE V, L.P., a Delaware limited partnership ("WCAS V"), WELSH, CARSON, ANDERSON & STOWE VI, L.P., a Delaware limited partnership ("WCAS VI"), WILLIAM BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP, an Illinois limited partnership, ("Blair LF") and WILLIAM BLAIR CAPITAL PARTNERS V, L.P., a Delaware limited partnership, ("Blair V"; WCAS V, WCAS VI, Blair LF and Blair V being hereinafter referred to individually as a "Guarantor" and collectively as the "Guarantors"). WHEREAS, the Guarantors are collectively the owners of approximately 80% of the outstanding common and preferred stock of the Company; WHEREAS, the Company and Bank of America Illinois (the "Bank") are parties to a Credit Agreement, dated as of December 18, 1995 (the "Credit Agreement"), as amended, providing for the extension by the Bank to the Company of a revolving line of credit (the "Line of Credit"); WHEREAS, the maximum amount of Line of Credit was originally $10,000,000, which was increased to $13.5 million as of February 10, 1997 (the "February Increase"), subsequently decreased to $5 million and then increased to a total of $20 million as of October 31, 1997 (the "October Increase"). WHEREAS, in connection with the establishment of the Line of Credit and the February Increase and the October Increase in the maximum amounts thereof, the Guarantors gave certain guarantees to the Bank with respect to the Line of Credit and, in consideration thereof, were issued warrants to purchase shares of the Company's Common Stock; WHEREAS, the Company and the Bank have entered into the Fifth Amendment to Credit Agreement, dated as of the date hereof (the "Fifth Amendment"), providing, among other things, for an increase in the Line of Credit of $16 million (the "Additional Indebtedness"), which will permit the Bank to advance a total of $36 million thereunder; WHEREAS, in order to induce the Bank to increase and extend the Line of Credit pursuant to the October Increase, the Bank, WCAS VI, Blair V and the other Guarantors agreed to modify the Guarantor Percentages provided for in the Credit Agreement, with the effect that, effective as of the date thereof, only WCAS VI and Blair V would be liable to the Bank on the Guaranty; WHEREAS, in order to induce the Bank to increase and extend the Line of Credit pursuant to the Fifth Amendment, the Bank and the Guarantors have agreed to modify the Guarantor Percentages provided for in the Credit Agreement, with the effect that, effective as of the date hereof, WCAS V will also be liable to the Bank on the Guaranty; WHEREAS, WCAS V and Blair V are willing to assume the additional financial risk associated with the Additional Indebtedness under the Guaranty, and in consideration thereof, the Company is willing to issue to WCAS V and Blair V warrants to purchase an additional 84,050 shares of its Common Stock, on the terms and conditions hereinafter set forth; WHEREAS, as a result of the forgoing, the Guarantors wish to amend and extend the previous agreements among themselves with respect to the manner in which they will bear the economic incidence of any payments made by any of them under the Guaranty; WHEREAS, the Guarantors hereby confirm that they are assuming the financial risk associated with the Guaranty and the Line of Credit (including but not limited to the financial risk associated with the Additional Indebtedness) in order to protect their existing substantial equity investments in the Company and to ensure the Company's future financial viability; and NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereby agree as follows: I. ARTICLE ISSUANCE OF WARRANTS Section 1.01 Issuance of Warrants. (a) In consideration of the assumption by WCAS V and Blair V of the additional financial risk associated with the Additional Indebtedness under the Guaranty, the Company shall execute and deliver to each of WCAS V and Blair a warrant in the form annexed hereto as Exhibit 1 (individually a "Warrant" and collectively the "Warrants") to purchase shares of the Company's Common Stock, $.01 par value ("Common Stock"), at an exercise price specified therein. WCAS V shall be entitled to a Warrant to purchase 80% shares of Common Stock and Blair V shall be entitled to a Warrant to purchase 20% shares of Common Stock. Section 1.02 Tax and Accounting Treatment. The Company, WCAS V and Blair V agree that for federal, state and local income tax as well as for financial accounting purposes, the issuance of the Warrants by the Company to WCAS V and Blair V is in the nature of a dividend distribution and is not compensation (or a payment) for any services, and each hereby agrees to treat the issuance of the Warrants in such manner for all such purposes, all to the maximum extent permitted by applicable law. 2 II. ARTICLE REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to, and agrees with, WCAS V and Blair V as follows: Section 2.01 Organization. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to do business as a foreign corporation in good standing in each of the jurisdiction in which it owns or leases any real property or in which the nature of business transacted by it makes such licensing or qualification necessary and where the failure to be so licensed or qualified would have a material adverse affect on the business, operations or financial condition of the Company. The Company has the corporate power and authority to own and hold its properties and to carry on its business as currently conducted, to execute, deliver and perform this Agreement and the Warrants and to issue, sell and deliver the shares of Common Stock issuable upon the exercise of the Warrants (the "Warrant Shares"). Section 2.02 Authorization of Agreement, etc. (a)The execution, delivery and performance by the Company of this Agreement and the Warrants, and the issuance, sale and delivery of the Warrant Shares upon exercise of the Warrants, have been duly authorized by all requisite corporate action and will not (i) violate any provision of law, any order of any court or other agency of government, the Amended and Restated Certificate of Incorporation or By-laws of the Company, or any provision of any indenture, agreement or other instrument by which the Company or any of its subsidiaries or any of their respective properties or assets is bound or affected; (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default any such indenture, agreement or other instrument; or (iii) result in the creation or imposition of any lien, charge or incumbrance of any nature upon any of the properties or assets of the Company or any of its subsidiaries. (b) The Warrant Shares have been duly reserved for issuance upon exercise of the Warrants and, when so issued, will be duly authorized, validly issued and outstanding, fully paid and nonassessable shares of Common Stock. Neither the execution and delivery of the Warrants nor the issuance and delivery of the Warrant Shares upon exercise thereof is subject to any preemptive rights of shareholders of the Company or to any right of first refusal or other similar right in favor of any person. Section 2.03 Validity. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. The Warrants, when executed in accordance with this Agreement, will constitute legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms. 3 III. ARTICLE REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS Each of WCAS V and Blair V represents and warrants to the Company that it is acquiring the Warrants, and will, upon exercise thereof, acquire the Warrant Shares, for its own account for purpose of investment and not with a view to or for sale in connection with any distribution thereof. Each of WCAS V and Blair V further represents that it understands (i) that neither the Warrants nor the Warrant Shares have been registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof, (ii) the Warrants and, upon exercise thereof, the Warrant Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is otherwise exempt from such registration, (iii) the Warrants and the Warrant Shares will bear a legend to such effect and (iv) the Company will make a notation on its transfer books to such effect. Each of WCAS V and Blair V further understands that the exemption from registration afforded by Rule 144 under the Securities Act depends on the satisfaction of various conditions and that, if applicable, affords the basis of sales of the Warrants and/or the Warrant Shares in limited amounts under certain conditions. Each of WCAS V and Blair V (i) acknowledges that it has had a full opportunity to request from the Company to review and has received all information deemed relevant in making a decision to enter into this Agreement and consummate the transactions contemplated thereby and (ii) will comply with the restrictions on transferability of the Warrants and Warrant Shares contained in the Warrant. Each of WCAS V and Blair V is an "Accredited Investor" within the meaning of Rule 501(a) of the Securities Act. IV. ARTICLE AGREEMENTS AMONG THE GUARANTORS The Guarantors agree that, as among themselves, the liability for any and all payments made by any of them pursuant to the Guaranty will be allocated to and borne by them, as follows: (i) 80% to WCAS VI, 18.4% to Blair V and 1.6% to Blair LF with respect to the first $20 million of principal indebtedness (and any interest, penalties and other charges thereon) and (ii) 80% to WCAS V and 20% to Blair V with respect to any payments in excess of $20 million of principal indebtedness (and any interest, penalties and other charges thereon) pursuant to the Fifth Amendment. Each of the Guarantors agrees to indemnify each of the other Guarantors for any payments made pursuant to the Guaranty (or to indemnify other Guarantors in accordance with this Article IV) by such other Guarantor that were in excess of such other Guarantor's pro rata share of all amounts paid by the Guarantors under the Guaranty, determined in accordance with the first sentence of this Article IV, but only to the extent of the excess, if any, of its own payments made pursuant to the Guaranty plus the indemnity payments made by it to other Guarantors in accordance with this Article IV, over its pro rata share of all amounts paid by the Guarantors under the Guaranty, determined in accordance with the first sentence of this Article 4 IV. The foregoing shall apply irrespective of which of the Guarantors has actually made or is liable to make payment under the terms and provisions of the Guaranty and without regard to the release of any Guarantor of its obligations under the Guaranty by the Bank or any assignee thereof. V. ARTICLE AGREEMENTS OF THE COMPANY The Company covenants and agrees that any right to payment received by the Guarantors in respect of the Credit Agreement, as amended, and their guaranty thereof, whether by way of purchase, subrogation or otherwise, and regardless whether and to what extent the same shall be subordinated to other indebtedness to the Banks or shall have been waived pending certain events, may be applied, both as to principal and accrued and unpaid interest, dollar for dollar, by the Guarantors, or any of them, as the purchase price of any equity securities offered by the Company to investors for cash. In addition, in the event that the Company shall be unable to make a payment under the Credit Agreement, as amended, the Guarantors shall have the right (but not the obligation) (i) to purchase additional equity securities of the Company and (ii) to require the Company to use the net proceeds of such purchase to make such payment under the Credit Agreement, as amended. The right set forth in the preceding sentence may only be exercised upon joint approval by the Guarantors, and the securities so purchased shall be issued at fair value, based upon current market conditions for the issuance of equity securities. The Company shall use its best efforts to provide the Guarantors with sufficient notice in advance of a payment default under the Credit Agreement, as amended, to enable the Guarantors to exercise their rights under this Article V. VI. ARTICLE MISCELLANEOUS Section 6.01 Expenses. Each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated; provided, however, that the Company shall pay the fees and disbursements of the Guarantors' special counsel, Messrs. Reboul, MacMurray, Hewitt, Maynard & Kristol. Section 6.02 Survival of Agreements. All covenants, agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the Warrants and the issuance, sale and delivery of the Warrant Shares. 5 Section 6.03 Parties in Interest. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Section 6.04 Notices. All notices, requests, consent and other communications hereunder shall be in writing and shall be mailed by first class registered mail, postage prepaid, or sent by a recognized courier service addressed as follows: If to the Company to it at: 90 Merrick Avenue, Suite 501 East Meadow, New York 11554 Fax: (516) 542-4508 Attention: David M. Goldwin, Esq. If to WCAS VI or WCAS V to it at 320 Park Avenue Suite 2500 New York, New York 10022 Attention: Anthony J. de Nicola If to Blair LF or Blair V to it at 222 W. Adams Street Chicago, Illinois 60606 Attention: Timothy M. Murray or, in any such case, at such other address or addresses as shall have been furnished in writing my such party to the others. SECTION 6.05 LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 6.06 Entire Agreement. This Agreement constitutes the entire Agreement of the parties with respect to the subject matter hereof and may not be modified or amended except in writing. Section 6.07 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and the Guarantors have executed this Agreement as of the day and year first above written. MEDE AMERICA CORPORATION By ---------------------------------- Name: Title: WELSH, CARSON, ANDERSON & STOWE V, L.P. By WCAS V Partners, General Partner By ---------------------------------- General Partner WELSH, CARSON, ANDERSON & STOWE VI, L.P. By WCAS VI Partners, L.P., General Partner By ---------------------------------- General Partner WILLIAM BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP By William Blair Leveraged Capital Management, L.P. By William Blair & Company, General Partner By --------------------------------- WILLIAM BLAIR CAPITAL PARTNERS V, L.P. By William Blair Capital Partners, LLC, General Partner By -------------------------------- EXHIBIT 1 FORM OF WARRANT THIS WARRANT HAS BEEN ISSUED IN RELIANCE UPON THE REPRESEN TATION OF THE HOLDER THAT IT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARDS THE RESALE OR OTHER DISTRIBUTION THEREOF. NEITHER THIS WARRANT NOR THE SHARES ISSU ABLE UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. MEDE AMERICA CORPORATION Stock Subscription Warrant Warrant to Subscribe October 7, 1998 for shares Void After October 7, 2003 ---------- THIS CERTIFIES that, for value received, [NAME OF HOLDER], a [ ] ("Holder"), or its registered assigns, is entitled to subscribe for and purchase from MEDE AMERICA CORPORATION, a Delaware corporation (hereinafter called the "Corporation"), at an exercise price (the "Warrant Exercise Price") of (i) $8.00 per share (subject to adjustment as hereinafter provided) or (ii) in the event an initial public offering for the Corporation's Common Stock (as herein defined) is completed by March 31, 1999, the offering price per share, at any time prior to October 7, 2003, up to [ ( )] (subject to adjustment as hereinafter provided) fully paid and nonassessable shares of Common Stock, subject, however, to the provisions and upon the terms and conditions hereinafter set forth. This Warrant and any warrant or warrants subsequently issued upon exchange or transfer hereof and each other warrant issued pursuant to the Agreement, dated as of October 7, 1998 (the "Agreement"), among the Corpo ration and the stockholders of the Corporation named therein, and any warrant or warrants subse quently issued upon exchange or transfer thereof, are hereinafter collectively called the "War rants". Section 1. Exercise of Warrant. (a) Method of Exercise. The rights represented by this Warrant may be exercised by the holder hereof, in whole at any time or from time to time in part, but not as to a fractional share of Common Stock, by the surrender of this Warrant (properly endorsed) at the office of the Corporation as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Corporation, and as further provided below in this Section 1: (i) Cash Exercise. By payment to the Corporation of the Warrant Exercise Price in cash or by certified or official bank check, for each share being purchased; (ii) Surrender of Indebtedness of or Claims Against Corporation. By surrender to the Corporation for cancellation of any indebtedness of or claim against the Corporation (including without limitation any claim against the Corporation as subrogee in the event the Holder shall have performed under its guarantee under the Credit Agreement, as defined in the Agreement), or of any portion thereof, for which credit shall be given toward the Warrant Exercise Price for each share being acquired on a dollar-for-dollar basis with reference to the principal amount canceled; (iii) Net Issue Exercise. By an election to receive shares the aggregate fair market value of which as of the date of exercise is equal to the fair market value of this Warrant (or the portion thereof being exercised) on such date, in which event the Corporation, upon receipt of notice of such election, shall issue to the holder hereof a number of shares of the Corporation's Common Stock equal to (A) the number of shares of Common Stock acquirable upon exercise of all or any portion of this Warrant being exercised, as at such date, multiplied by (B) the balance remaining after deducting (x) the Warrant Exercise Price, as in effect on such date, from (y) the fair market value of one share of the Corpora tion's Common Stock as at such date and dividing the result by (C) such fair market value; or (iv) Combined Payment Method. By satisfaction of the Warrant Exercise Price for each share being acquired in any combination of two or more of the methods described in clauses (i), (ii) and (iii) above. (b) Definition of Fair Market Value. For the purposes of this Section 1, "fair market value" shall mean, as to any security, as follows: if that security is listed or admit ted to trading on one or more national securities exchanges, the average of the last reported sales prices per share regular way or, in case no such reported sales takes place on any such day, the average of the last reported bid and asked prices per share regular 2 way, in either case on the principal national securities exchange on which that security is listed or admitted to trading, for the 20 trading days immediately preceding the date upon which the fair market value is determined (the "Determination Date"); if that security is not listed or admitted to trading on a national securities exchange but is quoted by the NASD Automated Quotation System ("NASDAQ"), the average of the last reported sales prices per share regular way or, in case no reported sale takes place on any such day or the last reported sales prices are not then quoted by NASDAQ, the average for each such day of the last reported bid and asked prices per share, for the 20 trading days immediately preceding the Determination Date as furnished by the National Quotation Bureau Incor porated or any similar successor organization; and if that security is not listed or admitted to trading on a national securities exchange or quoted by NASDAQ or any other nation ally recognized quotation service, the "fair market value" shall be the fair value thereof determined jointly by the Corporation and the registered holders of Warrants outstanding representing a majority of the shares of Common Stock acquirable upon exercise of the Warrants, provided, however, that if such parties are unable to reach agreement within a reasonable time, the "fair market value" shall be determined in good faith by an inde pendent investment banking firm selected jointly by the Corporation and the registered holders of Warrants outstanding representing a majority of the shares of Common Stock issuable upon exercise of the Warrants or, if that selection cannot be made within 15 days, by an independent investment banking firm selected by the American Arbitration Associa tion in accordance with its rules. Anything in this paragraph (b) to the contrary notwith standing, the fair market value of this Warrant or any portion thereof as of any Determina tion Date shall be equal to (i) the fair market value of the shares of Common Stock issuable upon exercise of this Warrant (or such portion thereof), (determined in accor dance with the foregoing provisions of this paragraph (b)), minus (ii) the aggregate Warrant Exercise Price of this Warrant (or such portion thereof). (c) Delivery of Certificates, Etc. In the event of any exercise of the rights repre sented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of the holder, shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which the Warrant was surrendered and payment of the Warrant Exercise Price and any applicable taxes was made, except that, if the date of such surrender and payment is a date on which the stock transfer books of the Corporation are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 3 Section 2. Adjustment of Number of Shares. Upon each adjustment of the Warrant Exercise Price as provided in Section 3, the holder of this Warrant shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment, the number of shares (calculated to the nearest tenth of a share) obtained by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment. Section 3. Adjustment of Price Upon Issuance of Common Stock. If and whenever the Corporation shall issue or sell any shares of its Common Stock for a consideration per share less than the Warrant Exercise Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale the Warrant Exercise Price shall be reduced to the price (calculated to the nearest $.01) determined by dividing (i) an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such issue or sale (in cluding as outstanding all shares of Common Stock issuable upon conversion of all outstanding Convertible Securities (as hereinafter defined) or exercise of outstanding Warrants multiplied by the then existing Warrant Exercise Price, and (b) the consideration, if any, received by the Corpo ration upon such issue or sale, by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale (including as outstanding all shares of Common Stock issuable upon conversion of all outstanding Convertible Securities or exercise of outstanding Warrants). No adjustments of the Warrant Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.01 per share or more. For purposes of this Section 3, the following paragraphs (a) to (p), inclusive, shall also be applicable: (a) Issuance of Rights or Options. In case at any time the Corporation shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options", and such convertible or exchangeable stock or securities being herein called "Convertible Securities") whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consider ation for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable 4 upon the issue or sale of such Convert ible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Warrant Exercise Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options and thereafter shall be deemed to be outstanding. Except as otherwise provided in paragraph (c), no adjustment of the Warrant Exercise Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (b) Issuance of Convertible Securities. In case the Corporation shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange of all such Convertible Securities) shall be less than the Warrant Exercise Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (i) except as otherwise provided in paragraph (c) below, no adjustment of the Warrant Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (ii) if any such issue or sale of such Convertible Securities is made upon exercise of any Option to purchase any such Convertible Securi ties for which adjustments of the Warrant Exercise Price have been or are to be made pursuant to other provisions of this Section 3, no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale. (c) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in paragraph (a), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (a) or (b), or the rate at which any Convertible Securities referred to in paragraph (a) or (b) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Warrant Exercise Price in effect at 5 the time of such event shall forthwith be readjusted to the Warrant Exercise Price whichffect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold; and on the expiration of any such Option or the termination of any such right to convert or exchange such Convertible Securities, the Warrant Exercise Price then in effect hereunder shall forthwith be increased to the Warrant Exercise Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such Option referred to in paragraph (a) or the rate at which any Convertible Securities referred to in paragraph (a) or (b) are convertible into or exchangeable for Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Warrant Exercise Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such Option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Warrant Exercise Price then in effect hereunder is thereby reduced. (d) Stock Dividends. In case the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation payable in Common Stock, Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued in a subdivision of outstanding shares as provided in paragraph (h) below. (e) Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the Corporation, without deduction of any expenses incurred or any under writing commissions or concessions paid or allowed by the Corporation in connection therewith. The amount of consideration deemed to be received by the Corporation pursuant to the foregoing provisions of this paragraph (e) upon any issuance and/or sale, pursuant to an established compensation plan of the Corporation, to directors, officers or 6 employees of the Corporation in connection with their employment of shares of Common Stock, Options or Convertible Securities, shall be increased by the amount of any tax benefit realized by the Corporation as a result of such issuance and/or sale, the amount of such tax benefit being the amount by which the Federal and/or State income or other tax liability of the Corporation shall be reduced by reason of any deduction or credit in respect of such issuance and/or sale. In case any Options shall be issued in connection with the issue and sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. In case any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger or consolidation in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the Corporation of such portion of the assets and business of the non-surviving corporation as such Board shall determine to be attributable to such Common Stock, Options or Convertible Securities, as the case may be. In the event of any consolidation or merger of the Corporation in which the Corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Corporation for stock or other securities of any corporation, the Corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the Warrant Exercise Price, the determination of the number of shares of Common Stock receivable under this Warrant immediately prior to such merger, consolidation or sale, for purposes of paragraph (j), shall be made after giving effect to such adjustment of the Warrant Exercise Price. (f) Record Date. In case the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities, or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (g) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 3. (h) Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, 7 the Warrant Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination shall be proportionately increased. (i) Certain Issues of Common Stock Excepted. Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Warrant Exercise Price in the case of the issuance of shares of Common Stock upon exercise of employee stock options approved by the Board of Directors of the Corporation. (j) Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Corporation or any consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby each holder of the Warrants shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Corporation immediately theretofore receivable upon the exercise of such Warrant or Warrants, such shares of stock, securities or assets (including cash) as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant Exercise Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such exercise rights (in cluding an immediate adjustment, by reason of such reorganization or reclassification, of the Warrant Exercise Price to the value for the Common Stock reflected by the terms of such reorganization or reclassification if the value so reflected is less than the Warrant Exercise Price in effect immediately prior to such reorganization or reclassification). In the event of a merger or consolidation of the Corporation as a result of which a greater or lesser number of shares of common stock of the surviving corporation are issuable to holders of Common Stock of the Corporation outstanding immediately prior to such merger or consolidation, the Warrant Exercise Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Corpo ration. The Corporation will not effect any such consolidation, merger or any sale of all or substantially all of its assets of properties, unless prior to the consummation thereof the 8 successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed or delivered to each holder of the Warrants at the last address of such holder appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive. (k) Notice of Adjustment. Upon any adjustment of the Warrant Exercise Price, then and in each such case, the Corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to each holder of the Warrants at the address of such holder as shown on the books of the Corporation, which notice shall state the Warrant Exercise Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (l) Certain Events. If any event occurs as to which in the opinion of the Board of Directors of the Corporation the other provisions of this Section 3 are not strictly applicable or if strictly applicable would not fairly protect the exercise rights of this Warrant, in accordance with the essential intent and principles of such provisions to protect against dilution, then such Board of Directors shall in good faith make an adjust ment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such exercise rights as aforesaid. (m) Stock to Be Reserved. The Corporation will at all times reserve and keep available out of its authorized Common Stock or its treasury shares, solely for the purpose of issue upon the exercise of this Warrant as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of this Warrant. The Corpora tion covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Warrant Exercise Price. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Corporation may be listed. The Corporation will not take any action which results in any adjustment of the Warrant Exercise Price if the total number of shares of Common Stock issued and issuable after such action upon exercise of this Warrant would exceed the total number of shares of Common Stock then authorized by the Corporation's Articles of Incorporation. The Corporation has not granted and will not grant any right of first refusal with respect to shares issuable upon exercise of this Warrant, and there are no preemptive rights associated with such shares. 9 (n) Issue Tax. The issuance of certificates for shares of Common Stock upon exercise of the Warrants shall be made without charge to the holders of such Warrants for any issuance tax in respect thereof provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of any holder of the Warrants. (o) Closing of Books. The Corporation will at no time close its transfer books against the transfer of the shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. (p) Definition of Common Stock. As used herein the term "Common Stock" shall mean and include the Common Stock, $.01 par value, of the Corporation as autho rized on the date hereof and also any capital stock of any class of the Corporation hereinafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Corpora tion, provided, however, that the shares purchasable pursuant to this Warrant shall include only shares designated as Common Stock, $.01 par value, of the Corporation on the date hereof, or shares of any class or classes resulting from any reclassification or reclass ifications thereof which are not limited to any such fixed sum or percentage and are not subject to redemption by the Corporation and, in case at any time there shall be more than one such resulting class, the shares of each class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. Section 4. Notices of Record Dates. In the event of (1) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution (other than cash dividends out of earned surplus), or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (2) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation or any transfer of all or substantially all the assets of the Corporation to or consolidation or merger of the Corporation with or into any other corporation, or (3) any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, 10 then and in each such event the Corporation will give notice to the holder of this Warrant specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock will be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganiza tion, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be given at least 20 days and not more than 90 days prior to the date therein specified, and such notice shall state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act or to a favorable vote of stockholders, if either is required. Section 5. [omitted] Section 6. No Stockholder Rights or Liabilities. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Corporation. No provi sion hereof, in the absence of affirmative action by the holder hereof to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Warrant Exercise Price or as a stockholder of the Corporation, whether such liability is asserted by the Corporation or by creditors of the Corporation. Section 7. Investment Representation and Legend. The holder, by acceptance of the Warrant, represents and warrants to the Corporation that it is acquiring the Warrant and the shares of Common Stock (or other securities) issuable upon the exercise hereof for investment purposes only and not with a view towards the resale or other distribution thereof and agrees that (a) it will not offer, sell, transfer, encumber or otherwise dispose of the Warrant or any of the shares of Common Stock (or other securities) issuable upon the exercise hereof unless either (i) there is an effective registration statement under said Act relating thereto or (ii) the Corporation has received an opinion of counsel, reasonably satisfactory in form and substance to the Corpora tion, stating that such registration is not required; and (b) the Corporation may affix upon this Warrant the following legend: "This Warrant has been issued in reliance upon the representation of the holder that it has been acquired for investment purposes and not with a view towards the resale or other distribution thereof. Neither this Warrant nor the shares issuable upon the exercise of this Warrant have been registered under the Securities Act of 1933." The holder, by acceptance of this Warrant, further agrees that the Corporation may affix the following legend to certificates for shares of Common Stock issued upon exercise of this Warrant: 11 "The securities represented by this certificate have been issued in reliance upon the representation of the holder that they have been acquired for investment and not with a view toward the resale or other distribution thereof, and have not been registered under the Securities Act of 1933. Neither the securities evidenced hereby, nor any interest therein, may be offered, sold, transferred, encumbered or otherwise disposed of unless either (i) there is an effective registration statement under said Act relating thereto or (ii) the Corporation has received an opinion of counsel, reasonably satisfactory in form and substance to the Corporation, stating that such registration is not required." Section 8. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Corporation may, on such terms as to indemnity or otherwise as it may in its discretion reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Corporation, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. Section 9. Notices. All notices, requests and other communications required or permitted to be given or delivered hereunder shall be in writing, and shall be delivered, or shall be sent by certified or registered mail, postage prepaid and addressed, if to the holder to such holder at the address shown on such holder's Warrant or at such other address as shall have been furnished to the Corporation by notice from such holder. All notices, requests and other communications required or permitted to be given or delivered hereunder shall be in writing, and shall be delivered, or shall be sent by certified or registered mail, postage prepaid and addressed to the Corporation at such address as shall have been furnished to the holder by notice from the Corporation. 12 IN WITNESS WHEREOF, MedE America Corporation has executed this Warrant on and as of the day and year first above written. MEDE AMERICA CORPORATION By_____________________________ 13 SUBSCRIPTION AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to subscribe for and purchase ____shares of Common Stock of MedE America Corporation, a Delaware Corporation (the "Corporation") covered by such Warrant, and makes payment herewith in full therefor [at the price per share provided by such Warrant [in cash] [by surrender of indebtedness of the Corporation as provided in Section 1(a)(ii) of such Warrant] [as provided in Section 1(a)(iii) of such Warrant]. Signature ---------------------------- -------------------------------------- Address ------------------------------ -------------------------------------- EX-10.11 3 EXHIBIT 10.11 EXHIBIT 10.11 FIFTH AMENDMENT TO CREDIT AGREEMENT This Amendment, dated as of October 7, 1998 (this "Amendment") is entered into by and between MEDE AMERICA CORPORATION, a Delaware corporation (the "Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). RECITALS The Company and the Bank are parties to a Credit Agreement dated as of December 18, 1995, as amended (the "Credit Agreement"), pursuant to which the Bank extended a revolving credit facility. Capitalized terms used and not otherwise defined or amended in this Amendment shall have the meanings respectively assigned to them in the Credit Agreement. The Company has requested that the Bank extend the maturity date, to increase the commitment and to change the relative percentage contributions of the Guarantors. In order to induce the Bank to agree to the foregoing, the Bank has requested, and the Company has agreed, to pay an amendment fee. The Company has requested that the Bank enter into this Amendment in order to approve and reflect the foregoing, and the Bank has agreed to do so, all upon the terms and provisions and subject to the conditions hereinafter set forth. AGREEMENT In consideration of the foregoing and the mutual covenants and agreement hereinafter set forth, the parties hereto mutually agree as follows: A. AMENDMENTS. 1. Amendment of Section 1.01. Section 1.01 is hereby amended by amending the definitions of: (a) "Guarantor's Support Percentage" shall mean (A) with respect to the first $20,000,000 of Loans outstanding (i) with respect to WCAS V, 0%; (ii) with respect to WCAS VI, 80%; (iii) with respect to WB Leveraged Capital, 1.6%; and (iv) with respect to WB Capital Partners, 18.4%; and (B) with respect to the remaining $16,000,000 of Loans outstanding (i) with respect to WCAS V, 80%; (ii) with respect to WCAS VI, 0%; (iii) with respect to WB Leveraged Capital, 0%; and (iv) with respect to WB Capital Partners, 20%. (c) "Revolving Commitment" by deleting the amount "$20,000,000" and substituting the amount "$36,000,000" therefor; and (d) "Revolving Termination Date" by deleting the date "October 31, 1998" and substituting the date "October 29, 1999". 2. Addition of New Covenant. Article VI is hereby amended by adding the following as a new Section 6.14: Section 6.14 Year 200 Compliance. The Company has completed or accomplished, or will complete or accomplish, the following: (a) By August 31, 1999, prepare a comprehensive, detailed inventory and assessment of the risk posed by the "Year 2000 problem" as it may affect the Company's own business, properties or operations; (b) By August 31, 1999, make a detailed inquiry of material suppliers, vendors and customers of the Company, to ascertain whether such persons are aware of the need to address the Year 2000 problem and whether they are taking appropriate steps to do so; (c) By August 31, 1999, prepare a detailed project plan and budget for ensuring that the Year 2000 problem is successfully addressed in all material respects as it pertains to thou Company's own business, properties or operations, and containing contingency plans to mitigate the effects of any third party's unexpected failure to address the Year 2000 problem; (d) By August 31, 1999, renovate all systems and equipment affected by the Year 2000 problem to cause them to perform correctly date-sensitive functions for relevant date data from before and after December 31, 1999 ("Year 2000 Compliance") or replace them with technology not so affected, and commence testing; and (e) By August 31, 1999, complete testing and installation of all material systems and equipment to ensure timely Year 2000 Compliance. For the purpose of this Section 6.14, "'Year 2000 Problem' shall mean the inability of computers, as well as embedded microchips in non-computing devices, to perform properly date-sensitive functions with respect to certain dates prior to and after December 31, 1999." B. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Bank that: 2 1. No Event of Default specified in the Credit Agreement and no event which with notice or lapse of time or both would become such an Event of Default has occurred and is continuing; 2. The representations and warranties of the Company pursuant to the Credit Agreement are true on and as of the date hereof as if made on and as of said date; 3. The making and performance by the Company of this Amendment have been duly authorized by all corporate action; and 4. No consent, approval, authorization, permit or license from any federal or state regulatory authority is required in connection with the making or performance of the Credit Agreement as amended hereby. C. CONDITIONS PRECEDENT. This Amendment will become effective as of October 7, 1998 provided that the Bank shall have received in form and substance satisfactory to the Bank, all of the following: 1. A copy of a resolution passed by the Board of Directors of the Company, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, authorizing the borrowing herein provided for and the execution, delivery and performance of the Credit Agreement as hereby amended. 2. A certificate of incumbency certifying the names of the officers of the Company authorized to sign this Amendment, together with the true signatures of such officers. 3. Executed counterparts of this Amendment. 4. Payment of an amendment fee in the amount of $25,000. 5. A copy of the executed asset purchase agreement among the Company and the stockholders of HealthCare Interchange Inc. (the "Asset Purchase"). 6. Evidence that all conditions to the closing of the Asset Purchase have occurred and all documents and agreements required thereby have been executed and delivered D. MISCELLANEOUS. 1. This Amendment may be signed in any number of counterparts, each of which shall be an original, with same effect as if the signatures thereto and hereto were upon the same instrument. 3 2. Except as herein specifically amended, fill terms, covenants and provisions of the Credit Agreement shall remain in full force and effect and shall be performed by the parties hereto according to its terms and provisions and all references therein or in the Exhibits shall henceforth refer to the Credit Agreement as amended by this Amendment. 3. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 4 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first written. MEDE AMERICA CORPORATION By: --------------------------- Title: ------------------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: --------------------------- Title: ------------------------ ACKNOWLEDGED AND AGREED: WELSH, CARSON, ANDERSON & STOWE V, L.P. By: WCAS V PARTNERS Its General Partner By: ----------------------------------- Its General Partner WELSH, CARSON, ANDERSON & STOWE VI, L.P. By: WCAS VI PARTNERS Its General Partner By: ----------------------------------- Its General Partner WILLIAM BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP By: WILLIAM BLAIR LEVERAGED CAPITAL MANAGEMENT, L.P. By: WILLIAM BLAIR & COMPANY, General Partner By: ----------------------------------- 5 WILLIAM BLAIR CAPITAL PARTNERS V, L.P. By: WILLIAM BLAIR CAPITAL PARTNERS, LLC, General Partner By: ----------------------------------- 6 EX-10.12 4 EXHIBIT 10.12 EXHIBIT 10.12 SIXTH AMENDMENT TO CREDIT AGREEMENT This Amendment, dated as of December 15, 1998 (this "Amendment") is entered into by and between MEDE AMERICA CORPORATION, a Delaware corporation (the "Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). RECITALS The Company and the Bank are parties to a Credit Agreement dated as of December 18, 1995, as amended (the "Credit Agreement"), pursuant to which the Bank extended a revolving credit facility. Capitalized terms used and not otherwise defined or amended in this Amendment shall have the meanings respectively assigned to them in the Credit Agreement. The Company has requested that the Bank modify the financial covenants and waive non-compliance with the financial covenants for the period ending September 30, 1998. In order to induce the Bank to agree to the foregoing, the Bank has requested, and the Company has agreed, to pay an Amendment fee. The Company has requested that the Bank enter into this Amendment in order to approve and reflect the foregoing, and the Bank has agreed to do so, all upon the terms and provisions and subject to the conditions hereinafter set forth. AGREEMENT In consideration of the foregoing and the mutual covenants and agreement hereinafter set forth, the parties hereto mutually agree as follows: A. AMENDMENTS 1. Amendment of Section 7.15. Section 7.15 is hereby amended and restated as follows: 7.15 Maximum Leverage Ratio. The Leverage Ratio at the end of each quarterly period shall not exceed the ratio set forth below for the periods set forth below: Quarter Ending Maximum Ratio -------------- ------------- September 30, 1998 3.00 December 31, 1998 6.80 March 31, 1999 6.20 June 30, 1999 4.50 September 30, 1999 and and thereafter 4.10 For purposes of calculating the Leverage Ratio hereunder, (i) EBITDA shall include EBITDA of the Company and its Subsidiaries adjusted, on a pro forma basis, to include the EBITDA for the applicable period of any business acquired by the Company; and (ii) Indebtedness shall include Indebtedness of the Company and its Subsidiaries. 2. Amendment of Section 7.16. Section 7.16 is hereby amended and restated as follows: 7.16 Minimum Interest Coverage Ratio. The Minimum Interest Coverage Ratio for each fiscal quarter shall not be less than the ratio set forth below at the end of each fiscal quarter for the periods set forth below: Quarter Ending Maximum Ratio -------------- ------------- September 30, 1998 3.00 December 31, 1998 1.65 March 31, 1999 1.70 June 30, 1999 2.20 September 30, 1999 and thereafter 2.30 For purposes of calculating the Minimum Interest Coverage Ratio hereunder, EBITDA and cash interest expense shall include, respectively, EBITDA and cash interest expense of the Company and its Subsidiaries adjusted, on a pro forma basis, to include the EBITDA and incremental projected cash interest expenses if any, with respect to the acquisition of any business acquired by the Company during the two fiscal quarters prior to the date of calculation of the Minimum Interest Coverage Ratio. B. WAIVER. The Company has requested and the Bank has agreed to waive compliance with Sections 7.15 and 7.16 for the period ending September 30, 1998. C. REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants to the Bank that: 1. No Event of Default specified in the Credit Agreement and no event which with notice or lapse of time or both would become such an Event of Default has occurred and is continuing; 2. The representations and warranties of the Company pursuant to the Credit Agreement are true on and as of the date hereof as if made on and as of said date; 2 3. The making and performance by the Company of this Amendment have been duly authorized by all corporate action; and 4. No consent, approval, authorization, permit or license from any federal or state regulatory authority is required in connection with the making or performance of the Credit Agreement as amended hereby. D. CONDITIONS PRECEDENT This Amendment will become effective as of December 15, 1998 provided that the Bank shall have received in form and substance satisfactory to the Bank, all of the following: 1. Executed counterparts of this Amendment. 2. Payment of an amendment fee in the amount of $54,000. E. MISCELLANEOUS 1. This Amendment may be signed in any number of counterparts, each of which shall be an original, with same effect as if the signatures thereto and hereto were upon the same instrument. 2. Except as herein specifically amended, all terms, covenants and provisions of the Credit Agreement shall remain in full force and effect and shall be performed by the parties hereto according to its terms and provisions and all references therein or in the Exhibits shall henceforth refer to the Credit Agreement as amended by this Amendment. 3. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 3 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first written. MEDE AMERICA CORPORATION By: _______________________________________ Title: ____________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: _______________________________________ Title: ____________________________________ ACKNOWLEDGED AND AGREED: WELSH, CARSON, ANDERSON & STOWE V, L.P. By: WCAS V PARTNERS Its General Partner By: ________________________ Its General Partner WELCH, CARSON, ANDERSON & STOWE VI, L.P. By: WCAS VI PARTNERS Its General Partner By: __________________________ Its General Partner 4 WILLIAM BLAIR LEVERAGED CAPITAL FUND LIMITED PARTNERSHIP By: WILLIAM BLAIR LEVERAGED CAPITAL MANAGEMENT, L.P. By: WILLIAM BLAIR & COMPANY, General Partner By: ______________________ 5 EX-10.13 5 EXHIBIT 10.13 EXHIBIT 10.13 ================================================================================ STOCK PURCHASE AGREEMENT among MEDE AMERICA CORPORATION and THE STOCKHOLDERS OF HEALTHCARE INTERCHANGE, INC. NAMED IN SCHEDULE I HERETO Dated as of October 20, 1998 ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I. SALE AND TRANSFER OF SHARES; PURCHASE PRICE; CLOSING..................................................1 SECTION 1.01 Sale and Transfer of Shares............................................................1 SECTION 1.02 Delivery of Shares and Payment of Purchase Price.......................................1 SECTION 1.03 Closing................................................................................2 ARTICLE II. REPRESENTATIONS AND WARRANTIES AS TO THE COMPANY ....................................................2 SECTION 2.01 Organization, Qualifications and Corporate Power; Subsidiaries.........................2 SECTION 2.02 Capitalization.........................................................................3 SECTION 2.03 Financial Statements...................................................................3 SECTION 2.04 Absence of Undisclosed Liabilities.....................................................4 SECTION 2.05 Absence of Certain Changes or Events...................................................4 SECTION 2.06 Consents and Approvals.................................................................5 SECTION 2.07 Title to Properties, Absence of Liens and Encumbrances.................................5 SECTION 2.08 List of Properties, Contracts and Other Data...........................................6 SECTION 2.09 Third-Party Payer and Customer Contracts...............................................7 SECTION 2.10 Intangible Rights......................................................................7 SECTION 2.11 Software...............................................................................7 SECTION 2.12 Litigation, Etc........................................................................8 SECTION 2.13 Taxes..................................................................................8 SECTION 2.14 Governmental Authorizations and Regulations...........................................10 SECTION 2.15 Labor Matters; Employees..............................................................10 SECTION 2.16 Insurance.............................................................................11 SECTION 2.17 Use of Real Property..................................................................11 SECTION 2.18 Condition of Assets...................................................................11 SECTION 2.19 Employee Benefit Plans................................................................11 SECTION 2.20 Related Party Transactions............................................................13 SECTION 2.21 Environmental Matters.................................................................13 SECTION 2.22 System Capacity.......................................................................13 SECTION 2.23 Stock and Asset Transfers.............................................................13 SECTION 2.24 Securities Laws Matters...............................................................14 SECTION 2.25 Y2K Compliance........................................................................14 SECTION 2.26 Limit on Employee Obligations.........................................................14
Page ---- ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.................................................15 SECTION 3.01 Organization, Qualifications and Corporate Power......................................15 SECTION 3.02 Authorization of Agreements, Etc......................................................15 SECTION 3.03 Validity..............................................................................15 SECTION 3.04 Title to Shares.......................................................................15 SECTION 3.05 Brokers' or Finders' Fees.............................................................16 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.....................................................16 SECTION 4.01 Organization, Power, Etc..............................................................16 SECTION 4.02 Authorization of Agreements, Etc......................................................16 SECTION 4.03 Validity..............................................................................16 SECTION 4.04 Governmental Approvals................................................................17 SECTION 4.05 Litigation Relating to Transaction....................................................17 SECTION 4.06 Brokers' or Finders' Fees.............................................................17 ARTICLE V. COVENANTS............................................................................................17 SECTION 5.01 Certain Covenants of the Stockholders ................................................17 SECTION 5.02 Books and Records.....................................................................18 SECTION 5.03 Preparation of Certain Financial Statements...........................................18 SECTION 5.04 Certain Tax Matters...................................................................18 SECTION 5.05 Certain Balance Sheet Transactions....................................................19 SECTION 5.06 Consents and Approvals................................................................21 SECTION 5.07 Retention of Employees................................................................21 SECTION 5.08 Intercare and MTI Dispositions........................................................21 SECTION 5.09 Employee Bonuses......................................................................21 SECTION 5.10 Access to Tax and Other Records.......................................................21 ARTICLE VI. CONDITIONS PRECEDENT................................................................................23 SECTION 6.01 Conditions Precedent to the Obligations of the Purchaser..............................23 SECTION 6.02 Conditions Precedent to the Obligations of the Stockholders...........................26 ARTICLE VII. INDEMNIFICATION....................................................................................26 SECTION 7.01 Survival of Representations and Warranties; Limitation................................26 SECTION 7.02 Tax Indemnity.........................................................................27 SECTION 7.03 General Indemnity by the Stockholders.................................................27
ii
Page ---- SECTION 7.04 General Indemnity by the Purchaser....................................................28 SECTION 7.05 Third Party Claims....................................................................28 SECTION 7.06 Procedure.............................................................................29 SECTION 7.07 Remedies Limited......................................................................29 SECTION 7.08 Limited Y2K Indemnity.................................................................30 ARTICLE VIII. TERMINATION AND ABANDONMENT...........................................................31 SECTION 8.01 Termination...........................................................................31 SECTION 8.02 Procedure and Effect of Termination...................................................31 ARTICLE IX. MISCELLANEOUS.........................................................................32 SECTION 9.01 Expenses, Etc.........................................................................32 SECTION 9.02 Execution in Counterparts.............................................................32 SECTION 9.03 Notices...............................................................................32 SECTION 9.04 Waivers...............................................................................33 SECTION 9.05 Amendments, Supplements, Etc..........................................................33 SECTION 9.06 Entire Agreement......................................................................33 SECTION 9.07 Applicable Law........................................................................33 SECTION 9.08 Binding Effect; Benefits..............................................................34 SECTION 9.09 Assignability.........................................................................34 SECTION 9.10 Pre-Closing Breach....................................................................34
iii INDEX TO EXHIBITS AND SCHEDULES Exhibit Description - ------- ----------- A Escrow Agreement B-1 Amended and Restated Payer Agreement (Right Choice) B-2 Amended and Restated Payer Agreement (General) C Data Processing Agreement D-1 Form of Employment Agreement D-2 Form of Transition Agreement D-3 Form of Release (Intercare employees hired by PEI) D-4 Form of Release (employees to be terminated) D-5 Form of Release (Intercare employees not hired by PEI) D-6 Form of Release Letter (Kruessel) E Form of Opinion of Counsel for the Stockholders F Form of Non-Competition and Confidentiality Agreement G Non-Competition Agreement (Romer) Schedule Description - -------- ----------- I Stockholders 2.01 Subsidiaries 2.02 Shares of Capital Stock; Warrants, etc. 2.03 Financial Statements 2.04 Absence of Undisclosed Liabilities 2.05 Changes Since June 30, 1998 2.06 Consents and Approvals 2.07 Title, Liens and Related Matters 2.08 List of Properties, Contracts, Etc. 2.10 Intangible Rights 2.11 Software 2.12 Litigation 2.13 Tax Matters 2.14 Regulations and Governmental Authorizations 2.15 Employees 2.16 Insurance 2.18 Condition of Assets 2.19 Severance and Other Benefits 2.20 Related Party Transactions 2.25 Y2K Compliance 5.05(b) Certain Payments 5.09 Employee Bonuses 6.01(e) Employees iv STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of October 20, 1998, among MEDE AMERICA CORPORATION, INC., a Delaware corporation (the "Purchaser"), and the stockholders of Healthcare Interchange, Inc., a Missouri corporation (the "Company"), named in Schedule I hereto (hereinafter sometimes referred to individually as a "Stockholder" and collec tively as the "Stockholders"). WHEREAS, on the Closing Date (as defined herein), the Stockholders will own all of the issued and outstanding shares of capital stock of the Company, consisting of (i) 35,000 shares (the "A Common Shares") of Class A Common Stock, $1 par value ("A Common Stock"), (ii) 35,000 shares (the "B Common Shares") of Class B Common Stock, $1 par value ("B Common Stock"), (iii) 20,001 shares (the "C Common Shares") of Class C Common Stock, $1 par value ("C Common Stock"), and (iv) 62,500 shares (the "Preferred Shares," and collectively with the A Common Shares, the B Common Shares and the C Common Shares, the "Shares") of Convertible Cumulative Preferred Stock, $1 par value ("Preferred Stock"); and WHEREAS, the Stockholders desire to sell and the Purchaser desires to purchase the Shares, all on the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties agree as follows: ARTICLE I. SALE AND TRANSFER OF SHARES; PURCHASE PRICE; CLOSING SECTION 1.01. Sale and Transfer of Shares. Subject to the terms and conditions set forth herein, on the Closing Date (as hereinafter defined) each Stockholder shall sell to the Purchaser, and the Purchaser shall purchase from such Stockholder, the number of A Common Shares, B Common Shares, C Common Shares and Preferred Shares set forth opposite the name of such Stockholder in Part B of Schedule I hereto under the headings "A Common Shares," "B Common Shares," "C Common Shares" and "Preferred Shares," as applicable. SECTION 1.02. Delivery of Shares and Payment of Purchase Price. (a) On the Closing Date, each Stockholder shall deliver to the Purchaser a certificate or certificates in defini tive form, registered in the name of such Stockholder or accompanied by a stock transfer power duly executed by the registered holder of such certificate and transferring the Shares evidenced thereby to such Stockholder, evidencing the Shares being sold by such Stockholder hereunder, duly endorsed for transfer or accompanied by stock transfer powers duly endorsed in blank, with all requisite stock transfer taxes paid and stamps affixed. (b) As payment in full of the purchase price for the Shares and against delivery of the certificates evidencing the Shares as aforesaid, on the Closing Date the Purchaser shall: (i) pay an aggregate $11,200,000 (the "Initial Cash Consideration") to the Stockholders or as otherwise directed in writing by the Stockholders, by wire transfer of immediately available funds in the amounts set forth opposite the name of each Stockholder in Schedule I hereto under the heading "Cash Paid at Closing;" and (ii) cause $400,000 in cash (the "Escrow Amount," collectively with the Initial Cash Consideration, the "Purchase Price") to be deposited in an escrow account pursuant to an Escrow Agreement among the Purchaser, the Stockholders and the Escrow Agent named therein, substantially in the form of Exhibit A hereto (the "Escrow Agreement"), to secure in part the indemnification obligations of the Stockholders pursuant to Article VII hereof. SECTION 1.03. Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Thompson Coburn, One Mercantile Center, St. Louis, Missouri 63101, within two business days after the satisfaction or waiver of all conditions to closing set forth herein, or at such other place or at such other date and time as the Stockholders and the Purchaser may mutually agree (the date and time of the Closing is herein called the "Closing Date"). ARTICLE II. REPRESENTATIONS AND WARRANTIES AS TO THE COMPANY The Stockholders jointly and severally represent and warrant to the Purchaser as follows: SECTION 2.01. Organization, Qualifications and Corporate Power; Subsidiaries. (a) The Company is a corporation duly incorporated and validly existing under the laws of the State of Missouri and is duly licensed or qualified as a foreign corporation in each other juris diction in which it owns or leases any real property or, to the extent the failure to so qualify would have a Material Adverse Effect (as defined herein), in which the nature of business transacted by it makes such licensing or qualification necessary. The Company has the corporate power and authority, and the legal right, to own and operate its properties and to carry on its business as currently conducted. (b) Except as set forth in Schedule 2.01 hereto, the Company does not own of record or beneficially, or have any right or obligation to acquire, directly or indirectly, (i) any shares of outstanding capital stock or securities convertible into or exchangeable for capital stock 2 of any other corporation or (ii) any participating interests in any partnership, joint venture or other non-corporate business enterprise. SECTION 2.02. Capitalization. (a) The authorized capital stock of the Company consists of (i) 66,250 shares of A Common Stock, of which 35,000 shares are issued and outstanding, fully paid and nonassessable and owned as set forth in Part A of Schedule I hereto, (ii) 66,250 shares of B Common Stock, of which 35,000 shares are issued and outstanding, fully paid and nonassessable and owned as set forth in Part A of Schedule I hereto, (iii) 56,000 shares C Common Stock, of which 20,001 shares are issued and outstanding, fully paid and nonassessab le and owned as set forth in Part A of Schedule I hereto, and (iv) 62,500 shares of Preferred Stock, of which 62,500 shares are issued and outstanding, fully paid and nonassessable and owned as set forth in Part A of Schedule I hereto. As of the Closing Date, all shares of capital stock of the Company shall be owned as set forth in Part B of Schedule I hereto. Except as set forth in Schedule 2.02 hereto, none of the Shares are subject to, nor were any of them issued in violation of, any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. (b) Except as set forth in Schedule 2.02 hereto, (i) no subscription, warrant, option, convertible security or other right (contingent or other) to purchase or acquire any shares of any class of capital stock of the Company are authorized or outstanding, (ii) there is not any commitment of the Company to issue any shares, warrants, options or other such rights or to distribute to holders of any class of its capital stock any evidences of indebtedness or assets and (iii) the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any shares of the capital stock of the Company or any interest therein or to pay any dividend or make any other distribution in respect thereof. At the Closing, neither the stock options listed or reflected on Schedule 2.02 hereto (or in any other Schedule hereto), nor any right to receive payment of any sort in respect of such stock options, will be outstanding. (c) Effective upon the consummation of the transactions contemplated hereby, each of the Stockholders, by its execution and delivery of this Agreement, acknowledges satisfaction in full of all dividends payable in respect of the Preferred Stock through the Closing Date, and forever waives any claim, right, title or interest in or to any such dividends not actually paid as of the Closing Date. SECTION 2.03. Financial Statements. Attached hereto as Schedule 2.03 are the balance sheet of the Company as of June 30, 1998, and the related statements of operation, cash flows and stockholders' equity (deficit) for the nine months then ended, including the notes thereto (collectively, the "Financial Statements"). The Financial Statements (i) are complete and correct in all material respects, (ii) were prepared from the books and records of the Company in conformity with generally accepted accounting principles applied on a consistent basis (subject to normal year-end adjustments) and (iii) fairly present the financial position and stockholders' equity of the Company as of the dates specified therein and the income and cash flows for the periods then ended. 3 SECTION 2.04. Absence of Undisclosed Liabilities. Except (i) as and to the extent reflected in the Financial Statements, (ii) as set forth in Schedule 2.04 hereto, or (iii) for immaterial trade payables and similar operating liabilities incurred since June 30, 1998 in the ordi nary course of business and consistent with past practice, the Company has no liabilities or obliga tions of any kind or nature, whether known or unknown, secured, unsecured, absolute, accrued, contingent or otherwise, and whether due or to become due (including without limitation any tax liabilities due or to become due, or whether incurred in respect of or measured by the assets, sales, income or receipts of the Company for any period), which liabilities or obligations would be required to be reflected on a balance sheet of the Company prepared in accordance with generally accepted accounting principles. SECTION 2.05. Absence of Certain Changes or Events. Since June 30, 1998, except as otherwise set forth in Schedule 2.05 hereto or as expressly contemplated by this Agreement, the Company has not: (a) changed or amended its Articles of Incorporation or By-laws; (b) incurred any obligation or liability (fixed or contingent), except normal trade or business obligations incurred in the ordinary course of business and consistent with past practice, none of which individually or in the aggregate is materially adverse; (c) discharged or satisfied any material lien, security interest, charge or other encumbrance or paid any material obligation or liability (fixed or contingent), other than in the ordinary course of business and consistent with past practice; (d) mortgaged, pledged or subjected to any lien, security interest, charge or other encumbrance any of its assets or properties (other than Permitted Liens as defined in Section 2.07 below); (e) transferred, leased or otherwise disposed of any of its material assets or properties, except for fair consideration in the ordinary course of business and consistent with past practice, or acquired any material assets or properties, except in the ordinary course of business and consistent with past practice; (f) declared, set aside or paid any distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeemed or other wise acquired any of its capital stock or split, combined or otherwise similarly changed its capital stock or authorized the creation or issuance of or issued or sold any capital stock or any securities or obligations convertible into or exchangeable therefor, or given any person any right to acquire any capital stock from the Company, or agreed to take any such action; 4 (g) made any investment of a capital nature, whether by purchase of stock or securities, contributions to capital, property transfers or otherwise, in any other partner ship, corporation or other entity, or purchased any material property or assets; (h) canceled or compromised any debt or claim, other than in the ordinary course of business consistent with past practice; (i) waived or released any rights of material value, including without limita tion, any Intangible Rights (as defined in Section 2.08(b) below); (j) transferred or granted any rights under or with respect to any Intangible Rights, or permitted any license, permit or other form of authorization relating to an Intangible Right to lapse; (k) made or granted any wage or salary increase applicable to any group or classification of employees generally, entered into any employment contract with, or made any loan to, or entered into any material transaction of any other nature with, any officer or employee of the Company; or (l) suffered any casualty loss or damage (whether or not such loss or damage shall have been covered by insurance) which affects in any material respect its ability to conduct its business. SECTION 2.06. Consents and Approvals. Except as set forth on Schedule 2.06 hereto, no order, authorization, approval or consent from, or filing with, (i) any federal or state governmental or public body or other authority having jurisdiction over either Stockholder or the Company or (ii) any third party (including, without limitation, pursuant to any contract to which the Company is a party) is necessary (A) for the execution, delivery and performance by such Stockholder of its obligations under this Agreement or the Ancillary Agreements (as defined herein), to the extent that such Stockholder is a party thereto, or the consummation of the transactions contemplated hereby or (B) in order that the business of the Company can be conducted immediately following the Closing Date substantially in the same manner as heretofore conducted. SECTION 2.07. Title to Properties, Absence of Liens and Encumbrances. Except as set forth in Schedule 2.07 hereto, the Company has, and will have as of the Closing Date, good and valid title to all its assets and properties, in each case free and clear of all liens, charges, security interests or other encumbrances of any nature whatsoever, other than (x) liens for taxes not yet due, (y) mechanic's, materialman's and similar statutory liens arising in the ordinary course of business and which, in the aggregate, would not have a material adverse effect on the business, properties, prospects or condition (financial or other) of the Company (a "Material Adverse Effect"), or (z) security interests securing indebtedness not in default for the purchase price of or lease rental payments on property purchased or leased under capital lease arrange- 5 ments in theordinary course of business (the liens, charges, security interests and other encumbrances described in clauses (x), (y) and (z) above being referred to herein as "Permitted Liens"). SECTION 2.08. List of Properties, Contracts and Other Data. Annexed hereto as Schedule 2.08 is a list setting forth the following: (a) a description of all leases of real or personal property to which the Company is a party, either as lessee or lessor, including a description of the parties to each such lease, the property to which each such lease relates, and the rental term and monthly (or other) rents payable under each such lease; (b) (i) all patents, trademarks and trade names, trademark and trade name registrations, logos, servicemark registrations, copyright registrations, all applications pending on the date hereof for patent or for trademark, trade name, servicemark or copy right registrations, and all other material intellectual property rights (collectively "In tangible Rights") owned by the Company (specifying the nature of the rights therein), and (ii) all licenses granted by or to the Company and all other agreements to which the Company is a party that relate, in whole or in part, to any Intangible Rights mentioned in (i) above or to other proprietary rights reasonably necessary to the Company, whether owned by any of the Stockholders or the Company or otherwise; (c) all collective bargaining agreements, employment and consulting agree ments, independent contractor agreements, executive compensation plans, bonus plans, deferred compensation agreements, employee pension plans or retirement plans, employee profit sharing plans, employee stock purchase and stock option plans, group life insurance, hospitalization insurance, severance or other similar plans or arrangements maintained for or providing benefits to employees of, or independent contractors or other agents for the Company (in any such case, whether oral or written); (d) all contracts, including without limitation guarantees, mortgages, inden tures and loan agreements, to which the Company is a party, or to which the Company or its assets or properties is subject and which are not specifically referred to in clauses (a), (b), or (c) above, provided, however, that there need not be listed in said Schedule 2.08 pursuant to this clause (d) any sales contracts, supply contracts with suppliers and other such contracts incurred in the ordinary course of business and consistent with past practice, other than any such contract which (i) is a contract or group of related contracts which exceeds $5,000 in amount, (ii) contains warranties by the Company in excess of those customary in its business, (iii) cannot be performed in the normal course within 12 months after the Closing Date without breach or penalty or (iv) would be terminable or result in a penalty or additional obligation on the part of the Company upon the consum mation of the transactions contemplated hereby; and (e) all agreements with third party payers and customers. 6 Schedule 2.08 indicates, for each contract listed therein, whether such contract relates to the so-called "Financial Services" business or the so-called "Intercare" business (or to both, as the case may be). True and complete copies of all documents and complete descriptions of all binding oral commitments (if any) referred to in said Schedule 2.08 have been provided or made available to the Purchaser and/or its counsel. Except as disclosed in such Schedule, all material provisions of the contracts referred to in such Schedule are valid and enforceable obligations of the Company and, to the knowledge of the Company and the Stockholders, of the other parties thereto. Neither the Company nor any of the Stockholders has been notified of, or is aware that any basis exists for, any claim that any contract referred to in such Schedule is not valid and enforceable in accordance with its terms for the periods stated therein, or that there is under any such contract any existing default or event of default or event which with notice or lapse of time or both would constitute such a default. The lease for premises at 2452 Centerline Ind. Dr., Maryland Heights, Missouri 63043 will be validly terminated prior to the Closing Date. SECTION 2.09. Third-Party Payer and Customer Contracts. Other than with respect to the third-party payers and customers of HIIT (as defined herein) or relating to the "Intercare" business, the Company has not lost since June 30, 1998, and neither the Company nor any of the Stockholders has been notified that the Company will lose or suffer diminution in, and to the knowledge of the Company and the Stockholders, no representative of a third-party payer or other customer has notified the Company or any of the Stockholders that, in the event of a sale of the Company, the Company would lose or suffer diminution in, its relationship with any third-party payer(s) or other customer(s) that, in the aggregate, accounted for more than five percent (5%) of the revenues of the Company during the nine months ended June 30, 1998. SECTION 2.10. Intangible Rights. Except as set forth in Schedule 2.10 hereto, (i) the Company has complied with its contractual obligations relating to the protection of such of the Intangible Rights used by it pursuant to licenses or other contracts, (ii) the Company has the right to use its Intangible Rights to provide, sell and produce the services provided and sold by it and to conduct its business as heretofore conducted, and the consummation of the transactions contemplated hereby will not alter or impair any such Intangible Rights, (iii) all such Intangible Rights are valid, enforceable and in good standing, and no claims have been asserted with respect to the use by the Company of any of the Intangible Rights or otherwise for patent, copyright or trademark infringement, and (iv) to the knowledge of the Company and the Stockholders, no person is infringing on or violating the Intangible Rights or know-how used by the Company. SECTION 2.11. Software. (a) The operating and applications computer software programs and databases used by the Company in the conduct of its business (other than programs and databases that are generally commercially available for a per unit license fee of less than $1,000) (collectively, the "Software") are described in Schedule 2.11 hereto. Except as set forth in Schedule 2.11, the Company owns outright or holds valid licenses to all copies of the Software used by it in its business. None of the Software used by the Company, and no use by the 7 Company thereof, infringes upon or violates any patent, copyright, trade secret or other proprietary right of any other person and, to the knowledge of the Company and the Stockhold ers, no claim with respect to any such infringement or violation is threatened. The Company has taken all steps reasonably necessary to protect its right, title and interest in and to the Software owned by the Company, including, without limitation, the use of written agreements containing appropriate confidentiality provisions with all third parties having access to the source code relating to the Software. (b) The Company possesses or has access to the original and all copies of all documentation, including, without limitation, all source code for all Software owned by it. Upon consummation of the transactions contemplated by this Agreement, except as set forth in Schedule 2.11, the Company will continue to own all the Software owned by it, free and clear of all claims, liens, encumbrances, obligations and liabilities, and, with respect to all agreements for the lease or license of Software which require consents or other actions as a result of the consummation of the transactions contemplated by this Agreement in order for the Company to continue to use and operate such Software after the Closing Date, the Company will have obtained such consents or taken such other actions so required. (c) Any programs, modifications, enhancements or other inventions, improve ments, discoveries, methods or works of authorship included in the Software that were created by employees of the Company were made in the regular course of such employees' employment with the Company using the Company's facilities and resources and, as such, constitute "works made for hire." SECTION 2.12. Litigation, Etc. Schedule 2.12 hereto sets forth a complete list and an accurate description of all claims, actions, suits, proceedings and investigations pending or, to the knowledge of the Company and the Stockholders, threatened, by or against the Company or any of its properties, assets, rights or businesses. No such pending or threatened claims, actions, suits, proceedings or investigations, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any of the Stockholders has any knowledge of any basis for any other such claim, action, suit, proceeding or investigation which, if adversely decided, would have a Material Adverse Effect. There are no actions, suits, proceedings or claims pending before or by any court, arbitrator, regulatory authority or government agency against or affecting any of the Stockholders or the Company that might enjoin or prevent the consummation of the transactions contemplated by this Agreement. SECTION 2.13. Taxes. (a) Except as set forth in Schedule 2.13 hereto, the Company has (i) duly and timely filed all returns, declarations, reports, estimates, information returns and statements ("Re turns") required to be filed by it in respect of any Taxes (as hereinafter defined), all of which Returns (including all informational Returns) were correct as filed (or as subsequently amended) and correctly reflect the facts regarding the income, business, assets, operations, activities and 8 status of the Company as well as any Taxes required to be paid or collected by the Company; (ii) timely paid or withheld all Taxes that are due and payable with respect to the Returns referred to in clause (i); (iii) established, consistent with past practice, an adequate reserve, if any, on its books and records for the payment of all Taxes with respect to any taxable period (or portion thereof) ending on or prior to the Closing Date; and (iv) complied with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and has timely withheld from employee wages and paid over to the proper governmental authorities when due all amounts required to be so withheld and paid over. For purposes of this Agreement, "Taxes" shall mean (A) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, license, withholding on amounts paid or received, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit taxes, custom duties or other taxes, governmental fees or other like assessments or charges of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed on the Company by any governmental authority responsible for the imposition of any such taxes (domestic or foreign) ("Taxing Authorities"), (B) liability for the payment of any amounts of the type described in (A) as a result of being a member of an affiliated, consolidated, combined or unitary group, or being a party to any agreement or arrangement whereby liability for payments of such amounts was determined or taken into account with reference to the liability of any other person for any period prior to the Closing Date and (C) liability with respect to the payment of any amounts described in (A) as a result of any express or implied obligation to indemnify any other person. (b) Except as set forth in Schedule 2.13 hereto, no Federal, state or local income Tax Returns of the Company are being examined or have been examined by any Taxing Authority. (c) Except as set forth in Schedule 2.13 hereto, the Company has never (A) requested or received a Tax ruling (other than a determination with respect to a qualified employee benefit plan) or entered into a legally binding agreement (such as a closing agreement) with any Taxing Authority, which ruling or agreement could have an effect on the Taxes of the Company on or after the Closing Date or (B) filed any election or caused any deemed election under Section 338 of the Code, or any similar state or local provision. (d) Except as set forth in Schedule 2.13 hereto, (A) no extensions of time have been granted to the Company to file any Return, which Return has not been filed in the time period permitted by any such extension, (B) no deficiency or adjustment for any Taxes has been proposed, asserted or assessed against the Company, which deficiency or adjustment has not been paid in full, and no Federal, state, local or foreign audits or other administrative proceedings or court proceedings are currently in progress or pending against the Company with respect to any Taxes owed by the Company, and (C) no waiver or consent extending any statute of limitations for the assessment or collection of any Taxes owed by the Company, which waiver or consent 9 remains in effect, has been executed by the Company or on behalf of the Company, nor are any re quests for such waivers or consents pending. (e) Except as set forth in Schedule 2.13 hereto, the Company has never (A) been a member of any consolidated, combined or unitary group for Federal, state, local or foreign Tax law purposes or (B) been a party to any Tax-sharing or allocation agreement. (f) The Company is not a party to any agreement, contract or arrangement that would result, by reason of the consummation of any of the transactions contemplated herein, separately or in the aggregate, in the payment of any "excess parachute payment" within the meaning of Section 280G of the Code. SECTION 2.14. Governmental Authorizations and Regulations. (a) Except as set forth in Schedule 2.14 hereto, the Company has all govern mental licenses, franchises and permits ("Governmental Permits") required under applicable law for the conduct of its business as currently conducted. (b) The business of the Company is being conducted in material compliance with all applicable laws, ordinances, rules and regulations of all governmental authorities relating to its properties or applicable to its business, including without limitation the terms of all Governmental Permits and federal securities laws. Neither the Company nor any of the Stock holders has received any notice of any alleged violation of any of the foregoing. (c) Neither the Company nor any of its properties, operations or businesses is subject to any court or administrative order, judgment, injunction or decree. To the knowledge of the Company and the Stockholders, no action has been taken or recommended by any govern mental or regulatory official, body or authority, either to revoke, withdraw or suspend any license used in the operations of the Company. SECTION 2.15. Labor Matters; Employees. (a) No collective bargaining agreement is applicable to any employees of the Company. There are not any disputes between the Company and any of its employees that might reasonably be expected to have a Material Ad verse Effect. To the knowledge of the Company and the Stockholders, there are not any organi zational efforts presently being made or threatened involving any of such employees. Neither the Company nor any of the Stockholders has received notice of any claim that the Company has failed to comply with any laws relating to employment, including any provisions thereof relating to wages, hours, collective bargaining, the payment of social security and other payroll or similar taxes, equal employment opportunity, employment discrimination and employment safety, or that the Company is liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 10 (b) There are no proceedings pending or, to the knowledge of the Company and the Stockholders, threatened before the National Labor Relations Board with respect to any employees of the Company. There are no discrimination charges (relating to sex, age, religion, race, national origin, ethnicity, handicap or veteran status) against the Company pending before any federal or state agency or authority. (c) Schedule 2.15 hereto lists all employees of the Company as of the date hereof, and indicates for each employee (i) whether, to the knowledge of the Stockholders and the Company, such employee will be employed in connection with the "Intercare" business following the Closing, (ii) the salary now received by such Employee and (iii) the total amount (including stay/severance benefits and amounts payable on exercise of any "in the money" stock options held by such Employee) of all benefits that will be payable to the Employee as a result of the consum mation of the transactions contemplated hereby. SECTION 2.16. Insurance. All policies of fire, liability, workers' compensation and other forms of insurance providing insurance coverage to or for the Company are listed in Schedule 2.16 hereto and, except as set forth in said Schedule 2.16, (i) the Company is a named insured under such policies, (ii) all premiums with respect thereto covering all periods up to and including the Closing Date have been paid and (iii) no notice of cancellation or termination has been received with respect to any such policy. All such policies are in full force and effect and will remain in full force and effect to and including the Closing Date, and coverage thereunder will continue to be in effect immediately after the Closing Date, without limit as to time, for occur rences prior to the Closing Date. SECTION 2.17. Use of Real Property. The leased real properties listed in Schedule 2.08 hereto are used and operated by the Company in compliance and conformity with all applicable leases. Neither the Company nor any of the Stockholders has received notice of any violation of any applicable zoning or building regulation, ordinance or other law, order, regulation or requirement relating to the respective real estate operations or assets of the Company and, to the knowledge of the Company and the Stockholders, there are no such violations. SECTION 2.18. Condition of Assets. Except as set forth in Schedule 2.18 hereto, all tangible personal property, fixtures and equipment comprising the assets of the Company are in a good state of repair (ordinary wear and tear excepted) and operating condition, and are sufficient and adequate to permit the Company to conduct its business as of the Closing Date. SECTION 2.19. Employee Benefit Plans. (a) Schedule 2.08 attached hereto lists each employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA") maintained by the Company or to which the Company contributes or is required to contribute or in which any employee of the Company participates (a "Plan"). The Company has complied and currently is in compliance in all material respects, both 11 as to form and operation, with the provisions of ERISA and the Internal Revenue Code of 1986, as amended (the "Code") applicable to each Plan. (b) Each of the Plans which is intended to qualify under Section 401(a) of the Code does so qualify and is exempt from taxation pursuant to Section 501(a) of the Code, and the Company has received favorable and unrevoked determination letters from the Internal Revenue Service to that effect. (c) The Company has not maintained, contributed to or been required to contribute to, and the employees of the Company do not participate in, a "multiemployer plan" (as defined in Section 3(37) of ERISA) or a "defined benefit plan" (as defined in Section 3(35) of ERISA). No amount is due or owing from the Company on account of a multiemployer plan or on account of any withdrawal therefrom. (d) Notwithstanding anything else set forth herein, neither the Company nor any of the Stockholders has incurred any liability with respect to any Plan under ERISA (in cluding, without limitation, Title I or Title IV of ERISA), the Code or other applicable law, which has not been satisfied in full, and no event has occurred, and there exists no condition or set of circumstances which could result in the imposition of any liability under ERISA (including, without limitation, Title I or Title IV of ERISA), the Code or other applicable law with respect to any of the Plans. (e) No Plan, other than a Plan which is an employee pension benefit plan (within the meaning of Section 3(2)(A) of ERISA), provides benefits, including without limita tion, death, health or medical benefits (whether or not insured), with respect to current or former employees of the Company beyond their retirement or other termination of service with the Company (other than (i) coverage mandated by applicable law, (ii) deferred compensation benefits accrued as liabilities on the books of the Company or (iii) benefits the full cost of which is borne by the current or former employee (or his beneficiary)). (f) Except as otherwise set forth in Schedule 2.19 hereto, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or officer of the Company to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compen sation due any such employee or officer. (g) The Company has provided to the Purchaser true and complete copies of the following, to the extent each is applicable, for each Plan: (i) the Plan; (ii) summary plan description of the Plan; (iii) the trust agreement, insurance policy or other instrument relating to the funding of the Plan; (iv) the most recent Annual Report (Form 5500 series) and accompanying schedule filed with the Internal Revenue Service or United States Department of Labor with respect to the Plan; (v) the most recent audited financial statement for the Plan; (vi) the most recent actuarial report of the Plan; (vii) the policy of fiduciary liability insurance (and agreements 12 related thereto) maintained in connection with the Plan; and (viii) the most recent determination letter issued by the Internal Revenue Service with respect to each of the Plans that is intended to qualify under Section 401(a) of the Code. SECTION 2.20. Related Party Transactions. Except as set forth in Schedule 2.20 hereto or as contemplated by this Agreement, there are no existing material arrangements or proposed material transactions between the Company or its subsidiaries and (i) any officer or director of the Company or its subsidiaries or any member of the immediate family of any of the foregoing persons (such officers, directors and family members being hereinafter individually re ferred to as a "Related Party"), (ii) any business (corporate or otherwise) which a Related Party owns, directly or indirectly, or in which a Related Party has an ownership interest, or (iii) between any Related Party and any business (corporate or otherwise) with which the Company or its subsidiaries regularly does business. SECTION 2.21. Environmental Matters. (a) The Company, its business, operations, properties and assets comply in all material respects with all existing Environmental Laws (as defined below). The Company has not received notice of violations of any existing Environmental Law relating to the Company, its business or operations or any of its assets or properties that might reasonably be expected to have a Material Adverse Effect. (b) For the purposes of this Agreement, "Environmental Laws" shall mean any law, statute, regulation, rule, order, ordinance, consent decree, settlement agreement or govern mental requirement of any governmental authority, as in effect on the date of this Agreement, which relates to or otherwise imposes liability or standards of conduct concerning the protection or pollution of the environment, or community health and safety, including, but not limited to the Comprehensive Environmental Response Compensation and Liability Act, as amended, the Federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act and the Hazardous and Solid Waste Amendments, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Toxic Substance and Control Act, the Federal Safe Drinking Water Act, and any similar or analogous statute, regulation, decisional law, legally binding conditions, standards, prohibitions, requirements or judgments or any governmental authority, as now exist. SECTION 2.22. System Capacity. The computer hardware, Software and communications equipment now being used by the Company are sufficient to accommodate the electronic data interchange and transaction processing currently performed by the Company and as proposed to be performed for the next twelve months (given reasonably anticipated Company growth and transaction volume absent the transactions contemplated by this Agreement). SECTION 2.23. Stock and Asset Transfers. The consummation of the transac tions contemplated by the "MTI Transfer Agreement" and the "Intercare Transfer Agreement" (as defined in Section 5.08 hereof), as contemplated by Section 5.08 hereof, will result in the valid and legally binding release (effective immediately after the Closing) of the Company, the Purchaser and their respective affiliates, parents, subsidiaries, directors, officers, employees and 13 agents, from all liabilities and obligations of any nature and howsoever arising (whether arising before, on or after the Closing Date, whether known or unknown, secured, unsecured, absolute, accrued, contingent or otherwise, and whether due or to become due) to the extent the same relate to the business now conducted by the Company's subsidiary, HII Telemedical Corp. ("HIIT"), and the so-called "Intercare" business now being conducted by the Company, other than any such obligations that are explicitly set forth either on the "Closing Balance Sheet" or the "Backup Materials" (as each is defined in Section 5.05 hereof). SECTION 2.24. Securities Laws Matters. Neither the Company nor, to the knowledge of the Company and the Stockholders, any person authorized by the Company or any Stockholder as agent, broker, dealer or otherwise in connection with the offering or sale of the Shares, or any similar securities has taken or will take any action (including without limitation any offer or sale of any securities under circumstances which would require the integration of such securities with the Common Shares being transferred by such Stockholder hereunder under the Securities Act of 1933 (the "Securities Act"), or the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder), which would subject such transfer to the registration provisions of the Securities Act. SECTION 2.25. Y2K Compliance. Anything in this Agreement to the contrary notwithstanding, the Purchaser acknowledges and agrees that neither the Company nor the Stockholders have made any representation or warranty to, or covenant with, the Purchaser with respect to issues surrounding the so called "Year 2000" or "Y2K" problem or Y2K compliance of any of the Company's or any Stockholder's equipment, software, computer hardware or other assets; provided, however, that notwithstanding the foregoing, the Stockholders hereby represent and warrant that, except as set forth in Schedule 2.25 hereto, the Company has made no agreement or contract with or commitment to any third party that the Company's equipment, software or computer hardware will be Y2K compliant prior to December 1, 1999. SECTION 2.26. Limit on Employee Obligations. Upon the execution and delivery of the "Employment Agreements," "Transition Agreements" and "Releases" (as defined herein) required by Section 6.01(e), by the employees listed on Schedule 6.01(e), after the Closing Date neither the Company, nor the Purchaser shall have any payment, severance, bonus or other compensatory obligations of any sort whatsoever arising from or relating to the employment of any employee of the Company or HIIT on or prior to the Closing Date, except for (i) the obligations of the Purchaser and the Company listed in the Employment Agreements, Transition Agreements and Releases, (ii) the obligation to provide credit for past services in determining eligibility and status in the Purchaser's employee benefit plans, (iii) the obligation to pay salary for the pay period in which the Closing Date takes place, (iv) reimbursement obligations for business expenses incurred by such employees and submitted for payment in accordance with the Pur chaser's policies now in effect and (v) for any other liabilities specifically listed on the Closing Balance Sheet or the Backup Materials. 14 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS Each Stockholder, severally and not jointly, represents and warrants as to itself to the Purchaser as follows: SECTION 3.01. Organization, Qualifications and Corporate Power. Such Stockholder has been duly incorporated and is in good standing under the laws of its jurisdiction of incorporation. Such Stockholder has all requisite corporate power and authority to execute and deliver (i) this Agreement, (ii) the Escrow Agreement, (iii) a Non-Competition and Confiden tiality Agreement in the form of Exhibit F hereto (the "Non-Competition Agreement"), (iv) in the case of RightCHOICE Managed Care, Inc. ("RightCHOICE"), an Amended and Restated Payer Agreement in the form of Exhibit B-1 hereto (the "RightCHOICE Payer Agreement") and a Data Processing Agreement in the form of Exhibit C hereto (the "Data Processing Agreement"), and (v) in the case of General American Life Insurance Company ("General"), an Amended and Restated Payer Agreement in the form of Exhibit B-2 hereto (the "General Payer Agreement," and collectively with the Escrow Agreement, the Non-Competition Agreement, the RightCHOICE Payer Agreement and the Data Processing Agreement, the "Ancillary Agreements"), and to perform its obligations hereunder and thereunder. SECTION 3.02. Authorization of Agreements, Etc. The execution and delivery by such Stockholder of this Agreement and the Ancillary Agreements to which it is a party, and the performance by such Stockholder of its obligations hereunder and thereunder, have been duly authorized by all requisite corporate action and will not (x) violate any provision of law, any order of any court or other agency of government, the charter or By-laws of such Stockholder, or any judgment, award or decree to which such Stockholder is a party, or by which such Stockholder or any of such Stockholder's properties or assets is bound or affected or (y) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the Shares. SECTION 3.03. Validity. This Agreement has been duly executed and delivered by such Stockholder and constitutes the legal, valid and binding obligations of such Stockholder, enforceable against such Stockholder in accordance with its terms. Each of the Ancillary Agreements, when executed and delivered by such Stockholder (if a party thereto) as contem plated hereby, will constitute the legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms. SECTION 3.04. Title to Shares. Such Stockholder is the lawful holder of record and beneficial owner of the number of Shares set forth opposite the name of such Stockholder in Schedule I to this Agreement, in each case free and clear of any and all pledges, security interests, liens, charges or other encumbrances of any nature whatsoever. The delivery by such 15 Stockholder of certificates or instruments and agreements evidencing the number of Shares set forth opposite the name of such Stockholder as aforesaid, duly endorsed for transfer or accompanied by stock transfer powers duly endorsed in blank, to the Purchaser pursuant to Section 1.02(a) above, against payment or in exchange for such Shares pursuant to Section 1.02(b) above, will transfer valid title to said Shares to the Purchaser, free and clear of any and all pledges, security interests, liens, charges or other encumbrances of any nature whatsoever. SECTION 3.05. Brokers' or Finders' Fees. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried out directly with the Purchaser or through the Stockholders' agent, Jefferies & Company, Inc. (whose fees and expenses shall be borne solely by the Stockholders), without the intervention of any person on behalf of the Company or the Stockholders in such manner as to give rise to any claim by any person against the Purchaser for a finder's fee, brokerage commission or similar payment. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Stockholders as follows: SECTION 4.01. Organization, Power, Etc. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Purchaser has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, and to perform its obligations hereunder and thereun der. SECTION 4.02. Authorization of Agreements, Etc. The execution and delivery by the Purchaser of this Agreement and the Ancillary Agreements to which it is a party, and the performance by the Purchaser of its obligations hereunder and thereunder, have been duly authorized by all requisite corporate action on the part of the Purchaser and will not (x) violate any provision of law, any order of any court or other agency of government, the Amended and Restated Certificate of Incorporation or By-laws of the Purchaser, any judgment, award or decree or any indenture, agreement or other instrument to which the Purchaser is a party, or by which it or any of its properties or assets is bound or affected; (y) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agree ment or other instrument; or (z) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Purchaser. SECTION 4.03. Validity. This Agreement has been duly executed and delivered by the Purchaser and constitutes the legal, valid and binding obligations of the Purchaser, enforce able against the Purchaser in accordance with its terms. Each of the Ancillary Agreements, when executed and delivered by the Purchaser (if a party thereto) as contemplated hereby, 16 will constitute the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. SECTION 4.04. Governmental Approvals. No order, authorization, approval or consent from, or filing with, any federal or state governmental or public body or other authority having jurisdiction over the Purchaser is necessary for the execution, delivery and performance by the Purchaser of its obligations under this Agreement or the Ancillary Agreements (to the extent that the Purchaser is a party thereto). SECTION 4.05. Litigation Relating to Transaction. There are no actions, suits, proceedings or claims pending before any court, arbitrator or government agency against or affecting the Purchaser which might enjoin or prevent the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements. SECTION 4.06. Brokers' or Finders' Fees. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by the Purchaser directly with the Stockholders, without the intervention of any person on behalf of the Purchaser in such manner as to give rise to any claim by any person against the Stockholders for a finder's fee, brokerage commission or similar payment. ARTICLE V. COVENANTS SECTION 5.01. Certain Covenants of the Stockholders. (a) During the period from the date of this Agreement to the Closing Date, the Stockholders will cause the Company to conduct its business and operations according to its ordinary course of business consistent with past practice and use its best efforts (i) to preserve its relationships with business partners, employees and customers, (ii) to maintain the contracts with third-party payers and customers in full force and effect in accordance with their terms and (iii) to ensure that the Company will continue to provide its services to such third party payers and customers. Without limiting the generality of the foregoing, except as otherwise expressly contemplated by this Agreement, prior to the Closing Date, without the prior written consent of the Purchaser, the Stockholders will cause the Company not to do any of the things listed in paragraphs (a) through (k) of Section 2.05 above. (b) Upon prior notice and at reasonable times, between the date hereof and the Closing Date, the Stockholders shall, and shall cause the Company to, provide access to repre sentatives of the Purchaser to the financial, accounting and legal records of the Company, and to key employees of the Company designated by the Purchaser, and, in connection therewith, shall permit representatives of the Purchaser to visit the premises of the Company. Such activities 17 shall be performed, so far as is reasonably possible, in such a manner as to avoid disruption of normal operations. (c) Between the date hereof and the Closing Date, the Stockholders shall cause the Company not to, except as required by consistently applied accounting methods, (A) utilize accounting principles different from those used in the preparation of the financial statements as of June 30, 1998 referred to in Section 2.03 above, (B) change in any manner its method of main taining its books of account and records from such methods as in effect on June 30, 1998, or (C) accelerate booking of revenues or the deferral of expenses, other than as shall be consistent with past practice and in the ordinary course of business. (d) Between the date hereof and the Closing Date, the Stockholders shall not, and shall cause the Company not to, enter into any transaction, make any agreement or commit ment, or take any action which would result in any of the representations, warranties or covenants of the Stockholders contained in this Agreement not being true and correct at and as of the time immediately after the occurrence of such transaction, event or action. SECTION 5.02. Books and Records. Promptly after the Closing Date, the Stockholders shall deliver to the Purchaser or the Company all books and records used in the operation of the business of the Company and all files, documents, papers, agreements, books of account and other records pertaining to the business of the Company, to the extent that such books, records, files and other materials are not located at the offices of the Company. SECTION 5.03. Preparation of Certain Financial Statements. (a) After the Closing and at no cost to the Stockholders, the Stockholders shall provide the Company's auditors with all financial information, other than information held by the Company, and data reasonably necessary to enable its independent accountants to prepare and review an audited consolidated balance sheet of the Company as of June 30, 1999 and the related statements of income, stockhol ders' equity and cash flows for the year then ended. (b) The Stockholders agree that, if requested by the Company as being necessary to prepare the audited financial statements as contemplated by Section 5.03(a) hereof, the Stockholders shall provide to the Company's auditors a management representation letter in a form reasonably acceptable to such auditors covering the period referred to above. SECTION 5.04. Certain Tax Matters. (a) Transfer Taxes. All stamp, transfer, sales and use Taxes imposed upon or incurred by any of the parties hereto in connection with the transfer of the Shares to the Purchaser under this Agreement, and any legal and other expenses relating thereto, shall be borne by the Stockholders. The Stockholders shall, at their own expense, prepare and file all necessary Tax Returns and other documents with respect to all such stamp, transfer, sales and use Taxes. 18 (b) Tax Returns. The Purchaser shall prepare and file all Tax Returns of the Company that have not yet been filed. Before filing any Tax Returns relating in whole or in part to the any period prior to the Closing Date, the Purchaser shall deliver a copy of such Tax Returns to the Stockholders for their review and approval (which will not be unreasonably withheld or delayed). The Purchaser shall make any changes requested by the Stockholders and reasonably acceptable to the Purchaser. For all Tax Returns relating both to periods before and after the Closing Date, all reasonable fees and expenses relating to the preparation of such returns shall be apportioned between the Stockholders, on the one hand, and the Company and the Purchaser, on the other hand, on the basis set forth in paragraph (c) below. The Stockholders shall provide the Purchaser with all reasonable assistance required to prepare and file such Tax Returns. The Stockholders shall be responsible for, and shall pay all Taxes shown on such Tax Returns that relate to any Tax period (or any portion thereof) ending on or before the close of business on the Closing Date (a "Prior Tax Period"). The Purchaser shall be responsible for, and shall pay, any such Taxes for which the Stockholders are not responsible. (c) Straddle Periods. Subject to Section 5.04(b), with respect to any Tax period that straddles the Closing Date, (i) the portion of any Tax based on income, profits or revenue that is attributable to a Prior Tax Period shall be determined based on a closing of the Company's books as of the close of business on the Closing Date and (ii) the portion of any other Tax attributable to a Prior Tax Period will be determined by multiplying the amount of such Tax by a fraction, the numerator of which shall equal the number of days in such Prior Tax Period up to and including the Closing Date and the denominator of which shall equal the total number of days in such Tax period. (d) Tax Disputes. In the event that the Stockholders dispute their responsi bility for any Tax under this Section 5.04, the Stockholders shall not be relieved of their obligation to pay, in the first instance, the amount of such Tax. If, within 15 days of the payment by the Stockholders of the disputed Tax, the Stockholders, on the one hand, and the Purchaser, on the other, are unable to resolve the dispute among themselves, they shall select a nationally recog nized financial accounting firm and shall give such firm the authority to resolve the dispute in its sole discretion. SECTION 5.05. Certain Balance Sheet Transactions. (a) Prior to or on the Closing Date, the Stockholders shall cause the Company (or direct the Purchaser to disburse a portion of the Purchase Price) to repay all indebtedness of the Company for borrowed money, and to take such actions as may be necessary or appropriate to release all liens, encumbrances, mortgages and security interests securing such indebtedness. (b) On or prior to the Closing Date, the Stockholders shall cause the Company to take such actions as may be necessary to cause (i) the Net Working Capital of the Company to be at least $1 on the Closing Date and (ii) the Tangible Net Worth of the Company on the Closing Date 19 to be at least $425,000, in each case after giving effect to (i) the transactions contemplated by the MTI Transfer Agreement and the Intercare Transfer Agreement and (ii) the payments listed on Schedule 5.05(b) hereof; provided, however, that the Net Working Capital and Tangible Net Worth may be reduced below such amounts by the amount payable to KPMG Peat Marwick LLP in connection with its audit of the Company as of and for the nine months ended June 30, 1998; provided, further, however, that such amount so payable shall not exceed $30,000. For purposes hereof, "Net Working Capital" shall be calculated by subtracting the sum of the Company's current liabilities from the sum of the Company's "cash," "accounts receivable" (excluding, however, any accounts receivable arising from the Company's "Intercare" business and the business conducted by HIIT (collectively, the "Excluded Receivables")), "deposits" and "prepaids," in each case deter mined in accordance with generally accepted accounting principles consistently applied and (to the extent not inconsistent with GAAP) in a manner consistent with that used by the Company in preparing the Financial Statements. For purposes hereof, "Tangible Net Worth" means the total assets of the Company (excluding, however, any Excluded Receivables) less the value of capitalized software, goodwill, other intangible assets and less all liabilities, in each case determined in accordance with generally accepted accounting principles consistently applied and (to the extent not inconsistent with GAAP) in a manner consistent with that used by the Company in preparing the Financial Statements. (c) On the Closing Date, the Stockholders shall deliver to the Purchaser a balance sheet (the "Closing Balance Sheet") of the Company, unaudited but certified by the Company's chief executive officer, reflecting (in accordance with paragraphs (a) and (b) above) the repayment of indebtedness and the revised Net Working Capital and Tangible Net Worth of the Company as of the Closing Date, and also reflecting the transactions contemplated by the MTI Transfer Agreement and the Intercare Transfer Agreement (and otherwise reflecting no material changes to the Company's audited June 30, 1998 balance sheet other than those described in Schedule 2.04 hereto). For all purposes of this Agreement, the Closing Balance Sheet shall be deemed to be part of the Financial Statements (without limiting the foregoing, the representations and warranties made by the Stockholders regarding the Financial Statements shall apply to the Closing Balance Sheet). The Stockholders shall also deliver to the Purchaser such supporting materials (collectively, the "Backup Materials") relating to the Closing Balance Sheet as the Purchaser may reasonably request, including without limitation worksheets of all accounts receiv able, accounts payable and accrued but unpaid expenses that are reflected on the Closing Balance Sheet. (d) Notwithstanding any policy of the Purchaser to the contrary, the Purchaser agrees to cause the Company to pay all accrued sales commissions set forth in the Backup Materials as and when due in accordance with the Company's policies prior to the Closing Date, whether or not such employees are then employed by the Purchaser or the Company. (e) The Purchaser agrees that, in connection with the transactions contemplated by the Intercare Transfer Agreement and the MTI Transfer Agreement, the Company will surrender 20 all right, title and interest in and to the Excluded Receivables. In the event that, after the Closing Date, the Company shall receive any amounts in payment of the Excluded Receivables, the Purchaser shall cause the Company to remit one-half of any such amount to each Stockholder (with the result that such amount shall be remitted in full to the Stockholders). Such remittances shall be made in a reasonably commercially prompt manner. SECTION 5.06. Consents and Approvals. Between the date hereof and the Closing Date, the Stockholders shall, and shall cause the Company to, use their respective best efforts to make the filings and procure the consents and approvals listed on Schedule 2.06 hereto. SECTION 5.07. Retention of Employees. Effective as of the Closing Date, the Purchaser will offer employment to certain employees (the "Retained Employees") of the Company principally engaged in the "Financial Services" business. The Retained Employees will be employed on the terms set forth in the "Employment Agreements" referred to in Section 6.01(e) below. Effective as of the Closing Date, the Purchaser will offer employment to certain other employees (the "Transitional Employees") on a transitional basis for periods of time up to one year, on the terms set forth in the "Transition Agreements" referred to in Section 6.01(e) below. SECTION 5.08. Intercare and MTI Dispositions. Between the date hereof and the Closing Date, the Stockholders shall, and shall cause the Company to, use their best efforts to execute and deliver agreements transferring from the Company all operations and liabilities relating to the business conducted by HIIT (such agreements being collectively referred to as the "MTI Transfer Agreement") and the so-called "Intercare" business being conducted by the Company (such agreements being collectively referred to as the "Intercare Transfer Agreement"). Among other things, the Intercare Transfer Agreement and the MTI Transfer Agreement shall provide (in terms satisfactory to the Purchaser and its counsel) that after the Closing Date the Company shall have no obligations or liabilities of any sort relating to the businesses so disposed, other than any such obligations that are explicitly set forth either on the Closing Balance Sheet or the Backup Materials. In connection with the transactions contemplated by the Intercare Transfer Agreement, the Purchaser agrees to negotiate in good faith with the proposed acquiror of the Intercare business the terms of any short-term transitional service agreements that may be required by such acquiror after the Closing Date. SECTION 5.09. Employee Bonuses. On the Closing Date, the Stockholders will cause a portion of the Purchase Price to be paid to the Company for the purpose of enabling the Company to pay (and the Stockholders shall cause the Company to pay) to each of the employees of the Company set forth on Schedule 5.09 hereto, a bonus in the amount set forth opposite the name of such employee. 21 SECTION 5.10. Access to Tax and Other Records. (a) After the Closing Date, if and to the extent that the Purchaser has asserted a claim for Damages under Article VII hereof, or any other third party has asserted a claim against either the Company or either Stockholder with respect to any act or omission alleged to have been taken or omitted by the Company on or prior to the Closing Date, then upon the request of either Stockholder the Purchaser shall (i) grant to such Stockholder and its representatives the right, during normal business hours, to inspect and copy the books, records and other documents of the Company and (ii) use commercially reasonable efforts to cause the Company's auditors to permit such Stockholder to inspect and copy worksheets and other information pertaining to the Company and its financial statements, in each case as reasonably necessary to defend such Stockholder against any such claim. In connection with any such inspection, the Stockholder making such inspection shall reimburse the Purchaser's, the Company's and the auditors' (as the case may be) reasonable out-of-pocket expenses only. (b) After the Closing Date, in connection with any claim or investigation by the Internal Revenue Service or any state or local taxing authority with respect to (i) the Company, for any periods ending on or prior to the Closing Date, or (ii) the transactions contemplated by this Agreement, the Purchaser shall cause the Company to make available to either Stockholder access to appropriate employees, agents and representatives of the Company, in each case as reasonably necessary to defend itself against any such claim or to represent itself in any such investigation. Any out-of-pocket expenses reasonably and actually incurred by the Purchaser or the Company in complying with the provisions of this paragraph (b) shall be borne by the Stockholder requesting such assistance. (c) The Purchaser shall, and shall cause the Company to, keep and maintain all their tax books, records and other tax information pertaining to the Company for all tax periods ending on or prior to the Closing Date for a period of six (6) years after the Closing Date, and thereafter shall (and shall cause the Company to) offer such tax information to the Stockholders prior to the disposal thereof. (d) To the extent that either Stockholder requests information pursuant to this Section 5.10, such Stockholder shall keep such information confidential as though it were "Confidential Information," as such term is defined in the Non-Competition Agreement; provided, however, that notwithstanding the terms of the Non-Competition Agreement, such Stockholder may use such information for its own benefit in connection with the claim, investigation or proceeding giving rise to such Stockholder's request for information. Notwithstanding the provisions of this Section 5.10, in the event that Purchaser is advised in writing by its outside legal counsel that disclosure of any information hereunder would destroy or compromise a legally accepted privilege against disclosure (including without limitation privileges relating to attorney-client communications or attorney work products), the Purchaser and the Company shall not be obligated to disclose such information. 22 ARTICLE VI. CONDITIONS PRECEDENT SECTION 6.01. Conditions Precedent to the Obligations of the Purchaser. The obligation of the Purchaser to consummate the transactions contemplated by this Agreement is subject, at the option of the Purchaser, to the satisfaction at or prior to the Closing Date of each of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of each Stockholder contained in this Agreement or in any certificate or document delivered to the Purchaser pursuant hereto shall be true and correct on and as of the Closing Date as though made at and as of that date, and each Stockholder shall have so certified to the Purchaser in writing. (b) Compliance with Covenants. Each Stockholder shall have performed and complied in all material respects with all terms, agreements, covenants and conditions of this Agreement to be performed or complied with by it at or prior to the Closing Date, and each Stockholder shall have so certified to the Purchaser in writing. (c) Balance Sheet Adjustments. The Stockholders shall have made (or caused the Company to make) the payments, and delivered to the Purchaser the Closing Balance Sheet, contemplated by and in accordance with Sections 5.05 and 5.09 hereof. Such adjustments, and the form of such balance sheet after giving effect to such adjustments, shall be reasonably acceptable to the Purchaser. (d) Indebtedness for Borrowed Money. The Stockholders shall have caused the Company to repay all indebtedness for borrowed money, and shall have caused all liens, encumbrances, mortgages and security interests in respect thereof to be released. The Stockhold ers shall have caused the Company to deliver to the Purchaser evidence of such repayments and releases, which evidence shall be reasonably satisfactory to the Purchaser and its counsel. (e) Employment Arrangements. Each of the Retained Employees listed on Schedule 6.01(e) hereto shall have executed and delivered to the Company and the Purchaser an Employment Agreement in the form of Exhibit D-1 hereto (collectively, the "Employment Agreements"). Each of the Transitional Employees listed on Schedule 6.01(e) hereto shall have executed and delivered to the Company and the Purchaser a Transition Agreement in the form of Exhibit D-2 hereto (collectively, the "Transition Agreements"). Each of the other employees of the Company or HIIT shall have executed and delivered to the Company and the Purchaser a Release in the form of either Exhibit D-3, Exhibit D-4, Exhibit D-5, or Exhibit D-6 hereto (collectively, the "Releases"), as specified by Schedule 6.01(e). 23 (f) All Proceedings To Be Satisfactory. All proceedings to be taken by the Company and the Stockholders in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser and its counsel, and the Purchaser and said counsel shall have received all such counterpart origi nals or certified or other copies of such documents as they may reasonably request. (g) No Material Adverse Change. Except as disclosed on the Schedules to this Agreement, there shall not have occurred since June 30, 1998 any material adverse change (i) in the financial condition or results of operations of the business of the Company or (ii) in the capacity of the Company to conduct such business in a manner consistent with past practice. (h) Opinion of Counsel. The Purchaser shall have received the opinion of Thompson Coburn, counsel to the Stockholders, in substantially the form of Exhibit E hereto. (i) Consents and Approvals. All authorizations, consents, waivers and approvals set forth in Schedule 2.06 hereto shall have been duly obtained and shall be in form and substance reasonably satisfactory to the Purchaser and its counsel. (j) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted by any party or threatened by any governmental department, agency or authority, in either case seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated hereby or which would, if adversely decided, have a Material Adverse Effect. (k) Ancillary Agreements. The Stockholders, the Company and the Escrow Agent shall have executed and delivered the Ancillary Agreements to which each of them is a party, and the Ancillary Agreements shall be in full force and effect with respect to each of them. (l) MTI Transfer Agreement and Intercare Transfer Agreement. The MTI Transfer Agreement and the Intercare Transfer Agreement (in form and substance satisfactory to the Purchaser and its counsel) shall be have been executed and delivered by all parties thereto, all conditions to closing set forth therein shall have been satisfied, and such agreements shall have been consummated in accordance with their respective terms. (m) Intercare Switching Agreement. The Company and the acquiror of the Intercare business shall have executed and delivered an Intercare Switching Agreement on mutually agreeable terms. (n) Resignations. The Purchaser shall have received from each person who is, immediately prior to the Closing Date, a director or officer of the Company, his or her written resignation, effective as of the Closing Date, from such position. 24 (o) Supporting Documents. On or prior to the Closing Date, the Purchaser and its counsel shall have received copies of the following supporting documents: (i) (A) the charter documents of the Company and each of the Stockholders certified as of a recent date by the Secretary of State of such corporation's jurisdiction of incorporation and (B) a certificate of such Secretary of State as to the due incorporation and good standing of the Company or such Stockholder, as the case may be, and listing all documents on file with said official; (ii) a certificate of the Secretary or an Assistant Secretary of the Company and each of the Stockholders, dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the By-laws of the Company or such Stockholder, as the case may be, as in effect on the date of such certification; (B) that the charter of the Company or such Stockholder, as the case may be, have not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(B) above; (C) in the case of each Stockholder, that attached thereto is a true and complete copy of the resolutions adopted by the Board of Directors or an authorized committee of the Board of Directors of such Stockholder, authorizing the execution, delivery and performance of this Agreement and the Ancillary Agreements; and (D) as to the incum bency and signature of each officer of the Company or such Stockholder that is executing any Ancillary Agreement or other certificate or document delivered in connection with the Closing; and (iii) such additional supporting documents as the Purchaser or its counsel may rea sonably request. All such documents shall be satisfactory in form and substance to the Purchaser and its counsel. (p) Non-Competition Agreement. John Romer shall have executed and delivered a Non-Competition Agreement substantially in the form of Exhibit G hereto, and the same shall be in full force and effect. (q) Settlement of Litigation. The lawsuit described on Schedule 2.12 hereto shall have been settled and dismissed with prejudice. The terms of such settlement shall be satisfactory to the Purchaser and its counsel. (r) Financing. The Purchaser shall have obtained financing from Bank of America NT&SA in an amount sufficient to enable it to pay the Purchase Price. 25 SECTION 6.02. Conditions Precedent to the Obligations of the Stockholders. The obligations of the Stockholders under this Agreement are subject, at the option of the Stockholders, to the satisfaction at or prior to the Closing Date of each of the following condi tions: (a) Accuracy of Representations and Warranties. The representations and warranties of the Purchaser contained in this Agreement or in any certificate or document delivered to the Stockholders pursuant hereto shall be true and correct on and as of the Closing Date as though made at and as of that date. (b) Compliance with Covenants. The Purchaser shall have performed and complied in all material respects with all terms, agreements, covenants and conditions of this Agreement to be performed or complied with by it at or prior to the Closing Date. (c) All Proceedings to Be Satisfactory. All proceedings to be taken by the Purchaser in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Stockholders and their counsel, and the Stockholders and said counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. (d) Employment Arrangements. Each of the Retained Employees shall have executed and delivered to the Company and the Purchaser an Employment Agreement. Each of the Transitional Employees shall have executed and delivered to the Company and the Purchaser a Transition Agreement. Each of the Company's employees not to be retained by the Company or the Purchaser following the Closing Date shall have executed and delivered to the Company and the Purchaser a Release. (e) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted by any party or threatened by any governmental department, agency or authority, in either case seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated hereby. (f) Ancillary Agreements. The Purchaser, the Company and the Escrow Agent shall have executed and delivered the Ancillary Agreements to which each of them is a party, and the Ancillary Agreements shall be in full force and effect with respect to each of them. ARTICLE VII. INDEMNIFICATION SECTION 7.01. Survival of Representations and Warranties; Limitation. All representations and warranties made by any party hereto in this Agreement or pursuant hereto 26 shall survive the Closing Date hereunder for a period of eighteen months, except for (i)those representations and warranties set forth in Section 2.13 hereof, which shall survive until the expiration of all applicable Tax statutes of limitations (including any extensions thereof) and (ii) those representations and warranties set forth in Sections 2.02 and 3.04 hereof, which shall survive indefinitely. Notwithstanding the other provisions of this Article VII, no party hereto shall be obligated to indemnify any other party hereto until the aggregate amount of Taxes and/or Damages (as defined herein) in respect of which indemnification is sought exceeds $30,000, it being understood that the foregoing limitation is a "threshold" and not a "deductible." In addition, the maximum aggregate liability of the Stockholders for "Damages" (as defined herein) shall be $11,600,000. There shall be no maximum aggregate liability of the Stockholders for Taxes payable in accordance with Section 7.02 hereof. SECTION 7.02. Tax Indemnity. (a) The Stockholders jointly and severally agree to and will indemnify, defend and hold harmless the Purchaser and the Company from and against any and all Taxes incurred by, imposed upon or attributable to the Company or HIIT, including reasonable legal fees and expenses incurred by the Company, HIIT or any party hereto and relat ing thereto, for any Prior Tax Period, including without limitation any amount due for sales and use Taxes payable as a result of an audit conducted by state or local governmental authorities. (b) For purposes of this Section 7.02, any interest, penalty or additional charge included in Taxes shall be deemed to be a Tax for the period to which the item or event giving rise to such interest, penalty or additional charge is attributable, and not a Tax for the period during which such interest, penalty or additional charge accrues. (c) The indemnity provided for in this Section 7.02 shall be independent of any other indemnity provision hereof and, anything in this Agreement to the contrary notwithstanding, shall survive until the expiration of the applicable statutes of limitation, including any extensions thereof, for the Taxes referred to herein. Any Taxes, legal fees and expenses subject to indemnifi cation under this Section 7.02 shall not be subject to indemnification under Section 7.03 or Section 7.04 hereof. SECTION 7.03. General Indemnity by the Stockholders. Subject to the terms and conditions of this Article VII, the Stockholders agree to and will, jointly and severally, indemnify, defend and hold the Purchaser and the Company (together with their respective directors, officers, employees, agents, stockholders and affiliates) harmless from and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, costs and expenses, including without limitation interest, penalties and reasonable attorneys' fees and expenses (hereinafter collectively called "Damages"), asserted against, resulting to, imposed upon or incurred by the Company or the Purchaser (or such other parties) by reason of, resulting from or arising out of: 27 (i) a breach of any representation or warranty of any Stockholder contained in or made pursuant to this Agreement, except as and to the extent that Section 7.02 above shall be applicable thereto, in which case the provisions of said section shall govern; (ii) any breach of any covenant or agreement of any Stockholder contained in or made pursuant to this Agreement; (iii) any claims, actions, suits, proceedings, or investigations described in Schedule 2.12 hereof, or any other claim, action, suit, proceeding, or investigation against the Company or the Stockholders, whether known or unknown as of the Closing Date, to the extent arising from an event occurring or a claim arising on or prior to the Closing Date (including, without limitation, any claims for severance or other employment-related benefits by any employee of the Company beyond those specifically assumed by the Purchaser pursuant to the Employment Agreements, the Transition Agreements and the Releases); or (iv) any liabilities or obligations of any nature and howsoever arising (whether arising before, on or after the Closing Date, whether known or unknown, secured, unse cured, absolute, accrued, contingent or otherwise, and whether due or to become due) to the extent the same relate to the business conducted by HIIT or to the so-called "Intercare" business conducted by the Company on or prior to the Closing Date, other than any liabilities or obligations of the Company specifically listed on the Closing Balance Sheet or the Backup Materials. SECTION 7.04. General Indemnity by the Purchaser. Subject to the terms and conditions of this Article VII, the Purchaser agrees to and will indemnify, defend and hold the Stockholders (together with their respective directors, officers, employees, agents, stockholders and affiliates) harmless from and against all Damages asserted against, resulting to, imposed upon or incurred by the Stockholders (or such other parties) by reason of, resulting from or arising out of: (i) a breach of any representation or warranty of the Purchaser contained in or made pursuant to this Agreement, (ii) any breach of any covenant or agreement of the Purchaser contained in or made pursuant to this Agreement or (iii) any liabilities or obligations of the Company specifically listed on the Closing Balance Sheet or the Backup Materials. SECTION 7.05. Third Party Claims. The respective obligations and liabilities of the Stockholders, on the one hand, and the Purchaser, on the other hand (herein sometimes called the "indemnifying party"), to the other (herein sometimes called the "party to be indemnified" or 28 the "indemnified party") under Sections 7.03 and 7.04 hereof with respect to claims resulting from the assertion of liability by third parties shall be subject to the following terms and conditions: (a) Within 30 days after receipt of notice of commencement of any action or the assertion of any claim by a third party, the party to be indemnified shall give the indemnifying party written notice thereof together with a copy of such claim, process or other legal pleading (provided that failure so to notify the indemnifying party of the assertion of a claim within such period shall not affect its indemnity obligation hereunder except as and to the extent that such failure shall adversely affect the defense of such claim), and the indemnifying party shall have the right to undertake the defense thereof by representatives of its own choosing. (b) In the event that the indemnifying party, by the 30th day after receipt of notice of any such claim (or, if earlier, by the tenth day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the party to be indemnified will (upon further notice to the indemnifying party) have the right to undertake the defense, compro mise or settlement of such claim on behalf of and for the account and risk of the indemnifying party, subject to the right of the indemnifying party to assume the defense of such claim at any time prior to settlement, compromise or final determination thereof. (c) Anything in this Section 7.05 to the contrary notwithstanding, (i) if there is a reasonable probability that a claim may materially and adversely affect the party to be indem nified other than as a result of money damages or other money payments, the indemnified party shall have the right, at its own cost and expense, to compromise or settle such claim, but (ii) the party to be indemnified shall not, without the prior written consent of the indemnifying party, settle or compromise any claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the indemnifying party a release from all liability in respect of such claim. (d) In connection with any such indemnification, the party to be indemnified will cooperate in all reasonable requests of the indemnifying party. SECTION 7.06. Procedure. In the event that a party incurs Damages or Taxes for which it in good faith believes it is entitled to indemnification under this Article VII, and the procedure set forth in Section 7.05 is not applicable, then at any time after incurring or paying such Damages or Taxes, such party shall notify the Purchaser or the Stockholders, as applicable, of such payment or incurrence in writing and request that such party or parties pay to it the amount of such Damages or Taxes. Within 30 days after receiving such a written request, the party or parties from whom indemnity is sought shall, in good faith, either (i) pay the amounts so requested to be indemnified or (ii) notify the party seeking indemnification that it does not intend to pay such amounts, in which case the party seeking indemnification may pursue any and all lawful remedies in respect of its claims. 29 SECTION 7.07. Remedies Limited. From and after the Closing Date, the indemnification provisions of this Article VII shall be the sole and exclusive contractual remedy of the parties hereto with respect to any breach of this Agreement; provided that the foregoing shall not prohibit any claim for injunctive or non-monetary equitable relief. SECTION 7.08. Limited Y2K Indemnity. (a) The Purchaser shall have no right of indemnification for Damages to the extent the same arise out of or relate to the Y2K problem, other than for a breach of the representations set forth in the proviso to Section 2.25 of this Agreement and except as specifically provided in this Section 7.08. (b) In the event that: (i) between the Closing Date and June 30, 1999, a client or clients (each a "Terminat ing Client") of the Company terminate their respective contracts with the Company; (ii) the principal grounds for termination of such Terminating Client's contract is the failure of the Company to abide by a representation or warranty (whether oral or written and whether set forth on Schedule 2.25 or otherwise), made by the Company on or prior to the Closing Date, relating to the date prior to which the Company's systems or services would be Y2K compliant; and (iii) the aggregate revenues of all Terminating Clients for the twelve months ended September 30, 1998 exceeded $500,000; then the Stockholders shall jointly and severally pay to the Purchaser an amount equal to 40% of (i) the "net sales" (computed in accordance with the "net sales" shown on the "Schedule of Financial Services Customer Agreements" appended to Schedule 2.08(d) hereof) generated by each such Terminating Client in the month prior to the termination of such Terminating Client's contract, multiplied by (ii) eighteen. (c) The Stockholders jointly and severally agree to indemnify, defend and hold harmless the Purchaser and the Company from and against any and all Damages resulting from claims by any clients of the Company to the extent that such claims relate to an actual or alleged failure of the Company to abide by a representation or warranty (whether oral or written and whether set forth on Schedule 2.25 or otherwise), made by the Company on or prior to the Closing Date, relating to the date prior to which the Company's systems or services would be Y2K compliant. (d) In no event shall the Stockholders be obligated to indemnify the Purchaser and/or the Company under this Section 7.08 for any amounts in excess of $1,000,000 in the aggregate. 30 ARTICLE VIII. TERMINATION AND ABANDONMENT SECTION 8.01. Termination. This Agreement may be terminated at any time prior to the Closing: (a) by the mutual consent of the Stockholders and the Purchaser; (b) by a "Breaching Party" (as defined in Section 9.10 hereof), subject to the terms (including the payment obligations) of Section 9.10; or (c) by the Purchaser, on the one hand, or the Stockholders, on the other hand, if the Closing shall not have occurred on or before November 30, 1998 or such later date as may be agreed upon by the parties hereto, provided, however, that the right to termi nate this Agreement under this clause (c) shall not be available to any party (a "Defaulting Party") whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date. If the Closing shall not have occurred, or this Agreement shall not have been terminated in accordance with this Section 8.01, by December 31, 1998, this Agreement shall automatically terminate on said date, provided, however, that such termination shall not affect the liability hereunder of any Defaulting Party. SECTION 8.02. Procedure and Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby by any or all of the parties pursuant to Section 8.01 above, written notice thereof shall forthwith be given to the other parties to this Agreement (other than in the event of an automatic termination as provided in such Section) and this Agreement (except for this Section and Sections 8.01 and 9.01, which shall continue) shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided in this Agreement: (a) the parties hereto will promptly redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; and (b) no party shall have any liability or further obligation to any other party to this Agreement pursuant to this Agreement except as provided in this Article VIII. 31 ARTICLE IX. MISCELLANEOUS SECTION 9.01. Expenses, Etc. (a) Subject to Section 9.10 hereof, all costs and expenses, including fees and disbursements of counsel, advisors, accountants and consultants, incurred in connection with the negotiation, preparation, execution and delivery of this Agreement and the closing of the transactions contemplated hereby (collectively, "Expenses"), shall be paid by the party incurring such Expenses. All transfer, documentary, stamp and other similar taxes, if any, in connection with the transfer of the Shares as provided herein shall be borne by the Stockholder selling or exchanging such Shares. (b) The Stockholders, on the one hand, and the Purchaser, on the other hand, will indemnify the other and hold it or them harmless from and against any claims for finders' fees or brokerage commissions in relation to or in connection with such transactions as a result of any agreement or understanding between such indemnifying party and any third party. SECTION 9.02. Execution in Counterparts. For the convenience of the parties, this Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 9.03. Notices. All notices which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient and deemed to be received if (i) delivered personally, (ii) mailed by registered or certified mail, return receipt requested and postage prepaid, or (iii) sent via a nationally recognized overnight courier service, in each case as follows: if to the Purchaser, to: MEDE AMERICA Corporation Suite 501 90 Merrick Avenue East Meadow, New York 11554 Attention: Thomas P. Staudt with a copy to: Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, New York 10111 Attention: Mark J. Tannenbaum, Esq. 32 if to any Stockholder, to the address appearing under the name of such Stockholder in Schedule I hereto, and in each case with a copy to: Thompson Coburn One Mercantile Center Suite 3500 St. Louis, Missouri 63101 Attention: Donald B. Dorwart, Esq. or such other address or addresses as the Stockholders, on the one hand, or the Purchaser, on the other hand, shall have designated by notice in writing to the other. SECTION 9.04. Waivers. Either the Stockholders, on the one hand, or the Purchaser, on the other hand, may, by written notice to the other, (i) extend the time for the performance of any of the obligations or other actions of the other under this Agreement, (ii) waive any inaccuracies in the representations or warranties of the other contained in this Agreement or in any document delivered pursuant to this Agreement, (iii) waive compliance with any of the conditions or covenants of the other contained in this Agreement, or (iv) waive performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. SECTION 9.05. Amendments, Supplements, Etc. At any time this Agreement may be amended or supplemented by such additional agreements, articles or certificates, as may be determined by the parties hereto to be necessary, desirable or expedient to further the purposes of this Agreement, or to clarify the intention of the parties hereto, or to add to or modify the covenants, terms or conditions hereof or to effect or facilitate any governmental approval or acceptance of this Agreement or to effect or facilitate the filing or recording of this Agreement or the consummation of any of the transactions contemplated hereby. Any such instrument must be in writing and signed by all parties hereto. SECTION 9.06. Entire Agreement. This Agreement, its Exhibits and Schedules and the documents executed on the Closing Date in connection herewith, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUSIVE OF THE CONFLICTS OF LAWS PROVISIONS THEREOF. 33 SECTION 9.08. Binding Effect; Benefits. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted as signs. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. SECTION 9.09. Assignability. Neither this Agreement nor any of the parties' rights hereunder shall be assignable by any party hereto without the prior written consent of the other parties hereto. SECTION 9.10. Pre-Closing Breach. (a) Between the date hereof and the Closing Date, if as a result of any investigation by any party or any information disclosed to or discovered by such party prior to the Closing Date, such party determines that any representation or warranty of another party hereunder is not true, or that any covenant of another party (in either case, the "Breaching Party") is impracticable or impossible of performance (a "Pre-Closing Breach"), the party making such determination will use reasonable efforts to communicate the existence of a possible Pre-Closing Breach to the Breaching Party. Promptly after learning of any Pre-Closing Breach, the Breaching Party shall use its best efforts to remedy or cure the same; provided that, in the event the Breaching Party determines that the cost of remedying such Pre-Closing Breach is greater than $100,000 or that such Pre-Closing Breach cannot be remedied prior to the Closing Date, the Breaching Party may terminate this Agreement and its obligations hereunder by paying all fees, expenses and internal allocated costs of each other party hereto relating to the negotiation, execution or implementation of the acquisition contemplated hereby. As of the date hereof, the total of such costs for the Purchaser is $150,000. Any party entitled to reimbursement for fees, expenses and costs (whether arising before or after the date hereof) shall submit reasonably detailed supporting documentation to the Breaching Party. (b) Nothing in paragraph (a) above shall restrict the requirement that the Breaching Party either satisfy or obtain a waiver of all conditions precedent set forth in Section 6.01 or Section 6.02 hereof, as the case may be, in order to cause the Purchaser or the Stockhold ers, as the case may be, to be obligated to consummate the transactions contemplated hereby (c) Notwithstanding anything to the contrary set forth in this Agreement, no investigation or acquisition of information (whether actual, alleged or imputed) by any party hereto shall in any way operate as a waiver of the representations, warranties and covenants made to or for the benefit of such party in this Agreement. In addition to and without limiting the generality of the foregoing, after the Closing Date any actual or alleged failure by any party hereto to disclose a Pre-Closing Breach shall in no way restrict such party from seeking indemnification or any other available remedy hereunder for such Pre-Closing Breach. 34 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties hereto as of the day and year first above written. MEDE AMERICA CORPORATION By ---------------------------------- Richard P. Bankosky Chief Financial Officer STOCKHOLDERS: RIGHTCHOICE MANAGED CARE, INC. By ---------------------------------- Name: Title: GENERAL AMERICAN LIFE INSURANCE COMPANY By ---------------------------------- Name: Title: 35
SCHEDULE I, PART B A Common B Common C Common Preferred Initial Cash Name and Address of Stockholder Shares Shares Shares Shares Payment - ------------------------------- ------------- ------------- ------------- ----------- -------------- RightCHOICE Managed Care, Inc. 0 35,000 10,000.5 31,250 $5,600,000 1831 Chestnut St. Louis, Missouri 63103 Attn: Sandra Van Trease General American Life Insurance Company 35,000 0 10,000.5 31,250 $5,600,000 13045 Tesson Ferry Road St. Louis, Missouri 63128 Attn: Michael P. Ingrassia
EX-21.1 6 EXHIBIT 21.1 Subsidiaries of the Registrant: MEDE America Corporation of Ohio Healthcare Interchange, Inc. EX-23.1 7 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. 5 to Registration Statement No. 333-55977 of MEDE America Corporation on Form S-1 of our report dated August 5, 1998 (October 7, 1998 as to Note 6.b., October 30, 1998 as to Note 14 and December 11, 1998 as to Note 13) (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 13) relating to the consolidated financial statements of MEDE America Corporation as of June 30, 1997 and 1998 and for each of the three years in the period ended June 30, 1998 appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. Our audits of the consolidated financial statements of MEDE America Corporation referred to in our aforementioned report also included the financial statement schedule of MEDE America Corporation listed in Part II at Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Jericho, New York December 23, 1998 EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT MEDE America Corporation East Meadow, New York We consent to the use in Amendment No. 5 to Registration Statement No. 333-55977 of MEDE America Corporation on Form S-1 of our report dated October 7, 1997 relating to the statement of income of The Stockton Group, Inc. for the year ended June 30, 1997, appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Charlotte, North Carolina December 23, 1998 EX-23.3 9 EXHIBIT 23.3 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT The Board of Directors HealthCare Interchange, Inc.: We consent to the use, in Amendment No. 5 to registration statement No. 333-55977 on Form S-1 of MEDE America Corporation, of our audit report, dated September 8, 1998, except as to notes 3 and 15, which are as of October 30, 1998, on the consolidated balance sheet of HealthCare Interchange, Inc. and subsidiary as of June 30, 1998 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the nine-month period ended June 30, 1998, which report appears in the Form S-1 of MEDE America Corporation dated December 23, 1998 and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP St. Louis, Missouri December 23, 1998 -----END PRIVACY-ENHANCED MESSAGE-----