-----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, Hx9wBw4UBYhJ353K+IENTp3zQVcvvqm6dgqN0u1/wlMtEyNb+MWjz660ZOI2/M0A v6EHGb18PFsk3PUWWNNutw== 0001005150-99-000062.txt : 19990129 0001005150-99-000062.hdr.sgml : 19990129 ACCESSION NUMBER: 0001005150-99-000062 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990128 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: 99515699 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 JANUARY 28, 1999 REGISTRATION NO. 333-55977 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 7 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 JANUARY 28, 1999 P R O S P E C T U S 4,166,667 SHARES [GRAPHIC OMITTED] MEDE AMERICA CORPORATION COMMON STOCK ------------------ All of the shares of Common Stock offered hereby (the "Offering") are being sold by MEDE AMERICA Corporation ("MEDE AMERICA" or the "Company"). Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company's Common Stock has been approved for listing on the Nasdaq National Market under the symbol "MEDE." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS(1) COMPANY(2) Per Share ......... $ $ $ Total(3) .......... $ $ $
- -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses estimated at $1,700,000, payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 625,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and the Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered and accepted by them, and subject to their right to reject orders in whole or in part. It is expected that certificates for such shares of Common Stock will be made available for delivery at the offices of Salomon Smith Barney Inc., 333 West 34th Street, New York, New York 10001, on or about , 1999. ------------------ SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC. WILLIAM BLAIR & COMPANY , 1999 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. [DIAGRAM OF MEDE AMERICA CORPORATION'S TECHNOLOGY, PRODUCTS AND SERVICES] ------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." MEDE AMERICA is a trademark of the Company. All other trade names, trademarks or service marks appearing in this Prospectus are the property of their respective owners and are not the property of the Company. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. THE COMPANY MEDE AMERICA is a leading provider of electronic data interchange ("EDI") products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. As of December 31, 1998, the Company processed over 900,000 transactions per business day for over 65,000 providers located in all 50 states. Since its formation in March 1995, the Company has expanded both through internal growth and the acquisition of six healthcare EDI processing businesses. As part of its strategy of providing an integrated suite of EDI solutions to a broad range of healthcare providers, the Company has focused on acquisitions that provide entry into new markets or expand the Company's product suite. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or restructured various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. Innovations over the past decade in computer and telecommunications technologies have resulted in the development of EDI systems to electronically process and transmit information among the various participants in the healthcare industry. These systems were designed to replace the paper-based recording and transmission of information, enabling greater processing speed, reduced processing costs and more accurate data interchange. According to Health Data Directory, in 1998 over 4.4 billion electronic and paper claims will be paid in all sectors of the healthcare services market. From 1994 to 1998 (estimated), the proportion of total healthcare claims that were electronically processed increased from 47% to 62%. During such period the number of claims processed electronically increased at an average rate of 14% per year. The Company expects the electronic processing of healthcare claims to continue to increase as a result of increased reliance on electronic commerce and increased emphasis on cost containment in the healthcare industry. The penetration of electronic processing varies significantly among the different markets within the healthcare industry. Health Data Directory estimates that in 1998 electronic processing will account for approximately 16% of total dental claims, 40% of total physician medical claims, 84% of total hospital medical claims and 88% of total pharmacy claims. In addition to the opportunity to convert remaining paper-based claims to electronic processing, the Company believes that there is significant market potential for EDI processing in the non-claim area, including eligibility verification, remittance transactions and other data exchange transactions such as claims tracking, referrals and physician scripting. The Company believes that EDI penetration in these non-claim transaction categories is low, and as a result, the EDI transaction growth in these areas will exceed that of the EDI claims processing market. The Company believes that it has several competitive strengths which will enable it to capitalize on the significant growth opportunities in the healthcare EDI marketplace. 3 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............................ 12,613,084 shares (1)(2) USE OF PROCEEDS.................. To retire all outstanding subordinated indebtedness and accrued interest thereon, and a portion of outstanding bank indebtedness. PROPOSED NASDAQ NATIONAL MARKET SYMBOL...................... MEDE - ---------- (1) Reflects the proposed Recapitalization (as defined herein). (2) Excludes (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic Warrant (as defined herein), (ii) 84,050 shares of Common Stock issuable pursuant to the 1998 Guaranty Warrants (as defined herein) and (iii) 482,823 shares of Common Stock issuable upon the exercise of stock options outstanding as of December 31, 1998 under the MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Stock Plan"), of which 233,668 were exercisable at such date. The weighted average exercise price of all outstanding stock options is $4.84 per share. See "Recent Developments" and "Management -- Employee Benefit Plans." RECENT DEVELOPMENTS On July 17, 1998, the Company entered into a Transaction Processing Agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, medical service organizations ("MSOs") and physician practice management companies ("PPMs"). Under the Processing Agreement, the Company will undertake certain software development obligations, and from July 1, 1999 it will become the exclusive processor (subject to certain exceptions) of medical reimbursement claims for Medic's subscribers submitted to payors with whom MEDE AMERICA 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 increase, on October 7, 1998, the Company granted to such funds warrants (the "1998 Guaranty Warrants") to purchase an aggregate 84,050 shares of the Company's Common Stock, at a per share exercise price determined in the same manner as the Medic Warrant. The 1998 Guaranty Warrants are immediately exercisable and may be exercised up to five years after the date of grant. The Company's operating results for the three months ended December 31, 1997 and 1998 are summarized below: The Company's revenues for the three months ended December 31, 1998 were $13.0 million compared to $9.8 million for the three months ended December 31, 1997, representing an increase of 32%. Net loss for the three months ended December 31, 1998 was $1.1 million (or $.19 per share) compared to a net loss of $1.3 million (or $.23 per share) for the three months ended December 31, 1997, representing a decrease of 20% (or 17% on a per share basis). The Company expects that it will continue to incur net losses at least through the three months ending March 31, 1999. See "Risk Factors -- History of Operating Losses; Limited Operating History." For the three months ended December 31, 1998, EBITDA was $2.4 million, compared to $1.3 million for the three months ended December 31, 1997, representing an increase of 83%. The Company processed approximately 76.3 million transactions in the three months ended December 31, 1998 compared to approximately 54.7 million transactions processed in the corresponding period of the prior fiscal year, representing an increase of approximately 40%. On January 26, 1999, the Company entered into a Credit Agreement (the "New Credit Facility") with NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities LLC, as Syndication Agent, and the Company's subsidiaries as Guarantors. The New Credit Facility provides for a $25 million revolving credit facility that matures on January 26, 2002. The New Credit Facility is not guaranteed by any third party, but is secured by substantially all of the Company's assets including the stock of the Company's subsidiaries. The New Credit Facility contains various covenants and conditions, including those relating to Year 2000 compliance, changes in control and management and restrictions on the payment of dividends on the Common Stock. See "Dividend Policy." The closing of the initial lending under the New Credit Facility is anticipated to take place simultaneously with the consummation of the Offering. Such closing is subject to a number of conditions and covenants on the part of the Company. Assuming that the initial lending under the New Credit Facility takes place as scheduled, the Company intends to borrow sufficient funds under the New Credit Facility in order to repay all amounts outstanding under the existing Credit Facility. There can be no assurance that the closing of the initial lending under the New Credit Facility will take place on the terms contemplated or otherwise. 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 ................................ -- 107,030 126,211 188,114 Medical ................................. -- 15,687 23,075 31,564 Dental .................................. -- 6,021 12,188 14,681 --------- --------- --------- ---------- Total transactions processed .......... -- 128,738 161,474 234,359 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 53,466 53,466 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 65,949 70,202 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 of Notes to Consolidated Financial Statements of the Company. (4) During the periods presented, the Company made a series of acquisitions and divested certain non-core or unprofitable operations. Revenues attributable to these divested operations, which are included in the statement of operations data, were $1,709,000, $3,617,000, $2,252,000, $241,000 and $190,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months ended September 30, 1997, respectively. (5) Reflects the write-off of goodwill related to the acquisitions of Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"). (6) Reflects the write-down of costs relating to client lists and related allocable goodwill obtained in the acquisition of General Computer Corporation, subsequently renamed MEDE AMERICA Corporation of Ohio ("MEDE OHIO"). (7) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (8) Reflects (i) expenses of $2,864,000 relating to the spin-off of the Company by Card Establishment Services, Inc. ("CES") in the fiscal year ended June 30, 1995 and (ii) expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000 and $2,301,000 in the fiscal years ended June 30, 1996 and 1997, respectively. (9) Supplemental net loss per share, giving effect to the Recapitalization, would be $(0.62) and $(0.13) for the fiscal year ended June 30, 1998 and the three months ended September 30, 1998, respectively. (10) Gives effect to (i) the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the Offering, as if they had occurred on September 30, 1998. (11) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with generally accepted accounting principles ("GAAP") and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described below. The following table summarizes EBITDA and adjusted EBITDA for all periods presented:
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 of Notes to Consolidated Financial Statements of the Company. (2) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with GAAP and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described above. - ----------- Except as otherwise noted herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes no exercise of the Medic Warrant or the 1998 Guaranty Warrants and (iii) has been adjusted to give effect to a one-for-4.5823 reverse stock split of all outstanding Common Stock (the "Reverse Stock Split"). The Company's Preferred Stock, $.01 par value ("Preferred Stock"), provides for conversion of the aggregate liquidation value of the Preferred Stock, including accrued but unpaid dividends, into Common Stock at the initial public offering price per share. However, cash realized by the Company upon any exercise of the Underwriters' over-allotment option would be applied to the payment of accrued dividends on the Preferred Stock and the remainder of such accrued dividends would convert into Common Stock. Except as otherwise noted herein, each reference in this Prospectus to Common Stock issuable upon conversion of all of the Preferred Stock assumes a conversion price of $12.00. Based on an aggregate liquidation preference of the Preferred Stock of $32,420,358 (including $8,424,758 of accrued dividends) as of December 31, 1998, 2,701,643 shares of Common Stock would be so issuable as of such date. In addition, concurrently with the consummation of the Offering, an additional 59,926 shares of Common Stock will be issued upon the exercise of certain outstanding Common Stock purchase warrants. The Medic Warrant and the 1998 Guaranty Warrants, all having an exercise price equal to the price to the public in the Offering, will remain outstanding after the Offering. Such conversion of the Preferred Stock, and exercise of warrants to purchase 59,926 shares of Common Stock (on a "net exercise" basis), are referred to herein as the "Recapitalization." See "Capitalization," "Description of Common Stock," "Principal Stockholders" and "Underwriting." 9 RISK FACTORS In addition to other information contained in this Prospectus, prospective investors should carefully consider the following risk factors before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors and the matters set forth in this Prospectus generally. HISTORY OF OPERATING LOSSES; LIMITED OPERATING HISTORY The Company has experienced substantial net losses, including net losses of $16.6 million, $19.3 million, $8.8 million, $5.0 million and $1.1 million for the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months ended September 30, 1998, respectively. The Company had an accumulated deficit of approximately $51.3 million as of September 30, 1998. In connection with its acquisitions completed to date, the Company has incurred significant acquisition-related charges and will record significant amortization expense related to goodwill and other intangible assets in future periods. There can be no assurance that the Company will be able to achieve or sustain revenue growth or profitability on a quarterly or annual basis. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's operating history is limited. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with limited operating histories, particularly companies in new and rapidly evolving markets such as EDI and transaction processing. Such risks include, but are not limited to, an evolving and unpredictable business model and the difficulties inherent in the management of growth. To address these risks, the Company must, among other things, maintain and increase its client base, implement and successfully execute its business and marketing strategies, continue to develop and upgrade its technology and transaction-processing systems, provide superior client service, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks or in achieving profitability, and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. ACQUISITION STRATEGY; NEED FOR ADDITIONAL CAPITAL The Company's strategy includes acquisitions of healthcare EDI businesses that complement or supplement the Company's business. The success of such a strategy will depend on many factors, including the Company's ability to identify suitable acquisition candidates, the purchase price and the availability and terms of financing. Significant competition for acquisition opportunities exists in the healthcare EDI industry, which may significantly increase the costs of and decrease the opportunities for acquisitions. Although the Company is actively pursuing possible acquisitions, there can be no assurance that any acquisition will be consummated. No assurances can be given that the Company will be able to operate any acquired businesses profitably or otherwise successfully implement its expansion strategy. The Company may finance future acquisitions through borrowings or the issuance of debt or equity securities. Any borrowings would increase the Company's interest expense and any issuance of equity securities could have a dilutive effect on the holders of Common Stock. The Company will not be able to account for acquisitions under the "pooling of interests" method for at least two years following the Offering. Accordingly, such future acquisitions may result in significant goodwill and a corresponding increase in the amount of amortization expense and could also result in write-downs of purchased assets, all of which could adversely affect the Company's operating results in future periods. The Credit Facility is scheduled to terminate on October 29, 1999. Although the Company has entered into the New Credit Facility to provide up to $25 million in financing for working capital and other uses beyond such date, the obligations of the lenders to close the initial funding under the New Credit Facility are subject to a number of conditions and there can be no assurance that such financing 10 will be made available. Accordingly, there can be no assurance that the Company will be able to obtain financing on terms favorable to the Company and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. INTEGRATION OF ACQUIRED BUSINESSES The success of the Company's acquisition strategy also depends to a large degree on the Company's ability to effectively integrate the acquired products and services, facilities, technologies, personnel and operations into the Company. The process of integration often requires substantial management attention and other corporate resources, and the Company may not be able to accurately predict the resources that will be needed to integrate acquired operations. There can be no assurance that the Company will be able to effectively integrate any or all acquired companies or operations. Any failure to do so could result in operating inefficiencies, redundancies, management distraction or technological difficulties (among other possible adverse consequences), any of which could have a material adverse effect on the Company's business, financial condition and results of operations. EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards and the frequent introduction of new and enhanced services. The Company's success will depend upon its ability to enhance its existing services, to introduce new products and services on a timely and cost-effective basis to meet evolving client requirements, to achieve market acceptance for new products or services and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company will be able to respond effectively to technological changes or new industry standards. Moreover, there can be no assurance that other companies will not develop competitive products or services, or that any such competitive products or services will not have an adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON CONNECTIONS TO PAYORS The Company's business is enhanced by the substantial number of payors (such as insurance companies, Medicare and Medicaid agencies and Blue Cross/Blue Shield organizations) to which the Company has electronic connections. These connections may either be made directly or through a clearinghouse or other intermediary. The Company has attempted to enter into suitable contractual relationships to ensure long term payor connectivity; however, there can be no assurance that the Company will be able to maintain its links with all payors with whom it currently has connections. In addition, there can be no assurance that the Company will be able to develop new connections (either directly or through clearinghouses) on satisfactory terms, if at all. Lastly, certain third-party payors provide EDI systems directly to healthcare providers, bypassing third-party processors such as the Company. The failure to maintain its existing connections with payors and clearinghouses or to develop new connections as circumstances warrant, or an increase in the utilization of direct links between providers and payors, could have a material adverse effect on the Company's business, financial condition and results of operations. DEVELOPMENT OF EDI PROCESSING IN THE HEALTHCARE INDUSTRY The Company's strategy anticipates that electronic processing of healthcare transactions, including transactions involving clinical as well as financial information, will become more widespread and that providers and third-party payors increasingly will use EDI processing networks for the processing and transmission of data. Electronic transmission of healthcare transactions is still developing, and complexities in the nature and types of transactions which must be processed have hindered, to some degree, the development and acceptance of EDI processing in this market. There can be no assurance that continued conversion from paper-based transaction processing to EDI processing in the healthcare industry will occur or that, to the extent it does occur, healthcare providers and payors will use independent processors such as the Company. Furthermore, if EDI processing extensively penetrates the healthcare 11 market or becomes highly standardized, it is possible that competition among transaction processors will focus increasingly on pricing. If competition causes the Company to reduce its pricing in order to retain market share, the Company may suffer a material adverse change in its business, financial condition and results of operations. POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS The Company's quarterly operating results have varied significantly in the past and are likely to vary from quarter to quarter in the future. Quarterly revenues and operating results may fluctuate as a result of a variety of factors, including: integration of acquired businesses; seasonal variability of demand for healthcare services generally; the number, timing and significance of announcements and releases of product enhancements and new products by the Company and its competitors; the timing and significance of announcements concerning the Company's present or prospective strategic alliances; the loss of clients due to consolidation in the healthcare industry; legislation or changes in government policies or regulations relating to healthcare EDI processing; delays in product installation requested by clients; the length of the sales cycle or the timing of sales; client budgeting cycles and changes in client budgets; marketing and sales promotional activities; software defects and other quality factors; and general economic conditions. The Company's operating expense levels, which will increase with the addition of acquired businesses, are relatively fixed. If revenues are below expectations, net income is likely to be disproportionately adversely affected. Further, in some future quarters the Company's revenues or operating results may be below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock would likely be materially adversely affected. See "Summary -- Quarterly Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Operating Results." PROPOSED HEALTHCARE DATA CONFIDENTIALITY LEGISLATION Legislation that imposes restrictions on third-party processors' ability to analyze certain patient data without specific patient consent has been introduced in the U.S. Congress. Although the Company does not currently access or analyze individually identifiable patient information, such legislation, if adopted, could adversely affect the ability of third-party processors to transmit information such as treatment and clinical data, and could adversely affect the Company's ability to expand into related areas of the EDI healthcare market. In addition, the Health Insurance Portability and Accountability Act, passed in 1997, mandates the establishment of federal standards for the confidentiality, format and transmission of patient data, as well as recordkeeping and data security obligations. It is possible that the standards so developed will necessitate changes to the Company's operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The Company faces significant competition from healthcare and non-healthcare EDI processing companies. The Company also faces potential competition from other companies, such as vendors of provider information management systems, which have added or may add their own proprietary EDI processing systems to existing or future products and services. Competition may be experienced in the form of pressure to reduce per transaction prices or eliminate per transaction pricing altogether. If EDI processing becomes the standard for claims and information processing, a number of larger and better capitalized entities may elect to enter the industry and further increase competitive pricing pressures. Many of the Company's existing and potential competitors are larger and have significantly greater financial, marketing, technological and other resources than the Company. There can be no assurance that increased competition will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business - -- Competition." 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, 12 using a variety of different technologies. However, the occurrence of an event that overcomes the data processing and transmission redundancies then in place could lead to service interruptions and could have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, prior to January 1, 2000, computer systems and/or software used by many companies (including the Company) will need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential consequences of the Year 2000 phenomenon. Although the Company currently offers software products that are designed or have been modified to comply with the Year 2000 requirements, the Company has identified certain products and services which it believes are not Year 2000 compliant. While the Company has plans to address such problems, there can be no assurance that the costs of bringing these systems into compliance will not be significantly greater than expected, that compliance will be achieved in a timely manner, or that providers and payors will bring their systems into Year 2000 compliance in a timely manner. The failure to achieve Year 2000 compliance in a timely manner could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Year 2000 Compliance." In October 1998 the Company acquired HII. HII's EDI products and services fall into three categories: physician claims processing, hospital claims processing and claims data transmission (extraction and transmission of claims data to a third party data analyst). Based on its review at the time of the acquisition, the Company determined that none of these products is Year 2000 compliant. Prior to the HII acquisition, certain employees and officers of HII made express and implied representations to a number of HII's clients that HII's systems would be Year 2000 compliant by January 1, 1999. While the Company is actively engaged in a remediation program to provide HII's clients with Year 2000 compliant products and services, it is likely that such remediation program will not be completed prior to mid-1999. Consequently, certain of HII's clients may elect to terminate their relationships with HII. The New Credit Facility contains a covenant on the part of the Company to cause its products to be Year 2000 compliant by September 30, 1999. Failure to achieve such compliance on a timely basis would create a default under the New Credit Facility. There can be no assurance that such compliance will be achieved on a timely basis. Failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Year 2000 Compliance." DEPENDENCE ON KEY PERSONNEL The Company's performance depends in significant part on the continued service of its executive officers, its product managers and key sales, marketing and development personnel. The Company considers its key management personnel to be Thomas P. Staudt, President and Chief Executive Officer, William M. McManus, Linda K. Ryan and Roger L. Primeau, in charge of the pharmacy, medical and dental operations, respectively, James T. Stinton, the Company's Chief Information Officer, and Richard P. Bankosky, the Company's Chief Financial Officer. No single individual is considered by the Company to be critical to the Company's success. The Company does not maintain employment agreements with these officers or other employees (with limited exceptions) and the failure to retain the services of such persons could have a material adverse effect on the Company's business, financial condition and results of operations. 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 sys- 13 tem at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including investments in the Company's products and services. In addition, many healthcare providers are consolidating to create larger healthcare delivery organizations. This consolidation reduces the number of potential clients for the Company's services, and the increased bargaining power of these organizations could lead to reductions in the amounts paid for the Company's services. Other healthcare information companies, such as billing services and practice management vendors, which currently utilize the Company's services, could develop or acquire transaction processing and networking capabilities and may cease utilizing the Company's services in the future. The impact of these developments in the healthcare industry is difficult to predict and could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent that the current trend toward consolidation in the industry continues, MEDE AMERICA may find it more difficult to obtain access to payors, information providers and practice management software vendors on whom its ability to deliver services and enroll new clients now depends. Loss of access to these industry participants could materially adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT The Company's ability to compete effectively depends to a significant extent on its ability to protect its proprietary information. The Company relies on a combination of statutory and common law copyright, trademark and trade secret laws, client licensing agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. The Company does not include in its software any mechanisms to prevent or inhibit unauthorized use, but generally enters into confidentiality agreements with its consultants, clients and potential clients and limits access to, and distribution of, its proprietary information. The Company has not filed any patent applications with respect to its intellectual property. It is the Company's policy to defend its intellectual property; however, there can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company is also subject to the risk of alleged infringement by it of intellectual property rights of others. Although the Company is not currently aware of any pending or threatened infringement claims with respect to the Company's current or future products, there can be no assurance that third parties will not assert such claims. Any such claims could require the Company to enter into license arrangements or could result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Furthermore, litigation may be necessary to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects that software developers will increasingly be subject to such claims as the number of products and competitors providing software and services to the healthcare industry increases and overlaps occur. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. 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 14 will not occur in products under development or in enhancements to current products. Any such errors or failures could result in loss of revenues and clients, delay in market acceptance, diversion of development resources, damage to the Company's reputation or increased service costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company has not experienced any material product defects. CONTROL BY EXISTING STOCKHOLDERS After the Offering, 48.3% of the Common Stock will be owned by investment funds affiliated with WCAS and 7.7% will be owned by investment funds affiliated with WBCP. See "Principal Shareholders" and "Description of Capital Stock -- Recapitalization." As a result of this concentration of ownership, these shareholders may be able to exercise control over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such control may have the effect of delaying or preventing a change in control of the Company. The Company's Board of Directors currently includes Thomas E. McInerney and Anthony J. de Nicola, designees of WCAS, and Timothy M. Murray, a designee of WBCP. The funds affiliated with WCAS may be deemed to be controlled by their respective general partners, the general partners of each of which include some or all of the following individuals: Thomas E. McInerney and Anthony J. de Nicola, directors of the Company, Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Andrew M. Paul, Robert A. Minicucci, Paul B. Queally and Laura M. VanBuren. The funds affiliated with WBCP may be deemed to be controlled by their respective general partners, the general partners of which include William Blair & Company L.L.C. and certain of its employees, including Timothy E. Murray, a director of the Company. NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price has been determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the market price of the Common Stock in the future. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The stock market has from time to time experienced extreme price and volume fluctuations, particularly in the securities of technology companies, which have often been unrelated to the operating performance of individual companies. Announcements of technological innovations or new and enhanced commercial products by the Company or its competitors, market conditions in the industry, developments or disputes concerning proprietary rights, changes in earnings, economic and other external factors, political and other developments and period-to-period fluctuations in financial results of the Company may have a significant impact on the market price and marketability of the Company's Common Stock. Fluctuations in the trading price of the Common Stock may also adversely affect the liquidity of the trading market for the Common Stock. POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS The Company's Board of Directors is authorized to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that may be issued in the future. While the Company has no present intention to issue shares of Preferred Stock, any such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have 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" 15 with an "interested stockholder" for a period of three years after the date of the transaction in which such person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of these provisions could have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Amended and Restated Certificate of Incorporation and the Company's Bylaws could also have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Laws and Certain Charter and Bylaw Provisions; Anti-Takeover Measures." SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE Sales of Common Stock (including Common Stock issued upon the exercise of outstanding stock options) in the public market after this Offering could materially adversely affect the market price of the Common Stock. Upon the completion of this Offering and giving effect to the Recapitalization, the Company will have 12,613,084 shares of Common Stock outstanding, assuming no exercise of stock options and no exercise of the Underwriters' over-allotment option. Of these outstanding shares of Common Stock, the 4,166,667 shares sold in this Offering will be freely tradeable, without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 8,446,417 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act and were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be resold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144 under the Securities Act. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, approximately 8,202,876 shares of Common Stock and options to purchase 482,823 shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this Prospectus without the prior written consent of Salomon Smith Barney Inc. Upon expiration of the lock-up agreements, all shares of Common Stock currently outstanding will be immediately eligible for resale, subject to the requirements of Rule 144. The Company is unable to predict the effect that sales may have on the then prevailing market price of the Common Stock. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and "Shares Eligible for Future Sale." BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS Prospective investors should be aware that current holders of the Company's Common Stock and Preferred Stock will benefit from the Offering. Approximately $25.2 million of the net proceeds of the Offering will be used to prepay all then outstanding principal and accrued interest on a Senior Subordinated Note (as herein defined) held by WCAS Capital Partners II, L.P., one of the Company's principal stockholders. In addition, approximately $19.6 million of the net proceeds will be used to reduce outstanding indebtedness and accrued interest under the Credit Facility. If the Underwriters' overallotment option is exercised, the cash realized by the Company therefrom will be applied to the payment of accrued dividends on the Preferred Stock (which amounted to $8,424,758 as of December 31, 1998) and the remainder of such accrued dividends would convert into Common Stock. The Company has entered into a New Credit Facility, which is not guaranteed by a third party. The existing Credit Facility is guaranteed by the Company's four principal stockholders. 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." 16 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 and the New Credit Facility prohibit the Company from paying dividends on the Common Stock. See "Dividend Policy." RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS This Prospectus contains certain statements that are "forward-looking statements," which include, among other things, the discussions of the Company's business strategy and expectations concerning developments in the healthcare EDI industry, the Company's market position, future operations, transaction growth, margins and profitability, and liquidity and capital resources. Investors in the Common Stock offered hereby are cautioned that such forward-looking statement involves risks and uncertainties, and that although the Company believes that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved. 17 THE COMPANY MEDE AMERICA is a leading provider of EDI products and services to a broad range of providers and payors in the healthcare industry. The Company offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, the Company's EDI products reduce processing costs, increase collection rates and result in more accurate data interchange. The Company maintains over 540 direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payors, as well as over 500 indirect connections with additional payors through claims clearinghouses. As of December 31, 1998, the Company processed over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of Card Establishment Services, Inc. ("CES"), in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., Medical Processing Center, Inc. ("MPC") and Wellmark, Inc. ("Wellmark"), which comprised the heathcare services business of CES, historically provided EDI services to hospitals and physicians. After the spin-off, the Company made several strategic acquisitions to strengthen its core hospital/medical business and to expand into the pharmaceutical and dental markets. In March 1995, the Company acquired General Computer Corporation, subsequently renamed MEDE AMERICA Corporation of Ohio (referred to herein as "MEDE OHIO"), a developer of EDI systems and services for the pharmaceutical industry, and in June 1995 the Company acquired Latpon Health Systems, Incorporated ("Latpon"), a developer of proprietary EDI claims processing software for hospitals and physicians. These acquisitions were followed by acquisitions of Electronic Claims and Funding, Inc. ("EC&F"), and Premier Dental Systems, Corp. ("Premier"), in October 1995. These companies were engaged in the EDI and management software businesses in the dental market. The Company enhanced its presence in the pharmacy market by acquiring Time-Share Computer Systems, Inc. ("TCS"), in February 1997 and The Stockton Group, Inc. ("Stockton") in November 1997. Healthcare Interchange, Inc. ("HII"), a provider of transaction processing services to hospitals and physician groups, was acquired in October 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." The Company's executive offices are located at 90 Merrick Avenue, Suite 501, East Meadow, New York 11554, and its telephone number is (516) 542-4500. 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, assuming an initial public offering price of $12.00 per share, are estimated to be $44.8 million ($51.8 million if the Underwriters' over-allotment option is exercised in full), after deducting the estimated offering fees and expenses payable by the Company. The Company intends to use the net proceeds from the Offering as follows: (i) approximately $25.2 million to prepay all then outstanding principal and accrued interest on its outstanding 10% Senior Subordinated Note due February 14, 2002 (the "Senior Subordinated Note") and (ii) the balance (approximately $19.6 million) to reduce the outstanding indebtedness and accrued interest under the Credit Facility. Cash realized by the Company upon any exercise of the Underwriters' over-allotment option would be applied to the payment of accrued dividends on the Preferred Stock and the remainder of such accrued dividends would convert into Common Stock. As of December 31, 1998, such accrued dividends totaled $8,424,758. See "Certain Transactions." Pending application to the foregoing uses, such proceeds will be invested in short-term, investment-grade, interest-bearing obligations. DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Credit Facility and the New Credit Facility prohibit the payment of 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 10,493 Other debt ................................... 1,222 1,222 --------- --------- Total long-term debt ....................... 42,627 11,715 --------- --------- Redeemable cumulative preferred stock ......... 31,823 -- --------- --------- Stockholders' (deficit) equity Common Stock(2) .............................. 57 127 Additional paid-in capital ................... 27,521 104,074 Accumulated deficit .......................... (51,328) (52,873) --------- --------- Total stockholders' (deficit) equity ......... (23,750) 51,328 --------- --------- Total capitalization ......................... $ 50,700 $ 63,043 ========= =========
- ---------- (1) As adjusted to reflect (i) additional borrowings of $11.7 million in connection with the acquisition of HII in October 1998, (ii) the Recapitalization and (iii) the sale of 4,166,667 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the anticipated application of the estimated net proceeds therefrom. (2) Excludes (i) 1,250,000 shares of Common Stock issuable pursuant to the Medic Warrant, (ii) 84,050 shares of Common Stock issuable pursuant to the 1998 Guaranty Warrants and (iii) 482,823 shares of Common Stock reserved for issuance upon exercise of stock options outstanding under the Stock Plan as of December 31, 1998, at a weighted average exercise price of $4.84 per share, of which 233,668 were exercisable at such date. See "Prospectus Summary -- Recent Developments" and "Management-Employee Benefit Plans." Includes 59,926 shares of Common Stock issuable upon exercise of Common Stock purchase warrants as contemplated by the Recapitalization. See "Description of Capital Stock." 20 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 services...... 10,765 298 1,313 -- Research and development ................. 3,941 43 -- -- General and administrative ............... 4,865 161 1,001 -- Depreciation and amortization ............ 7,143 54 200 1,270 (5) (22)(6) -------- Total operating expenses .................. 43,672 772 4,193 1,277 --------- ------ ------ -------- Income (loss) from operations ............. (1,382) 874 751 (1,277) Other (income) expense .................... (12) -- -- -- Interest expense (income), net ............ 3,623 27 190 791 (7) --------- ------ ------ -------- Income (loss) before provision for income taxes (Income from continu- ing operations as it relates to HII) ..... (4,993) 847 561 (2,068) Provision for income taxes ................ 42 -- -- -- --------- ------ ------ -------- Net income (loss) (Income from con- tinuing operations as it relates to HII) ..................................... (5,035) 847 $ 561 (2,068) ====== Preferred stock dividends ................. (2,400) -- -- --------- ------ -------- Net income (loss) applicable to common stockholders ...................... $ (7,435) $ 847 $ (2,068) ========= ====== ======== Basic and diluted net loss per common share .................................... $ (1.31) Weighted average common shares outstanding - Basic and diluted .......... 5,679 -- 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 services...... -- 12,376 -- 12,376 Research and development ................. -- 3,984 -- 3,984 General and administrative ............... -- 6,027 -- 6,027 Depreciation and amortization ............ -- 8,645 -- 8,645 -- ---------- Total operating expenses .................. -- 49,914 -- 49,914 ---------- --------- ---------- --------- Income (loss) from operations ............. -- (1,034) -- (1,034) Other (income) expense .................... -- (12) -- (12) Interest expense (income), net ............ -- 4,631 (3,992)(8) 639 ---------- --------- ---------- --------- Income (loss) before provision for income taxes (Income from continu- ing operations as it relates to HII) ..... -- (5,653) 3,992 (1,661) Provision for income taxes ................ -- 42 -- 42 ---------- --------- ---------- --------- Net income (loss) (Income from con- tinuing operations as it relates to HII) ..................................... -- (5,695) 3,992 (9) (1,703) Preferred stock dividends ................. 2,400 (10) -- -- -- ---------- --------- ---------- --------- Net income (loss) applicable to common stockholders ...................... $ 2,400 $ (5,695) $ 3,992 $ (1,703) ========== ========= ========== ========= Basic and diluted net loss per common share .................................... $ (0.14) Weighted average common shares outstanding - Basic and diluted .......... 2,462 (11) 8,141 4,167 (12) 12,308
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL ADJUSTMENTS ----------------------- RELATING TO THE COMPANY HII(13) HII ACQUISITION ------------- --------- ----------------- Revenues ................................. $ 12,006 $1,312 $ -- Operating expenses: Operations .............................. 4,793 479 -- Sales, marketing and client services..... 2,930 278 -- Research and development ................ 1,106 -- -- General and administrative .............. 1,263 248 -- Depreciation and amortization ........... 1,894 44 239 (5) --------- ------ ------ Total operating expenses ................. 11,986 1,049 239 --------- ------ ------ Income (loss) from operations ............ 20 263 (239) Other (income) expense ................... -- -- -- Interest expense (income), net ........... 1,089 64 120 (7) --------- ------ ------ Income (loss) before provision for income taxes ............................ (1,069) 199 (359) Provision for income taxes ............... 16 -- -- --------- ------ ------ Net income (loss) ........................ (1,085) 199 (359) Preferred stock dividends ................ (600) (23) 23 (14) --------- ------ ------ Net income (loss) applicable to common stockholders ..................... $ (1,685) $ 176 $ (336) ========= ====== ====== Basic and diluted net loss per common share ................................... $ (0.30) Weighted average common shares outstanding - Basic and diluted ......... 5,685 -- 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 services..... -- 3,208 -- 3,208 Research and development ................ -- 1,106 -- 1,106 General and administrative .............. -- 1,511 -- 1,511 Depreciation and amortization ........... -- 2,177 -- 2,177 ---------- --------- ---------- -------- Total operating expenses ................. -- 13,274 -- 13,274 ---------- --------- ---------- -------- Income (loss) from operations ............ -- 44 -- 44 Other (income) expense ................... -- -- -- -- Interest expense (income), net ........... -- 1,273 (1,059)(8) 214 ---------- --------- ---------- -------- Income (loss) before provision for income taxes ............................ -- (1,229) 1,059 (170) Provision for income taxes ............... -- 16 -- 16 ---------- --------- ---------- -------- Net income (loss) ........................ -- (1,245) 1,059 (9) (186) Preferred stock dividends ................ 600 (10) -- -- -- ---------- --------- ---------- -------- Net income (loss) applicable to common stockholders ..................... $ 600 $ (1,245) $ 1,059 $ (186) ========== ========= ========== ======== Basic and diluted net loss per common share ................................... $ (0.02) Weighted average common shares outstanding - Basic and diluted ......... 2,462 (11) 8,147 4,167 (12) 12,314
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. The Company's acquisition of HII was consummated on October 30, 1998. For the month of October 1998, HII reported a net loss of $653,000 (compared to a net loss of $104,000 for the corresponding month of the prior year). For the month of October 1998, HII's loss from continuing operations (which were the only operations of HII acquired by the Company) was $653,000 (compared to income of $70,000 for the corresponding month of the prior year). The decrease was primarily attributable to charges incurred in connection with the acquisition of HII by the Company, including $467,000 of banking and legal fees, $74,000 of severance payments and a $263,000 charge relating to the settlement of stock options owned by a terminated executive. 24 - ---------- (1) As restated, to adjust the write-off of acquired in-process research and development and the amortization of goodwill resulting from the TCS acquisition. See Note 13 of Notes to Consolidated Financial Statements of the Company. (2) Represents the historical results of operations of Stockton from July 1, 1997 through the date of acquisition by the Company in November 1997. (3) Represents the historical continuing operations of HII for the 12 months ended June 30, 1998. Discontinued operating segments of HII were not acquired by the Company. The loss from such discontinued operations of HII for the 12 months ended June 30, 1998 was $4,395,000. (4) Represents rent expense relating to a new operating lease for the Stockton facility. (5) Represents adjustments for amortization expense related to the acquisitions of Stockton and HII as if they had occurred July 1, 1997, as follows:
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 $2,000,000 as of July 1, 1997. Such charge has been excluded from the pro forma statements of operations. (10) Represents the elimination of the dividends accrued on the Preferred Stock due to the Recapitalization. (11) Represents the conversion of the Preferred Stock and accrued dividends thereon into Common Stock due to the Recapitalization. (12) Represents the sale by the Company of 4,166,667 shares of Common Stock in the Offering. (13) Represents the historical continuing operations of HII for the three months ended September 30, 1998. (14) Represents the elimination of the dividends accrued on HII's preferred stock. 25 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) (1,545)(10) (52,873) ------------ --------- ------------ --------- 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 certain 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 .................................. -- 107,030 126,211 188,114 38,513 53,466 Medical ................................... -- 15,687 23,075 31,564 7,762 8,348 Dental .................................... -- 6,021 12,188 14,681 3,546 4,135 --------- --------- --------- --------- -------- ------- Total transactions processed ............. -- 128,738 161,474 234,359 49,821 65,949 Transactions per FTE (9)(10) ............... -- 321 415 642 137 174 Revenue per FTE (10) ....................... $ 48 $ 79 $ 91 $ 116 $ 25 $ 32 Operating expenses per transaction (9) ..... -- 0.39 0.27 0.19 0.21 0.18
(1) As restated, to adjust the write-off of acquired in-process research and development and the amortization of goodwill resulting from the TCS acquisition. See Note 13 of Notes to Consolidated Financial Statements of the Company. (2) During the periods presented, the Company made a series of acquisitions and divested certain non-core or unprofitable operations. Revenues attributable to these divested operations, which are included in the statement of operations data, were $1,709,000, $3,617,000, $2,252,000, $241,000 and $190,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and the three months ended September 30, 1997, respectively. (3) Reflects the write-off of goodwill related to the acquisitions of MPC and Wellmark. (4) Reflects the write-down of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. (5) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (6) Reflects (i) expenses of $2,864,000 relating to the spin-off of the Company by CES in the fiscal year ended June 30, 1995 and (ii) expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000 and $2,301,000 in the fiscal years ended June 30, 1996 and 1997, respectively. (7) Supplemental net loss per share, giving effect to the Recapitalization, would be $(0.62) and $(0.13) for the fiscal year ended June 30, 1998 and the three months ended September 30, 1998, respectively. (8) EBITDA represents net income (loss) plus provision for income taxes, net interest expense, other (income) expense and depreciation and amortization. EBITDA is not a measurement in accordance with GAAP and should not be considered an alternative to, or more meaningful than, earnings (loss) from operations, net earnings (loss) or cash flow from operations as defined by GAAP or as a measure of the Company's profitability or liquidity. Not all companies calculate EBITDA in the same manner and, accordingly, EBITDA shown herein may not be comparable to EBITDA shown by other companies. The Company has included information concerning EBITDA herein because management believes EBITDA provides useful information. Adjusted EBITDA represents EBITDA plus certain other charges as described below. The following table summarizes EBITDA and adjusted EBITDA for all periods presented:
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 business day for over 65,000 providers located in all 50 states. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., MPC and Wellmark, which comprised the heathcare services business of CES, historically provided EDI services to hospitals and physicians. Their combined financial results were reflected in the fiscal 1995 financial statements on a full year basis. Since its formation, the Company has expanded both through internal growth and the acquisition of six healthcare transaction processing businesses. As part of its strategy of providing an integrated suite of EDI products to a broad range of healthcare providers, the Company has focused on acquisitions that provide entry into new markets or expand the Company's product suite. All acquisitions have been accounted for under the purchase method of accounting. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or modified various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. These integration activities impacted the Company's financial results in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and are ongoing. 30 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 certain assets of TCS, a provider of pharmacy switching and PBM transaction processing systems and services for pharmacies and eligibility verification services for physicians, for a total cash payment of $11,465,000, including transaction expenses. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $11,065,000, consisting of $1,556,000 of in-process research and development, $2,984,000 of software and $6,525,000 of goodwill. As of the date of the acquisition, the Company wrote off the acquired in-process research and development which had not reached technological feasibility and had no alternative future use. The Company generally is amortizing the software over three years and is amortizing the goodwill over seven years. The in-process research and development acquired from TCS consisted of advanced Windows software technology for PC and client server platforms for healthcare EDI transactions. Products under development included: (1) a plan member eligibility verification product for workers compensation; (2) a medical claims processing system to meet the HCFA 1500 EDI industry standard; and (3) a switching system for internet claims from retail pharmacies. At the time of the acquisition, the Company estimated that continued development activities for six months to one year resulting in additional estimated research and development costs of $460,000 would be required in order to prove feasibility and bring the project to commercial viability. It was the opinion of management that such projects had an above average probability of successful completion and could contribute to revenue, profit and cash flow within 18 to 24 months from the date of purchase. At this time, all three projects are substantially complete. However, any or all of these projects could fail to produce an economic gain. Such failure, if encountered, would not affect the Company's current product suite and financial results, but would decrease the Company's opportunities for growth. Estimated costs to complete the acquired in-process research and development projects as of the date of acquisition were as follows: ESTIMATED RESEARCH AND DEVELOPMENT EXPENSE (IN THOUSANDS)
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, such 33 failure would not affect the Company's current suite of products or, in management's opinion, have a material impact on the Company's results of operations or overall financial condition. In November 1997, the Company acquired certain assets and assumed certain liabilities of Stockton, a provider of PBM transaction processing systems and related services for the pharmacy market. Stockton was purchased for an initial cash payment of $10,674,000 including transaction expenses, and a contingent earnout payment based upon the achievement of certain revenue growth targets. If such revenue targets are achieved over the 12-month period ending September 30, 1998, a maximum payment of $2,600,000 (plus interest at an annual rate of 7.25%) will be made. Based on revenues recorded through September 30, 1998 by Stockton, the Company has accrued additional contingent consideration of $2,022,000 as of September 30, 1998 which was treated as additional purchase price and was, therefore, added to goodwill. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of $10,414,000, consisting of $2,133,000 of software and client lists and $8,281,000 of goodwill. The Company generally is amortizing the software over five years and is amortizing the client lists and goodwill over five years and 20 years, respectively. In October 1998, the Company acquired HII, a provider of EDI transaction processing services to hospitals and physician groups in Missouri, Kansas and Illinois. Prior to the purchase of HII, Intercare and Telemedical, two unrelated healthcare services divisions, were divested from HII in separate transactions. The Company did not acquire such businesses or any proceeds from the disposition thereof. HII was purchased for a total cash payment of approximately $11,718,000, including transaction expenses. The acquisition was accounted for under the purchase method and the Company recorded total intangible assets of approximately $11,013,000, consisting of $2,713,000 of client lists and approximately $8,300,000 of goodwill. The Company is amortizing the client lists over five years and goodwill over 20 years. Revenues Revenues are derived from the sale of transaction processing products and services primarily on a fee-for-transaction basis. Transaction fees vary depending upon transaction type and service provided. The Company currently receives fees from providers for the majority of its transactions including claims processing, eligibility verification, claims switching, pharmacy script processing and tracking and Medicaid enrollment. The Company also receives fees from payors for the transmission of electronic claims and formulary payments from pharmaceutical manufacturers relating to the Company's PBM script processing and management reporting services. These transaction-based revenues comprise the predominant portion of the Company's total revenues and tend to be recurring. Other revenue is derived from one-time payments related to installation and implementation services, software license fees and EDI systems equipment sales. See "Business -- Suite of EDI Products and Services." Transaction-based revenues and related formulary services revenues (if applicable), which collectively constitute the majority of the Company's total revenues, are recognized at the time the transactions are processed and the services are provided. Revenues associated with software support and implementation fees, each constituting less than 3% of the Company's revenues for the fiscal year ended June 30, 1998, are recognized ratably over the contract period or as the service is provided. Revenue from licensing of software, which also constitutes less than 3% of the Company's total revenues for the fiscal year ended June 30, 1998, is recognized upon installation if it is determined that the Company has no significant remaining obligations and collectibility of the resulting receivable is considered probable. Operating Expenses Operations Expense. Operations expense consists of data and voice telecommunications expense, salaries and benefits for operations employees and other costs associated with transaction processing and services provided to clients, such as network and telecommunications, maintenance, computer operations and systems administration, facilities and other additional indirect expenses. Since 1996, operations expense as a percentage of revenues and operations expense per transaction have declined as a result of the Company's integration and restructuring efforts and increased operating leverage. Restructuring charges recorded in connection with the Company's integration activities have resulted in variability in the Company's quarterly operating results. 34 Sales, Marketing and Client Services Expense. Sales, marketing and client services expense consists primarily of salaries, benefits, commissions and related indirect costs and expenditures for marketing programs, trade shows, advertising, help desk software and related client communications. As the Company continues to implement its growth strategy, sales, marketing and client services expenses are expected to continue to increase. Research and Development Expense. Research and development expense consists primarily of salaries, benefits and related indirect expenses associated with the design, research and development of new products and enhancements to existing current products. The development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility has been established, any additional software development costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." Amortization of purchased software and technology and of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of three to five years is assigned to purchased software and technology and an original estimated economic life of five years is assigned to capitalized software development costs. Amortization begins in the period in which the related product is available for general release to customers. During the fiscal year ended June 30, 1998 and the three months ended September 30, 1998, the Company capitalized $462,000 and $239,000, respectively, of software development costs for projects for which technological feasibility has been established but were not yet available for client release. Prior to July 1, 1997, the Company did not have any software development projects for which significant development costs were incurred between the establishment of technological feasibility and general client release of the product. The Company believes that the development of enhanced and new product offerings are essential to remaining competitive and it expects that development expenses will increase in the future. General and Administrative Expense. General and administrative expense primarily consists of salaries, benefits and related indirect costs for the administrative, executive, finance, legal, human resources and internal systems personnel, as well as accounting and legal fees. As the Company implements its growth strategy, general and administrative expenses are expected to increase. Depreciation and Amortization Expense. The Company depreciates the cost of its tangible capital assets on a straight-line basis over the estimated economic life of the asset: three to five years for computer equipment, five years for furniture and fixtures, and 20 to 25 years for buildings and improvements. Acquisition-related intangible assets, which include the value of software and client lists, are amortized based on the estimated useful economic life of the asset at the time of acquisition, and therefore will vary among acquisitions. The Company recorded amortization expense relating to goodwill and other intangible assets of $3,708,000 and $5,064,000 during the fiscal years ended June 30, 1997 and 1998, respectively. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations of the Company expressed as a percentage of total revenues.
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 of Notes to Consolidated Financial Statements of the Company. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Revenues Revenues for the three months ended September 30, 1998 were $12.0 million compared to $9.2 million in the corresponding period of fiscal 1998, representing an increase of 30%. The increase was primarily attributable to growth of the existing business and to incremental revenue from the acquisition of Stockton in November 1997, partially offset by the loss of revenues from operations that were divested. The Company processed 66 million transactions in the three months ended September 30, 1998, compared to 50 million transactions processed in the corresponding period of fiscal 1998, representing an increase of 32%. The increase resulted from the addition of new clients, increased transaction volume from existing clients and to a lesser extent the acquisition of Stockton. The average price per transaction received by the Company declined by 8% between such periods, as a result of a relatively higher proportion of lower-priced Pharmacy division switching transactions compared to the other divisions' higher-priced transactions, and a greater portion of transactions that were processed under contracts with volume-based pricing terms. Operating Expenses Operations expense was $4.8 million for the three months ended September 30, 1998, compared to $4.3 million in the corresponding period of fiscal 1998, representing an increase of 12%. As a percentage of revenues, operations expense decreased from 46% for the first three months of fiscal 1998 to 40% in the corresponding period of fiscal 1999. The increase in operations expense was primarily due to the acquisition of Stockton in November of 1997, the results of which were included in the current quarter but not in the prior year's quarter, and to a lesser extent the higher volume of transactions processed. The decrease in operations expense as a percentage of revenues was primarily due to operations leverage from systems consolidation for recent acquisitions, the effects of ongoing cost reduction programs, and the impact of the divested operations, which results were included in the 1998 period but not the 1999 period. Sales, marketing and client services expense was $2.9 million for the three months ended September 30, 1998, compared to $2.4 million in the corresponding period of fiscal 1998, representing an increase of 23%. As a percentage of revenues, sales, marketing and client services expense decreased from 26% for the first three months of fiscal 1998 to 24% in the corresponding period of fiscal 1999. The increase in sales, marketing and client services expense was primarily due to the inclusion of the Stockton acquisition, the hiring of new employees in sales and marketing to support expansion of the Company's business into new markets, as well as client support and help desk services to serve an expanded customer base. Research and development expense was $1.1 million for the three months ended September 30, 1998, compared to $806,000 in the corresponding period of fiscal 1998, representing an increase of 37%. As a percentage of revenues, research and development expense was 9% for each such period. The increase in research and development costs in the period was primarily due to development of new and enhanced EDI transaction products and services, development associated with major customer contracts currently expected to roll out in calendar 1999 and the establishment of additional direct payor connections. In addition, Year 2000 compliance expenditures amounted to $132,000 for the three months ended September 30, 1998; there were no such expenditures in the corresponding period of fiscal 1998. The Company capitalized $239,000 of software development costs in the first three months of fiscal 1999, compared to $93,000 in the corresponding period of fiscal 1998. 36 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 of the Company. YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 Revenues Revenues for the fiscal year ended June 30, 1997 were $35.3 million compared to $31.8 million in fiscal 1996, representing an increase of 11%. The increase was primarily attributable to revenue from the acquisition of TCS in February 1997, partially offset by the loss of revenues from operations that were divested. The increase was also due to the growth of the existing business. The Company processed 161 million transactions in the fiscal year ended June 30, 1997 compared to 129 million transactions processed in fiscal 1996, representing an increase of 25%. The increase resulted from the addition of new clients, the growth of business from existing clients and the TCS acquisition. The average price per transaction in fiscal 1997 declined by 4% from fiscal 1996, primarily as a result of the divested operations having higher claims pricing. Operating Expenses Operations expense was $16.8 million for the fiscal year ended June 30, 1997 compared to $19.2 million in fiscal 1996, representing a decrease of 12%. As a percentage of revenues, operations expense decreased from 60% in fiscal 1996 to 48% in fiscal 1997. The operations expense improvement was a result of ongoing cost reduction programs, systems consolidation for recent acquisitions and the divestitures of non-core or unprofitable operations. Sales, marketing and client services expense was $8.8 million for the fiscal year ended June 30, 1997 compared to $7.1 million in fiscal 1996, representing an increase of 24%. As a percentage of revenues, sales, marketing and client service expense increased from 22% in fiscal 1996 to 25% in fiscal 1997. These increases reflect the inclusion of the TCS acquisition in the results for five months and, to a lesser extent, the addition of client support personnel and the increase in help desk tracking software expenses. Research and development expense was $3.3 million for the fiscal year ended June 30, 1997 compared to $2.1 million in fiscal 1996, representing an increase of 54%. As a percentage of revenues, research and development expense increased from 7% in fiscal 1996 to 9% in fiscal 1997. These increases were due to the hiring of new employees and other expenses related to the expansion of the Company's processing capacity and the implementation of new technology processing platforms throughout its data processing centers. General and administrative expense was $5.3 million for the fiscal year ended June 30, 1997 compared to $6.1 million in fiscal 1996, representing a decrease of 13%. As a percentage of revenues, general and administrative expense decreased from 19% in fiscal 1996 to 15% in fiscal 1997. These decreases were primarily a result of consolidation and integration activities. Depreciation and amortization expense was $5.5 million for fiscal year ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an increase of 5%. As a percentage of revenues, depreciation and amortization expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997. 38 Acquisition-related expenses for the fiscal year ended June 30, 1997 included a $1.6 million write-off related to in-process research and development from the acquisition of TCS (for software that had not achieved technological feasibility and had no alternative use) and a contingent earnout charge of $2.3 million recorded by the Company in connection with the EC&F purchase agreement. In addition, in fiscal 1997, the Company recorded a gain of $885,000 from a sale of securities. See Note 12 of Notes to Consolidated Financial Statements of the Company. During the fiscal year ended June 30, 1996, the Company wrote down approximately $10.0 million of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. Such intangible assets were written down to the net present value of the estimated future cash flows to be derived from these clients as of June 30, 1996. The write-down was required due to a loss of approximately 25% of the acquired MEDE OHIO client base. In addition, a contingent earnout charge of $538,000 was recorded in connection with the EC&F purchase agreement during the fiscal year ended June 30, 1996. QUARTERLY OPERATING RESULTS
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 of Notes to Consolidated Financial Statements of the Company. 39 LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has used capital from external sources to fund its internal growth and operations and to make acquisitions. Such capital requirements have been provided by (i) the Company's four principal stockholders, through periodic purchases of the Company's debt and equity securities and (ii) the Credit Facility. Since June 30, 1995 an investment fund affiliated with WCAS has purchased a Senior Subordinated Note in the principal amount of $25.0 million and 370,993 shares of Common Stock from the Company for an aggregate $25.0 million, which was used in connection with the acquisition of TCS, to repay borrowings under the Credit Facility and for general working capital purposes. See "Certain Transactions." As of September 30, 1998, the Company had outstanding borrowings of $18.0 million under the Credit Facility. Such borrowings bore interest at a weighted average rate of 6.97% per annum as of September 30, 1998. The Company was not in compliance with the leverage and interest coverage covenants as of September 30, 1998. The lender has granted a waiver relating to the noncompliance with these covenants of the Credit Facility and has amended these covenants on a prospective basis such that the Company anticipates it will be in compliance with such covenants at least through September 30, 1999. In October 1998, the total availability under the Credit Facility was increased to $36.0 million, and the Company drew down an additional $13.2 million, of which $11.7 million was used to finance the HII acquisition. As of December 31, 1998, the Company had outstanding borrowings of $31.1 million under the Credit Facility. Such borrowings bore interest at a weighted average rate of 6.41% per annum as of December 31, 1998. All indebtedness under the Credit Facility has been, and currently is, guaranteed by the Company's four principal stockholders. See "Certain Transactions." Covenants under the existing agreement include: customary covenants and restrictions on additional liabilities and disposition of assets, achieving Year 2000 compliance by August 1999, maintaining financial records and reporting, a maximum quarterly leverage ratio, a minimum interest coverage ratio, restrictions on the payment of dividends, as well as prior approval for acquisitions. See "Risk Factors -- Year 2000 Compliance." On January 26, 1999, the Company entered into a Credit Agreement (the "New Credit Facility") with NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities LLC, as Syndication Agent, and the Company's subsidiaries as Guarantors. The New Credit Facility provides for a $25 million revolving credit facility that matures on January 26, 2002. The New Credit Facility is not guaranteed by any third party, but is secured by substantially all of the Company's assets including the stock of the Company's subsidiaries. The New Credit Facility contains various covenants and conditions, including those relating to Year 2000 compliance, changes in control and management and restrictions on the payment of dividends on the Common Stock. See "Dividend Policy." The closing of the initial lending under the New Credit Facility is anticipated to take place simultaneously with the consummation of the Offering. Such closing is subject to a number of conditions and covenants on the part of the Company. Assuming that the initial lending under the New Credit Facility takes place as scheduled, the Company intends to borrow sufficient funds under the New Credit Facility in order to repay all amounts outstanding under the existing Credit Facility. There can be no assurance that the closing of the initial lending under the New Credit Facility will take place on the terms contemplated or otherwise. In the event that such closing does not take place as anticipated, the Company will need to obtain alternative financing prior to October 29, 1999, when the Credit Facility terminates. See "Risk Factors -- Acquisition Strategy; Need for Additional Capital." As of September 30, 1998, the Company had cash and cash equivalents of $3.6 million and net working capital of $2.2 million. Net cash used in operations was $1.7 million, $4.0 million and $2.5 million for the fiscal years ended June 30, 1996, 1997 and 1998, respectively. Net cash provided by operating activities was $447,000 for the three months ended September 30, 1998. The $2.5 million net cash used in operations for the fiscal year ended June 30, 1998 was used primarily for contingent earnout charges on acquisitions made in prior fiscal years which resulted in a net decrease in accounts payable 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 40 three months ended September 30, 1998 resulted primarily from the $1.1 million of income from operations (after adding back non-cash charges) resulting from increased revenues and operating margins. The net cash provided from operations also reflected increased investments in accounts receivable ($729,000), formulary receivables ($942,000) and other assets ($625,000), which were partially offset by an increase in accounts payable and accrued expenses ($1,853,000). Cash used for investment purposes was $4.9 million, $12.2 million, $12.1 million and $869,000 for the fiscal years ended June 30, 1996, 1997 and 1998 and the three months ended September 30, 1998, respectively. Cash used for investment purposes during the fiscal year ended June 30, 1998 was primarily used to acquire Stockton for $10.7 million and also to fund capital expenditures (predominantly computer and network hardware and software) in the amount of $913,000. Cash used for investment purposes for the three months ended September 30, 1998 was used to fund capital expenditures of $466,000 and additions to intangible assets of $403,000. The Company expects to pay $1.7 million of additional contingent consideration relating to the Stockton acquisition by the end of the March 31, 1999 quarter and at least $2.0 million per annum for the foreseeable future for capital investment to support growth in transaction processing. Cash provided by financing activities was $657,000, $15.5 million, $15.6 million and $1.0 million for the fiscal years ended June 30, 1996, 1997 and 1998 and the three months ended September 30, 1998, respectively. Cash provided by financing activities during the fiscal year ended June 30, 1998 and the three months ended September 30, 1998 was primarily provided from borrowings under the Credit Facility which was partially offset by principal repayments of debt and capital lease obligations. In the fiscal year ended June 30, 1997, cash was provided by the issuance of a Senior Subordinated Note in the principal amount of $25,000,000 and 370,993 shares of Common Stock for aggregate proceeds of $25.0 million, which proceeds were partially offset by the repayment of outstanding borrowings under the Credit Facility and principal repayments of debt and capital lease obligations. Approximately $25.2 million of the net proceeds of the Offering will be used to prepay all then outstanding principal and accrued interest on the Senior Subordinated Note and approximately $19.6 million of the net proceeds will be used to reduce outstanding indebtedness and accrued interest under the Credit Facility. In connection with the repayment of the Senior Subordinated Note, the Company will record an extraordinary charge of approximately $1.4 million relating to the write-off of the remaining discount on the Senior Subordinated Note. The Company expects to use the New Credit Facility to finance the Company's future acquisitions and general working capital needs, subject to satisfaction of covenants set forth therein. 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 New 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 activi- 41 ties scheduled for completion in mid-1999. For retail pharmacy practice management clients, the Company's remediation program consists of providing software upgrades, with discounted hardware packages to enable such clients to utilize Year 2000 compliant systems. The Company is currently contacting retail pharmacy customers and expects that the implementation of such program will extend throughout calendar 1999. A version of the UNIX operating platform software used in pharmacy transaction switching, which the manufacturer represents to be Year 2000 compliant, was released in December 1998. Testing of that operating platform software on the Company's hardware, with the Company's pharmacy transaction switching software, is scheduled for January and February of 1999. In October 1998 the Company acquired HII. HII's EDI products and services fall into three categories: physician claims processing (small- and large-group), hospital claims processing and claims data transmission (extraction and transmission of claim data to a third party data analyst). Based on its review at the time of the acquisition, the Company determined that none of HII's products is Year 2000 compliant. The Company intends to modify HII's common carrier and Internet-based claims processing system for small physician groups to make it Year 2000 compliant. The Company also intends to modify HII's payor data transmission products to make such products Year 2000 compliant. These modifications are scheduled to be completed by spring 1999. The Company intends to migrate HII's claims processing for hospitals and large physician groups to the Company's MedE Claim product; this migration is scheduled to start in spring 1999 and be completed by mid-1999. The Company can, if necessary, process claims for hospitals and large physician groups through its common carrier and Internet-based claims processing system. Some or all of the Company's revenues from each of the three areas in which Year 2000 problems have been identified, as well as those of HII's clients, are subject to the risk of Year 2000 noncompliance. The total revenue from the Company's PBM services clients was $6,491,000 in fiscal 1998. The total revenue from Pharmacy retail system sales was $511,000 in fiscal 1998. The total revenue derived from Pharmacy switching was $8,183,000 in fiscal 1998. The total claims and related revenue derived from HII was $4,950,000 for the twelve months ended June 30, 1998. Excluding anticipated expenditures associated with ordinary product development, the Company has budgeted approximately $1,210,000 through December 1999 for Year 2000 compliance costs, of which approximately $512,000 had been expended through December 31, 1998. The Company believes that this amount will be sufficient to execute its plan and cover contingency plan costs. The Company believes that it has sufficient resources to implement its plan. However, there can be no assurance that expenditures required to achieve compliance with Year 2000 requirements will not exceed the budgeted amounts. The Company's client base consists of over 65,000 health-care providers and over 1,000 payors. While the Company has not attempted to assess the readiness of each of these entities, the Company has begun to work with major customers and suppliers to insure that Year 2000 compliance issues will not interrupt the normal activities supported by these relationships. The Company's Medicare/Medicaid Payors are subject to a Year 2000 compliance program undertaken by the Health Care Financing Administration. Under the HCFA plan, all mission critical systems have been identified, and an Independent Verification and Validation consultant has been retained to perform inspections and testing of all public payors. This plan includes both random and announced system and site testing. The Company believes that the most likely worst case Year 2000 scenario would include the following: (i) one or more parts of the Company's software and operating systems would operate incorrectly; (ii) one or more of the Company's payors would be unable to receive transactions; and (iii) one or more of the Company's providers/clients would not have completed internal Year 2000 conversions. The Company has completed the assessment of its critical hardware and software and believes that the assessment has revealed all significant Year 2000 problems, that such problems will be capable of remediation, and that the Company's software and hardware will perform substantially as planned when Year 2000 processing begins. As contingency planning, the Company has three available options should certain functions not operate properly on January 1, 2000. First, the Company has developed its internal systems in such a manner as to allow such systems to accept non-Year 2000 compliant data, and convert such data based on defaults and algorithms developed in conjunction with the providers to Year 2000 compatible formats. This methodology 42 is applicable for claims, eligibility and enrollment transactions. Second, for payors, in the event a payor is unable to accept EDI claims, the Company currently has the capability, internally and, if necessary with support from an outside vendor, to print paper claims forms from supplied provider data and to send those claims in paper form to non-Year 2000 compliant payors. Third, for medical claims, a bulletin board system acquired in the HII transaction could be utilized by clients, with minimal programming set up, as a means of transmitting claims to the Company via common carriers and the Internet. See "Risk Factors -- Year 2000 Compliance." IMPACT OF INFLATION Inflation has not had a material impact on the Company's historical operations or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS Recent pronouncements of the Financial Accounting Standards Board, which are not required to be adopted at this date, include SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". These pronouncements are not expected to have a material impact on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is not required to be adopted at this date. The Company is currently evaluating the impact of this statement on its financial statements. NET OPERATING LOSSES As of June 30, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $36.4 million. Such loss carryforwards expire in the fiscal years 2005 through 2013. Because of certain changes in ownership, as defined in the Internal Revenue Code, which occurred during 1996 and 1995, certain of these net operating loss carryforwards are subject to annual limitations. See Note 7 of Notes to Consolidated Financial Statements of the Company. 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 December 31, 1998, the Company processed over 900,000 transactions per day for over 65,000 providers located in all 50 states. The Company's mission is to be the leading provider of integrated healthcare transaction processing technology, networks and databases, enabling its clients to improve the quality and efficiency of their services. The Company was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MedE America, Inc., MPC, and Wellmark, which comprised the healthcare services business of CES, historically provided EDI services to hospitals and physicians. Since its formation, the Company has expanded both through internal growth and the acquisition of six healthcare transaction processing businesses. As part of its strategy of providing an integrated suite of EDI products and services to a broad range of healthcare providers, the Company has focused on acquisitions that provide entry into new markets or expand the Company's product suite. The Company has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or restructured various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. INDUSTRY OVERVIEW Innovations over the past decade in computer and telecommunications technologies have resulted in the development of EDI systems to electronically process and transmit information among the various participants in the healthcare industry. These systems were designed to replace paper-based recording and transmission of information, enabling greater processing speed, reduced processing costs and more accurate data interchange. Electronic processing enables providers to verify patient eligibility or obtain authorization for services at the time of appointment, registration or at the time of claim submission. The healthcare EDI processor then interfaces with the payor to obtain an eligibility or authorization confirmation, which is transmitted back to the provider. To obtain payment, providers must submit claims information in formats specified by the respective payors. Healthcare EDI processors can facilitate this process by utilizing customized software programs that can perform "edits" to the data supplied by providers and re-format that data to meet the data specifications of payors. Electronically transmitted claims are sent either directly from the provider to the payor, or through the healthcare EDI processor (which in turn transmits the claims to the payor directly or through one or more intermediaries). The claim is received and reviewed by the payor and the remittance response is communicated (usually not electronically) back to the provider. Each of these steps in the healthcare delivery process gives rise to a current or potential EDI transaction. Health Data Directory estimates that in 1998 over 4.4 billion electronic and paper claims will be paid in all sectors of the healthcare services market, and over the past five years healthcare claims increased at an average rate of 6.25% per year. The Company expects the volume of healthcare claims to continue to grow as the U.S. population ages and life expectancy of the U.S. population increases. The increase in claims has been accompanied by an increase in the proportion of claims that are electronically processed. From 1994 to 1998 (estimated), the proportion of total healthcare claims that were electronically processed increased from 47% to 62%. During such period the number of claims pro- 44 cessed electonically increased at an average rate of 14% per year. The Company expects the electronic processing of healthcare claims to continue to increase as a result of increased reliance on electronic commerce and increased emphasis on cost containment in the healthcare industry. The penetration of electronic processing varies significantly among the different markets within the healthcare industry. Health Data Directory estimates that in 1998 electronic processing will account for approximately 16% of total dental claims, 38% of total physician medical claims, 83% of total hospital medical claims and 86% of total pharmacy claims. In addition to the opportunity to convert remaining paper-based claims to electronic processing, the Company believes that there is significant market potential for EDI processing in the non-claim area, including eligibility verification, remittance transactions and other data exchange transactions such as claims tracking, referrals and physician scripting. The Company believes that EDI penetration in these non-claim transaction categories is low, and as a result, the EDI transaction growth in these areas will exceed that of the EDI claims processing market. As compared to claims processing, the electronic processing of non-claim information transactions in the healthcare industry, such as eligibility inquiries, enrollment in Medicare and Medicaid programs, referrals, formulary inquiries to pharmacy benefit managers and prescription delivery, has emerged only recently and is less pervasive. The Company believes that only a small percentage of non-claim information transactions are managed electronically. In addition to opportunities to expand its claims processing business, the Company believes that there are significant possibilities to expand electronic processing to non-claim areas in the healthcare market, for the following reasons: o As advanced technology continues to penetrate the healthcare industry, an increasing amount of healthcare data will be managed electronically. For example, healthcare providers are implementing practice management software systems to manage the clinical, financial and administrative aspects of their businesses. Increasingly, these software systems incorporate EDI processing capabilities. o Efforts by government and private insurers to contain healthcare costs are expected to motivate hospitals and physicians to use EDI not only to lower costs, but also to improve operating efficiencies and increase accuracy. For example, state Medicaid programs and some private insurance companies now encourage providers to verify patients' medical benefits eligibility electronically. o As the healthcare industry continues to undergo consolidation, the larger scale of the resulting entities may result in increased EDI use. For example, various managed care companies have encouraged their provider networks to utilize EDI for authorizations, enrollment verification, encounter reports and referrals. Currently, the EDI market is fragmented and consists of several nationally prominent EDI claims processors and several hundred regional EDI service providers who occupy selected niches in specialized markets and geographical sectors. Over the past several years, many of the regional EDI service providers have been acquired by national organizations. The Company believes that competitive conditions in the healthcare information industry will continue to favor consolidation as larger, more diversified organizations are able to reduce costs and offer an integrated package of standardized products and services. COMPETITIVE STRENGTHS The Company believes that it has several competitive strengths which will enable it to capitalize on the significant growth opportunities in the healthcare EDI marketplace. COMPREHENSIVE SUITE OF EDI PRODUCTS AND SERVICES. The Company has followed a strategy of developing or acquiring EDI products and services that may be provided to a broad range of healthcare clients. The Company's products incorporate open architecture designs and what the Company regards as "best of breed" technology and may be purchased as modular additions to the client's existing data storage and retrieval system, or as part of a comprehensive EDI processing system. These products also provide to the client the capability and the required security to transmit or receive EDI transactions across the Internet. They are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice manage- 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 127 research and development and technical support professionals dedicated to developing, supporting and commercializing new and enhanced EDI solutions. In addition, the Company intends to undertake acquisitions in order to expand its suite of product offerings. o UTILIZE STRATEGIC PARTNERSHIPS TO EXPAND CLIENT BASE. MEDE AMERICA's strategic alliances with vendors, distributors and dealers of practice management software have played an important role in building relationships with small groups of physicians, pharmacists and dentists. These companies promote MEDE AMERICA's EDI products as a modular addition to their practice management software. The Company also has strategic relationships with large hospital groups, Medicaid intermediaries, PBMs and professional organizations. The Company believes that such strategic partnerships provide important opportunities for increasing the Company's revenue base. o PURSUE STRATEGIC ACQUISITIONS. Currently, the EDI market includes several hundred regional EDI service providers which occupy selected niches in specialized markets and geographical areas. The Company intends to capitalize on the fragmented market for the provision of EDI services by aggressively pursuing consolidation opportunities in order to increase its client and revenue base, expand its product suite, enter into new geographic markets, utilize its operating leverage to increase efficiency and add new talent and technical capacity in emerging areas of the EDI processing industry. SUITE OF EDI PRODUCTS AND SERVICES MEDE AMERICA's products and services enable its healthcare clients to process and transmit transactions more efficiently and accurately, reducing costs and increasing overall processing speed. The Company's EDI products incorporate open architecture designs and what the Company regards as "best of breed" technology and may be purchased as modular additions to existing data storage and retrieval systems or as part of a comprehensive EDI processing system. They are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice management and billing systems. In addition, new products can be added to respond to changing client requirements. The scalability of the Company's products permits its clients to accommodate increasing transaction volumes without substantial new investments in software and hardware. The following table illustrates the breadth of the Company's product and service offerings: 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 98 associates organized according to market, client type and product category. The Company also has a client services organization consisting of 66 associates dedicated to help desk and client support functions. A significant component of compensation for all sales personnel is performance based, although the Company bases quotas and bonuses on a number of factors in addition to actual sales, such as client satisfaction and collection of receivables. MEDE AMERICA's marketing efforts include direct sales, telesales, strategic partnerships with healthcare vendors, trade shows, direct marketing, telemarketing, the Internet, and specific advertising and marketing campaigns where appropriate. In the medical and pharmacy markets, the Company's current strategic business alliances include relationships with some of the country's largest hospitals, hospital networks, hospital information systems vendors, practice management software vendors, pharmacy chains, healthcare organizations and payors. The Company also maintains strategic alliances with certain state Medicaid programs. MEDE AMERICA's strategic alliances with vendors, distributors and dealers of practice management software have played an important role in building relationships with individual and small groups of physicians, pharmacies and dentists. These companies promote MEDE AMERICA's EDI products as modular additions to their practice management software. MEDE AMERICA has also won endorsements from 18 state dental associations, representing nearly half of all dentists in practice today. The Company's sales channels include targeting dental practice management companies and payor-driven programs aimed at their network providers. Recent significant expansion of MEDE AMERICA's direct connectivity to dental payors has contributed to its ability to generate revenue from this market while at the same time eliminating its dependence on other processors and clearinghouses. RESEARCH AND DEVELOPMENT As of December 31, 1998, the Company employed 86 people in the areas of product design, research and development, and 41 people in the areas of quality assurance and technical support. The Company's product development strategy is focused on continuous enhancement of its existing products to increase their functionality and ease of use, and the development of new products for additional EDI transactions and telecommunications offerings. Particular attention is devoted to the ongoing integration of developed and acquired systems and applications into a consolidated suite of EDI product offerings and supporting services for the markets served by the Company. In the Company's 1996, 1997 and 1998 fiscal years, research and development expenditures totaled $2,132,000, $3,278,000 and $3,941,000, respectively, representing approximately 7%, 9% and 9%, respectively, of the Company's total revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." TECHNOLOGY AND OPERATIONS MEDE AMERICA recognizes the crucial role of technology and telecommunications in the EDI marketplace. Since the beginning of fiscal 1996, the Company has acquired new hardware and software and made data center improvements costing more than $5.0 million. As a result, the Company is currently operating at approximately one-third of its operating capacity. The continuing use of newer emerging technologies and platforms has contributed significantly to the Company's current operational position. Examples of such innovations include the use of Internet technologies for data transmissions, on-line transaction monitoring tools and development of Windows-based front-end applications for clients. 50 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 December 31, 1998, the Company employed 405 people, including 110 in operations, 98 in sales and marketing, 66 in client services, 86 in research and development, 35 in finance and administration and ten in corporate. None of the Company's employees is represented by a union or other collective bargaining group. The Company believes its relationship with its employees to be satisfactory. 52 FACILITIES The following chart summarizes the Company's facilities and their monthly transaction capacities:
ESTIMATED MONTHLY TRANSACTION OWNED/LEASE FACILITY PERSONNEL TRANSACTION TYPE CAPACITY EXPIRATION DATE - ------------------------------ ----------- ------------------------------ ------------- ---------------------- Ohio (Primary Medical and 152 Eligibility 2,000,000 Owned Pharmacy Data Center) Real-Time Benefit Management 6,000,000 Switching 48,000,000 Claims 3,000,000 New York (Secondary Medical 35 Eligibility 2,000,000 January 2003 and Pharmacy Data Center) Enrollment 25,000 Georgia (Dental Data Center) 57 Dental Claims 1,600,000 January 2001 Corporate Headquarters, 140 Real-Time Benefit Management 2,000,000 Various dates between Sales & Development January 1999 and Feb- Offices (5 sites) and ruary 2003. PBM Processing St. Louis (HII Facility) 21 Claims N/A1 May 2005
- ---------- 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 53 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. 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 AMERICA has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to revenues to be paid by payors (in respect of which a commission is payable to Medic) as well as fees to be paid by Medic. The Processing Agreement sets forth detailed performance criteria and development and implementation timetables; inability to meet these criteria may result in financial penalties or give Medic a right to terminate this agreement. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter (unless either party elects to terminate). Contemporaneously, to ensure a close working relationship between the parties, on July 19, 1998, the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The difference between the two alternative prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The Medic Warrant vests over a two year period and may be exercised up to five years from the date of grant. The Medic Warrant contains customary weighted average antidilution provisions. The Company and the principal stockholders associated with WCAS and WBCP have agreed that following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. On October 30, 1998, the Company acquired all the outstanding shares of stock of HII, a St. Louis, Missouri based provider of EDI transaction processing services to hospitals and physician groups in the midwest. Prior to such acquisition, HII was a subsidiary of RightCHOICE and General American. The Company acquired HII for a total cash payment of approximately $11.7 million, including transaction expenses. Immediately prior to the acquisition, HII's "Intercare" and "Telemedical" businesses were divested in separate transactions. The Company did not acquire such businesses or any proceeds from the disposition thereof. The HII acquisition was financed by an amendment to the Credit Facility increasing the facility to $36,000,000. To induce investment funds affiliated with WCAS and WBCP to guarantee this increase, on October 7, 1998, the Company granted to such funds the 1998 Guaranty Warrants to purchase an aggregate 84,050 shares of the Company's Common Stock at a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The difference between the two prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The 1998 Guaranty Warrants are immediately exercisable and may be exercised up to five years from the date of grant. On January 26, 1999, the Company entered into a Credit Agreement with NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities LLC, as Syndication Agent, and the Company's subsidiaries as Guarantors. The New Credit Facility provides for a $25 million revolving credit facility that matures on January 26, 2002. The New Credit Facility is not guaranteed by any third party, but is secured by substantially all of the Company's assets including the stock of the Company's subsidiaries. The New Credit Facility contains various covenants and conditions, including those relating to Year 2000 compliance, changes in control and management and restrictions on the payment of dividends on the Common Stock. See "Dividend Policy." 54 The closing of the initial lending under the New Credit Facility is anticipated to take place simultaneously with the consummation of the Offering. Such closing is subject to a number of conditions and covenants on the part of the Company. Assuming that the initial lending under the New Credit Facility takes place as scheduled, the Company intends to borrow sufficient funds under the New Credit Facility in order to repay all amounts outstanding under the existing Credit Facility. There can be no assurance that the closing of the initial lending under the New Credit Facility will take place on the terms contemplated or otherwise. 55 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. 56 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 57 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($) - --------------------------------------- ----------- ------------- ----------------- --------------- ---------------- Thomas P. Staudt ...................... 185,833 150,000 -- 229,141 -- President and Chief Executive Officer Richard P. Bankosky ................... 136,969 55,000 -- 34,915 -- Chief Financial Officer, Treasurer and Secretary William M. McManus .................... 133,269 55,000 -- 39,279 -- Senior Vice President and General Manager -- Pharmacy and Medical Roger L. Primeau ...................... 121,050 25,000 27,900 23,567 -- Senior Vice President and General Manager -- Dental James T. Stinton ...................... 158,878 50,000 -- 40,371 -- Chief Information Officer ............
58 - ---------- (1) Bonuses are granted under a bonus formula annually established by the Board of Directors, based upon the performance (measured by EBITDA) of the Company (or certain operating divisions thereof). Unless a specified percentage of the EBITDA target is achieved, no bonus is paid. EBITDA targets are adjusted to reflect accounting changes, acquisitions and other significant, one-time events. (2) Total number granted through June 30, 1998 (exercised and unexercised). OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding grants of options to purchase Common Stock in fiscal 1998 to each of the Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(1) -------------------------------------------------------------- ------------------ NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION GRANTED(#) FISCAL YEAR(2) ($/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 59 Company, the employee will neither compete with the Company in the United States nor solicit any customer or employee of the Company. In addition, the employee will not disclose any trade secrets (as defined in the agreement) and, for a term of 12 months following the cessation of his or her employment by the Company, will not disclose any confidential information (as defined in the agreement). EMPLOYEE BENEFIT PLANS Under the MEDE AMERICA Corporation and its Subsidiaries Stock Option and Restricted Stock Purchase Plan (the "Stock Plan"), up to 655,000 shares of Common Stock are reserved for issuance to the officers and employees of the Company. These shares may be issued either outright, as restricted stock awards, or they may be issued pursuant to either "incentive stock options" under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), or "non-qualified" stock options. As of December 31, 1998, options to purchase up to an aggregate 482,823 shares of Common Stock were outstanding, of which 233,668 options were exercisable. The weighted average exercise price for all options granted under the Stock Plan is $4.84 per share. Following the Offering, the Board of Directors has provided that no additional grants or awards will be made under the Stock Plan. Under the MEDE AMERICA Corporation and its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan (the "New Stock Plan"), a variety of awards, including incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), "non-qualified" stock options, restricted stock awards and other stock-based awards, may be granted to officers, employees, directors, consultants and advisors of the Company and its subsidiaries. An aggregate 1,500,000 shares of Common Stock are currently reserved for issuance under the New Stock Plan. The Board of Directors will initially administer the New Stock Plan, but may delegate such responsibility to a committee of the Board (the "Plan Administrator"). The terms and conditions of individual awards made to employees and consultants and, except as described below, non-employee directors, may vary, subject to the following guidelines: (i) the exercise price of options may not be less than 85% of the fair market value of the Common Stock on the date of grant provided, however, that neither (a) the exercise price of incentive stock options nor (b) the exercise price of non-qualified stock options intended to qualify as "performance-based compensation" within the meaning of the Code may be less than 100% of the fair market value of the Common Stock on the date of grant (or, in the case of incentive stock options granted to a stockholder owning in excess of 10% of the total combined voting power of all classes of Company stock, 110% of the fair market value); (ii) the maximum number of shares of Common Stock which may be the subject of awards granted to any employee under the New Stock Plan during any calendar year may not exceed 300,000; (iii) the term of incentive stock options may not exceed ten years from the date of grant; and (iv) no awards may be granted after June 30, 2008. Except as described below with respect to non-employee directors, the Plan Administrator determines, within the guidelines set forth above, the amount of each award, the conditions and limitations applicable to the exercise of an option, the exercise price therefor and the form of payment that may be used to exercise the award, which may include cash, check, shares of Common Stock and promissory notes. Each non-employee director automatically receives non-qualified stock options to purchase up to 1,000 shares of Common Stock upon his or her initial election to the Board of Directors and upon each anniversary thereof upon which he or she is still serving as a director. The exercise price for each such option is the fair market value on the date of grant. Non-employee director options vest six months after grant and the exercise period may not exceed ten years, provided that, subject to certain exceptions in the event of death or disability, no non-employee director options may be exercised more than 90 days after such director ceases to serve as a director. The Board of Directors may grant restricted and unrestricted share awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or a part of such shares at their purchase price from the recipient in the event that conditions specified by the Plan Administrator are not satisfied prior to the end of the applicable restricted period. Shares of restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered during the applicable 60 restricted period. The Plan Administrator may, in its sole discretion, grant or sell (at a purchase price per share equal to at least 85% of the fair market value) shares of Common Stock free of any restrictions under the New Stock Plan. In the event of a merger or sale of all or substantially all the assets of the Company, the Board of Directors may, in its discretion, take any one or more of certain actions including accelerating all unvested or unrealizable awards, terminating all unexercised options and requiring the acquiring company to assume all outstanding awards. While the Company currently anticipates that most grants under the New Stock Plan will consist of stock options, the Company may also grant restricted stock awards, which entitle recipients to acquire shares of Common Stock subject to certain conditions. Options or other awards that are granted under the New Stock Plan but expire unexercised are available for future grants. Vesting of options under the New Stock Plan would be subject to acceleration at the discretion of the Board of Directors under certain circumstances. Under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan"), employees of the Company, including directors of the Company who are employees, are eligible to participate in semi-annual plan offerings in which payroll deductions may be used to purchase shares of Common Stock. The purchase price of such shares is the lower of 85% of the fair market value of the Common Stock on the day the offering commences and 85% of the fair market value of the Common Stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the Offering. On July 23, 1998, the Board of Directors determined to grant options to purchase an aggregate 400,000 shares of Common Stock under the New Stock Plan to certain employees of the Company (including the Named Executive Officers) contingent upon consummation of the Offering. Such options, which include both incentive and non-qualified stock options, will have an exercise price equal to the price to the public in the Offering and generally will vest ratably over four years from the date of grant except that the initial installment of options to be granted to certain executive officers, including the Named Executive Officers, will vest immediately upon consummation of the Offering. The grants to be received by each of the Named Executive Officers are as follows: 160,000 shares for Mr. Staudt, 40,000 shares for each of Messrs. Bankosky and McManus, 16,000 shares for Mr. Primeau and 30,000 shares for Mr. Stinton. On November 15, 1998, the Board of Directors determined to grant options (such grant to be effective as of the date of the Offering) to purchase an aggregate 51,500 shares of Common Stock under the New Stock Plan to certain employees of the Company, most of whom were formerly employed by HII. Such options will be incentive stock options, will have an exercise price equal to the price to the public in the Offering and generally will vest ratably over four years from the date of grant. 61 CERTAIN TRANSACTIONS In June 1995, the Company acquired MEDE OHIO, through a merger between the Company and the parent of MEDE OHIO ("Parent"). Parent was owned by Welsh, Carson, Anderson & Stowe V, L.P. ("WCAS V"), which had formed Parent to acquire MEDE OHIO in an all cash merger that was consummated in March 1995. The acquisition price of MEDE OHIO, including amounts required to finance the merger and to provide MEDE OHIO with working capital and pre-merger bridge financing, was approximately $22.6 million. The exchange ratio in the merger between Parent and the Company was based on the acquisition cost of MEDE OHIO and an independent valuation of the Company that was performed in connection with the spin-off of the Company by CES. In the merger and a related offering to raise working capital for the Company, the Company issued an aggregate 1,772,351 shares of Common Stock and 171,889 shares of Preferred Stock to investment funds and individuals affiliated with WCAS, and an aggregate 189,465 shares of Common Stock and 28,987 shares of Preferred Stock to investment funds affiliated with WBCP. In October 1995, WCAS V and Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI") each advanced the Company $1.75 million as bridge financing for the Company's acquisition of EC&F and Premier. The loan bore interest at the rate of 10% per annum and matured on December 31, 1995. The Company repaid the loan in December 1995. On December 18, 1995, the Company issued to its four principal stockholders, WCAS V, WCAS VI, William Blair Capital Partners V, L.P. ("Blair V"), and William Blair Leveraged Capital Fund, Limited Partnership ("Blair LCF"), warrants to purchase an aggregate 52,532 shares of Common Stock at an exercise price of $4.58 per share in connection with their agreement to guarantee the Company's obligations under the Credit Facility. On January 10, 1997, the Company increased the amount of available borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS VI, Blair V and Blair LCF each agreed to guarantee payment of a portion of the additional debt to be incurred under the increased credit line. In consideration for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 18,330 shares of Common Stock. The warrants have a ten-year term and the exercise price thereunder is $5.73 per share. On October 31, 1997, the Company increased the amount of available borrowings under the Credit Facility, and in connection therewith, WCAS V, WCAS VI, Blair V and Blair LCF each agreed to guarantee payment of a portion of the additional debt to be incurred under the increased credit line. In consideration for such guarantees, the Company issued to WCAS V, WCAS VI, Blair V and Blair LCF warrants to purchase an aggregate 34,200 shares of Common Stock. The warrants have a ten year term and the exercise price thereunder is $5.73 per share. On February 14, 1997, the Company issued a 10% Senior Subordinated Note due February 14, 2002 in the principal amount of $25,000,000, plus an aggregate 370,993 shares of Common Stock, to WCAS Capital Partners II, L.P. ("WCAS CP II"), for an aggregate purchase price of $25,000,000. WCAS CP II is an affiliate of each of WCAS V and WCAS VI, and Thomas McInerney and Anthony de Nicola, both directors of the Company, are general partners of the sole WCAS CP II general partner. The Company intends to use the proceeds of the Offering to repay in full the 10% Senior Subordinated Note and to reduce the indebtedness under the Credit Facility. See "Use of Proceeds." The Company does not anticipate further borrowing from or seeking further loan guarantees from any of the entities referred to above. In connection with the issuance and sale of its 10% Senior Subordinated Note to WCAS CP II, the Company granted to WCAS CP II certain demand and "piggyback" registration rights pursuant to a Registration Rights Agreement, dated as of February 14, 1997 between the Company and WCAS CP II. In addition, the Company has granted demand and piggyback registration rights to Medic with respect to the shares of Common Stock issuable upon exercise of the Medic Warrant. On July 17, 1998, the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock a per share exercise price equal to the price of the Common Stock to the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, 62 at an exercise price equal to $8.00 per share. The difference between the two alternative prices reflects, in the Company's view, the incremental value of a share of Common Stock resulting from the Offering and the concurrent Recapitalization. The Medic Warrant vests over a two year period and may be exercised up to five years after the date of grant. The Company and the principal stockholders associated with WCAS and WBCP have agreed that, following the completion of the Offering and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25% of the shares of Common Stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. As of the date of this Prospectus, Medic has not named a designee. The terms of the Preferred Stock have been amended to provide for conversion of the aggregate liquidation value of the Preferred Stock including accrued but unpaid dividends into Common Stock at the price per share received by the Company upon the consummation of its initial public offering; provided further, however, that cash realized by the Company upon any exercise of the Underwriters' overallotment option would be applied to the payment of accrued dividends in lieu of having such dividends convert into Common Stock. In addition, in connection with the Offering, the holders of the outstanding warrants (other than the Medic Warrant and the 1998 Guaranty Warrants) agreed to exercise all such warrants by the net issuance exercise method for an aggregate 59,926 shares of Common Stock. WCAS V, WCAS VI, Blair V and Blair LCF are the owners of an aggregate 193,100 shares of Preferred Stock, and warrants to purchase 52,532 and 52,530 shares of Common Stock, at exercise prices of $4.58 and $5.73 per share, respectively. On October 7, 1998, in connection with their agreement to extend their guaranty of the Company's obligations under the Credit Facility to cover an additional $16 million of indebtedness, the Company issued to WCAS V and Blair V warrants to purchase an aggregate 84,050 shares of Common Stock at a per share price equal to the price of the Common Stock to the public in the Offering, or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The warrants are immediately exercisable and may be exercised up to five years from the date of grant. Blair V and Blair LCF, and Timothy Murray, a director of the Company, are each affiliates of William Blair & Company, L.L.C., an underwriter of the Offering. See "Underwriting." PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of December 31, 1998, and as adjusted to reflect the sale of Common Stock offered hereby, by (i) each person (or group of affiliated persons) known by the Company to own beneficially more than five percent of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. The numbers of shares set forth below (i) give effect to the Recapitalization and the Reverse Stock Split, (ii) assume an Offering price of $12.00 per share of Common Stock and (iii) assume a sale of 4,166,667 shares of Common Stock in the Offering. Unless otherwise indicated, the address for each stockholder is c/o the Company, 90 Merrick Avenue, Suite 501, East Meadow, New York 11554. 63
SHARES BENEFICIALLY OWNED(1) -------------------------------------- PERCENTAGE OWNED(2) ------------------------ BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING - ------------------------------------------------- ----------- ---------- ----------- Welsh, Carson, Anderson & Stowe (3) ............. 6,153,182 72.27% 48.53% 320 Park Avenue, 25th Floor New York, NY 10019 William Blair & Co., L.L.C. (4) ................. 991,151 11.71% 7.85% 222 West Adams Street Chicago, Illinois 60606 Southlake & Co., as Nominee ..................... 656,881 7.78% 5.21% c/o State Street Bank & Trust Co. 222 Franklin Street -- Concourse Boston, MA 02110 ............................... Thomas P. Staudt (5) ............................ 170,591 1.99% 1.34% Richard P. Bankosky (6) ......................... 12,873 - - James T. Stinton (7) ............................ 21,603 - - William M. McManus (8) .......................... 22,256 - - Linda K. Ryan (9) ............................... 1,918 - - Roger L. Primeau (10) ........................... 8,334 - - Thomas E. McInerney (11) ........................ 6,012,579 70.62% 47.42% 320 Park Avenue, 25th Floor New York, NY 10019 Anthony J. de Nicola (12) ....................... 5,987,212 70.32% 47.22% 320 Park Avenue, 25th Floor New York, NY 10019 Timothy M. Murray (13) .......................... 987,806 11.67% 7.82% 222 West Adams Street Chicago, Illinois 60606 All current directors and executive officers as a 7,243,635 83.28% 56.31% group (9 persons) ..............................
- ---------- - Represents beneficial ownership of less than 1% of the Common Stock. (1) Gives effect to the Recapitalization and the Reverse Stock Split. Unless otherwise indicated, the entities and individuals identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws, where applicable. (2) The percentages shown are based on 8,446,417 shares of Common Stock outstanding on December 31, 1998, plus, as to each entity or group listed unless otherwise noted, the number of shares of Common Stock deemed to be owned by such holder pursuant to Rule 13d-3 under the Exchange Act as of such date, assuming exercise of options held by such holder that are exercisable within 60 days of the date of this Prospectus. (3) Includes 2,731,420 shares of Common Stock held by WCAS V, 2,745,720 shares of Common Stock held by WCAS VI, 66,164 shares of Common Stock held by WCAS Information Partners L.P. ("WCAS Info."), 370,993 shares of Common Stock held by WCAS CP II, 171,645 shares of Common Stock held by individual partners of WCAS, and warrants to purchase up to 67,240 shares of Common Stock held by WCAS V. Such partners are also partners of the sole general partner of each of the foregoing limited partnerships. The respective general partners of WCAS V, WCAS VI, WCAS Info. and WCAS CP II are WCAS V Partners, L.P., WCAS VI Partners, L.P., WCAS INFO Partners and WCAS CP II Partners. The individual partners of each of these partnerships include some or all of Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A. Minicucci, Anthony J. de Nicola and Laura M. VanBuren. The partners of WCAS who are also directors of the Company are Thomas E. McInerney (who is also Chairman of the Board of Directors) and Anthony J. de Nicola. Each of the foregoing persons may be deemed to be the beneficial owner of the Common Stock owned by WCAS. (4) Includes 637,814 shares of Common Stock held by Blair V, 333,182 shares of Common Stock held by Blair LCF, 3,345 shares of Common Stock held by an individual affiliated with WBCP, and warrants to purchase up to 16,810 shares of Common 64 Stock held by Blair V. Timothy M. Murray, a partner of WBCP, is also a director of the Company and may be deemed to be a beneficial owner of the Company's Common Stock owned by WBCP. (5) Includes options to purchase up to 111,732 shares of Common Stock. (6) Includes options to purchase up to 1,527 shares of Common Stock. (7) Includes options to purchase up to 21,603 shares of Common Stock. (8) Includes options to purchase up to 22,256 shares of Common Stock. (9) Includes options to purchase up to 1,613 shares of Common Stock. (10) Includes options to purchase up to 8,334 shares of Common Stock. (11) Includes 2,731,420 shares of Common Stock held by WCAS V, 2,745,720 shares of Common Stock held by WCAS VI, 66,164 shares of Common Stock held by WCAS Info., 370,993 shares of Common Stock held by WCAS CP II, and warrants to purchase up to 67,240 shares of Common Stock held by WCAS V. Mr. McInerney disclaims beneficial ownership of such shares. (12) Includes 2,731,420 shares of Common Stock held by WCAS V, 2,745,720 shares of Common Stock held by WCAS VI, 66,164 shares of Common Stock held by WCAS Info., 370,993 shares of Common Stock held by WCAS CP II, and warrants to purchase up to 67,240 shares of Common Stock held by WCAS V. Mr. de Nicola disclaims beneficial ownership of such shares. (13) Includes 637,814 shares of Common Stock held by Blair V, 332,182 shares of Common Stock held by Blair LCF, and warrants to purchase up to 16,810 shares of Common Stock held by Blair V. Mr. Murray disclaims beneficial ownership of such shares. 65 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 30,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock. Upon completion of this Offering, and after giving effect to the Recapitalization and the Reverse Stock Split, there will be 12,613,084 shares of Common Stock (13,238,084 shares if the Underwriters' over-allotment option is exercised) and no shares of Preferred Stock outstanding. As of December 31, 1998, before giving effect to the Recapitalization but after giving effect to the Reverse Stock Split, there were 5,684,847 shares of Common Stock outstanding and 239,956 shares of Preferred Stock outstanding, held of record by 126 stockholders. In addition, as of December 31, 1998, before giving effect to the Recapitalization but after giving effect to the Reverse Stock Split, there were outstanding options to purchase 482,823 shares of Common Stock and warrants to purchase 105,062 shares of Common Stock. Pursuant to the Recapitalization, all such warrants will be exercised (on a "net exercise" basis) (for an aggregate 59,926 shares), and all shares of Preferred Stock will be converted into an aggregate 2,701,643 shares of Common Stock (based on the aggregate liquidation preference of the Preferred Stock as of December 31, 1998, assuming no exercise of the Underwriters' over-allotment option) prior to the consummation of the Offering. On July 17, 1998, the Company issued to Medic a warrant to purchase 1,250,000 shares of the Company's Common Stock. On October 7, 1998, the Company issued to WCAS V and Blair V warrants to purchase an aggregate 84,050 shares of Common Stock. See "Prospectus Summary -- Recent Developments." COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends as are declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock have the right to a ratable portion of assets remaining after the payment of all debts and other liabilities, subject to the liquidation preferences of the holders of any outstanding Preferred Stock. Holders of Common Stock have neither preemptive rights nor rights to convert their Common Stock into any other securities and are not subject to future calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the shares offered hereby upon issuance and sale will be, fully paid and non-assessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of Preferred Stock that the Company may designate and issue in the future. PREFERRED STOCK Upon the closing of this Offering and assuming no exercise of the Underwriters' over-allotment option, all of the outstanding shares of the Preferred Stock together with accrued but unpaid dividends thereon will be automatically converted at the public offering price into 2,701,643 shares of Common Stock. The Board of Directors is authorized, subject to certain limitations prescribed by Delaware law, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock, $.01 par value, in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series. The Company believes that the power to issue Preferred Stock will provide flexibility in connection with possible corporate transactions. The issuance of Preferred Stock, however, could adversely affect the voting power of holders of Common Stock and restrict their rights to receive payments upon liquidation. It could also have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any shares of Preferred Stock. WARRANTS On July 17, 1998, the Company granted to Medic the Medic Warrant to acquire 1,250,000 shares of the Company's Common Stock, at a per share exercise price equal to the price of the Common Stock to 66 the public in the Offering or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The Medic Warrant vests over a two year period and may be exercised up to five years after the date of grant. On October 7, 1998, in connection with their agreement to extend their guaranty of the Company's obligations under the Credit Facility to cover an additional $16 million of indebtedness, the Company issued to WCAS V and Blair V, the 1998 Guaranty Warrants to purchase an aggregate 84,050 shares of Common Stock at a per share price equal to the price of the Common Stock to the public in the Offering, or, in the event that an initial public offering is not completed by March 31, 1999, at an exercise price equal to $8.00 per share. The 1998 Guaranty Warrants are immediately exercisable and may be exercised up to five years from the date of grant. In addition to the Medic Warrant and the 1998 Guaranty Warrants referred to above, as of December 31, 1998, four investors owned warrants to purchase 59,926 shares of Common Stock (on a "net exercise" basis), which will be exercised in full upon the closing of this Offering. The Medic Warrant and the 1998 Guaranty Warrants will remain outstanding following completion of the Offering. See "Certain Transactions." DELAWARE LAWS AND CERTAIN CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER MEASURES Upon the consummation of this Offering made hereby, the Company will be subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a "business combination" is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. All directors elected to the Company's Board of Directors serve until the next annual meeting of the stockholders and the election and qualification of their successors or their earlier death, resignation or removal. The Board of Directors is authorized to create new directorships and to fill such positions so created. The Board of Directors (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board of Directors occurring for any reason for the remainder of the term of the vacant directorship. The Company's Bylaws provide that, for nominations to the Board of Directors or for other business to be properly brought by a stockholder before an annual meeting of stockholders, the stockholder must first have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice generally must be delivered not less than 90 days nor more than 120 days prior to the anniversary of the immediately preceding annual meeting. The notice by a stockholder must contain, among other things, certain information about the stockholder delivering the notice and a description of the proposed business to be brought before the meeting. Certain of the provisions of the Amended and Restated Certificate of Incorporation and Bylaws discussed above could make more difficult or discourage a proxy contest or other change in the management of the Company or the acquisition or attempted acquisition of control by a holder of a substantial block of the Company's stock. It is possible that such provisions could make it more difficult to accomplish, or could deter, transactions which stockholders may otherwise consider to be in their best interests. As permitted by the DGCL, the Amended and Restated Certificate of Incorporation provides that Directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as Directors, except for liability (i) for any breach of their duty of loyalty to the Company and its stockholders, (ii) for acts or omissions not in good faith or which involve 67 intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 or successor provisions of the DGCL or (iv) for any transaction from which the Director derives an improper personal benefit. The Amended and Restated Certificate of Incorporation and Bylaws provide that the Company shall indemnify its Directors and officers to the fullest extent permitted by Delaware law (except in some circumstances, with respect to suits initiated by the Director or officer) and advance expenses to such Directors or officers to defend any action for which rights of indemnification are provided. In addition, the Amended and Restated Certificate of Incorporation and Bylaws also permit the Company to grant such rights to its employees and agents. The Bylaws also provide that the Company may enter into indemnification agreements with its Directors and officers and purchase insurance on behalf of any person whom it is required or permitted to indemnify. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as Directors, officers and employees. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services. 68 SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering there has been no market for the Common Stock of the Company. The Company can make no prediction as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. See "Risk Factors -- Shares Eligible for Future Sale; Possible Adverse Effect on Future Market Price." Upon completion of this Offering, the Company expects to have 12,613,084 shares of Common Stock outstanding (excluding 482,823 shares reserved for issuance upon the exercise of outstanding stock options, 1,250,000 shares reserved for issuance upon the exercise of the Medic Warrant and 84,050 shares reserved for issuance upon the exercise of the 1998 Guaranty Warrants) (13,238,084 shares of Common Stock outstanding if the Underwriters' over-allotment option is exercised in full). Of these shares, the 4,166,667 shares offered hereby will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act, which will be subject to the resale limitations imposed by Rule 144, as described below. All of the remaining 8,446,417 shares of Common Stock outstanding will be "restricted securities" within the meaning of Rule 144 and may not be resold in the absence of registration under the Securities Act, or pursuant to exemptions from such registration including, among others, the exemption provided by Rule 144 under the Securities Act. Of the restricted securities, 626,758 shares are eligible for sale in the public market immediately after this Offering pursuant to Rule 144(k) under the Securities Act. A total of 7,819,659 additional restricted securities will be eligible for sale in the public market in accordance with Rule 144 or 701 under the Securities Act beginning 90 days after the date of this Prospectus. Taking into consideration the effect of the lock-up agreements described below and the provisions of Rules 144 and 144(k), 223,030 restricted shares will be eligible for sale in the public market immediately after this Offering, 20,511 restricted shares will be eligible for sale beginning 90 days after the date of this Prospectus, and the remaining restricted shares will be eligible for sale upon the expiration of the lock-up agreements 180 days after the date of this Prospectus, subject to the provisions of Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are required to be aggregated) whose restricted securities have been outstanding for at least one year, including a person who may be deemed an "affiliate" of the Company, may only sell a number of shares within any three-month period which does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock (approximately 126,131 shares after this Offering) or (ii) the average weekly trading volume in the Company's Common Stock in the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. A person who is not an affiliate of the issuer, has not been an affiliate within three months prior to the sale and has owned the restricted securities for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. In addition, the Company has granted demand and piggyback registration rights to WCAS CP II with respect to 370,993 shares of Common Stock and to Medic with respect to 1,250,000 shares of Common Stock issuable upon the exercise of the Medic Warrant. All or part of such shares may be sold in the public market following the exercise of such rights subject to the lock-up arrangements described below with respect to WCAS CP II and to vesting and exercise requirements with respect to the Medic Warrant. All officers, directors and certain holders of Common Stock beneficially owning, in the aggregate, 8,202,876 shares of Common Stock and options to purchase 482,823 shares of Common Stock, have agreed, pursuant to certain lock-up agreements, that they will not sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge, or otherwise dispose of, directly or indirectly, any shares of Common Stock owned by them, or that could be purchased by them through the exercise of options to purchase Common Stock of the Company, for a period of 180 days after the date of this 69 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." 70 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement, dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, shares of Common Stock which equal the number of shares set forth opposite the name of such Underwriter below.
UNDERWRITER NUMBER OF SHARES - --------------------------------------------- ----------------- Salomon Smith Barney Inc. ................ Bear, Stearns & Co. Inc. ................. William Blair & Company, L.L.C. .......... Total ................................. ============
The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co. Inc. and William Blair & Company, L.L.C. are acting as representatives (the "Representatives"), propose initially to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain other dealers. After the initial public offering, the public offering price and such concessions may be changed by the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 625,000 additional shares of Common Stock at the public offering price set forth on the cover page hereof less underwriting discounts and commissions. The Underwriters may exercise such option to purchase additional shares solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares in such table. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company and its executive officers and directors and certain other holders of Common Stock and securities convertible into or exercisable or exchangeable for Common Stock have agreed that for a period of 180 days after the date of this Prospectus they will not, without the prior written consent of Salomon Smith Barney Inc., sell, offer to sell, solicit an offer to purchase, contract to sell, grant any option to sell, pledge or otherwise dispose of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock except in certain limited circumstances. See "Shares Eligible for Future Sale." 71 At the Company's request, the Underwriters have reserved up to 5% of the shares of Common Stock (the "Directed Shares") for sale at the initial public offering price to persons who are directors, officers or employees of, or otherwise associated with, the Company and its affiliates and who have advised the Company of their desire to purchase shares of Common Stock. The number of shares of Common Stock available for sale to the general public will be reduced to the extent of sales of Directed Shares to any of the persons for whom they have been reserved. Any shares of Common Stock not so purchased will be offered by the Underwriters on the same basis as all other shares of Common Stock offered hereby. The Company has agreed to indemnify those Underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the Directed Shares. In connection with this Offering and in accordance with applicable law and industry practice, the Underwriters may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of a security. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits Salomon Smith Barney Inc., as managing underwriter, to reclaim a selling concession from a syndicate member in connection with the Offering when shares of Common Stock originally sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. The Underwriters are not required to engage in any of these activities. Any such activities, if commenced, may be discontinued at any time. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company and the Representatives. Among the factors considered in determining the initial public offering price were the history of, and the prospects for, the Company's business and the industry in which it competes, an assessment of the Company's management, its past and present operations, the past and present results of operations of the Company and the trend of such results of operations, the prospects for earnings of the Company, the present state of the Company's development, the general condition of the securities market at the time of this Offering and the market prices of similar securities of comparable companies at the time of this Offering. William Blair & Company, L.L.C., one of the Representatives of the Underwriters, is affiliated with Blair V and Blair LCF, two of the Company's principal stockholders and, by virtue of such affiliation, is, prior to the Offering, an "affiliate" of the Company within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, the Offering is being made in conformity with certain applicable provisions of Rule 2720. Salomon Smith Barney Inc., another Underwriter of the Offering (the "Independent Underwriter"), will act as a "qualified independent underwriter," as defined in Rule 2720, in connection with the Offering. The Independent Underwriter, in its role as qualified independent underwriter, has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. The Independent Underwriter will not receive any additional fees for serving as a qualified independent underwriter in connection with the Offering. The price of shares of Common Stock sold to the public will be no higher than that recommended by the Independent Underwriter. Timothy M. Murray, a director of the Company, is a managing director of WBCP and a principal of William Blair & Company, L.L.C. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Reboul, MacMurray, Hewitt, Maynard & Kristol and for the Underwriters by Dewey Ballantine LLP, New York, New York. 72 EXPERTS The consolidated financial statements of the Company as of June 30, 1997 and 1998 and for each of the three years in the period ended June 30, 1998 included in this Prospectus, and the related financial statement schedule included elsewhere in this Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement, and have been so included in reliance upon such report given upon their authority as experts in accounting and auditing. The statement of operations of Stockton for the year ended June 30, 1997 included in this Prospectus has been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and has been so included in reliance upon such report given upon their authority as experts in accounting and auditing. The consolidated financial statements of Healthcare Interchange, Inc. and subsidiary as of June 30, 1998 and for the nine-month period ended June 30, 1998, included herein and elsewhere in the registration statement have been audited and reported upon by KPMG LLP, independent certified public accountants. Such financial statements have been included herein and in the registration statement in reliance upon the report of KPMG LLP, appearing herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1, including amendments thereto (the "Registration Statement"), under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being deemed to be qualified in its entirety by such reference. The Registration Statement, including all exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: the New York regional office located at 7 World Trade Center, Suite 1300, New York, New York 10048, and the Chicago regional office located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this material may also be obtained from the Commission's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, such material may also be accessed electronically at the Commission's Internet home page: (http:// www.sec.gov). The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent public accountants, and will make available quarterly reports for the first three quarters of each fiscal year containing unaudited financial information and such other periodic reports as the Company may determine to be appropriate or as may be required by law. 73 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., December 11, 1998 as to Note 13 and January 26, 1999 as to Note 14) 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 --------- --------- --------- SERIES A REDEEMABLE CUMULATIVE PREFERRED STOCK: $.01 par value; 250 shares authorized; 240 shares issued and outstanding (aggregate liquidation value of $23,996 plus ac- crued dividends) (Notes 8 and 9) ................................ 28,823 31,223 31,823 $ -- --------- --------- --------- --------- COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' (DEFICIT) EQUITY: Common stock, $.01 par value; 6,329 shares authorized; 5,671, 5,685 and 5,685 shares issued and outstanding, respectively. 57 57 57 84 Additional paid-in capital ........................................ 27,713 25,584 27,521 59,317 Accumulated deficit ............................................... (45,208) (50,243) (51,328) (51,328) Deferred compensation (Note 8) .................................... -- (90) -- -- --------- --------- --------- --------- Total stockholders' (deficit) equity ............................ (17,438) (24,692) (23,750) $ 8,073 --------- --------- --------- --------- TOTAL .............................................................. $ 48,090 $ 59,394 $ 64,726 ========= ========= =========
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 into common stock at the assumed initial public offering ("IPO") price of $12.00 per share. See Note 8. q. Reclassifications -- Certain amounts in prior years' financial statements have been reclassified to conform with the 1998 presentation. 2. ACQUISITIONS a. EC&F and Premier -- In October 1995, the Company acquired all of the outstanding shares of EC&F and Premier, which companies had common ownership, for a cash purchase price of approximately $4,050,000, including transaction expenses. The transaction was financed through loans obtained from the Company's majority stockholder. Such loans were subsequently repaid with borrowings under the Company's Credit Facility (as herein defined). In addition, the Company is contingently liable for additional consideration if certain earnings levels are attained relating to EC&F during the three-year period following the consummation of the transaction. At June 30, 1996, the Company accrued $538,000 in connection with the contingent liability relating to earnings levels attained during the first year. At June 30, 1997, the Company accrued a settlement totaling $2,216,000 relating to the contingent liability for the second and third years. Such accruals of contingent considerations were recorded as compensation expense as these contingent payments were made to former shareholders of EC&F and Premier who were required by the stock purchase agreement to remain in the Company's employ during the period in which the contingent consideration was to be earned. Purchased software and technology was valued at $764,000 and generally is being amortized over three years. EC&F and Premier are developers of electronic systems which provide EDI services to the dental industry. In March 1997, the Company sold the operating net assets of Premier for $540,000, including the buyer's assumption of $152,000 of Premier liabilities. There was no gain or loss on the sale of such net assets. b. TCS -- In February 1997, the Company purchased certain assets of Time-Share Computer Systems, Inc. ("TCS") for $11,465,000, including transaction expenses. Purchased in-process research and development, which had not reached technological feasibility and had no alternative future use amounted to $1,556,000 and was charged to operations at the acquisition date. Purchased software and technology was valued at $2,984,000 and generally is being amortized over three years. TCS provides data pro- F-9 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) cessing and information management services to healthcare providers and pharmacies through integrated electronic data interchange systems. The acquisition was financed by a portion of the proceeds from the Senior Subordinated Note and Share Purchase Agreement (as hereinafter defined) (Note 6). c. Stockton -- In November 1997, the Company purchased certain assets and assumed certain liabilities of The Stockton Group, Inc. ("Stockton") for a cash purchase price of $10,674,000, including transaction expenses. In addition, the Company is contingently liable for additional consideration of up to $2,600,000 (plus interest at an annual rate of 7.25%) if Stockton's revenue during the 12-month period ended September 30, 1998 is at least $5,000,000. Based on revenues recorded through September 30, 1998 by Stockton, the Company has accrued additional contingent consideration of $2,022,000 as of September 30, 1998, which was treated as additional purchase price and was, therefore, added to goodwill. Purchased software and technology and client lists were valued at $1,230,000 and $903,000, respectively, and generally are being amortized over five years. Stockton is engaged in the business of providing EDI and transaction processing services to the healthcare industry. The transaction was financed through borrowings under the Company's Credit Facility. These acquisitions were recorded using the purchase method of accounting and, accordingly, the results of operations of these acquired companies are included in the consolidated results of operations of the Company since the dates of their respective acquisitions. The purchase price of each acquisition has been allocated to the respective net assets acquired based upon their fair values. Goodwill, which represents the excess of cost over the estimated fair value of the net assets acquired, for these transactions were as follows: EC&F and Premier -- $3,586,000; TCS -- $6,525,000 and Stockton -- $8,281,000. Goodwill is being amortized over 20 years except for the goodwill recorded in connection with the acquisition of TCS which is being amortized over seven years. The following unaudited pro forma information for the year ended June 30, 1997 and 1998 includes the operations of the Company, inclusive of the operations of both TCS and Stockton as if the acquisitions had occurred at July 1, 1996. This pro forma information gives effect to the amortization expense associated with goodwill and other intangible assets acquired, adjustments related to the fair market value of the assets and liabilities acquired, interest expense relating to financing the acquisitions, and related income tax effects.
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 29, 1999. Borrowings under the agreement bear interest at either the bank's base rate, as defined, plus .25% or an offshore rate, as defined, plus 1.25%. The weighted average interest rate on outstanding borrowings at October 31, 1998 was 6.41%. The Company is required to pay a commitment fee of .375% per annum on the unused portion of the Credit Facility. All borrowings under the agreement are guaranteed by certain stockholders of the Company. In consideration for the granting of such guarantees, the stockholders were issued warrants to purchase 52,530 shares (valued at $121,000), 18,330 shares (valued at $52,000) and 34,200 shares (valued at $98,000) of the Company's common stock during the years ended June 30, 1996, 1997 and 1998, respectively. In addition, the stockholders were issued warrants to purchase 84,050 shares on October 7, 1998 in consideration for the granting of the most recent guaranty. All warrants issued were valued using the Black-Scholes Option Pricing Model. The aggregate fair value of these warrants is recorded in other assets as deferred financing costs and is being amortized over the life of the agreement. The terms of the agreement, among F-12 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, of which 250,000 were designated as relating to Series A redeemable cumulative preferred stock (Note 9). e. Recapitalization -- In conjunction with the proposed IPO and as provided for in the Company's July 27, 1998 amendment and restatement of its certificate of incorporation, the Company contemplates a recapitalization of its capital stock (the "Recapitalization"). The Recapitalization involves the conversion of all outstanding preferred stock into common stock (based upon liquidation value as defined in Note 9) and the exercise of all outstanding warrants other than the Medic Warrant (as herein defined) and warrants to purchase 84,050 shares of common stock issued on October 7, 1998. (See Note 6.b.). However, cash realized by the Company upon any exercise of the underwriters' overallotment option would be applied to the payment of accrued dividends on the preferred stock and the remainder of such accrued dividends would convert into common stock. The preferred stock conversion will be effected based upon the IPO price per share. Assuming an IPO price of $12.00 per share and no exercise of the underwriters' overallotment, the preferred stock will be converted into approximately 2,652,000 shares of common stock. The warrants will be converted, in a cashless exercise, into approximately 60,000 shares of common stock. f. Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has approved the 1998 Employee Stock Purchase Plan (the "Purchase Plan"). Employees of the Company, including directors of the Company who are employees, are eligible to participate in quarterly plan offerings in which payroll deductions may be used to purchase shares of common stock. The purchase price of such shares is the lower of 85 percent of the fair market value of the common stock on the day the offering commences and 85 percent of the fair market value of the common stock on the date the offering terminates. The first offering period under the Purchase Plan will not commence until the completion of the IPO. g. New Stock Option and Restricted Stock Purchase Plan -- In anticipation of the proposed IPO, the Board has approved the 1998 Stock Option and Restricted Stock Purchase Plan (the "New Stock Plan"). The New Stock Plan permits the granting of any or all of the following types of awards: incentive stock options; nonqualified stock options; restricted stock; or other stock-based awards, to officers, employees, directors, consultants and advisors of the Company. To date, no options have been granted under the New Stock Plan; however, the Board determined to grant options to purchase an aggregate 400,000 shares of common stock pursuant to the New Stock Plan to certain F-16 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) employees of the Company (including certain executive officers) contingent upon consummation of the IPO. Such options, which include both incentive and non-qualified stock options, will have an exercise price equal to the price to the public in the IPO and generally will vest ratably over four years from the date of grant except that the initial installment of options to be granted to certain executive officers will vest immediately upon consummation of the IPO. h. On November 15, 1998, the Board determined to grant options (such grant to be effective as of the date of the IPO) to purchase an aggregate 51,500 shares of common stock under the New Stock Plan to certain employees of the Company, most of whom were formerly employed by HII. Such options will be incentive stock options, will have an exercise price equal to the price to the public in the IPO and generally will vest ratably over four years from the date of grant. 9. SERIES A REDEEMABLE CUMULATIVE PREFERRED STOCK As of June 30, 1997 and 1998, the Company had outstanding 239,956 shares of preferred stock. The preferred stock is subject to mandatory redemption in two equal installments on May 31, 2001 and 2002; however, the Company may redeem the preferred stock in whole at any time or in part from time to time at its option. The Company would also be required to redeem the preferred stock should it consummate a public offering of its common stock pursuant to which the Company receives aggregate net proceeds of at least $15,000,000. (See Note 8). The redemption price, as well as liquidation value, of the preferred stock is $100 per share plus any accrued but unpaid dividends. Dividends on this preferred stock, which are cumulative, are payable, if declared, at $10 per share per annum. No dividends have been declared or paid. At September 30, 1998, cumulative undeclared and unpaid dividends on this preferred stock totaled $7,827,000. 10. COMMITMENTS AND CONTINGENCIES a. Leases -- The Company leases certain offices and equipment under operating leases. The minimum noncancelable lease payments are as follows (in thousands):
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 remuneration 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 levels of the services of such providers. These agreements expire through November 2001. The Company was in compliance with the terms of these agreements as of June 30, 1998. The minimum annual amounts under these agreements are as follows (in thousands):
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 stockholders ..... (13,864) (11,233) (7,035) (7,435) Basic and diluted net loss per common share..... $ (2.56) $ (2.07) $ (1.24) $ (1.31)
14. SUBSEQUENT EVENTS a. Acquisition -- In October 1998, the Company acquired all the outstanding shares of capital stock of Healthcare Interchange Inc. ("HII") a St. Louis, Missouri-based provider of EDI transaction processing services to hospitals and physician groups in Missouri, Kansas and Illinois. Prior to the acquisition of HII, two unrelated healthcare services divisions, Intercare and Telemedical, were divested from HII in separate transactions. HII was purchased for a total cash payment of approximately $11,718,000, including transaction expenses and was financed with borrowings under the Credit Facility. The acquisition will be accounted for under the purchase method of accounting. The following unaudited pro forma information for the year ended June 30, 1998 includes the operations of the Company, inclusive of the operations of both Stockton and HII as if the acquisitions had occurred as of July 1, 1997. The pro forma information for the three months ended September 30, 1998 includes the operations of the Company, inclusive of the operations of HII as if the acquisition had occurred at July 1, 1997. This pro forma information gives effect to the amortization expense associated with goodwill and other intangible assets acquired, adjustments related to the fair market value of the assets and liabilities acquired interest expense related to financing the acquisitions, and related income tax effects. The allocation of the purchase price is preliminary and subject to change upon review by management of additional evidence relating to the fair value of assets acquired and liabilities assumed at the closing date. Adjustments to the purchase price allocation, if any, would likely relate to amounts assigned to intangible assets. F-19 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. New Credit Facility -- On January 26, 1999, the Company entered into a Credit Agreement (the "New Credit Facility"). The New Credit Facility provides for a $25 million revolving credit facility that matures on January 26, 2002. The New Credit Facility is not guaranteed by any third party, but is secured by substantially all of the Company's assets including the stock of the Company's subsidiaries. The New Credit Facility contains various covenants and conditions, including those relating to Year 2000 compliance, changes in control and management and restrictions on the payments of dividends on the common stock. The closing of the initial lending under the New Credit Facility is anticipated to take place simultaneously with the IPO. Such closing is subject to a number of conditions and covenants on the part of the Company. Assuming that the initial lending under the New Credit Facility takes place as scheduled, the Company intends to borrow sufficient funds under the New Credit Facility in order to repay all amounts outstanding under the existing Credit Facility. 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. The Company's fiscal year end is September 30. Unaudited Interim Consolidated Financial Statements -- The consolidated balance sheet of the Company as of September 30, 1998 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the three-month period ended September 30, 1998 included in the accompanying consolidated financial statements, which are unaudited, include the accounts of Healthcare Interchange, Inc. and its wholly-owned subsidiary. All significant intercompany accounts have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Adjustments consist only of normal recurring items. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Cash and Cash Equivalents -- The Company considers cash equivalents to be securities held for cash management purposes having original maturities of three months or less at the time of investment. b. Inventories -- Inventories are stated at the lower of cost or market. Cost is determined principally using the specific identification method. Inventories at June 30, 1998 are comprised principally of raw materials. c. Property, Equipment and Computer Software -- Property, equipment and computer software are carried at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset. Costs associated with the internal development of software are capitalized once the marketability and technological feasibility of the software have been established. The property, equipment and computer software are depreciated on the straight-line basis over the following useful lives:
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
F-30 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) d. Income Taxes -- Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those differences are expected to be recovered or settled. e. Revenue Recognition -- The Company recognizes revenue from the sale of its services in the period that the services are delivered or provided. Unearned income on service contracts is amortized by the straight-line method over the term of the contracts. Revenue from the sale of the Company's products is recognized in the period that the products are shipped to the customers. f. Stock-Based Compensation -- The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock options. The Company has adopted the pro forma disclosures-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. g. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the period. Actual results may differ from those estimates. 3. DISCONTINUED OPERATIONS In fiscal 1999, the Company's Board of Directors approved a plan to discontinue the operations of its Televideo and Intercare operating segments; and on September 17, 1998, signed a letter of intent to sell substantially all the assets of the financial transactions business to MEDE America Corporation (MEDE America). See note 15. The Company's consolidated financial statements as of June 30, 1998 and for the nine-month period then ended include a charge of $2,073,601 to provide for an after-tax loss on the disposal of the discontinued operations, including estimated operating losses of $342,971 through the expected date of disposal. Operating results for the nine-month period ended June 30, 1998 and financial position as of June 30, 1998 of the discontinued segments are summarized below: Results of operations: NINE-MONTH PERIOD ENDED JUNE 30, 1998 -------------------- Net revenues .............................. $ 528,552 Loss from discontinued operations ......... (4,100,385) ============ Financial position: AS OF JUNE 30, 1998 -------------- Current: Accounts receivable, net ................ $ 162,271 Inventories ............................. 74,501 --------- $ 236,772 ========= Non-current - property, equipment and $ 176,455 computer software, net ......... ========= F-31 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 out- F-32 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) standing borrowings on the revolving credit facility was approximately $877,000 at a weighted average interest rate of 8.0% for the nine-month period ended June 30, 1998. The revolving credit facility had a balance of $1,010,000 at June 30, 1998. As of June 30, 1998, the carrying value of the Company's revolving credit facilities approximated fair value based upon borrowing rates currently available for debt instruments with similar remaining terms and maturities. The Company's $750,000 revolving credit facility and notes payable are secured by substantially all of the Company's assets. Additionally, the $500,000 and $2,500,000 revolving credit facilities are guaranteed by two of the Company's stockholders. The Company's commitment agreement with the local bank for the notes payable and revolving credit facilities contains restrictive covenants which include the maintenance of minimum tangible net worth, as defined, and certain financial ratios. The Company failed to meet certain covenant requirements which has placed the Company in technical default. Consequently, the Company has classified the entire outstanding balance of borrowings under the notes payable and revolving credit facilities as a current liability. 7. NOTES PAYABLE On February 28, 1995, the Company entered into a $300,000 note payable with a local bank. The note was paid in full by the Company in February 1998. The note payable accrued interest at a fixed rate of 9.0% and required monthly payments of principal and interest. On May 30, 1995, the Company entered into a $170,000 note payable with a local bank. The note bears interest at a fixed rate of 9.75%, requires monthly payments of principal and interest, with the balance due on May 30, 2000, and is secured by substantially all assets of the Company. The note is payable on demand, and accordingly, is classified as a current liability. The balance at June 30, 1998 was $73,751. 8. RELATED PARTY TRANSACTIONS During the nine-month period ended June 30, 1998, two stockholders provided network and other services to the Company. Total expenses incurred by the Company for these services totaled approximately $116,000 for the nine-month period ended June 30, 1998. At June 30, 1998, the Company owed approximately $152,000, to these stockholders for such services. Revenue received from services provided to stockholders totaled approximately $844,000 for the nine-month period ended June 30, 1998. Due from stockholders represents amounts receivable for services provided to the stockholders. 9. LEASE COMMITMENTS The Company leases certain office space and equipment under various lease agreements. Rent expense of the continuing operations of the Company totaled $183,291 for the nine-month period ended June 30, 1998. Future minimum lease payments under noncancellable operating leases with maturities in excess of one year related to continuing operations are as follows: 1999 ........... $238,240 2000 ........... 240,133 2001 ........... 212,320 2002 ........... 208,969 2003 ........... 199,460 Thereafter ..... 395,841 ======= F-33 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 4,166,667 SHARES NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS [GRAPHIC OMITTED] DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A MEDE AMERICA SOLICITATION OF AN OFFER TO BUY ANY OF THE CORPORATION SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------------------------------- TABLE OF CONTENTS COMMON STOCK PAGE ---- Prospectus Summary ............................ 3 Risk Factors .................................. 10 The Company ................................... 18 Use Of Proceeds ............................... 19 Dividend Policy ............................... 19 Capitalization ................................ 20 Dilution ...................................... 21 Unaudited Pro Forma Consolidated Financial Information ................................ 22 Selected Consolidated Financial Data .......... 28 Management's Discussion And Analysis Of Financial Condition And Results Of -------------------------- Operations ................................. 30 P R O S P E C T U S Business ...................................... 44 , 1999 Management .................................... 56 -------------------------- Certain Transactions .......................... 62 Principal Stockholders ........................ 63 Description Of Capital Stock .................. 66 Shares Eligible For Future Sale ............... 69 Underwriting .................................. 71 Legal Matters ................................. 72 Experts ....................................... 73 Additional Information ........................ 73 Index To Financial Statements ................. F-1 SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC. WILLIAM BLAIR & COMPANY ----------------- UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ===============================================================================================================
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. 3.5 -- Amendment to Certificate of Incorporation of the Registrant 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 + -- Letter dated January 8, 1999 from Nationsbank N.A. to MEDE AMERICA Corporation, re- garding the proposed credit facility. 10.7 + -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8 -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan. 10.9** -- Transaction Processing Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 10.10+ -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan. 10.11+ -- Fifth Amendment To Credit Agreement dated as of October 7, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.12+ -- Sixth Amendment to Credit Agreement dated as of December 15, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.13+ -- Stock Purchase Agrement, dated as of October 20, 1998 among MEDE AMERICA Corporation and the Stockholders of Healthcare Interchange, Inc. named in Schedule I thereto. 10.14+ -- Letter Agreement dated as of January 8, 1999 between MEDE AMERICA Corporation and Bank of America Illinois.
II-4
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.15 -- Credit Agreement, dated as of January 26, 1999, among MEDE AMERICA Corporation, MEDE AMERICA Corporation of Ohio, Healthcare Interchange, Inc., the Initial Lenders named therein, NationsBank, N.A., and NationsBanc Montgomery Securities LLC. 21.1+ -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3 -- Consent of KPMG LLP, independent accountants. 23.4* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1+ -- Power of Attorney. 27.1+ -- Financial Data Schedule.
- ---------- * 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 January 28, 1999. 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 - --------------------------- --------------------------------------- ----------------- /s/ THOMAS P. STAUDT President and Chief Executive January 28, 1999 - ------------------------- Officer(Principal executive Thomas P. Staudt officer); Director /s/ THOMAS P. STAUDT* Chief Financial Officer (Principal January 28, 1999 - ------------------------- financial and accounting officer) Richard P. Bankosky /s/ THOMAS P. STAUDT* Director January 28, 1999 - ------------------------- Thomas E. McInerney /s/ THOMAS P. STAUDT* Director January 28, 1999 - ------------------------- Anthony J. de Nicola /s/ THOMAS P. STAUDT* Director January 28, 1999 - ------------------------- 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. 3.5 -- Amendment to Certificate of Incorporation of the Registrant 4.1+ -- Specimen certificate for shares of Common Stock. 4.2+ -- Note and Share Purchase Agreement between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P., dated as of February 14, 1997. 4.3+ -- Warrant Agreement dated as of October 31, 1997 among MEDE AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Part- ners V, L.P., and Warrants issued thereunder. 4.4 + -- Warrant Agreement dated as of January 10, 1997 among MEDE AMERICA Corporation, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Part- ners V, L.P., and Warrants issued thereunder. 4.5 + -- Warrant Agreement dated as of December 18, 1995 among MEDE AMERICA Corpora- tion, Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Partners V, L.P., and Warrants issued thereunder. 4.6 + -- Registration Rights Agreement, dated as of February 14, 1997 between MEDE AMERICA Corporation and WCAS Capital Partners II, L.P. 4.7 + -- Warrant, dated as of July 17, 1998, issued by MEDE AMERICA Corporation to Medic Computer Systems, Inc. 4.8 + -- Registration Rights Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 4.9 + -- Stockholders Agreement, dated as of July 17, 1998 among Medic Computer Systems, Inc., Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., William Blair Capital Partners V, L.P., WCAS Capital Partners II, L.P., and William Blair Leveraged Capital Fund Limited Partnership. 4.10+ -- Investment Agreement, dated as of July 17, 1998 between MEDE AMERICA Corporation and Medic Computer Systems, Inc. 4.11+ -- Warrant Agreement dated as of October 7, 1998 among MEDE AMERICA Corporation, Welsh, Carson Anderson & Stowe VI, L.P., William Blair Leveraged Capital Fund Limited Partnership and William Blair Capital Partners V.I.P., and Warrants issued thereunder. 5.1 -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1 + -- MEDE AMERICA Corporation and Its Subsidiaries Stock Option and Restricted Stock Purchase Plan as amended.
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.2 + -- Credit Agreement between MEDE AMERICA Corporation and Bank of America Illinois dated as of December 18, 1995 as amended, with accompanying guarantees. 10.3 + -- Form of Indemnification Agreement between MEDE AMERICA Corporation and Directors thereof. 10.4 + -- Agreement of Lease dated as of October 15, 1991 between HMCC Associates and MedE America, Inc. 10.5 + -- Lease Agreement dated as of July 10, 1995 as amended January 3, 1997 between T&J Enter- prises, LLC and Electronic Claims & Funding, Inc. 10.6 + -- Letter dated January 8, 1999 from Nationsbank N.A. to MEDE AMERICA Corporation, re- garding the proposed credit facility. 10.7 + -- Form of Non-Competition, Non-Solicitation and Confidentiality Agreement between MEDE AMERICA Corporation and Employees. 10.8 -- MEDE AMERICA Corporation and Its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan. 10.9** -- Transaction Processing Agreement, dated as of July 17, 1998 between MEDE AMERICA Cor- poration and Medic Computer Systems, Inc. 10.10+ -- MEDE AMERICA Corporation 1998 Employee Stock Purchase Plan. 10.11+ -- Fifth Amendment To Credit Agreement dated as of October 7, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.12+ -- Sixth Amendment to Credit Agreement dated as of December 15, 1998 between MEDE AMERICA Corporation and Bank of America National Trust and Savings Association. 10.13+ -- Stock Purchase Agrement, dated as of October 20, 1998 among MEDE AMERICA Corporation and the Stockholders of Healthcare Interchange, Inc. named in Schedule I thereto. 10.14+ -- Letter Agreement dated as of January 8, 1999 between MEDE AMERICA Corporation and Bank of America Illinois. 10.15 -- Credit Agreement, dated as of January 26, 1999, among MEDE AMERICA Corporation, MEDE AMERICA Corporation of Ohio, Healthcare Interchange, Inc., the Initial Lenders named therein, NationsBank, N.A., and NationsBanc Montgomery Securities LLC. 21.1+ -- Subsidiaries of the Company. 23.1 -- Consent of Deloitte & Touche LLP, independent accountants. 23.2 -- Consent of Deloitte & Touche LLP, independent accountants. 23.3 -- Consent of KPMG LLP, independent accountants. 23.4 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1+ -- Power of Attorney. 27.1+ -- Financial Data Schedule.
- ---------- * To be filed by amendment. ** Confidential treatment requested. + Previously filed. EX-3.5 2 EXHIBIT 3.5 CERTIFICATE OF AMENDMENT to AMENDED AND RESTATED CERTIFICATE OF INCORPORATION of MEDE AMERICA CORPORATION MEDE AMERICA CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST: that the following resolutions were duly adopted by unanimous written consent of the Board of Directors of the Corporation, setting forth proposed amendments to the Certificate of Incorporation of the Corporation; determining that the capital of the Corporation will not be decreased on account of such amendments; and declaring such amendments to be advisable and directing that such amendments be submitted to the stockholders of the Corporation for its approval. The resolutions are as follows: "RESOLVED, that there is hereby adopted an amendment to the Corporation's Amended and Restated Certificate of Incorporation pursuant to which Section 1 of Part I of Article FOURTH of the Amended and Restated Certificate of Incorporation of the Corporation shall be amended to include the following as subsection (iii): '(iii) To the extent that the Corporation receives proceeds from the exercise of an underwriter's over-allotment option in a firm commitment initial public offering as contemplated by Section 6A, those proceeds received shall be used to pay accrued and unpaid dividends on the Series A Preferred Stock. Such payment shall be made immediately prior to the mandatory conversion of the Series A Preferred Stock described in Section 6A.' "RESOLVED, that there is hereby adopted an amendment to the Corporation's Amended and Restated Certificate of Incorporation pursuant to which the last sentence of Section 6A of Part I of Article FOURTH of the Amended and Restated Certificate of Incorporation of the Corporation shall be amended, to read in its entirety, as follows: 'Such conversion shall be effective 30 days after the closing of such public offer ing or sooner if upon the exercise of the underwriter's over-allotment option (the "Conversion Date"); provided, however, that certificates evidencing the shares of Common Stock issuable upon such conversion shall not be issued except on surrender of the certificates for the shares of the Series A Preferred Stock so converted. "RESOLVED, that there is hereby adopted an amendment to the Corporation's Amended and Restated Certificate of Incorporation pursuant to which Section 6B of Part I of Article FOURTH of the Amended and Restated Certificate of Incorporation of the Corporation shall be amended, to include the following sentence as the fourth sentence thereof: 'No dividends shall accrue on the Series A Preferred Stock during the period between the closing of a public offering contemplated by Section 6A and the Conversion Date.' "RESOLVED that the Board of Directors determines that the capital of the Corporation will not be decreased on account of the foregoing amendment, declares the foregoing amendment to the Corporation's Amended and Restated Certificate of Incorporation to be advisable and directs that the amendment be submitted to the stock holders of the Corporation for their approval pursuant to Section 242(b) of the General Corporation Law of the State of Delaware." SECOND: that the Amendment of the Amended and Restated Certificate of Incorporation effected by this Certificate was duly authorized by the holders of a majority of the outstanding capital stock of the Corporation entitled to vote thereon, after first having been declared advisable by the Board of Directors of the Corporation, all in accordance with the provi sions of Section 242 of the Delaware General Corporation Law. THIRD: that the capital of the Corporation will not be reduced under, or by reason of, the foregoing amendment to the Certificate of Incorporation of the Corporation. IN WITNESS WHEREOF, MEDE AMERICA CORPORATION has caused this certificate to be signed by Thomas Staudt, its President and Chief Executive Officer, this 20th day of January, 1999. MEDE AMERICA CORPORATION By:/s/ Thomas Staudt ------------------------------------- Thomas Staudt President and Chief Executive Officer EX-5.1 3 EXHIBIT 5.1 EXHIBIT 5.1 REBOUL, MACMURRAY, HEWITT, MAYNARD & KRISTOL 45 Rockefeller Plaza New York, New York 10111 January 28, 1999 MedE America Corporation 90 Merrick Avenue East Meadow, New York 11554 Ladies and Gentlemen: We have acted as counsel to MedE America Corporation, a Delaware corporation (the "Company"), in connection with the preparation and filing of the Registration Statement (File No. 333-55977) of the Company on Form S-1, as amended (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), relating to the public offering (the "Offering") by the Company of up to 4,791,667 shares (including 625,000 shares subject to over-allotment options) of Common Stock, $.01 par value, of the Company (the "Common Stock"). In that connection, we have participated in the preparation of the Registration Statement, including the Prospectus contained therein (the "Prospectus") and have reviewed certain corporate proceedings. In addition, we have examined originals or copies certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, as we have deemed necessary to form a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of all such latter documents. As to all questions of fact material to this opinion that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The Company is a corporation duly incorporated and validly existing under the laws of the State of Delaware. 2. The shares of Common Stock to be registered for sale by the Company under the Registration Statement have been duly authorized and, when issued and paid for as contemplated by the Prospectus, will be validly issued, fully paid and non-assessable. The opinions expressed herein are limited to the corporate laws of the State of Delaware and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction. The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. These opinions may not be used or relied upon by any other person, nor may this letter or any copies thereof be furnished to a third party, filed with a governmental agency, quoted cited or otherwise referred to without our prior written consent. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. In giving the foregoing consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. We also consent to the incorporation by reference of this opinion in a related registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act. Very truly yours, REBOUL, MACMURRAY, HEWITT MAYNARD & KRISTOL 2 EX-10.8 4 EXHIBIT 10.8 EXHIBIT 10.8 MEDE AMERICA CORPORATION AND ITS SUBSIDIARIES 1998 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN Section 1. Purpose. The purpose of the MEDE AMERICA Corporation and its Subsidiaries 1998 Stock Option and Restricted Stock Purchase Plan (the "Plan") is to promote the interests of MEDE AMERICA Corporation, a Delaware corporation (the "Company"), and any Subsidiary thereof and the interests of the Company's stockholders by providing an opportunity to selected Employees, Consultants and Non-Employee Directors of the Company to purchase Common Stock of the Company, thereby enhancing the Company's ability to attract, retain, motivate and encourage such persons to devote their best efforts to the business and financial success of the Company. It is intended that this purpose will be effected by awards of Non-Qualified Stock Options, Incentive Stock Options, Restricted Stock and/or Unrestricted Stock. Section 2. Definitions. For purposes of the Plan, the following terms used herein have the following meanings, unless a different meaning is clearly required by the context: 2.1. "Administrator" means the Board of Directors or any Committees that shall be administering the Plan in accordance with Section 4 hereof. 2.2. "Annual Option" means a Non-Qualified Stock Option granted to a Non- Employee Director on the next business day following each annual meeting of stockholders at which such Non-Employee Director is elected as a Director, other than the annual meeting of stockholders at which such Non-Employee Director is initially elected a Director. 2.3. "Applicable Laws" means the legal requirements relating to the administration of stock option plans under state corporate laws, federal and state securities laws and the Code. 2.4. "Award" means any award of an Option or Stock under the Plan. 2.5. "Board of Directors" means the Board of Directors of the Company. 2.6. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.7. "Committee" means any committee appointed by the Board of Directors in accordance with Section 4 of the Plan. 2.8. "Common Stock" means the Common Stock, $.01 par value, of the Company. 2.9. "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary of the Company to render services and who is compensated for such services; provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. 2.10. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Administrator, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 2.11. "Director Option" means an Initial Option or an Annual Option.. 2.12. "Director" means any member of the Board of Directors. 2.13. "Employee" means any person, including without limitation, an officer of the Company, who, is employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall constitute "employment" by the Company. 2.14. "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; or 2 (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. 2.15. "Incentive Stock Option" means an Option granted to a Participant pursuant to Section 6 (including Section 6.7 thereof) which is intended to meet the requirements of Section 422 of the Code or any successor provision. 2.16. "Initial Option" means a Non-Qualified Stock Option granted pursuant to Section 6.8 to a Non-Employee Director on the first business day following his or her initial election to the Board of Directors. 2.17. "Non-Employee Director" means a Director who is not an employee of the Company or any Parent, Subsidiary or affiliate of the Company and is not (and is not affiliated with) a beneficial owner of 5% or more of the voting stock of the Company. 2.18. "Non-Qualified Stock Option" means an Option granted to a Participant pursuant to Section 6 that is not intended to be an Incentive Stock Option. 2.19. "Option" means any Incentive Stock Option or Non-Qualified Stock Option. 2.20. "Parent" of the Company shall have the meaning set forth in Section 424(e) of the Code. 2.21. "Participant" means any Employee, Consultant or Non-Employee Director to whom an Award is granted under the Plan. 2.22. "Restricted Period" means the period of time selected by the Administrator during which shares subject to an Award of Restricted Stock may be repurchased by or forfeited to the Company. 2.23. "Reporting Person" means a Participant that is subject to Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2.24. "Restricted Stock" means shares of Common Stock awarded to a Participant under Section 7. 2.25. "Stock" means shares of Restricted Stock or Unrestricted Stock. 2.26. "Subsidiary" of the Company shall have the meaning set forth in Section 424(f) of the Code. 2.27. "Unrestricted Stock" means shares of Common Stock awarded to a Participant under Section 7 free of any restrictions under the Plan. 3 Section 3. Common Stock Subject to the Plan. 3.1. Number of Shares. The total number of shares of Common Stock for which Awards may be granted under the Plan shall not exceed in the aggregate [1,500,000 (###)] shares of Common Stock (subject to adjustment as provided in Section 3.3 hereof). The Company, during the term of this Plan, will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan. 3.2. Reissuance. The shares of Common Stock that may be subject to Awards under the Plan may be either authorized and unissued shares or shares reacquired at any time and now or hereafter held as treasury stock as the Administrator may determine. In the event that any outstanding Option expires, is terminated, forfeited or becomes unexercisable for any reason without having been exercised in full, the shares allocable to the unexercised portion of such Option may again be subject to an Award under the Plan, subject, in the case of Incentive Stock Options, to any limitation required by the Code. If any shares of Common Stock issued or sold pursuant to a Stock award or the exercise of an Option shall have been repurchased by the Company, then such shares shall not again be available for future grant or award under the Plan. 3.3. Stock Dividends, Etc.. In the event that the Administrator, in its sole discretion, determines that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or other similar transaction affects the Common Stock such that an adjustment is required in order to preserve or prevent enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator, subject, in the case of Incentive Stock Options, to any limitation required under the Code, may equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards and (iii) the award, exercise or conversion price with respect to any of the foregoing, and if considered appropriate, the Administrator may cause the number of shares subject to any Award always to be a whole number. The Administrator may make Awards under the Plan in substitution for stock and stock based awards held by employees of another corporation who concurrently become employees of the Company as a result of a merger or consolidation of the employing company with the Company or a Parent or Subsidiary of the Company or the acquisition by the Company or a Parent or Subsidiary of the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Administrator deems appropriate under the circumstances. 4 Section 4. Administration of the Plan. 4.1. Procedure. (a) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Participants. (b) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee consisting of two or more Non-Employee Directors. (c) Rule 16b-3. To the extent that the Administrator determines it to be desirable to qualify transactions hereunder as exempt under Rule 16b-3 of the Exchange Act, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (d) Other Administration. Other than as provided above, the Plan shall be administered by (i) the Board of Directors or (ii) a Committee, which committee shall be constituted to satisfy Applicable Laws. 4.2. Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific powers delegated by the Board of Directors to such Committee, the Administrator shall have the authority, in its discretion: (a) to determine the Fair Market Value of the Common Stock, in accordance with Section 2.14 of the Plan; (b) to select the Employees and Consultants to whom Awards may be granted hereunder; (c) to determine whether and to what extent awards of Options and Stock, or any combination thereof, are granted hereunder; (d) to determine the number of shares of Common Stock to be covered by each Award made hereunder; (e) to determine the amount (not less than par value per share) and the form of the consideration that may be used to purchase shares of Common Stock pursuant to any Stock award or upon exercise of any Option (including, without limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a Participant may be used by the Participant to exercise an Option); 5 (f) to approve forms of agreements for use under the Plan; (g) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder, including without limitation, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting, acceleration or waiver of forfeiture restrictions and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (h) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (i) to construe and interpret the terms of the Plan: (j) to prescribe, amend and rescind rules and regulations relating to the Plan; (k) to modify or amend the terms of any Award; (l) to accelerate vesting periods with respect to outstanding Options and the end of Restricted Periods with respect to Stock Awards; provided, however, that any Incentive Stock Options may only be"accelerated" in accordance with Section 424(h) of the Code; (m) to authorize any person to execute on behalf of the Company any instrument required to effect any Award granted by the Administrator; and (n) to exercise all other powers granted to the Administrator under the Plan and make all other determinations deemed necessary or advisable for administering the Plan. 4.3. Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Options or Stock awarded under the Plan . 4.4. Expenses, Etc. All expenses and liabilities incurred by the Administrator in the administration of the Plan shall be borne by the Company. The Administrator may employ attorneys, consultants, accountants or other persons in connection with the administration of the Plan. The Company, and its officers and directors, shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Administrator shall be liable for any action, determination or interpretation taken or made in good faith with respect to the Plan or any Award granted thereunder. 6 Section 5. Eligibility. Awards may be granted to any Employee, Consultant or Non-Employee Director. The Administrator shall have the sole authority to select the Employees and Consultants to whom discretionary Awards are to be granted hereunder, and to determine whether a person is to be granted a Non-Qualified Stock Option, an Incentive Stock Option, Restricted Stock or Unrestricted Stock, or any combination thereof. Non-Employee Directors shall only be eligible to receive grants of Non-Qualified Stock Options pursuant to Section 6.8 of the Plan. No person other than an Employee, Consultant or Non-Employee Director shall have any right to participate in the Plan. Any person selected by the Administrator for participation during any one period will not by virtue of such participation have the right to be selected as a Participant for any other period. The maximum number of shares of Common Stock which may be the subject of Awards granted to any one employee under the Plan during any calendar year shall be 300,000 shares. For this purpose, the grant of a new Award in substitution for outstanding Awards shall be deemed to constitute a new grant, separate from the original grant that is to be canceled. Incentive Stock Options may be granted only to persons eligible to receive Incentive Stock Options under the Code. Section 6. Options. 6.1. Subject to the provisions of the Plan, the Administrator may award Incentive Stock Options and Non-Qualified Stock Options, and determine the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422 of the Code, or any successor provision, and any regulations thereunder. 6.2. Exercise Price. The Administrator shall establish the exercise price of each Option at the time such Option is awarded. Such price shall not be less than 85% of the Fair Market Value of the Common Stock on the date of grant; provided that (i) in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value of the Common Stock at the time of grant and (ii) in the case of a Non-Qualified Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price shall not be less than 100% of the Fair Market Value at the time of grant. 6.3. Vesting. Each Option shall be exercisable at such times and subject to such terms and conditions as the Administrator may specify in the applicable Option agreement or thereafter. The Administrator may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. 6.4. Payment. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or check in an amount equal to the exercise price of such Options or, to the extent permitted by the Administrator at or after the award of the Option, by 7 (a) delivery of shares of Common Stock owned by the optionee, valued at their Fair Market Value on the date of such option exercise, (b) delivery of a promissory note of the optionee to the Company on terms determined by the Administrator, (c) delivery of an irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or delivery of irrevocable instructions to a broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price, (d) payment of such other lawful consideration as the Administrator may determine or (e) any combination of the foregoing. In the event an optionee pays some or all of the exercise price of an Option by delivery of shares of Common Stock pursuant to clause(a) above, the Administrator may provide for the automatic award of an Option for up to the number of shares so delivered. 6.5. Transferability. Each Option granted under the Plan shall provide that neither it nor any interest therein may be transferred, assigned, pledged or hypothecated, by the optionee or by operation of law otherwise than by will, the laws of descent and distribution or a "qualified domestic relations order" (as defined in the Code), and shall be exercised during the lifetime of the optionee only by the optionee or a transferree pursuant to such a "qualified domestic relations order". No Option or interest therein may be or be made subject to execution, attachment or similar process. 6.6. Cancellation and New Grant of Options. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the canceled Options or (ii) the amendment of the terms of any and all outstanding Options under the Plan to provide an option exercise price per share which is higher or lower than the then current exercise price per share of such outstanding Options. 6.7. Incentive Stock Options. Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. The exercise period shall not exceed ten years from the date of grant. (b) If any Employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rule of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: 8 (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and (ii) The Option exercise period shall not exceed five years from the date of grant. (c) For so long as the Code shall so provide, options granted to any Employee under the Plan (and any other incentive stock option plans of the Company or its Subsidiaries) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such Options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value (determined as of the respective date or dates of grant) of more than $100,000. (d) No Incentive Stock Option may be exercised unless, at the time of such exercise, the Participant is, and has been continuously since the date of grant of his or her Option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised (to the extent exercisable on the date the Participant ceased to be an Employee of the Company or a Parent or Subsidiary) within the period of three months after the date the Participant ceases to be an employee of the Company or such Parent or Subsidiary (or within such lesser period as may be specified in the applicable option agreement); provided, that the agreement with respect to such Option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a Non-Qualified Stock Option under the Plan; (ii) if the Participant dies while in the employ of the Company, or within three months after the Participant ceases to be an Employee, the Incentive Stock Option (to the extent otherwise exercisable on the date of death) may be exercised by the Participant's Designated Beneficiary within the period of one year after the date of death (or within such lesser period as may be specified in the applicable Option agreement); and (iii) if the Participant becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while in the employ of the Company, the Incentive Stock Option may be exercised (to the extent otherwise exercisable on the date of death) within the period of one year after the date of such disability (or within such lesser period as may be specified in the Option agreement). In the event of the Participant's death during this one-year period, the Incentive Stock Option may be exercised by the Participant's Designated Beneficiary within the period of one year from the date the Participant became disabled or within such lesser period as may be specified in the applicable Option agreement. 9 For all purposes of the Plan and any Option granted hereunder, (i) "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Treasury Regulations under the Code (or any successor regulations) and (ii) any Option may provide that if such Option shall be assumed or a new Option substituted therefor in a transaction to which Section 424(a) of the Code applies, employment by such assuming or substituting corporation shall be considered for all purposes of such Option to be employment by the Company. Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 6.8. Non-Employee Director Options. Director Options shall be automatic and subject to the following additional terms and conditions: (a) All Director Options shall be Non-Qualified Stock Options. (b) Each Non-Employee Director shall be granted an Initial Option to purchase 1,000 shares of Common Stock on the date of his or her initial election to the Board of Directors, and an Annual Option to purchase 1,000 shares of Common Stock on the next business day following each annual meeting of stockholders. (c) The exercise price of each Director Option will be 100% of the Fair Market Value at the time of grant. (d) Director Options shall become exercisable six months after the time of grant. The exercise period shall not exceed ten years from the date of grant, provided that subject to the provisions of Section 6.8(e), no Director Option may be exercised more than 90 days after the optionee ceases to serve as a director of the Company. (e) if a Non-Employee Director dies or becomes disabled becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while a director of the Company, the Option may be exercised (to the extent otherwise exercisable on the date of disability or death), by such disabled director or, in the case of death, by the director's Designated Beneficiary, in each case within the period of one year after the date of disability or death (or within such lesser period as may be specified in the applicable Option agreement). Section 7. Restricted And Unrestricted Stock. 7.1. General. The Board of Directors may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their purchase price (or to require forfeiture of such shares if purchased at no cost) from the recipient in the event that conditions specified by the Administrator in the applicable Award are not satisfied prior to the end of the applicable Restricted Period or Restricted Periods established by the Administrator for such Award. Conditions for repurchase (or forfeiture) may be 10 based on continuing employment or service or achievement of pre-established performance or other goals and objectives. 7.2. Restricted Stock. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Administrator, during the applicable Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Board of Directors may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and, unless otherwise determined by the Board of Directors, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the Restricted Period, the Company (or such designee) shall deliver such certificates to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary. 7.3. Unrestricted Stock. The Administrator may, in its sole discretion, grant (or sell at a purchase price determined by the Board of Directors, which shall not be lower than 85% of Fair Market Value on the date of sale) Unrestricted Stock to Participants. 7.4. Payment. The purchase price for each share of Restricted Stock and Unrestricted Stock shall be determined by the Administrator and may not be less than the par value of the Common Stock. Such purchase price may be paid in the form of past services or such other lawful consideration as is determined by the Board of Directors. 7.5. Certificates. Stock certificates representing Shares of Restricted Stock or Unrestricted Stock shall bear a legend referring to any restrictions imposed thereon and such other matters as the Administrator may determine. 7.6. Acceleration. The Administrator may at any time accelerate the expiration of the Restricted Period applicable to all, or any particular, outstanding shares of Restricted Stock. Section 8. General Provisions Applicable to Awards. 8.1. Applicability of Rule 16b-3. Those provisions of the Plan which make an express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, or any successor provision, and then only with respect to Reporting Persons. 8.2. Documentation. Each Award under the Plan shall be evidenced by an instrument delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Administrator considers necessary or advisable. Such instruments may be in the form of agreements to be executed by both the Company and the Participant, or certificates, letters or 11 similar documents, acceptance of which will evidence agreement to the terms thereof and of this Plan. 8.3. Administrator Discretion. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Administrator need not treat Participants uniformly. 8.4. Termination of Status. Subject to the provisions of Section 6, the Administrator shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other termination of employment or other status of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may exercise rights under such Award. 8.5. Mergers, Etc. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity (an "Acquisition"), the Board of Directors or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions as to outstanding Awards: (i) provide that such Awards shall be assumed, or substantially equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) on such terms as the Board of Directors determines to be appropriate; (ii) upon written notice to Participants, provide that all unexercised Options will terminate immediately prior to the consummation of such transaction unless exercised by the Participant within a specified period following the date of such notice; (iii) in the event of an Acquisition under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Acquisition (the "Acquisition Price"), make or provide for a cash payment to Participants equal to the difference between (A) the Acquisition Price times the number of shares of Common Stock subject to outstanding Options (to the extent then exercisable at prices not in excess of the Acquisition Price) and (B) the aggregate exercise price of all such outstanding Options in exchange for the termination of such Options; and (iv) provide that all or any outstanding Awards shall become exercisable or realizable in full prior to the effective date of such Acquisition. 8.6. Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board of Directors may, in the exercise of its sole discretion in such instances, declare that any Award shall terminate as of a date fixed by the Board of Directors and give each Participant the right to exercise his or her Option as to all or any of the shares subject thereto, including shares as to which the Option would not otherwise be exercisable, or may accelerate the termination of the Restricted Period of any Stock Award. 12 8.7. Withholding. The Participant shall pay to the Company, or make provision satisfactory to the Administrator for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Administrator's discretion, and subject to such conditions as the Administrator may establish, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. 8.8. Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Administrator considers necessary or advisable to achieve the purposes of the Plan or comply with applicable laws. 8.9. Amendment of Award. The Board of Directors may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Non-Qualified Stock Option; provided that the Participant's consent to such action shall be required unless the Board of Directors determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 8.10. Conditions on Delivery of Common Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan (i) until all conditions of the Award have been satisfied or removed; (ii) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with; (iii) if the outstanding Common Stock is at the time listed on any stock exchange or admitted for trading on an automatic quotation system, until the shares to be delivered have been listed or authorized to be listed or quoted on such exchange or quotation system upon official notice of notice of issuance; and (iv) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Common Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as the Company may consider appropriate to avoid violation of such act and may require that the certificates evidencing such Common Stock bear an appropriate legend restricting transfer. Section 9. Miscellaneous 9.1. No Right To Employment or Other Status. The grant of an Award shall not be construed as giving a Participant the right to continued employment or service for the Company. The Company expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. 13 9.2. No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the record holder thereof. 9.3. Exclusion from Benefit Computations. No amounts payable upon exercise of Awards granted under the Plan shall be considered salary, wages or compensation to Participants for purposes of determining the amount or nature of benefits that Participants are entitled to under any insurance, retirement or other benefit plans or programs of the Company. 9.4. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 9.5. Grants Exceeding Allotted Shares. If the shares of Common Stock covered by an Award exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Award shall be void with respect to such excess stock, unless such additional shareholder approval is obtained in a timely manner. 9.6. Effective Date and Term. (i) Effective Date. The Plan shall become effective on July , 1998, the date of its adoption by the Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months after the date of the Board of Director's adoption of the Plan, no Options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter under the Plan. Amendments to the Plan not requiring stockholder approval shall become effective when adopted by the Board of Directors; amendments requiring stockholder approval shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months of the Board of Director's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such Option to a particular optionee. Subject to the limitations set forth in this Section 9(d), Awards may be made under the Plan at any time after the effective date and before the date fixed for termination of the Plan. 14 (ii) Termination. The Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to Awards under the Plan, or (iii) by action of the Board of Directors. No Award may be granted hereunder after termination of the Plan. The termination or amendment of the Plan shall not alter or impair any rights or obligations under theretofore granted under the Plan. 9.7. Amendment of Plan. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time; provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any applicable tax or regulatory requirement. Prior to any such approval, Awards may be made under the Plan expressly subject to such approval. 9.8. Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the State of Delaware. ***************************** 15 EX-10.15 5 EXHIBIT 10.15 EXHIBIT 10.15 $25,000,000 CREDIT AGREEMENT Dated as of January 26, 1999 Among MEDE AMERICA CORPORATION as Borrower and MEDE AMERICA CORPORATION OF OHIO and HEALTHCARE INTERCHANGE, INC. as Guarantors and THE INITIAL LENDERS NAMED HEREIN as Initial Lenders and NATIONSBANK, N.A. as Administrative Agent and NATIONSBANC MONTGOMERY SECURITIES LLC as Syndication Agent T A B L E O F C O N T E N T S Section Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01. Certain Defined Terms.............................................2 1.02. Computation of Time Periods; Other Definitional Provisions.......26 1.03. Accounting Terms.................................................27 1.04. Currency Equivalents Generally...................................27 ARTICLE II AMOUNTS AND TERMS OF THE WORKING CAPITAL ADVANCES 2.01. The Working Capital Advances.....................................27 2.02. Making the Working Capital Advances..............................27 2.03. Repayment of Working Capital Advances............................29 2.04. Termination or Reduction of the Commitments......................29 2.05. Prepayments......................................................30 2.06. Interest.........................................................31 2.07. Fees.............................................................32 2.08. Conversion of Working Capital Advances...........................32 2.09. Increased Costs, Etc.............................................34 2.10. January 23, 1999 Payments and Computations.......................36 2.11. Taxes............................................................39 2.12. Sharing of Payments, Etc.........................................42 2.13. Use of Proceeds..................................................42 2.14. Defaulting Lenders...............................................42 ARTICLE III CONDITIONS OF LENDING 3.01. Conditions Precedent to Initial Extension of Credit..............45 3.02. Conditions Precedent to Each Working Capital Borrowing...........49 3.03. Determinations Under Section 3.01................................50 ii Section Page ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01. Representations and Warranties of the Borrower...................50 ARTICLE V COVENANTS OF THE BORROWER 5.01. Affirmative Covenants............................................58 5.02. Negative Covenants...............................................66 5.03. Reporting Requirements...........................................72 5.04. Financial Covenants................................................ ARTICLE VI EVENTS OF DEFAULT 6.01. Events of Default................................................78 ARTICLE VII GUARANTY 7.01. Guaranty; Limitation of Liability................................81 7.02. Guaranty Absolute................................................82 7.03. Waivers and Acknowledgments......................................83 7.04. Subrogation......................................................84 7.05. Guaranty Supplements.............................................85 7.06. Subordination....................................................85 7.07. Continuing Guaranty; Assignments.................................86 ARTICLE VIII THE AGENTS 8.01. Authorization and Action.........................................86 8.02. Administrative Agent's Reliance, Etc.............................87 iii Section Page 8.03. NationsBank, NMS and Affiliates..................................88 8.04. Lender Credit Decision...........................................88 8.05. Indemnification..................................................89 8.06. Successor Administrative Agent...................................89 ARTICLE IX MISCELLANEOUS 9.01. Amendments, Etc..................................................90 9.02. Notices, Etc.....................................................91 9.03. No Waiver; Remedies..............................................92 9.04. Costs and Expenses...............................................92 9.05. Right of Set-off.................................................94 9.06. Binding Effect...................................................94 9.07. Assignments and Participations...................................95 9.08. Execution in Counterparts........................................98 9.09. Confidentiality..................................................98 9.10. Jurisdiction, Etc................................................98 9.11. Governing Law....................................................99 9.12. Waiver of Jury Trial.............................................99 iv SCHEDULES Schedule I - Commitments and Applicable Lending Offices Schedule 4.01 (a) - List of Equity Interests of the Borrower Schedule 4.01 (b) - List of all Subsidiaries of the Borrower Schedule 4.01 (d) - List of Approvals, Consents and Governmental Authorizations Schedule 4.01 (f) - List of Liabilities Not Reflected in Financial Statements Schedule 4.01 (z) - List of Real Property Schedule 4.01 (bb) - List of Intellectual Property Schedule 4.01 (v) - List of each Open Year Schedule 4.01 (y) - Debt Schedule 5.01 (n) - List of Real Property Subject to Mortgages Schedule 5.02 (a) - List of Existing Liens Schedule 5.02 (e) - List of Existing Investments EXHIBITS Exhibit A - Form of Working Capital Note Exhibit B-1 - Form of Notice of Borrowing Exhibit B-2 - Form of Notice of Conversion Exhibit C - Form of Assignment and Acceptance Exhibit D - Form of Security Agreement Exhibit E - Form of Guaranty Supplement Exhibit F - [Intentionally omitted] CREDIT AGREEMENT CREDIT AGREEMENT dated as of January 26, 1999 among MEDE AMERICA CORPORATION, a Delaware corporation (the "Borrower"), MEDE AMERICA CORPORATION OF OHIO, an Ohio corporation, and HEALTHCARE INTERCHANGE, INC., a Missouri corporation (each, a "Guarantor" and together with each other Additional Guarantor (as defined in Section 7.05), the "Guarantors"), the banks, financial institutions and other institutional lenders listed on the signature pages hereof under the caption "Initial Lenders" (the "Initial Lenders"), NATIONSBANC MONTGOMERY SECURITIES LLC ("NMS"), as the syndication agent and arranger (the "Syndication Agent") for the Facilities (as hereinafter defined) hereunder, and NATIONSBANK, N.A. ("NationsBank"), as the administrative and collateral agent (together with any successor thereto appointed pursuant to Article VIII, the "Administrative Agent") for the Lenders (as hereinafter defined). PRELIMINARY STATEMENTS: (1) The Borrower is a corporation organized under the laws of the State of Delaware, and the Borrower and the Guarantors are engaged in the business of providing electronic data interchange products and services to the health-care industry. (2) The Borrower has requested that the Lenders make Working Capital Advances to the Borrower from time to time prior to the Termination Date in an aggregate principal amount not to exceed $25,000,000 at any time outstanding. The Lenders have indicated their willingness to agree to lend such amounts on the terms and conditions of this Agreement. (3) The Borrower is the owner, beneficially and of record, of all issued and outstanding common stock of each of the Guarantors, and each of the Guarantors will receive substantial direct and indirect benefit from this Agreement. (4) Each of the Guarantors has agreed to guarantee the prompt and complete payment when due of the Guaranteed Obligations in accordance with Article VII hereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: 2 ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Acquisition Certificate" has the meaning specified in Section 5.02(e)(vii). "Administrative Agent" has the meaning specified in the recital of parties to this Agreement. "Administrative Agent's Account" means the account of the Administrative Agent maintained by the Administrative Agent with NationsBank at its office at 100 North Tryon Street, Charlotte, North Carolina 28255, and designated by the Administrative Agent as such in a written notice to the Borrower and each of the Lenders or such other account of the Administrative Agent that may be so designated from time to time. "Advance" means a Working Capital Advance. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to vote 5% or more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise. "Agents" means, collectively, the Administrative Agent, the Syndication Agent and each co-agent or sub-agent appointed by the Administrative Agent from time to time pursuant to Section 8.01(b). "Agreement Value" means, for each Hedge Agreement, on any date of determination, an amount determined by the Administrative Agent equal to: (a) in the case of a Hedge Agreement documented pursuant to the Master Agreement (Multicurrency-Cross Border) published by the International Swap and Derivatives Association, Inc. (the "Master Agreement"), the amount, if any, that would be payable by any Loan Party or any of its Subsidiaries to its counterparty to such Hedge Agreement, as if (i) such Hedge Agreement was being terminated early on such date of determination, (ii) such Loan Party or Subsidiary was the sole "Affected Party", and (iii) the Administrative Agent was the sole party 3 determining such payment amount (with the Administrative Agent making such determination pursuant to the provisions of the form of Master Agreement); or (b) in the case of a Hedge Agreement traded on an exchange, the mark-to-market value of such Hedge Agreement, which will be the unrealized loss on such Hedge Agreement to the Loan Party or Subsidiary of a Loan Party party to such Hedge Agreement determined by the Administrative Agent based on the settlement price of such Hedge Agreement on such date of determination, or (c) in all cases, the mark-to-market value of such Hedge Agreement, which will be the unrealized loss on such Hedge Agreement to the Loan Party or Subsidiary of a Loan Party party to such Hedge Agreement determined by the Administrative Agent as the amount, if any, by which (i) the present value of the future cash flows to be paid by such Loan Party or Subsidiary exceeds (ii) the present value of the future cash flows to be received by such Loan Party or Subsidiary pursuant to such Hedge Agreement; capitalized terms used and not otherwise defined in this definition shall have the respective meanings set forth in the above described Master Agreement. "Applicable Lending Office" means, with respect to each Lender, such Lender's Base Rate Lending Office in the case of a Base Rate Advance and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means (i) 0.75% per annum for Base Rate Advances and (ii) 1.75% per annum for Eurodollar Rate Advances. "Assigned Agreements" has the meaning specified in the Security Agreement. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in accordance with Section 9.07 and in substantially the form of Exhibit C hereto. "Average Market Price" shall mean, with respect to each share of Borrower Common Stock at any date, the average of the per share last reported sales prices for the twenty consecutive business days (a "business day" being any day that is not a legal holiday or other day on which banking institutions or any national securities exchanges are authorized by law or executive order to close) next preceding the date in question. The "last reported sales price" for each business day shall be (i) the last reported sales price of the Borrower Common Stock on the National Market System of the National Association of Securities Dealers, Inc., Automated Quotation System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, or (ii) if not quoted as described in clause (i), the mean between the high bid and low asked quotations for the Borrower Common Stock as reported by NASDAQ if at least two securities dealers have inserted both bid and asked quotations for Borrower Common Stock on at least 5 of the 10 preceding days, or (iii) if the Borrower Common Stock is listed or admitted for trading on any national securities exchange, the last sale price, or the closing bid 4 price if no sale occurred, of the Borrower Common Stock on the principal securities exchange on which the Borrower Common Stock is listed. If the Borrower Common Stock is quoted on a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (ii) of the preceding sentence if bid and asked quotations are reported but actual transactions are not, and in the manner set forth in clause (iii) of the preceding sentence if actual transactions are reported. If none of the conditions set forth above is met, the closing price of the Borrower Common Stock on any business day or the average of such closing prices for any period shall be the fair market value of the Borrower Common Stock as determined by a member firm of the New York Stock Exchange, Inc. selected by the Borrower and reasonably acceptable to the Administrative Agent. "Bankruptcy Law" means any proceeding of the type referred to in Section 6.01(f) or Title 11, U.S. Code, or any similar foreign, federal or state law for the relief of debtors. "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest established by NationsBank from time to time as its prime rate (which rate of interest may not be the lowest rate of interest charged by NationsBank to its customers); and (b) the Federal Funds Rate plus 0.50%. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.06(a)(i). "Base Rate Lending Office" means, with respect to each of the Lenders, the office of such Lender specified as its "Base Rate Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, as the case may be, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent for such purpose. "Blocked Account Letters" has the meaning specified in the Security Agreement. "Blocked Accounts" has the meaning specified in the Security Agreement. "Borrower" has the meaning specified in the recital of parties to this Agreement. "Borrower Common Stock " has the meaning specified in Section 3.01(g). 5 "Borrower's Account" means the account of the Borrower designated to the Administrative Agent on or prior to the Funding Date or such other account of such Borrower as is agreed from time to time in writing between the Borrower and the Administrative Agent. "Borrowing" means a Working Capital Borrowing. "Business Day" means a day of the year on which banks are not required or authorized by law to close in New York, New York, Charlotte, North Carolina or San Francisco, California and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Capital Assets" means, with respect to any Person, all equipment, fixed assets and real property or improvements of such Person, or replacements or substitutions therefor or additions thereto, that, in accordance with GAAP, have been or should be reflected as additions to property, plant or equipment on the balance sheet of such Person or that have a useful life of more than one year. "Capital Expenditures" means, with respect to any Person for any period, (a) all expenditures made directly or indirectly by such Person during such period for Capital Assets (whether paid in cash or other consideration and including, without limitation, all expenditures for maintenance and repairs which are required, in accordance with GAAP, to be capitalized on the books of such Person) and (b) solely to the extent not otherwise included in clause (a) of this definition, the aggregate principal amount of all Debt (including, without limitation, Obligations in respect of Capitalized Leases) assumed or incurred during such period in connection with any such expenditures for Capital Assets. For purposes of this definition, the purchase price of equipment that is purchased simultaneously with the trade-in of existing equipment or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount by which such purchase price exceeds the credit granted by the seller of such equipment for the equipment being traded in at such time or the amount of such insurance proceeds, as the case may be. "Capitalized Lease" means any lease with respect to which the lessee is required to recognize concurrently the acquisition of property or an asset and the incurrence of a liability in accordance with GAAP. "Cash Collateral Account" has the meaning specified in the Security Agreement. "Cash Equivalents" means any of the following types of Investments, to the extent owned by the Borrower or any of its Subsidiaries free and clear of all Liens (other than Liens created under the Collateral Documents): 6 (a) readily marketable obligations issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof having maturities of not more than 360 days from the date of acquisition thereof; provided that the full faith and credit of the United States of America is pledged in support thereof; (b) time deposits with, or insured certificates of deposit or bankers' acceptances of, any commercial bank that (i) (A) is a Lender or (B) is organized under the laws of the United States of America, any state thereof or the District of Columbia or is the principal banking subsidiary of a bank holding company organized under the laws of the United States of America, any state thereof or the District of Columbia, and is a member of the Federal Reserve System, (ii) issues (or the parent of which issues) commercial paper rated as described in clause (c) of this definition and (iii) has combined capital and surplus of at least $500,000,000, in each case with maturities of not more than 180 days from the date of acquisition thereof; and (c) commercial paper issued by any Person organized under the laws of any state of the United States of America and rated at least "Prime-1" (or the then equivalent grade) by Moody's or at least "A-1" (or the then equivalent grade) by S&P, in each case with maturities of not more than 180 days from the date of acquisition thereof; and (d) Investments, classified in accordance with GAAP as current assets of the Borrower or any of its Subsidiaries, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by financial institutions that have the highest rating obtainable from either Moody's or S&P, and the portfolios of which are limited solely to Investments of the character and quality described in clauses (a), (b) and (c) of this definition. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time. "CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System maintained by the U.S. Environmental Protection Agency. "Change of Control" means, at any time: (a) the WCAS Funds, collectively, shall cease to own and control legally and beneficially, either directly or indirectly, less than 20% of the shares of the Borrower Common Stock owned by the WCAS Funds immediately after giving effect to the recapitalization described in the Registration Statement (as adjusted for 7 stock splits, stock dividends, reverse stick splits, mergers, consolidations and other like events); (b) any "person" or "group" (each as used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended), directly or indirectly, of Voting Interests in the Borrower (including through securities convertible into or exchangeable for such Voting Interests) representing 15% or more of the combined voting power of all of the Voting Interests in the Borrower; (c) the replacement of a majority of the board of directors of the Borrower during a two-year period from the directors who constituted the board of directors of the Borrower at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the board of directors of the Borrower then still in office who either were members of such board of directors at the beginning of such period or whose election as a member of such board of directors was previously so approved; (d) any Person or two or more Persons acting in concert other than the one or more of the WCAS Funds shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation thereof, will result in its or their acquisition of the power to exercise, directly or indirectly, control over Voting Interests in the Borrower (including through securities convertible into or exchangeable for such Voting Interests) representing 15% or more of the combined voting power of all of the Voting Interests in the Borrower; or (e) with respect to any pledge or other security agreement covering all or any portion of the Equity Interests that are owned beneficially and of record by the WCAS Funds or their nominees, any secured party or pledgee thereunder shall become the holder of record of any such shares (except in the case of a registration of the pledge of such Equity Interests to such secured party or pledgee solely in its capacity as a pledgee) or shall receive dividends or other cash or cash equivalent distributions (including, without limitation, stock repurchases) in respect thereof, or shall proceed to exercise voting or other consensual rights in respect thereof (whether by proxy, voting or other similar arrangement or otherwise), or shall otherwise commence to realize upon such shares. "Collateral" means all of the "Collateral" referred to in the Collateral Documents and all of the other property and assets that are or are intended under the terms of the Collateral Documents to be subject to Liens in favor of the Administrative Agent for the benefit of the Secured Parties. 8 "Collateral Agent" means the Administrative Agent in its capacity as such under the Security Agreement. "Collateral Documents" means, collectively, the Security Agreement, the Mortgages, the Blocked Account Letters and each of the other agreements that creates or purports to create a Lien in favor of the Administrative Agent for the benefit of the Secured Parties. "Commitment" means a Term Commitment or a Working Capital Commitment, as the context may require. "Commitment Fee" has the meaning specified in Section 2.07(a). "Confidential Information" means information that is furnished to the Administrative Agent or any Lender by or on behalf of the Borrower pursuant hereto but does not include any such information that (a) is or becomes generally available to the public other than as a result of a breach by the Administrative Agent or any Lender of its obligations hereunder or (b) is or becomes available to the Administrative Agent or any such Lender from a source other than the Borrower. "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Consolidated EBITDA" means, with respect to any Person for any period, (a) the Consolidated Net Income of such Person and its Subsidiaries for such period plus (b) the sum of each of the following expenses that have been deducted from the determination of the Consolidated Net Income of such Person and its Subsidiaries for such period: (i) the Consolidated Interest Expense of such Person and its Subsidiaries for such period, (ii) all income tax expense (whether federal, state, local, foreign or otherwise) of such Person and its Subsidiaries for such period, (iii) all depreciation expense of such Person and its Subsidiaries for such period, (iv) all amortization expense of such Person and its Subsidiaries for such period, (v) all other non-cash items (including extraordinary losses) deducted in determining the Consolidated Net Income of such Person and its Subsidiaries for such period less all other non-cash items (including extraordinary gains) added in determining the Consolidated Net Income of such Person and its Subsidiaries, for such period, in each case determined on a Consolidated basis and in accordance with GAAP for such period and (vi) in the case of the Borrower and its Subsidiaries, non-recurring charges incurred by the Borrower and its Subsidiaries in connection with a Permitted Acquisition; provided that such changes do not exceed 5% of the aggregate consideration paid in connection with such Permitted Acquisition; and provided, further, that, if Consolidated EBITDA of the Borrower and its Subsidiaries is being calculated in respect of any Measurement Period in which a Permitted Acquisition has been consummated, there shall be added thereto or subtracted therefrom an amount equal to the product of (1) the Consolidated EBITDA (whether positive or negative) of the Person acquired (or reasonably attributable to the assets acquired) for the 9 one year period immediately preceding the date such Permitted Acquisition was consummated times (2) a fraction the numerator of which is number of days from the first day of such Measurement Period to the date the Permitted Acquisition was consummated and the denominator of which is 365. "Consolidated Interest Expense" means, with respect to any Person for any period, the gross interest expense accrued on all Indebtedness of such Person and its Subsidiaries during such period, determined on a Consolidated basis and in accordance with GAAP for such period, including, without limitation, (i) in the case of the Borrower, (A) interest expense accrued in respect of Debt resulting from Working Capital Advances and (B) all fees paid or payable pursuant to Section 2.07(a), and (ii) the interest component of all Obligations in respect of Capitalized Leases, (iii) commissions, discounts and other fees and charges paid or payable in connection with letters of credit, (iv) all amortization of original issue discount in respect of all Debt of such Person and its Subsidiaries and (v) the net payment, if any, paid or payable in connection with Hedge Agreements less the net credit, if any, received in connection with Hedge Agreements. "Consolidated Net Income" means, for any period, the net income (or net loss) of any Person and its Subsidiaries for such period, determined on a Consolidated basis and in accordance with GAAP, but excluding for each such period (without duplication): (a) the income (or loss) of any other Person accrued prior to the date on which it became a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or all or substantially all of the property and assets of such other Person are acquired by such Person or any of its Subsidiaries; (b) the income (or loss) of any other Person (other than a Subsidiary of such Person) in which a Person other than such Person or any of its Subsidiaries owns or otherwise holds an Equity Interest, except to the extent such income (or loss) shall have been received in the form of cash dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period; (c) the income of any Subsidiary of such Person to the extent that the declaration or payment of dividends or other distributions by such Subsidiary of such income is not permitted to be made or paid on the last day of such period; (d) any gains or losses (on an after-tax basis) attributable to the sale, lease, transfer or other disposition of any property or assets of such Person or any of its Subsidiaries other than sales by the Loan Parties of electronic data interchange products and services in the ordinary course of business; 10 (e) any earnings or charges resulting from the write-up or write-down of any property or assets of such Person or any of its Subsidiaries other than in the ordinary course of business; (f) any gains attributable to the collection of proceeds of insurance policies; and (g) to the extent not included in clauses (a) through (e) of this definition, the noncash portion of all extraordinary losses deducted in calculating net income and the noncash portion of all extraordinary gains added in calculating net income. "Constitutive Documents" means, with respect to any Person, the certificate of incorporation or registration (including, if applicable, certificate of change of name), articles of incorporation or association, memorandum of association, charter, bylaws, partnership agreement, trust agreement, joint venture agreement, limited liability company operating or members agreement, joint venture agreement or one or more similar agreements, instruments or documents constituting the organization or formation of such Person. "Contingent Obligation" means, with respect to any Person, any Obligation or arrangement of such Person to guarantee or intended to guarantee any Debt, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the Obligation of a primary obligor, (b) the Obligation to make take-or-pay or similar payments, if required, regardless of nonperformance by any other party or parties to an agreement or (c) any Obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. 11 "Conversion", "Convert" and "Converted" each refer to a conversion of Working Capital Advances of one Type into Working Capital Advances of the other Type pursuant to Section 2.08 or 2.09. "Current Assets" means, with respect to any Person, all assets of such Person that, in accordance with GAAP, would be classified as current assets on the balance sheet of a company conducting a business the same as or similar to that of such Person, after deducting appropriate and adequate reserves therefrom in each case in which a reserve is proper in accordance with GAAP. "Debt" means, with respect to any Person (without duplication) (a) all indebtedness of such Person for borrowed money, (b) all Obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person's business and not past due for more than 90 days after the date on which each such trade payable or account payable was created), (c) all Obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, or upon which interest payments are customarily made, (d) all Obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Obligations of such Person as lessee under Capitalized Leases, (f) all Obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all Obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests in such Person or any other Person, valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Obligations of such Person in respect of Hedge Agreements, take-or-pay agreements or other similar arrangements, valued, in the case of Hedge Agreements, at the Agreement Value thereof, (i) all Obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing if the transaction giving rise to such Obligation is considered indebtedness for borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP, (j) all Contingent Obligations, and (k) all Debt referred to in clauses (a) through (j) above of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt. "Default" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. 12 "Defaulted Advance" means, with respect to any Lender at any time, the portion of any Working Capital Advance required to be made by such Lender to the Borrower pursuant to Section 2.01 or 2.02 at or prior to such time that has not been made by such Lender or by the Administrative Agent for the account of such Lender pursuant to Section 2.02(d) as of such time. In the event that a portion of a Defaulted Advance shall be deemed made pursuant to Section 2.14(a), the remaining portion of such Defaulted Advance shall be considered a Defaulted Advance originally required to be made pursuant to Section 2.01 on the same date as the Defaulted Advance so deemed made in part. "Defaulted Amount" means, with respect to any Lender at any time, any amount required to be paid by such Lender to the Administrative Agent or any other Lender hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender to the Administrative Agent pursuant to Section 8.05 to reimburse the Administrative Agent such Lender's ratable share of any amount required to be paid by the Lenders to the Administrative Agent as provided therein. In the event that a portion of a Defaulted Amount shall be deemed paid pursuant to Section 2.14(b), the remaining portion of such Defaulted Amount shall be considered a Defaulted Amount originally required to be paid hereunder or under any other Loan Document on the same date as the Defaulted Amount so deemed paid in part. "Defaulting Lender" means, at any time, any Lender that, at such time, (a) owes a Defaulted Advance or a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 6.01(f). "Domestic Subsidiary" means, at any time, any of the direct or indirect Subsidiaries of the Borrower that is incorporated or organized under the laws of any state of the United States of America or District of Columbia. "Eligible Assignee" means, with respect to any Facility, (i) a Lender; (ii) an Affiliate of a Lender; or (iii) any other Person approved by the Administrative Agent and, so long as no Event of Default has occurred and is continuing at the time the related assignment is effected pursuant to Section 9.07, the Borrower (in either case such approval not to be unreasonably withheld or delayed and, in the case of the Borrower, such approval to be deemed to have been given if no objection thereto is received by the Administrative Agent and the assigning Lender within two Business Days after the date on which notice of the proposed assignment is provided to the Borrower); provided, however, that neither any Loan Party nor any Affiliate of a Loan Party shall qualify as an Eligible Assignee under this definition. "Environmental Action" means any action, suit, demand, demand letter, claim, notice of noncompliance or violation, notice of liability or potential liability, investigation, 13 proceeding, consent order or consent agreement relating in any way to any Environmental Law, any Environmental Permit or Hazardous Material or arising from alleged injury or threat to health, safety or the environment, including, without limitation, (a) by any Governmental Authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any Governmental Authority or any other Person for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. "Environmental Law" means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment, injunction, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "Equipment" has the meaning specified in the Security Agreement. "Equity Interests" means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA Affiliate" means any Person that for purposes of Title IV of ERISA is a member of the controlled group of any Loan Party, or under common control with any Loan Party, within the meaning of Section 414 of the Internal Revenue Code. "ERISA Event" means (a)(i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC or (ii) the requirements of Section 4043(b) of ERISA apply with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) 14 or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of any Loan Party or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the partial or complete withdrawal by any Loan Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA, that constitutes grounds for the termination of, or the appointment of a trustee to administer, such Plan. "Eurocurrency Liabilities" has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to each of the Lenders, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, as the case may be (or, if no such office is specified, its Base Rate Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent for such purpose. "Eurodollar Rate" means, for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate per annum at which deposits in U.S. dollars appear on page 3750 (or any successor page thereto) of the Dow Jones Telerate Screen two Business Days before the first day of such Interest Period and for a term comparable to such Interest Period or, if such rate does not so appear on the Dow Jones Telerate Screen on any date of determination, on the Reuters Screen LIBO Page two Business Days before the first day of such Interest Period and for a term comparable to such Interest Period by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period; provided, however, that if the Reuters Screen LIBO Page is being used to determine the Eurodollar rate at any date of determination and more than one rate is specified thereon from deposits in U.S. dollars, the applicable rate shall be the average of all such rates (rounded upward, if necessary, to the nearest whole multiple of 1/100 of 1% per annum). "Eurodollar Rate Advance" means a Working Capital Advance that bears interest as provided in Section 2.06(a)(ii). 15 "Eurodollar Rate Reserve Percentage" for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Excluded Assigned Agreements" means all of the respective right, title and interest of the Loan Parties in, to and under those Assigned Agreements whose terms expressly prohibit the Loan Parties from assigning their rights and interests thereunder without the consent of the counterparty thereto; provided that (i) the rights of the Loan Parties under such Assigned Agreements for money due or to become to the Loan Parties thereunder and (ii) all amounts actually paid to the Loan Parties under such Assigned Agreements shall constitute Collateral and shall be subject to the liens granted to the Collateral Agent under the Security Agreement. "Existing Credit Agreement" means the Credit Agreement, dated as of December 18, 1995, between the Borrower and Bank of America Illinois, as amended. "Existing Debt" has the meaning specified in Section 4.01(y). "Extraordinary Receipt" means any cash received by or paid to or for the account of any Person not in the ordinary course of business, including, without limitation, tax refunds, pension plan reversions, proceeds of insurance (other than proceeds of business interruption insurance to the extent such proceeds constitute compensation for lost earnings), condemnation awards (and payments in lieu thereof), indemnity payments and any purchase price adjustments; provided, however, that an Extraordinary Receipt shall not include cash receipts received from proceeds of insurance, condemnation awards (or payments in lieu thereof) or indemnity payments to the extent that such proceeds, awards or payments (a) in respect of loss or damage to equipment, fixed assets or real property are applied (or in respect of which expenditures were previously incurred) to replace or repair the equipment, fixed assets or real property in respect of which such proceeds were received in accordance with the terms of the Loan Documents, so long as such application is made within six months after the occurrence of such damage or loss or (b) are received by any Person in respect of any third party claim against such Person and applied to pay (or to reimburse such Person for 16 its prior payment of) such claim and the costs and expenses of such Person with respect thereto. "Facility" means the Working Capital Facility. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates (rounded upward, if necessary, to the nearest whole multiple of 1/100 of 1% per annum) on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "Fiscal Year" means, with respect to the Borrower or any of its Subsidiaries, the period commencing on July 1 in any calendar year and ending on the next succeeding June 30 or, if any such Subsidiary was not in existence on July 1 in any calendar year, the period commencing on the date on which such Subsidiary is incorporated, organized, formed or otherwise created and ending on the next succeeding June 30. "Funding Date" means the date on which the Initial Extension of Credit is made hereunder. "GAAP" has the meaning specified in Section 1.03. "Governmental Authority" means any nation or government, any state, province, city, municipal entity or other political subdivision thereof, and any governmental, executive, legislative, judicial, administrative or regulatory agency, department, authority, instrumentality, commission, board or similar body, whether federal, state, provincial, territorial, local or foreign. "Guarantee Supplement" has the meaning specified in Section 7.05. "Guaranteed Obligations" has the meaning specified in Section 7.01. "Guarantors" has the meaning specified in the recital of parties to this Agreement. "Guaranty" means the guaranty of the Guarantors contained in Article VII hereof. "Hazardous Materials" means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated 17 biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "Hedge Agreements" means, collectively, interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements. "Indemnified Party" has the meaning specified in Section 9.04(b). "Initial Extension of Credit" means the initial Working Capital Borrowing. "Initial Lenders" has the meaning specified in the recital of parties to this Agreement. "Initial Public Offering" means the offering and sale of Borrower Common Stock in accordance with the Registration Statement. "Insufficiency" means, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance, and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, upon notice received by the Administrative Agent not later than 11:00 A.M. (Charlotte, North Carolina time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that: (a) the Borrower may not select any Interest Period with respect to any Eurodollar Rate Advance that ends after the Termination Date; (b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration; (c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next 18 following calendar month, the last day of such Interest Period shall occur on the immediately preceding Business Day; and (d) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. "Inventory" has the meaning specified in the Security Agreement. "Investment" means, with respect to any Person, any loan or advance to such Person, any purchase or other acquisition of Equity Interests in or Debt of, or the property and assets comprising a division or business unit or all or a substantial part of the business of, such Person, any capital contribution to such Person or any other investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation (or similar transaction) and any arrangement pursuant to which the investor incurs indebtedness of the types referred to in clause (j) or (k) of the definition of "Debt" set forth in this Section 1.01 in respect of such Person. "Lender Indemnified Costs" has the meaning specified in Section 8.05. "Lender Parties" means the Lenders. "Lenders" means, collectively, the Initial Lenders and each Person that becomes a Lender pursuant to Section 9.07 for so long as such Initial Lender or Person, as the case may be, shall be a party to this Agreement. "Lien" means, with respect to any Person, (a) any mortgage, lien (statutory or other), pledge, hypothecation, security interest, charge or other preference or encumbrance of any kind (including, without limitation, any agreement to give any of the foregoing), (b) any sale of accounts receivable or chattel paper, or any assignment, deposit arrangement or lease intended as, or having the effect of, security, (c) any easement, right of way or other encumbrance on title to real property or (d) any other interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or any Capitalized Lease or upon or with respect to any property or asset of such Person (including, in the case of Equity Interests, voting trust agreements and other similar arrangements). 19 "Loan Documents" means, collectively, (i) this Agreement, (ii) the Working Capital Notes, (iii) the Guaranty and (iv) the Collateral Documents, in each case as amended, supplemented or otherwise modified hereafter from time to time in accordance with the terms thereof and section 9.01. "Loan Parties" means, collectively, the Borrower, the Guarantors and each of the other Subsidiaries of the Borrower party to a Guaranty Supplement or any of the Collateral Documents. "Material Adverse Change" means any material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower or any of its Subsidiaries. "Material Adverse Effect" means a material adverse effect on (a) the business, condition (financial or otherwise), operations, performance or properties of any Loan Party, (b) the rights and remedies of the Administrative Agent or any Lender under any Loan Document or (c) the ability of any Loan Party to perform its Obligations under any Loan Document to which it is or is to be a party. "Measurement Period" means, at any date of determination, the most recently completed four consecutive fiscal quarters of the Borrower on or immediately prior to such date or, if less than four consecutive fiscal quarters of the Borrower have been completed since the date of the Initial Extension of Credit, the fiscal quarters of the Borrower that have been completed since the date of the Initial Extension of Credit. "Medic Warrant" means the warrant to purchase 1,250,000 shares of Borrower Common Stock, issued by the Borrower to Medic Computer Systems, Inc. on July 17, 1998. "Moody's" means Moody's Investors Service, Inc. "Mortgage" has the meaning specified in Section 5.01(n)(i). "Mortgage Policy" has the meaning specified in Section 5.01(n)(ii)(B). "Multiemployer Plan" means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which any Loan Party or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a single employer plan (as defined in Section 4001(a)(15) of ERISA) that (a) is maintained for employees of any Loan Party or any ERISA Affiliate and at least one Person other than the Loan Parties and the ERISA Affiliates 20 or (b) was so maintained and in respect of which any Loan Party or any ERISA Affiliate could reasonably be expected to have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "NationsBank" has the meaning specified in the recital of parties to this Agreement. "NMS" has the meaning specified in the recital of parties to this Agreement. "Net Cash Proceeds" means, with respect to any sale, lease, transfer or other disposition of any property or asset, or the incurrence or issuance of any Debt, or the sale or issuance of any Equity Interests in any Person, or any Extraordinary Receipt received by or paid to or for the account of any Person, as the case may be, the aggregate amount of cash received from time to time (whether as initial consideration or through payment or disposition of deferred consideration) by or on behalf of such Person for its own account in connection with any such transaction, after deducting therefrom only (without duplication): (a) reasonable and customary brokerage commissions, underwriting fees and discounts, reasonable legal fees and expenses, finder's fees and other similar fees and commissions; and (b) the amount of taxes payable in connection with or as a result of such transaction. (c) in the case of any sale, lease, transfer or other disposition of any property or asset, the outstanding principal amount of, the premium or penalty, if any, on, and any accrued and unpaid interest on, any Debt (other than the Debt outstanding under the Loan Documents) that is secured by a Lien on the property and assets subject to such sale, lease, transfer or other disposition and is required to be repaid under the terms thereof as a result of such sale, lease, transfer or other disposition, and (d) in the case of any sale, lease, transfer or other disposition of any property or asset, the amount required to be reserved, in accordance with GAAP as in effect on the date on which the Net Cash Proceeds from such sale, lease, transfer or other disposition are determined, and so reserved, against liabilities under indemnification obligations, liabilities related to environmental matters or other similar contingent liabilities associated with the property and assets subject to such sale, lease, transfer or other disposition that are required to be so provided for under the terms of the documentation for such sale, lease, transfer or other disposition; in each case to the extent, but only to the extent, that the amounts so deducted are properly attributable to such transaction or to the property or asset that is the subject thereof and (i 21 in the case of clauses (a) and (c) of this definition, are actually paid at the time of receipt of such cash to a Person that is not an Affiliate of such Person or any Loan Party or of any Affiliate of any Loan Party and (ii) in the case of clauses (b) and (d) of this definition, are actually paid at the time of receipt of such cash to a Person that is not an Affiliate of such Person or any Loan Party or of any Affiliate of any Loan Party or, so long as such Person is not otherwise indemnified therefor, are reserved for in accordance with GAAP at the time of receipt of such cash based upon such Person's reasonable estimate of such taxes or contingent liabilities, as the case may be; provided, however, that if, at the time such taxes or such contingent liabilities are actually paid or otherwise satisfied, the amount of the reserve therefor exceeds the amount paid or otherwise satisfied, then the Borrower shall reduce the Commitments to the extent required by Section 2.04(b), and shall prepay the outstanding Working Capital Advances in accordance with the terms of Section 2.05(b), in an amount equal to the amount of such excess reserve. "Notice of Borrowing" has the meaning specified in Section 2.02(a). "Notice of Conversion" has the meaning specified in Section 2.08(a). "NPL" means the National Priorities List under CERCLA. "Obligation" means, with respect to any Person, any payment, performance or other obligation of such Person of any kind, including, without limitation, any liability of such Person on any claim, whether or not the right of any creditor to payment in respect of such claim is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured or unsecured, and whether or not such claim is discharged, stayed or otherwise affected by any proceeding referred to in Section 6.01(f). Without limiting the generality of the foregoing, the Obligations of the Loan Parties under the Loan Documents include (a) the obligation to pay principal, interest, charges, expenses, fees, reasonable attorneys' fees and disbursements, indemnities and other amounts payable by any Loan Party under any Loan Document and (b) the obligation of any Loan Party to reimburse any amount in respect of any of the foregoing that any Lender, in its sole discretion, may elect to pay or advance on behalf of such Loan Party. "OECD" means the Organization for Economic Cooperation and Development. "Open Year" means, with respect to any Person, any year for which United States federal income tax returns have been filed by or on behalf of such Person and for which the expiration of the applicable statute of limitations for assessment, reassessment or collection has not occurred (whether by reason of extension or otherwise). "Other Taxes" has the meaning specified in Section 2.11(b). 22 "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Permitted Acquisition" has the meaning specified in Section 5.02(e)(vii). "Permitted Disposition"means any sale or other disposition of assets if (i) such assets were acquired by a Loan Party in a Permitted Acquisition, (ii) the related Acquisition Certificate delivered by the Loan Party described such assets in reasonable detail and identified them as "Permitted Disposition Assets" and (iii) such assets were sold or otherwise disposed of by such Loan Party no later than twelve months after the date on which such Permitted Acquisition was consummated. "Permitted Liens" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) Liens for taxes, assessments and governmental charges or levies to the extent not required to be paid under Section 5.01(b); (b) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations (other than Debt for borrowed money) (i) that are not overdue for a period of more than 30 days or (ii) the amount, applicability or validity of which are being contested in good faith and by appropriate proceedings diligently conducted and with respect to which the Borrower or any of its Subsidiaries, as the case may be, has established reserves in accordance with GAAP; (c) pledges or deposits (i) to secure obligations under workers' compensation laws or similar legislation (other than in respect of employee benefit plans subject to ERISA), (ii) to secure public or statutory obligations or (iii) to secure obligations (other than Debt for borrowed money) in respect of (A) deductibles, premiums and similar amounts under insurance policies purchased in the ordinary course of business, (B) payments of rent and other customary obligations under leases permitted hereunder and (C) amounts owed to utilities and other service providers in the ordinary course of business; (d) Liens securing the performance of, or payment in respect of, bids, tenders, government contracts (other than for the repayment of borrowed money), surety and appeal bonds and other obligations of a similar nature incurred in the ordinary course of business; (e) any interest or title of a lessor or sublessor (including those arising under or in respect of Capitalized Leases and including Liens arising from the filing of protective Uniform Commercial Code financing statements relating solely to the interest or title of a lessor or sublessor) and any restriction or encumbrance to which the interest or title of such lessor or sublessor may be subject that is incurred in the ordinary course of business and, either individually or when aggregated with all other Permitted Liens in effect on any date of determination, could not be reasonably expected to have a Material Adverse Effect; (g) Liens arising out of judgments or awards that do not constitute an Event of Default under Section 6.01(g) or 6.01(h) and in respect of which the Borrower or any of its Subsidiaries subject thereto shall be prosecuting an appeal or proceedings for review in good faith and, pending such appeal or proceedings, shall have secured within ten days after the entry thereof a subsisting stay of execution and shall be maintaining reserves, in accordance with GAAP, 23 with respect to any such judgment or award; (h) easements, rights of way, zoning restrictions and other encumbrances on title to real property that were not incurred in connection with and do not secure Indebtedness and do not, either individually or in the aggregate, render title to the property encumbered thereby unmarketable or materially and adversely affect the use of such real property for its intended purposes and (i) rights of set-off in respect of fees (but not in respect of Debt for borrowed money) owed to banks and other financial institutions against deposits of the Loan Parties held by such banks and other financial institutions in the ordinary course of business. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Plan" means a Single Employer Plan or a Multiple Employer Plan. "Post-Petition Interest" has the meaning specified in Section 7.06. "Preferred Interests" means, with respect to any Person, Equity Interests issued by such Person that are entitled to a preference or priority over any other Equity Interests issued by such Person upon any distribution of such Person's property and assets, whether by dividend or upon liquidation. "primary obligation" has the meaning specified in the definition of "Contingent Obligation" set forth in this Section 1.01. "primary obligor" has the meaning specified in the definition of "Contingent Obligations" set forth in this Section 1.01. "Pro Rata Share" of any amount means, with respect to any Lender at any time, the product of (a) a fraction the numerator of which is the amount of such Lender's Commitment under the applicable Facility or Facilities at such time and the denominator of which is the aggregate amount of such Facility or Facilities at such time multiplied by (b) such amount. "Receivables" means has the meaning specified in the Security Agreement. "Redeemable" means, with respect to any Equity Interest, Debt or other right or Obligation, any such Equity Interest, Debt or other right or Obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer or (b) is redeemable at the option of the holder. 24 "Register" has the meaning specified in Section 9.07(d). "Registration Statement" has the meaning specified in Section 3.01(g). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Lenders" means, at any time, Lenders owed or holding at least 66-2/3% of the aggregate principal amount of the Working Capital Advances outstanding at such time, or, if no such principal amount is outstanding at such time, Lenders holding at least 66-2/3% of the aggregate of the Working Capital Commitments at such time; provided, however, that (i) if there are only two (2) Lenders at any time, Required Lenders shall mean both Lenders and (ii) if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time (A) the aggregate principal amount of the Working Capital Advances owing to such Lender (in its capacity as a Lender) and outstanding at such time and (B) the Unused Working Capital Commitment of such Lender at such time. "Requirements of Law" means, with respect to any Person, all laws, constitutions, statutes, treaties, ordinances, rules and regulations, all orders, writs, decrees, injunctions, judgments, determinations or awards of an arbitrator, a court or any other Governmental Authority, and all Governmental Authorizations, binding upon or applicable to such Person or to any of its properties, assets or businesses. "Responsible Officer" means, with respect to the Borrower or any of its Subsidiaries, the chief executive officer, the president, the chief financial officer, the principal accounting officer or the treasurer (or the equivalent of any of the foregoing) or any other officer, partner or member (or person performing similar functions) of the Borrower or any such Subsidiary responsible for overseeing the administration of, or reviewing compliance with, all or any portion of this Agreement or any of the other Loan Documents. "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc. "Secured Obligations" has the meaning specified in Section 2 of the Security Agreement. "Secured Parties" means, collectively, the Agents and the Lenders. "Security Agreement" has the meaning specified in Section 3.01(h)(ix). "Security Agreement Supplement" has the meaning specified in the Security Agreement. 25 "Single Employer Plan" means a single employer plan (as defined in Section 4001(a)(15) of ERISA) that (a) is maintained for employees of any Loan Party or any ERISA Affiliate and no Person other than the Loan Parties and the ERISA Affiliates or (b) was so maintained and in respect of which any Loan Party or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Solvent" and "Solvency" mean, with respect to any Person on any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Obligations" has the meaning specified in Section 7.06. "Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, unlimited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding shares of capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture, limited liability company or unlimited liability company or (c) the beneficial interest in such trust or estate, is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. "Surviving Debt" has the meaning specified in Section 3.01(b). "Taxes" has the meaning specified in Section 2.11(a). "Termination Date" means the earlier of (a) January 26, 2002 (or, if such day is not a Business Day, the next preceding Business Day) and (b) the date of termination in whole of the Working Capital Commitments pursuant to Section 2.04 or 6.01. 26 "Type" refers to the distinction between Working Capital Advances bearing interest at the Base Rate and Working Capital Advances bearing interest at the Eurodollar Rate. "Underwriters" has the meaning specified in Section 3.01(g). "Unused Working Capital Commitment" means, with respect to any Working Capital Lender at any time, (a) such Working Capital Lender's Working Capital Commitment at such time minus (b) the sum of the aggregate principal amount of all Working Capital Advances. "Voting Interests" means shares of capital stock issued by a corporation, or equivalent Equity Interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. "Welfare Plan" means a welfare plan (as defined in Section 3(1) of ERISA) that is maintained for employees of any Loan Party or in respect of which any Loan Party could reasonably be expected to have liability. "WCAS Funds" means the collective reference to the following Delaware limited partnerships: (i) William Blair Capital Partners V, L.P., (ii) Welsh, Carson, Anderson & Stowe V, L.P., (iii) William Blair Leveraged Capital Fund, Limited Partnership, (iv) Welsh, Carson, Anderson & Stowe VI, L.P., (v) WCAS Information Partners, L.P., and (vi) WCAS Capital Partner II, L.P. "WCAS Funds Warrants" means the warrants to purchase an aggregate 84,050 shares of Borrower Common Stock, issued by the Borrower to the WCAS Funds on October 7, 1998. "Withdrawal Liability" has the meaning specified in Part I of Subtitle E of Title IV of ERISA. "Working Capital Advance" has the meaning specified in Section 2.01. "Working Capital Borrowing" means a borrowing consisting of simultaneous Working Capital Advances of the same Type made by the Working Capital Lenders. "Working Capital Commitment" means, with respect to any Lender at any time, the amount set forth opposite such Lender's name on Schedule I hereto under the caption "Working Capital Commitment" or, if such Lender has entered into one or more Assignments and Acceptances, the amount set forth for such Lender in the Register maintained by the 27 Administrative Agent pursuant to Section 9.07(d) as such Lender's "Working Capital Commitment", as such amount may be reduced at or prior to such time pursuant to Section 2.04. "Working Capital Facility" means, at any time, the aggregate amount of the Working Capital Lenders' Working Capital Commitments at such time. "Working Capital Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Working Capital Advances made by such Lender. "Year 2000 Problem" has the meaning specified in Section 4.01(x). SECTION 1.02. Computation of Time Periods; Other Definitional Provisions. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". References in the Loan Documents to any agreement or contract "as amended" shall mean and be a reference to such agreement or contract as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its terms. SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the Consolidated financial statements of the Borrower and its Subsidiaries referred to in Section 4.01(f) ("GAAP"). SECTION 1.04. Currency Equivalents Generally. Any amount specified in this Agreement (other than in Articles II, VII and VIII) or any of the other Loan Documents to be in U.S. dollars shall also include the equivalent of such amount in any currency other than U.S. dollars, such equivalent amount to be determined at the rate of exchange quoted by NationsBank in Charlotte, North Carolina at the close of business on the Business Day immediately preceding any date of determination thereof, to prime banks in New York, New York for the spot purchase in the New York foreign exchange market of such amount in U.S. dollars with such other currency. 28 ARTICLE II AMOUNTS AND TERMS OF THE WORKING CAPITAL ADVANCES SECTION 2.01. The Working Capital Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make advances (each a "Working Capital Advance") in U.S. dollars to the Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date, in each case in an amount not to exceed the Unused Working Capital Commitment of such Lender at such time. Each Working Capital Borrowing shall be in an aggregate amount of $500,000 or an integral multiple of $100,000 in excess thereof or, if less, the amount of the aggregate Unused Working Capital Commitments at such time. Each Working Capital Borrowing shall consist of Working Capital Advances made simultaneously by the Lenders in accordance with their respective Pro Rata Shares of the Working Capital Facility. Within the limits of each Lender's Unused Working Capital Commitment in effect from time to time, the Borrower may borrow under this Section 2.01, prepay pursuant to Section 2.05(a) and reborrow under this Section 2.01. SECTION 2.02. Making the Working Capital Advances. (a) Except as otherwise provided in Section 2.02(b) or 2.03 or in respect of any Working Capital Borrowing requested to be made on the date of the Initial Extension of Credit, in which case notice will be given on the date of the Initial Extension of Credit, each Working Capital Borrowing shall be made on notice, given not later than 11:00 A.M. (Charlotte, North Carolina time) on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing comprised of Eurodollar Rate Advances, or on the first Business Day prior to the date of the proposed Borrowing in the case of a Borrowing comprised of Base Rate Advances, by the Borrower to the Administrative Agent, which shall give prompt notice thereof to each Lender by telex or telecopier. Each notice of a Working Capital Borrowing (a "Notice of Borrowing") shall be by telephone, confirmed immediately in writing, or by telex or telecopier, in substantially the form of Exhibit B-1 hereto, shall be duly executed by a Responsible Officer of the Borrower, and shall specify therein: (i) the requested date of such Working Capital Borrowing (which shall be a Business Day); (ii) the Type of Working Capital Advances requested to comprise such Working Capital Borrowing; (iii) the requested aggregate amount of such Working Capital Borrowing; and (iv) in the case of a Working Capital Borrowing comprised of Eurodollar Rate Advances, the requested duration of the initial Interest Period for each such Working Capital Advance. Each Lender shall, before 11:00 A.M. (Charlotte, North Carolina time) on the date of such Working Capital Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent's Account, in same day funds, such Lender's Pro Rata Share of such Working Capital Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower by crediting the Borrower's Account. 29 (b) Anything in subsection (a) of this Section 2.02 to the contrary notwithstanding, the Borrower may not select Eurodollar Rate Advances (A) for the initial Working Capital Borrowing hereunder, (B) during the period from the date of this Agreement to the date that is forty-five (45) days after such date (or such earlier date as shall be specified in its sole discretion by the Administrative Agent (in consultation with the Syndication Agent) in a written notice to the Borrower and the Lenders) or (C) if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.08 or 2.09. In addition, the Working Capital Advances may not be outstanding as part of more than ten (10) separate Working Capital Borrowings. (c) Each Notice of Borrowing shall be irrevocable and binding on the Borrower. In the case of any Working Capital Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Working Capital Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Working Capital Advance to be made by such Lender as part of such Working Capital Borrowing when such Working Capital Advance, as a result of such failure, is not made on such date. (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Working Capital Borrowing that such Lender will not make available to the Administrative Agent such Lender's Pro Rata Share of such Working Capital Borrowing, the Administrative Agent may assume that such Lender has made the amount of such Pro Rata Share available to the Administrative Agent on the date of such Working Capital Borrowing in accordance with subsection (a) or (b) of this Section 2.02, as applicable, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made the amount of such Pro Rata Share available to the Administrative Agent, such Lender and the Borrower severally agree to repay or to pay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid or paid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at such time under Section 2.06 to Working Capital Advances comprising such Working Capital Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall pay to the Administrative Agent such corresponding amount, such amount so paid shall constitute such Lender's Working Capital Advance as part of such Working Capital Borrowing for all purposes under this Agreement. (e) The failure of any Lender to make the Working Capital Advance to be made by it as part of any Working Capital Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Working Capital Advance on the date of such Working Capital Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the 30 Working Capital Advance to be made by such other Lender on the date of any Working Capital Borrowing. SECTION 2.03. Repayment of Working Capital Advances. The Borrower shall repay to the Administrative Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of all Working Capital Advances outstanding on such date. SECTION 2.04. Termination or Reduction of the Commitments. (a) Optional. The Borrower may, upon at least five Business Days' notice to the Administrative Agent, terminate in whole or reduce in part the Unused Working Capital Commitments; provided, however, that (i) each partial reduction of the Working Capital Facility shall be in an aggregate amount of $500,000 or an integral multiple of $100,000 in excess thereof or, if less, the aggregate amount of the Working Capital Facility and (ii) in no event shall the aggregate amount of the Working Capital Facility be reduced below $10,000,000 as a result of any such partial reduction. (b) Mandatory. The Working Capital Facility shall be automatically and permanently reduced on each date on which the prepayment of Working Capital Advances outstanding thereunder is required to be made pursuant to clause (A), (B) or (D) of Section 2.05(b)(i) by an amount equal to the amount required to be so prepaid; provided, however, that notwithstanding the foregoing provisions of this Section 2.04(b), in no event shall the Working Capital Facility be reduced, pursuant to this Section 2.04(b), to less than $10,000,000, and (ii) the Working Capital Facility shall not be reduced by the amount of any such required prepayments of the Working Capital Advances pursuant to clause (A) of Section 2.05(b)(i) (each, an "Asset Sale Prepayment") (A) to the extent that the aggregate amount of all Asset Sale Prepayments made during the most recent twelve month period ending on any date of determination does not exceed $1,000,000 and (B) if the Asset Sale Prepayment occurred as a result of a Permitted Disposition. (c) Application of Commitment Reductions. Upon each reduction of the Working Capital Facility pursuant to this Section 2.04, the Working Capital Commitment of each Lender shall be reduced by such Lender's Pro Rata Share of the amount by which the Working Capital Facility is reduced. . SECTION 2.05. Prepayments. (a) Optional. The Borrower may, upon at least one Business Day's notice in the case of Base Rate Advances and three Business Days' notice in the case of Eurodollar Rate Advances, in each case to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the aggregate principal amount of the Working Capital Advances comprising part of the same Working Capital Borrowing and outstanding on such date, in whole or ratably in part; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount of $500,000 or an integral multiple of $100,000 in excess thereof and (ii) no such prepayment of a Eurodollar Rate Advance shall be made other than on the last day of an Interest Period therefor. 31 (b) Mandatory. (i) The Borrower shall, on the date of receipt of the Net Cash Proceeds by any Loan Party from (A) the sale, lease, transfer or other disposition of any property or assets of any Loan Party (other than any property or assets expressly permitted to be sold, leased, transferred or otherwise disposed of pursuant to clause (i) of Section 5.02(d)), (B) the incurrence or issuance by any Loan Party of any Debt (other than Debt expressly permitted to be incurred or issued pursuant to clause (i) or (ii) of Section 5.02(b)), (C) the issuance or sale by any Loan Party of any Equity Interests therein (other than (i) the issuance and sale of Borrower Common Stock in connection with the Initial Public Offering (including, without limitation, Borrower Common Stock issued and sold (A) pursuant to the over-allotment arrangements with the Underwriters described in the Registration Statement, and (B) in consideration for the release of accrued and unpaid dividends on the Borrower's preferred stock (as described in the Registration Statement), (ii) the issuance and sale of Borrower Common Stock pursuant to the Medic Warrant and the WCAS Funds Warrants, (iii) Equity Interests in the Borrower expressly permitted to be issued or sold pursuant to clause (i) of Section 5.02(f) and (iv) the issuance and sale of Borrower Common Stock, or options to purchase Borrower Common Stock, in each case pursuant employee stock option or stock purchase plans) and (D) any Extraordinary Receipt received by or paid to or for the account of any Loan Party and not otherwise included in subclause (i)(A), (i)(B) or (i)(C) of this Section 2.05(b), prepay an aggregate principal amount of the Working Capital Advances comprising part of the same Borrowings equal to (x) in case of subclauses (i)(A), (i)(B) and (i)(D) of this Section 2.05(b), 100% of the amount of such Net Cash Proceeds and (y) in the subclause (i)(C) of this Section 2.05(b), 50% of such Net Cash Proceeds. (ii) The Borrower shall, on each Business Day, prepay an aggregate principal amount of the Working Capital Advances comprising part of the same Working Capital Borrowings equal to the amount by which (A) the sum of the aggregate principal amount of all Working Capital Advances outstanding on such Business Day exceeds (B) the Working Capital Facility on such Business Day (after giving effect to any permanent reduction thereof pursuant to Section 2.04 on such Business Day). (c) Prepayments to Include Accrued Interest, Etc. All prepayments under this Section 2.05 shall be made together with (i) accrued and unpaid interest to the date of such prepayment on the principal amount so prepaid and (ii) in the case of any such prepayment of a Eurodollar Rate Advance on a date other than the last day of an Interest Period therefor, any amounts owing in respect of such Eurodollar Rate Advance pursuant to 9.04(c). Upon the occurrence of a Default, the Administrative Agent shall also be authorized (without any further action by or notice to or from the Borrower or any other Loan Party) to apply such amount to the prepayment of the outstanding Working Capital Advances in accordance with this Section 2.05(b). SECTION 2.06. Interest. (a) Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of each Working Capital Advance owing to each Lender from the 32 date of such Working Capital Advance until such principal amount shall be paid in full, at the following rates per annum: (i) Base Rate Advances. During such periods as such Working Capital Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (A) the Base Rate in effect from time to time and (B) the Applicable Margin for such Working Capital Advance, payable in arrears quarterly on the Business Day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (ii) Eurodollar Rate Advances. During such periods as such Working Capital Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Working Capital Advance to the sum of (A) the Eurodollar Rate for such Working Capital Advance for such Interest Period and (B) the Applicable Margin for such Working Capital Advance, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full. (b) Default Interest. Upon the occurrence and during the continuance of a Default, the Borrower shall pay interest on (i) the unpaid principal amount of each Working Capital Advance owing to each Lender, payable in arrears on the dates referred to in clause (i) or (ii) of Section 2.06(a), as applicable, and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Working Capital Advance pursuant to clause (i) or (ii) of Section 2.06(a), as applicable, and (ii) to the fullest extent permitted by applicable law, the amount of any interest, fee or other amount payable under this Agreement or any other Loan Document to any Agent or any Lender that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid, in the case of interest, on the Type of Working Capital Advance on which such interest has accrued pursuant to clause (i) or (ii) of Section 2.06(a), as applicable, and, in all other cases, on Base Rate Advances pursuant to clause (i) of Section 2.06(a). (c) Notice of Interest Rate. Promptly after receipt of a Notice of Borrowing pursuant to Section 2.02(a), the Administrative Agent shall give notice to the Borrower and each Lender of the applicable interest rate determined by the Administrative Agent for purposes of clause (i) or (ii) of Section 2.06(a), as applicable. SECTION 2.07. Fees. (a) Commitment Fee. The Borrower shall pay to the Administrative Agent for the account of the Lenders a commitment fee (the "Commitment Fee"), from the date hereof in the case of each Initial Lender and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender 33 until, in each case, the Termination Date, payable in arrears quarterly on the last Business Day of each March, June, September and December, and on the Termination Date, at the rate of 0.50% per annum on the average daily Unused Working Capital Commitment of each Working Capital Lender; provided, however, that any Commitment Fee accrued with respect to any of the Working Capital Commitments of a Defaulting Lender during the period prior to the time such Lender became a Defaulting Lender and unpaid at such time shall not be payable by the Borrower so long as such Lender shall be a Defaulting Lender except to the extent that such Commitment Fee shall otherwise have been due and payable by the Borrower prior to such time; and provided further that no Commitment Fee shall accrue on any of the Working Capital Commitments of a Defaulting Lender so long as such Lender shall be a Defaulting Lender. (b) Agents' Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents such fees as may from time to time be agreed between the Borrower and the Administrative Agent. SECTION 2.08. Conversion of Working Capital Advances. (a) Optional. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 11:00 A.M. (Charlotte, North Carolina time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Section 2.09, Convert all or any portion of the Working Capital Advances of one Type comprising the same Borrowing into Working Capital Advances of the other Type; provided, however, that: (i) any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances; (ii) any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be made only if no Default shall have occurred and be continuing and shall be in an amount not less than $1,000,000 or an integral multiple of $1,000,000 in excess thereof; (iii) no Conversion of any Working Capital Advances shall result in more separate Working Capital Borrowings than permitted under Section 2.02(b); and (iv) each Conversion of Working Capital Advances comprising part of the same Working Capital Borrowing under any Facility shall be made among the Lenders in accordance with their respective Pro Rata Shares of such Working Capital Borrowing. Each notice of a Conversion (a "Notice of Conversion") shall be delivered by telephone, confirmed immediately in writing, or by telex or telecopier, in substantially the form of Exhibit B-2 hereto, shall be duly executed by a Responsible Officer of the Borrower, and shall, within the restrictions set forth in the immediately preceding sentence, specify therein: (A) the requested date of such Conversion (which shall be a Business Day); 34 (B) the Working Capital Advances requested to be Converted; and (C) if such Conversion is into Eurodollar Rate Advances, the requested duration of the Interest Period for such Eurodollar Rate Advances. The Administrative Agent shall give each of the Lenders prompt notice of each Notice of Conversion received by it, by telex or telecopier. Each Notice of Conversion shall be irrevocable and binding on the Borrower. (b) Mandatory. (i) On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Working Capital Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $500,000, such Working Capital Advances shall automatically Convert into Base Rate Advances. (ii) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" set forth in Section 1.01, the Administrative Agent will forthwith so notify the Borrower and the Lenders, whereupon each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance. (iii) Upon the occurrence and during the continuance of any Event of Default, (A) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (B) the obligation of the Lenders to make, or to Convert Base Rate Advances into, Eurodollar Rate Advances shall be suspended. SECTION 2.09. Increased Costs, Etc. (a) If, due to either (i) the introduction of or any change (other than any change by way of the imposition of or increase in reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation or application of any Requirement of Law after the date of this Agreement or (ii) the compliance with any directive, guideline or request from any central bank or other Governmental Authority or any change therein or in the interpretation, application, implementation, administration or enforcement thereof, that, in any case under this clause (ii), becomes effective or is issued or made after the date of this Agreement (whether or not having the force of law), there shall be any increase in the cost to any of the Lenders of agreeing to make or making, agreeing to participate in or participating in, agreeing to renew or renewing or funding or maintaining any Working Capital Advances of either Type, or any reduction in the amount owing to any of the Lenders or their respective Applicable Lending Offices under this Agreement in respect of any Working Capital Advances of either Type (excluding, for purposes of this Section 2.09, any such increased costs resulting from (A) Taxes or Other Taxes (as to which Section 2.11 shall govern), and (B) changes in the basis of taxation of overall net income or overall gross income by the United States of America or the jurisdiction under the laws of which such Lender is organized or has either of its Applicable Lending Offices or any political subdivision thereof), then the Borrower hereby agrees to pay, from time to time upon demand by 35 such Lender (with a copy of such demand to the Administrative Agent), to the Administrative Agent for the account of such Lender additional amounts sufficient to compensate or to reimburse such Lender for all such increased costs or reduced amounts. A certificate of the Lender requesting such additional compensation pursuant to this Section 2.09(a), submitted to the Borrower by such Lender and specifying therein the amount of such additional compensation, shall be conclusive and binding for all purposes, absent manifest error. In determining any such additional compensation, such Lender may use reasonable averaging and attribution methods. If any of the Lenders requests additional compensation from the Borrower under this subsection (a) in respect of its making, participating in or renewing Eurodollar Rate Advances, the Borrower may, upon notice to such Lender (with a copy of such notice to the Administrative Agent), suspend the obligation of such Lender to make, participate in and/or renew Eurodollar Rate Advances until the circumstances giving rise to such request no longer exist and, during such time, all Eurodollar Rate Advances that would otherwise be made by such Lender as part of any Working Capital Borrowing shall be made instead as Base Rate Advances and all payments of principal of and interest on such Base Rate Advances shall be made at the same time as payments on the Eurodollar Rate Advances otherwise comprising part of such Working Capital Borrowing. (b) If any of the Lenders determines that compliance with any Requirement of Law or any directive, guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), or any change therein or in the interpretation, application, implementation, administration or enforcement thereof, that is enacted or becomes effective, or is implemented or is first required or expected to be complied with, after the date of this Agreement affects the amount of capital required or expected to be maintained by such Lender (or either of the Applicable Lending Offices of such Lender) or by any Person controlling such Lender and that the amount of such capital is increased by or is based upon the existence of the commitment of such Lender to lend hereunder and other commitments of such type, then the Borrower hereby agrees to pay, upon demand by such Lender (with a copy of such demand to the Administrative Agent), to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such Person in light of such circumstances, to the extent that such Lender or such Person reasonably determines such increase in capital to be allocable to the existence of the commitment of such Lender to lend hereunder. A certificate of the Lender requesting such additional compensation pursuant to this subsection (b), submitted to the Borrower by such Lender and specifying therein the amount of such additional compensation, shall be conclusive and binding for all purposes, absent manifest error. In determining any such additional compensation, such Lender may use reasonable averaging and attribution methods. (c) If, with respect to any Eurodollar Rate Advances under the Working Capital Facility, Lenders owed or holding not less than a majority in interest of the aggregate principal amount of all Working Capital Advances outstanding at any time notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Working Capital Advances will not adequately reflect the cost to such Lenders of making, participating in or renewing, or funding or 36 maintaining, their Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Working Capital Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower (promptly following notice from the Lenders) that such Lenders have determined that the circumstances causing such suspension no longer exist. (d) Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to continue to fund or maintain Eurodollar Rate Advances hereunder, then, upon notice thereof and demand therefor by such Lender to the Borrower through the Administrative Agent, (i) each Eurodollar Rate Advance of such Lender will automatically, on the last day of the then existing Interest Period therefor, if permitted by applicable law, or otherwise upon demand Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Working Capital Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower that such Lender has determined that the circumstances causing such suspension no longer exist. If the obligation of a Lender to make Eurodollar Rate Advances is suspended pursuant to this subsection (d), then until the circumstances that gave rise to such suspension no longer apply to such Lender, all Eurodollar Rate Advances that would otherwise be made by such Lender as part of any Working Capital Borrowing shall be made instead as Base Rate Advances and all payments of principal of and interest on such Base Rate Advances shall be made at the same time as payments on the Eurodollar Rate Advances otherwise comprising part of such Working Capital Borrowing. (e) Each of the Lenders hereby agrees that, upon the occurrence of any circumstances entitling such Lender to additional compensation or to cease making, participating in or renewing, or funding or maintaining, Eurodollar Rate Advances under any of the foregoing provisions of this Section 2.09, such Lender shall use reasonable efforts (consistent with its internal policy and with legal and regulatory restrictions) to designate a different Applicable Lending Office for any Advances affected by such circumstances if the making of such designation, in the case of subsection (a) or (b) of this Section 2.09, would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue or, in the case of subsection (c) or (d) of this Section 2.09, would allow such Lender to continue to perform its obligations make, to participate in or renew, or to fund or maintain, Eurodollar Rate Advances, and, in any such case, would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. (f) If any of the Lenders entitled to additional compensation under any of the foregoing provisions of this Section 2.09 shall fail to designate a different Applicable Lending Office as provided in subsection (e) of this Section 2.09 or if the inadequacy or illegality contemplated 37 under subsection (c) or (d) of this Section 2.09, respectively, shall continue with respect to such Lender notwithstanding such designation, then, subject to the terms of Section 9.07(a), the Borrower may cause such Lender to (and, if the Borrower so demands, such Lender shall) assign all of its rights and obligations under this Agreement in accordance with Section 9.07(a); provided that if, upon such demand by the Borrower, such Lender elects to waive its request for additional compensation pursuant to Section 2.09(a) or 2.09(b), the demand by the Borrower for such Lender to so assign all of its rights and obligations under the Agreement shall thereupon be deemed withdrawn. Nothing in subsection (e) of this Section 2.09 or this subsection (f) shall affect or postpone any of the rights of any of the Lenders or any of the Obligations of the Borrower under any of the foregoing provisions of this Section 2.09 in any manner. (g) Each Lender requesting compensation under any of the foregoing provisions of this Section 2.09 shall submit to the Administrative Agent and the Borrower a certificate setting forth in reasonable detail the calculations of such compensation, and such certificate shall be conclusive and binding (in the absence of manifest error). SECTION 2.10. January 23, 1999 Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Working Capital Notes, irrespective of any right of counterclaim or set-off (except as otherwise provided in Section 2.14), not later than 11:00 A.M. (Charlotte, North Carolina time) on the day when due in U.S. dollars to the Administrative Agent at the Administrative Agent's Account in same day funds, with payments received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter cause like funds to be distributed (i) if such payment by the Borrower is in respect of principal, interest, commitment fees or any other Obligation then payable hereunder and under the Working Capital Notes to more than one Lender, to such Lenders for the accounts of their respective Applicable Lending Offices in accordance with their respective Pro Rata Shares of the amounts of such respective Obligations payable to such Lenders at such time and (ii) if such payment by the Borrower is in respect of any Obligation then payable hereunder solely to one Lender, to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(d), from and after the effective date of such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Working Capital Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or, in the case of a Lender, under the Working Capital Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. 38 (c) All computations of (i) interest in respect of Eurodollar Rate Advances shall be made by the Administrative Agent on the basis of a year of 360 days and (ii) interest in respect of Base Rate Advances and fees shall be made by the Administrative Agent on the basis of a year of 365 (or 366) days, as the case may be, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Working Capital Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or Commitment Fees, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next succeeding calendar month, such payment shall be made on the immediately preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to any Lender hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each such Lender on such due date an amount equal to the amount due such Lender on such date. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each such Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) Whenever any payment received by the Administrative Agent under this Agreement or any of the other Loan Documents is insufficient to pay in full all amounts due and payable to the Agents and the Lenders under or in respect of this Agreement and the other Loan Documents on any date, such payment shall be distributed by the Administrative Agent and applied by the Agents and the Lenders in the following order of priority: (i) first, to the payment of all of the fees, indemnification payments, costs and expenses that are due and payable to the Agents (solely in their respective capacities as Agents) under or in respect of this Agreement or any of the other Loan Documents on such date, ratably based upon the respective aggregate amounts of all such fees, indemnification payments, costs and expenses owing to the Agents on such date; (ii) second, to the payment of all of the indemnification payments, costs and expenses that are due and payable to the Lenders under Section 9.04 hereof, Section 7.01 of the Guaranty, Section 20 of the Security Agreement or similar section of any of the other 39 Loan Documents on such date, ratably based upon the respective aggregate amounts of all such indemnification payments, costs and expenses owing to the Lenders on such date; (iii) third, to the payment of all of the amounts that are due and payable to the Administrative Agent and the Lenders under Sections 2.09 and 2.11 hereof or Section 7.01 of the Guaranty on such date, ratably based upon the respective aggregate amounts thereof owing to the Administrative Agent and the Lenders on such date; (iv) fourth, to the payment of all of the fees that are due and payable to the Lenders under Section 2.07(a) on such date, ratably based upon the respective aggregate Working Capital Commitments of the Lenders on such date; (v) fifth, to the payment of all of the accrued and unpaid interest on the Obligations of the Borrower under or in respect of the Loan Documents that is due and payable to the Administrative Agent and the Lenders under Section 2.06(b) on such date, ratably based upon the respective aggregate amounts of all such interest owing to the Administrative Agent and the Lenders on such date; (vi) sixth, to the payment of all of the accrued and unpaid interest on the Working Capital Advances that is due and payable to the Administrative Agent and the Lenders under Section 2.06(a) on such date, ratably based upon the respective aggregate amounts of all such interest owing to the Administrative Agent and the Lenders on such date; (vii) seventh, to the payment of the principal amount of all of the outstanding Working Capital Advances that is due and payable to the Administrative Agent and the Lenders on such date, ratably based upon the respective aggregate amounts of all such principal owing to the Administrative Agent and the Lenders on such date; and (viii) eighth, to the payment of all other Obligations of the Loan Parties owing under or in respect of the Loan Documents that are due and payable to the Administrative Agent and the other Secured Parties on such date, ratably based upon the respective aggregate amounts of all such Obligations owing to the Administrative Agent and the other Secured Parties on such date. If the Administrative Agent receives funds for application to the Obligations of the Loan Parties under or in respect of the Loan Documents under circumstances for which the Loan Documents do not specify the Working Capital Advances or the Facility to which, or the manner in which, such funds are to be applied, the Administrative Agent may, but shall not be obligated to, elect to distribute such funds to each of the Lenders in accordance with such Lender's Pro Rata Share of the aggregate principal amount of all Working Capital Advances outstanding at such time in repayment or prepayment of such of the outstanding Working Capital Advances or other Obligations then owing to such Lender. 40 SECTION 2.11. Taxes. (a) Any and all payments by the Loan Parties hereunder or under the Working Capital Notes shall be made, in accordance with Section 2.10, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and each Agent, taxes that are imposed on its overall net income by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction under the laws of which such Lender or such Agent, as the case may be, is organized or is a resident, or has a fixed place of business or a permanent establishment, or any political subdivision of any of the foregoing, and, in the case of each Lender, taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction of either of its Applicable Lending Offices or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Working Capital Notes being, collectively, "Taxes"). If any Loan Party shall be required under applicable Requirements of Law to deduct any Taxes from or in respect of any sum payable hereunder or under any Working Capital Note to any Lender or any Agent, (i) the sum payable by such Loan Party shall be increased as may be necessary so that after such Loan Party and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 2.11) such Lender or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Loan Party shall make such deductions and (iii) such Loan Party shall pay the full amount deducted to the relevant taxation authority or other Governmental Authority in accordance with applicable Requirements of Law. (b) In addition, each Loan Party shall pay any present or future stamp, recording, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or under the Working Capital Notes or from the execution, delivery or registration of, any performance under, or otherwise with respect to, this Agreement or the Working Capital Notes (collectively, "Other Taxes"). (c) Each Loan Party shall indemnify each Lender and each Agent for the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.11, imposed on or paid by such Lender or such Agent, as the case may be, and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. The indemnity by the Loan Parties provided for in this subsection (c) shall apply and be made whether or not the Taxes or Other Taxes for which indemnification hereunder is sought have been correctly or legally asserted; provided, however, that such Lender or such Agent seeking such indemnification shall take all reasonable actions (consistent with its internal policy and legal and regulatory restrictions) requested by such Loan Party to assist such Loan Party in recovering the amounts paid thereby pursuant to this subsection (c) from the relevant taxation authority or other Governmental Authority. Amounts payable by the Loan Parties under the indemnity set forth in this subsection (c) shall be paid within 30 days from the date on which the applicable Lender or Agent, as the case may be, makes written demand therefor. 41 (d) Within 30 days after the date of any payment of Taxes, the Loan Parties shall furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing payment thereof, to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Administrative Agent. In the case of any payment hereunder or under the Working Capital Notes by or on behalf of any Loan Party through an account or branch outside the United States, or on behalf of any Loan Party by a payor that is not a United States person, if such Loan Party determines that no Taxes are payable in respect thereof, such Loan Party shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at its address referred to in Section 9.02, an opinion of counsel reasonably acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection (e) of this Section 2.11, the terms "United States" and "United States person" shall have the meanings specified in Section 7701 of the Internal Revenue Code. (e) Each Lender organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender, and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as reasonably requested in writing by any Loan Party (but only so long thereafter as such Lender remains lawfully able to do so), provide each of the Administrative Agent and such Loan Party with two original Internal Revenue Service forms 1001 or 4224, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Working Capital Notes. If the forms provided by a Lender at the time such Lender first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that, if at the date of the Assignment and Acceptance pursuant to which a Lender becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) of this Section 2.11 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service form 1001 or 4224, that the Lender reasonably considers to be confidential, the Lender shall give notice thereof to the Loan Parties and shall not be obligated to include in such form or document such confidential information. (f) For any period with respect to which a Lender has failed to provide the Loan Parties with the appropriate form, certificate or other document described in subsection (e) of this 42 Section 2.11 (other than if such failure is due to a change in the applicable Requirements of Law, or in the interpretation or application thereof, occurring after the date on which a form, certificate or other document originally was required to be provided or if such form, certificate or other document otherwise is not required under subsection (e) of this Section 2.11), such Lender shall not be entitled to indemnification under subsection (a) or (c) of this Section 2.11 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver a form, certificate or other document required hereunder, the Loan Parties shall take such steps as such Lender shall reasonably request to assist such Lender in recovering such Taxes. (g) Each of the Lenders hereby agrees that, upon the occurrence of any circumstances entitling such Lender to additional amounts pursuant to this Section 2.11, such Lender shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. (h) If any of the Lenders entitled to additional compensation under any of the foregoing provisions of this Section 2.11 shall fail to designate a different Applicable Lending Office as provided in subsection (g) of this Section 2.11, then, subject to the terms of Section 9.07(a), the Borrower may cause such Lender to (and, if the Borrower so demands, such Lender shall) assign all of its rights and obligations under this Agreement in accordance with Section 9.07(a); provided that if, upon such demand by the Borrower, such Lender elects to waive its request for additional compensation pursuant to this Section 2.11, the demand by the Borrower for such Lender to so assign all of its rights and obligations under the Agreement shall thereupon be deemed withdrawn. Nothing in subsection (g) of this Section 2.11 or this Section 2.11(h) shall affect or postpone any of the rights of any of the Lenders or any of the Obligations of the Borrower under any of the foregoing provisions of this Section 2.11 in any manner. SECTION 2.12. Sharing of Payments, Etc. If any Lender shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) (a) on account of Obligations due and payable to such Lender under or in respect of this Agreement or any of the other Loan Documents at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender at such time (other than pursuant to Section 2.09, 2.11, 9.04 or 9.07) to (ii) the aggregate amount of the Obligations due and payable to all Lenders at such time) of payments on account of the Obligations due and payable to all Lenders under or in respect of this Agreement and the other Loan Documents at such time obtained by all the Lenders at such time or (b) on account of Obligations owing (but not due and payable) to such Lender under or in respect of this Agreement or any of the other Loan Documents at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations owing to such Lender at such time (other than pursuant to Section 2.09, 2.11, 9.04 or 9.07) to (ii) the aggregate amount of the Obligations owing (but not due and payable) to all Lenders under or in respect of this Agreement and the other Loan Documents at such time) of payments on account of the Obligations owing (but not due and payable) to all Lenders 43 under or in respect of this Agreement and the other Loan Documents at such time obtained by all of the Lenders at such time, such Lender shall forthwith purchase from the other Lenders such interests or participating interests in the Obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each other Lender shall be rescinded and such other Lender shall repay to the purchasing Lender the purchase price to the extent of such Lender's ratable share (according to the proportion of (A) the purchase price paid to such Lender to (B) the aggregate purchase price paid to all Lender) of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (1) the amount of such other Lender's required repayment to (2) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower hereby agrees that any Lender so purchasing an interest or participating interest from another Lender pursuant to this Section 2.12 may, to the fullest extent permitted under applicable law, exercise all its rights of payment (including the right of setoff) with respect to such an interest or participating interest, as the case may be, as fully as if such Lender were the direct creditor of the Borrower in the amount of such an interest or participating interest. SECTION 2.13. Use of Proceeds. The proceeds of the Working Capital Advances shall be available (and the Borrower agrees that it shall use such proceeds) solely to finance Permitted Acquisitions or to provide working capital from time to time to the Borrower and its Subsidiaries and to pay Existing Debt that is not Surviving Debt. SECTION 2.14. Defaulting Lenders. (a) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Advance to the Borrower and (iii) the Borrower shall be required to make any payment hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower may, so long as no Default shall occur or be continuing at such time and to the fullest extent permitted by applicable law, set off and otherwise apply the Obligation of the Borrower to make such payment to or for the account of such Defaulting Lender against the obligation of such Defaulting Lender to make such Defaulted Advance. In the event that, on any date, the Borrower shall so set off and otherwise apply its obligation to make any such payment against the obligation of such Defaulting Lender to make any such Defaulted Advance on or prior to such date, the amount so set off and otherwise applied by the Borrower shall constitute for all purposes of this Agreement and the other Loan Documents a Working Capital Advance by such Defaulting Lender made on the date of such setoff under the Working Capital Facility. Such Working Capital Advance shall be a Base Rate Advance and shall be considered, for all purposes of this Agreement, to comprise part of the Working Capital Borrowing in connection with which such Defaulted Advance was originally required to have been made pursuant to Section 2.01, even if the other Working Capital Advances comprising such Working Capital Borrowing shall be Eurodollar Rate Advances on the date such 44 Advance is deemed to be made pursuant to this subsection (a). The Borrower shall notify the Administrative Agent at any time the Borrower exercises its right of set-off pursuant to this subsection (a) and shall set forth in such notice (A) the name of the Defaulting Lender and the Defaulted Advance required to be made by such Defaulting Lender and (B) the amount set off and otherwise applied in respect of such Defaulted Advance pursuant to this subsection (a). Any portion of such payment otherwise required to be made by the Borrower to or for the account of such Defaulting Lender which is paid by the Borrower, after giving effect to the amount set off and otherwise applied by the Borrower pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) or (c) of this Section 2.14. (b) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Amount to the Administrative Agent or any of the other Lenders and (iii) the Borrower shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Lender, then the Administrative Agent may, on its behalf or on behalf of such other Lenders and to the fullest extent permitted by applicable law, apply at such time the amount so paid by the Borrower to or for the account of such Defaulting Lender to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Lenders, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent and such other Lenders and, if the amount of such payment made by the Borrower shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent and the other Lenders, in the following order of priority: (i) first, to the Administrative Agent for any Defaulted Amount then owing to the Administrative Agent; (ii) second, to any other Lenders for any Defaulted Amounts then owing to such other Lenders, ratably in accordance with such respective Defaulted Amounts then owing to such other Lender. Any portion of such amount paid by the Borrower for the account of such Defaulting Lender remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (b), shall be applied by the Administrative Agent as specified in subsection (c) of this Section 2.14. (c) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall not owe a Defaulted Advance or a Defaulted Amount and (iii) the 45 Borrower, the Administrative Agent or any other Lender shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower or such other Lender shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (c) shall be deposited by the Administrative Agent in an account at a bank (the "Escrow Bank") selected by the Administrative Agent at the time, in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (c). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be Escrow Bank's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (c). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Working Capital Advances required to be made by such Defaulting Lender and to pay any amount payable by such Defaulting Lender hereunder and under the other Loan Documents to the Administrative Agent or any other Lender, as and when such Working Capital Advances or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Working Capital Advances and amounts required to be made or paid at such time, in the following order of priority: (i) first, to the Administrative Agent for any amount then due and payable by such Defaulting Lender to the Administrative Agent hereunder; (ii) second, to any other Lenders for any amount then due and payable by such Defaulting Lender to such other Lenders hereunder, ratably in accordance with such respective amounts then due and payable to such other Lenders; and (iii) third, to the Borrower for any Advance then required to be made by such Defaulting Lender pursuant to its Working Capital Commitment. In the event that any Lender that is a Defaulting Lender shall, at any time, cease to be a Defaulting Lender, any funds held by the Administrative Agent in escrow at such time with respect to such Lender shall be distributed by the Administrative Agent to such Lender and applied by such Lender to the Obligations owing to such Lender at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such Obligations outstanding at such time. (d) The rights and remedies against a Defaulting Lender under this Section 2.14 are in addition to other rights and remedies that the Borrower may have against such Defaulting 46 Lender with respect to any Defaulted Advance and that the Administrative Agent or any Lender may have against such Defaulting Lender with respect to any Defaulted Amount. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Initial Extension of Credit. The obligation of each Lender to make an Advance on the occasion of the Initial Extension of Credit hereunder is subject to the satisfaction of the following conditions precedent prior to or concurrently with the Initial Extension of Credit: (a) The Lenders shall be satisfied with the corporate and legal structure and capitalization of each Loan Party, including the terms and conditions of the charter, bylaws and each class of capital stock of each Loan Party and of each agreement or instrument relating to such structure or capitalization. (b) The Lenders shall be satisfied that all Existing Debt, other than the Debt identified on Part B of Schedule 4.01(y) (the "Surviving Debt"), has been prepaid, redeemed or defeased in full or otherwise satisfied and extinguished, that all liens on assets of the Loan Parties securing any such Existing Debt have been released of record. (c) Before giving effect to the transactions contemplated by this Agreement, there shall have occurred no Material Adverse Change since June 30, 1998. (d) There shall exist no action, suit, investigation, litigation or proceeding affecting any Loan Party pending or threatened before any court, governmental agency or arbitrator that (i) could have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of this Agreement, any Working Capital Note, any other Loan Document, or the consummation of the transactions contemplated hereby or the Initial Public Offering. (e) Nothing shall have come to the attention of the Lenders to lead them to believe (i) that any information provided to them in connection with the transactions contemplated hereby (including, without limitation, the Registration Statement) was or has become misleading, incorrect or incomplete in any material respect and (ii) that the Loan Parties would not have good and marketable title to all of their material assets. (f) The Borrower shall have paid all accrued fees and expenses of the Administrative Agent and the Lenders (including the accrued reasonable fees and expenses of counsel to the Administrative Agent). 47 (g) The Borrower shall have filed with the Securities and Exchange Commission a registration statement (the "Registration Statement") on form S-1 with respect to 4,166,667 shares of its common stock, par value $0.01 per share (the "Borrower Common Stock") and shall have caused the Registration Statement to become effective under the Securities Act of 1933 (as amended); and the Borrower shall have sold not less 4,166,667 shares of Borrower Company Stock to the underwriters (the "Underwriters") referred to in the Registration Statement at purchase price of not less than $11.50 per share and shall have received Net Cash Proceeds therefrom of not less than $42,862,503. The Lenders shall have received a copy of the Registration Statement and all documentation entered into or delivered by the Borrower or any other Loan Party in connection therewith (including any agreements with the Underwriters) and the same shall be in form and substance reasonably satisfactory to the Administrative Agent. (h) The Administrative Agent shall have received on or before the day of the Initial Extension of Credit the following, each dated such day (unless otherwise specified), in form and substance satisfactory to the Lenders (unless otherwise specified) and (except for the Working Capital Notes) in sufficient copies for each Lender: (i) The Working Capital Notes payable to the order of the Lenders. (ii) Certified copies of the resolutions of the Board of Directors of each Loan Party approving this Agreement, the Working Capital Notes and each other Loan Document to which it is or is to be a party, and of all documents evidencing other necessary corporate action and governmental and other third party approvals and consents, if any, with respect to this Agreement, the Working Capital Notes and each other Loan Document. (iii) A copy of the charter of each Loan Party and each amendment thereto, certified (as of a date reasonably near the date of the Initial Extension of Credit) by the Secretary of State of the jurisdiction of its incorporation as being a true and correct copy thereof. (iv) A copy of a certificate of the Secretary of State of the jurisdiction of its incorporation, dated reasonably near the date of the Initial Extension of Credit, listing the charter of each Loan Party and each amendment thereto on file in his or her office and certifying that (A) such amendments are the only amendments to such Loan Party's charter on file in his or her office, (B) each Loan Party have paid all franchise taxes to the date of such certificate and (C) each Loan Party is duly incorporated and in good standing under the laws of the State of the jurisdiction of its incorporation. 48 (v) A copy of a certificate of the appropriate State governmental authority of each jurisdiction in which each Loan Party is organized, dated reasonably near the date of the Initial Extension of Credit, certifying as to the recording of a certified copy of the charter of such Loan Party and each amendment thereto in his or her office. (vi) A copy of a certificate of the Secretary of State of each State in which each Loan Party is organized or conducts business, dated reasonably near the date of the Initial Extension of Credit, stating that such Loan Party is duly qualified and in good standing as a foreign corporation in such States and have filed all annual reports required to be filed to the date of such certificate; provided that no such certificates shall be required for any such States if the failure of any Loan Party to be qualified as a foreign corporation in such States, individually or in the aggregate, could not be reasonably expected to have a Material Adverse Effect. (vii) A certificate of each Loan Party, signed on behalf of such Loan Party by its President or a Vice President and its Secretary or any Assistant Secretary, dated the date of the Initial Extension of Credit (the statements made in which certificate shall be true on and as of the date of the Initial Extension of Credit), certifying as to (A) the absence of any amendments to the charter of such Loan Party since the date of the Secretary of State's certificate referred to in Section 3.01(h)(iv), (B) a true and correct copy of the bylaws of such Loan Party as in effect on the date of the Initial Extension of Credit, (C) the due incorporation and good standing of such Loan Party as a corporation organized under the laws of the State of its organization, and the absence of any proceeding for the dissolution or liquidation of such Loan Party, (D) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the date of the Initial Extension of Credit and (E) the absence of any event occurring and continuing, or resulting from the Initial Extension of Credit, that constitutes a Default. (viii) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign this Agreement, the Working Capital Notes and each other Loan Document to which it is or is to be a party and the other documents to be delivered hereunder and thereunder. (ix) A security agreement in substantially the form of Exhibit D (together with each other security agreement delivered pursuant to Section 5.01(m), in each case as amended, supplemented or otherwise modified from time to time in accordance with its terms, the "Security Agreement"), duly executed by the Borrower and each of its Subsidiaries, together with: 49 (A) certificates representing the Pledged Shares referred to therein accompanied by undated stock powers executed in blank and instruments evidencing the Pledged Debt referred to therein indorsed in blank, (B) copies of proper financing statements in the appropriate form for filing under the Uniform Commercial Code of all jurisdictions that the Administrative Agent may deem necessary or desirable in order to perfect and protect the liens and security interests created under the Security Agreement, covering the Collateral described in the Security Agreement, (C) completed requests for information, dated on or before the date of the Initial Extension of Credit, listing all effective financing statements filed in the jurisdictions referred to in clause (B) above that name the Borrower, or any other Loan Party as debtor, together with copies of such other financing statements, and (D) evidence that all other action that the Administrative Agent may deem reasonably necessary or desirable in order to perfect and protect the first priority liens and security interests created under the Security Agreement has been taken. (x) Such financial, business and other information regarding each Loan Party as the Lenders shall have reasonably requested, including, without limitation, information as to possible contingent liabilities, tax matters, environmental matters, obligations under Plans, Multiemployer Plans and Welfare Plans, collective bargaining agreements and other arrangements with employees, audited consolidated annual financial statements dated June 30, 1998, interim consolidated financial statements dated the end of the most recent fiscal quarter for which financial statements are available, pro forma financial statements as to the Borrower and its Subsidiaries and forecasts prepared by management of the Borrower and its Subsidiaries, in form and substance satisfactory to the Lenders, of balance sheets, income statements and cash flow statements on a quarterly basis for the first year following the day of the Initial Extension of Credit and on an annual basis for each year thereafter until the Termination Date. (xi) Certificates, in form and substance satisfactory to the Lenders, attesting to the Solvency of each Loan Party after giving effect to the transactions contemplated hereby, from its chief financial officer. (xii) A letter, in form and substance satisfactory to the Administrative Agent, from the Borrower to Deloitte & Touche LLP, its independent certified public accountants, advising such accountants that the Administrative Agent and the 50 Lenders have been authorized to exercise all rights of the Borrower to require such accountants to disclose any and all financial statements and any other information of any kind that they may have with respect to the Borrower and its Subsidiaries and directing such accountants to comply with any reasonable request of the Administrative Agent or any Lender for such information. (xiii) Evidence of insurance naming the Administrative Agent as insured and loss payee with such responsible and reputable insurance companies or associations, and in such amounts and covering such risks, as is satisfactory to the Lenders, including, without limitation, business interruption insurance. (xiv) Certified copies of each employment agreement and other compensation arrangement with each executive officer of any Loan Party. (xv) A favorable opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, special counsel to the Loan Parties, and Ohio and Missouri counsels to the Loan Parties reasonably acceptable to the Lenders, such opinions to be in form and substance reasonably satisfactory to the Lenders. (i) The Initial Extension of Credit shall have been made on or prior to March 31, 1999. SECTION 3.02. Conditions Precedent to Each Working Capital Borrowing. The obligation of each Lender to make an Advance on the occasion of each Working Capital Borrowing (including the Initial Extension of Credit), shall be subject to the further conditions precedent that on the date of such Working Capital Borrowing (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Working Capital Borrowing shall constitute a representation and warranty by the Borrower that both on the date of such notice and on the date of such Working Capital Borrowing or issuance such statements are true): (i) the representations and warranties contained in each Loan Document are correct on and as of such date, before and after giving effect to such Working Capital Borrowing and to the application of the proceeds therefrom, as though made on and as of such date other than any such representations or warranties that, by their terms, refer to a specific date other than the date of such Working Capital Borrowing, in which case as of such specific date; and (ii) no event has occurred and is continuing, or would result from such Working Capital Borrowing or from the application of the proceeds therefrom, that constitutes a Default, 51 and (b) the Administrative Agent shall have received such other approvals, opinions or documents as any Appropriate Lender through the Administrative Agent may reasonably request. SECTION 3.03. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Lender prior to the Initial Extension of Credit specifying its objection thereto and if the Initial Extension of Credit consists of a Working Capital Borrowing, such Lender shall not have made available to the Administrative Agent such Lender's Pro Rata Share of such Borrowing. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. Each Loan Party represents and warrants as to itself as follows: (a) Each Loan Party (i) is a corporation, limited partnership or limited liability company duly organized and validly existing under the laws of the jurisdiction of its organization and is in good standing under the laws of such jurisdiction and (ii) is duly qualified as a foreign corporation, limited partnership or limited liability company and is in good standing in each other jurisdiction in which the ownership, lease or operation of its property and assets or the conduct of its business require it to so qualify or be licensed, except, solely in the case of this clause (ii), where the failure to so qualify or be licensed or to be in good standing, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Each Loan Party has all of the requisite power and authority (including all Governmental Authorizations), and the legal right, to own or lease and to operate all of the property and assets it purports to own, lease or operate and to conduct all of its business as now conducted and as proposed to be conducted. Each Loan Party has all of the requisite power and authority, and the legal right, to execute and deliver each of the Loan Documents to which it is or is to be a party, to perform all of its Obligations hereunder and thereunder and to consummate the transactions contemplated hereby. All of the outstanding Equity Interests in the Borrower have been validly issued, are fully paid and nonassessable. Schedule 4.01(a) hereof sets forth, as of the date hereof, the type and amount of all outstanding Equity Interests in the Borrower that are owned directly or indirectly by one or more of the WCAS Funds, and such Equity Interest are owned by the WCAS Funds free and clear of all Liens (including, without limitation, preemptive or other similar rights of the holders thereof), except those created under the Collateral Documents. 52 (b) Set forth on Schedule 4.01(b) hereto is a complete and accurate list of all Subsidiaries of the Borrower, showing, as of the date of this Agreement, as to each such Subsidiary, the correct legal name thereof, the legal structure thereof, the jurisdiction of its organization, the number and type of each class of its Equity Interests authorized and the number outstanding, and the percentage of each such class of its Equity Interests outstanding on such date that are owned by the Borrower. All of the outstanding Equity Interests in the Subsidiaries of the Borrower have been validly issued, are fully paid and nonassessable and are owned directly by the Borrower in the type and amounts disclosed on Schedule 4.01(b) hereto free and clear of all Liens (including, without limitation, preemptive or other similar rights of the holders thereof), except those created under the Collateral Documents. No Subsidiary of the Borrower has any Subsidiaries. (c) The execution, delivery and performance by each Loan Party of each Loan Document to which it is or is to be a party, and the consummation of the transactions contemplated hereby, have been duly authorized by all necessary action (including, without limitation, all necessary shareholder or other similar action) and do not: (i) contravene the Constitutive Documents of such Loan Party; (ii) violate any Requirement of Law; (iii) conflict with or result in the breach of, or constitute a default under, any loan agreement, indenture, mortgage, deed of trust, lease, instrument, contract or other agreement binding on or affecting such Loan Party or any of its property or assets; or (iv) except for the Liens created under the Collateral Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the property or assets of such Loan Party. None of the Loan Parties is in violation of any Requirement of Law or in breach of any loan agreement, indenture, mortgage, deed of trust, lease, instrument, contract or other agreement referred to in the immediately preceding sentence, the violation or breach of which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (d) No Governmental Authorization, and no other consent, approval or authorization of, or notice to or filing with, or other action by, any other Person is required for: 53 (i) the due execution, delivery, recordation, filing or performance by any Loan Party of any of the Loan Documents to which it is or is to be a party, or for the consummation of any aspect of the transactions contemplated hereby; (ii) the grant by any Loan Party of the Liens granted by it pursuant to the Collateral Documents; (iii) the perfection or maintenance of the Liens created under the Collateral Documents (including the first priority nature thereof); or (iv) the exercise by the Administrative Agent or any of the Lenders of its rights under the Loan Documents or the remedies in respect of the Collateral pursuant to the Collateral Documents; except for the Governmental Authorizations, and the other consents, approvals, authorizations, notices, filings and other actions, described on Schedule 4.01(d) hereto. All of the Governmental Authorizations, and other the consents, approvals, authorizations, notices, filings and other actions, described on Schedule 4.01(d) hereto have been or will have been duly obtained, taken, given or made on or prior to the date of the Initial Extension of Credit and are, or on the date of the Initial Extension of Credit will be, in full force and effect, or, if expressly provided for on Schedule 4.01(d) hereto, will be duly obtained, taken, given or made in accordance with the terms set forth therefor on Schedule 4.01(d) hereto and, thereafter, will be in full force and effect. All applicable waiting periods in connection with each aspect of the transactions contemplated hereby have expired without any action having been taken by any competent authority restraining, preventing or imposing materially adverse conditions upon any aspect of such transactions or the rights of any Loan Party freely to transfer or otherwise dispose of, or to create any Lien on, any property or assets now owned or hereafter acquired by any of them. No Loan Party has received any notice relating to or threatening the revocation, termination, cancellation, denial, impairment or modification of any such Governmental Authorization, or is in violation or contravention of, or in default under, any such Governmental Authorization, except for those that could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect and by general principles of equity. (e) This Agreement has been, and each of the other Loan Documents when delivered hereunder will have been, duly executed and delivered by each of the Loan Parties intended to be a party thereto. This Agreement is, and each of the other Loan Documents when delivered hereunder will be, the legal, valid and binding obligations of each of the Loan Parties intended to be a party thereto, enforceable against such Loan Party in accordance with their respective terms, except to the extent such enforceability may be limited by the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. 54 (f) The Consolidated balance sheets of the Borrower and its Subsidiaries as at June 30, 1997 and June 30, 1998, and the related Consolidated statements of income and cash flow of the Borrower and its Subsidiaries for the fiscal years then ended, accompanied by an unqualified opinion of Deloitte & Touche LLP, independent public accountants of the Borrower, and the Consolidated balance sheet of the Borrower and its Subsidiaries as at September 30, 1998, and the related Consolidated statements of income and cash flow of the Borrower and its Subsidiaries for the 3 month period then ended, duly certified by the chief financial officer of the Borrower, copies of all of which have been furnished to each Lender, fairly present, subject, in the case of said balance sheets as at September 30, 1998, and said statements of income and cash flow for the 3 month period then ended, to year-end audit adjustments and the absence of footnotes, the Consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the Consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles applied on a consistent basis. Neither the Borrower nor any of its Subsidiaries has any material fixed or contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or anticipated losses from any unfavorable commitments, except as referred to, or reflected or provided for in, the financial statements referred to above in this Section 4.01(f) or as described in reasonable detail on Schedule 4.01(f) hereto. Since June 30, 1998, there has been no Material Adverse Change. (g) The Consolidated pro forma balance sheet of the Borrower and its Subsidiaries as at December 31, 1998, and the related Consolidated pro forma statements of income and cash flow of the Borrower and its Subsidiaries for the twelve months then ended, duly certified by the chief financial officer of the Borrower, copies of which have been furnished to each Lender, fairly present the Consolidated pro forma financial condition of the Borrower and its Subsidiaries as at such date and the Consolidated pro forma results of operations of the Borrower and its Subsidiaries for the period ended on such date, in each case after giving effect to the transactions contemplated hereby, all in accordance with GAAP. (h) The Consolidated forecasted balance sheets, income statements and cash flow statements of the Borrower and its Subsidiaries delivered to the Lenders pursuant to Section 3.01(h)(x) or 5.03 were prepared in good faith on the basis of the assumptions stated therein, which assumptions were fair in the light of conditions existing at the time of delivery of such forecasts, and represented, at the time of delivery, the Borrower's best estimate of its future financial performance (although the actual results during the periods covered by such forecasts may differ from the forecasted results). (i) Neither the Registration Statement nor any other information, exhibit or report (other than financial projections and pro forma financial information) furnished by or on behalf any Loan Party to any Agent or any Lender in connection with the Loan Documents or pursuant to the terms of the Loan Documents contains any untrue statement of a material 55 fact or omits to state a material fact necessary to make the statements made therein, in light of the circumstances in which any such statements were made, not misleading. (j) There is no action, suit, investigation, litigation, arbitration or proceeding pending or, to the best knowledge of the Loan Parties, threatened against or affecting any Loan Party or any of the property or assets thereof in any court or before any arbitrator or by or before any Governmental Authority of any kind that (i) either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or (ii) purports to affect the legality, validity, binding effect or enforceability of any of the Loan Documents or any aspect of the transactions contemplated hereby. (k) Each Loan Party is the legal and beneficial owner of the Collateral purported to be owned thereby under the Collateral Documents, free and clear of all Liens, except for the liens and security interests created under the Collateral Documents and except for Liens permitted under Section 5.02(a). The Collateral Documents create valid and perfected first priority liens on and security interests in the Collateral in favor of the Administrative Agent, for the benefit of the Secured Parties, securing the payment of the Secured Obligations. All of the Equity Interests in the Subsidiaries of the Borrower that are purported to comprise part of the Collateral have been delivered to the Administrative Agent as required under the terms of the Collateral Documents, together with undated stock powers or other appropriate powers duly executed in blank; all filings and other actions necessary to perfect and protect the liens and security interests of the Administrative Agent in the Collateral have been duly made or taken and are in full force and effect or will be duly made or taken in accordance with the terms of the Loan Documents; and all filing fees and recording taxes have been paid in full. (l) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no proceeds of any Advance will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. (m) No Loan Party is an "investment company," or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company" (as such terms are defined in the Investment Company Act of 1940, as amended). None of the making of any Working Capital Advances or the application of the proceeds or repayment thereof by the Borrower, or the consummation of any of transactions contemplated hereby, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. (n) Each Loan Party is Solvent. (o) Neither the business nor the property and assets of any Loan Party are or have been affected by any fire, explosion, accident, drought, storm, hail, earthquake, embargo, act 56 of God or of the public enemy or other casualty (whether or not covered by insurance) that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (p) There is (i) no unfair labor practice complaint pending or, to the best knowledge of the Loan Parties, threatened against any Loan Party by or before any Governmental Authority and no grievance or arbitration proceeding pending or, to the best knowledge of the Loan Parties, threatened against any Loan Party which arises out of or under any collective bargaining agreement that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, (ii) no strike, labor dispute, slowdown, stoppage or similar action or grievance pending or, to the best knowledge of the Loan Parties, threatened against any Loan Party and (iii) no union representation question existing with respect to the employees of any Loan Party and no union organizing activity taking place with respect to any of the employees of any of them. (q) (i) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan that has resulted in or is reasonably expected to result in a material liability of any Loan Party or any ERISA Affiliate. (ii) Schedule B (Actuarial Information) to the most recent annual report (Form 5500 Series) for each Plan, copies of which have been filed with the Internal Revenue Service and furnished to the Lenders, is complete and accurate and fairly presents the funding status of such Plan; and since the date of such Schedule B there has been no material adverse change in such funding status. (iii) Neither any Loan Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan. (iv) Neither any Loan Party nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (r) The operations and properties of each Loan Party comply in all material respects with all applicable Environmental Laws and Environmental Permits, all past noncompliance with such Environmental Laws and Environmental Permits has been resolved without ongoing obligations or costs, and no circumstances exist that could (i) form the basis of an Environmental Action against any Loan Party or any of its properties that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or (ii) cause any such property to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law. 57 (s) None of the properties currently or formerly owned or operated by any Loan Party is listed or proposed for listing on the NPL or on the CERCLIS or any analogous foreign, state or local list or is adjacent to any such property; there are no and, to the best knowledge of the Loan Parties, never have been any underground or aboveground storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been treated, stored or disposed on any property currently owned or operated by any Loan Party or, to the best of its knowledge, on any property formerly owned or operated by any Loan Party; there is no asbestos or asbestos-containing material on any property currently owned or operated by any Loan Party, except for those, the existence of which could not, individually or in the aggregate, could not form the basis of an Environmental Action that could be reasonably expected to have a Material Adverse Effect; and Hazardous Materials have not been released, discharged or disposed of on any property currently or formerly owned or operated by any Loan Party. (t) No Loan Party is undertaking, and has not completed, either individually or together with other potentially responsible parties, any investigation or assessment or remedial or response action relating to any actual or threatened release, discharge or disposal of Hazardous Materials at any site, location or operation, either voluntarily or pursuant to the order of any Governmental Authority or the requirements of any Environmental Law; and all Hazardous Materials generated, used, treated, handled or stored at, or transported to or from, any property currently or formerly owned or operated by any Loan Party have been disposed of in a manner not reasonably expected to result in material liability to any Loan Party. (u) Each Loan Party and their Affiliates have filed, have caused to be filed or have been included in all tax returns, reports and statements (federal, state, local and foreign) required to be filed and have paid all taxes, assessments, levies, fees and other charges shown thereon (or on any assessments received by any such Person or of which any such Person has been notified) to be due and payable, together with applicable interest and penalties, except for any such taxes, assessments, levies, fees and other charges the amount, applicability or validity of which is being contested in good faith and by appropriate proceedings diligently conducted and with respect to which such Loan Party or Affiliate may be, has established appropriate and adequate reserves in accordance with GAAP. All of the tax returns, reports and statements referred to in the immediately preceding sentence have been prepared in good faith and are complete and accurate in all material respects for the Loan Parties and their Affiliates for the respective periods covered thereby. (v) Set forth on Schedule 4.01(y) hereto is a complete and accurate list, as of the date of this Agreement, of each Open Year of each Loan Party and its Affiliates. There are no adjustments to (i) the federal income tax liability (including, without limitation, interest and penalties) of any Loan Party or its Affiliates proposed in writing by the Internal Revenue Service with respect to Open Years or (ii) any foreign, state or local tax liability (including, 58 without limitation, interest and penalties) of any Loan Party or any of its Affiliates proposed in writing by any foreign, state or local taxation authority that, in the aggregate for subclauses (i) and (ii) of this sentence, would exceed $100,000. No issues have been raised by the Internal Revenue Service in respect of Open Years or by any such foreign, state or local taxation authorities that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (w) Neither any Loan Party nor any of its Affiliates has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the assessment, reassessment, payment or collection of taxes of such Loan Party or any such Affiliate, or is aware of any circumstances that would cause the taxable years or other taxable periods of such Loan Party or any such Affiliate to no longer be subject to the normally applicable statute of limitations. Neither any Loan Party nor any of its Affiliates has provided, with respect to itself or any property held by it, any consent under Section 341(f) of the Internal Revenue Code. (x) Each Loan Party, on behalf of itself and its Subsidiaries, (i) has initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could reasonably expected to be adversely affected by the risk that computer applications used by such Loan Party or any of its Subsidiaries (or by their respective suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (collectively, the "Year 2000 Problem"), (ii) has developed a plan and timeline for addressing the Year 2000 Problem on a timely basis and (iii) has implemented such plan to date in accordance with such timetable. Based on the foregoing, each of the Loan Parties believes that all computer applications (including those of its and each of its Subsidiaries' suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after September 30, 1999, except to the extent that a failure to do so, either individually or in the aggregate, could not reasonably be expected to have Material Adverse Effect. (y) Set forth on Part A of Schedule 4.01(y) hereto is a complete and accurate list, as of the date of this Agreement, of all of the Debt of any Loan Party existing on such date (collectively, the "Existing Debt"), showing, as of such date, each of the Loan Parties party thereto, the principal amount outstanding thereunder, the interest rate thereon, the scheduled maturity date thereof and the amortization schedule, if any, therefor. Set forth on Part B of Schedule 4.01(y) hereto is a complete and accurate list, as of the date of this Agreement, of all of the Surviving Debt on such date, showing, as of such date, each of the Loan Parties party thereto, the principal amount outstanding thereunder, the interest rate thereon, the scheduled maturity date thereof and the amortization schedule, if any, therefor. 59 (z) Set forth on Part A of Schedule 4.01(z) hereto is a complete and accurate list of all real property owned by any Loan Party showing as of the date hereof the street address, county or other relevant jurisdiction, state, and record owner. Each Loan Party has good, marketable and insurable fee simple title to such real property, free and clear of all Liens, other than Liens created or permitted by the Loan Documents. Set forth on Part B of Schedule 4.01(z) hereto is a complete and accurate list of all leases of real property under which any Loan Party is the lessee, showing as of the date hereof the street address, county or other relevant jurisdiction, state, lessor, lessee, expiration date and annual rental cost thereof. Each such lease is the legal, valid and binding obligation of the lessor thereof, enforceable in accordance with its terms except to the extent such enforceability may be limited by the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. (aa) Set forth on Schedule 5.02(e) hereto is a complete and accurate list, as of the date of this Agreement, of all of the Investments (other than cash and Cash Equivalents) held by any Loan Party, showing, as of such date, the amount, the obligor or issuer thereof and the maturity, if any, thereof. (bb) Set forth on Schedule 4.01(bb) hereto is a complete and accurate list of all patents, trademarks, trade names, service marks and copyrights, and all applications therefor and licenses thereof, of each Loan Party showing as of the date hereof the jurisdiction in which registered, the registration number, the date of registration and the expiration date. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Working Capital Commitment hereunder, each Loan Party will: (a) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with ERISA and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970. (b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its property; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay or discharge any 60 such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors. (c) Compliance with Environmental Laws. Comply, and cause each of its Subsidiaries and all lessees and other Persons operating or occupying its properties to comply, in all material respects, with all applicable Environmental Laws and Environmental Permits, except to the extent that the failure to comply therewith, individually or in the aggregate, could not be reasonably expected to have a Material Adverse Effect; obtain and renew and cause each of its Subsidiaries to obtain and renew all Environmental Permits necessary for its operations and properties except to the extent that the failure to obtain or renew any such Environmental Permits could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; and conduct, and cause each of its Subsidiaries to conduct, any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials from any of its properties, in accordance with the requirements of all Environmental Laws; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances. (d) Maintenance of Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which such Loan Party or such Subsidiary operates. (e) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; provided, however, that the Borrower and its Subsidiaries may consummate any other merger or consolidation permitted under Section 5.02(c) and provided further that neither any Loan Party nor any Subsidiary of a Loan Party shall be required to preserve any right, permit, license, approval, privilege or franchise if the Board of Directors of such Loan Party or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of such Loan Party or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to such Loan Party, such Subsidiary or the Lenders. 61 (f) Visitation Rights. At any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, each Loan Party and any Subsidiary of each Loan Party, and to discuss the affairs, finances and accounts of each Loan Party and any of its Subsidiaries with any of their officers or directors and with their independent certified public accountants; provided that if the Administrative Agent and the Lenders undertake more than two such visits to the properties of the Loan Parties in any Fiscal Year, the Borrower shall not be required to reimburse the Lenders for the costs and expenses of the third and subsequent visits during such Fiscal Year unless an Event of Default shall occur and be continuing at the time thereof. (g) Preparation of Environmental Reports. At the request of the Administrative Agent from time to time, provide to the Lenders within 60 days after such request, at the expense of the Borrower, an environmental site assessment report for any of the properties of any Loan Party or any Subsidiary of any Loan Party described in such request, prepared by an environmental consulting firm acceptable to the Administrative Agent, indicating the presence or absence of Hazardous Materials and the estimated cost of any compliance, removal or remedial action in connection with any Hazardous Materials on such properties; without limiting the generality of the foregoing, if the Administrative Agent determines at any time that a material risk exists that any such report will not be provided within the time referred to above, the Administrative Agent may retain an environmental consulting firm to prepare such report at the expense of the Borrower, and each Loan Party hereby grants and agrees to cause any of its Subsidiaries that owns any property described in such request to grant at the time of such request, to the Administrative Agent, the Lenders, such firm and any agents or representatives thereof an irrevocable non-exclusive license, subject to the rights of tenants, to enter onto their respective properties to undertake such an assessment. All environmental reports required under this Section 5.01(g) shall be initially limited to "phase I" site audits unless the Administrative Agent reasonably determines that further assessment and investigation is warranted. (h) Keeping of Books. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which entries (which shall be full and correct in all material respects) shall be made of all financial transactions and the assets and business of each Loan Party and each such Subsidiary in accordance with generally accepted accounting principles in effect from time to time. (i) Maintenance of Properties, Etc. Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted and except that the Loan Parties may dispose of obsolete and worn-out property or equipment, in the ordinary course of business. 62 (j) Compliance with Terms of Leaseholds. Make all payments and otherwise perform all obligations in respect of all leases of real property to which any Loan Party or any Subsidiary of a Loan Party is a party, keep such leases in full force and effect and not allow such leases to lapse or be terminated or any rights to renew such leases to be forfeited or cancelled, notify the Administrative Agent of any default by any party with respect to such leases and cooperate with the Administrative Agent in all respects to cure any such default, and cause each of its Subsidiaries to do so except, in any case, where the failure to do so, either individually or in the aggregate, could not have a Material Adverse Effect. (k) Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Loan Documents with any of their Affiliates on terms that are fair and reasonable and no less favorable to such Loan Party or such Subsidiary than it would obtain in a comparable arm's-length transaction with a Person not an Affiliate. (l) Cash Concentration Accounts. Maintain main cash concentration accounts and Lockbox Accounts in accordance with the Security Agreement into which all proceeds of Collateral are paid to one or more banks acceptable to the Administrative Agent that have accepted the assignment of such accounts to the Administrative Agent pursuant to the Security Agreement. (m) Covenant to Guarantee Obligations and Give Security. Upon (x) the request of the Administrative Agent following the occurrence and during the continuance of a Default, (y) the formation or acquisition of any new Domestic Subsidiaries by the Borrower (including, without limitation, any such formation or acquisition made in connection with a Permitted Acquisition), or (z) the acquisition of any property by any Loan Party (including, without limitation, any such acquisition made in connection with a Permitted Acquisition), if such property, in the judgment of the Administrative Agent, shall not already be subject to a perfected first priority security interest in favor of the Administrative Agent for the benefit of the Secured Parties, then each Loan Party shall, in each case at such Loan Party's expense: (i) concurrently with the formation or acquisition of a Domestic Subsidiary, cause each such Domestic Subsidiary, and cause each direct and indirect parent of such Domestic Subsidiary (if it has not already done so), to duly execute and deliver to the Administrative Agent a guaranty supplement, in substantially the form of Exhibit E hereto, guaranteeing the other Loan Parties' obligations under the Loan Documents, (ii) concurrently with each such formation or acquisition, or within 10 days after such request, furnish to the Administrative Agent a description of the real 63 and personal properties of the Loan Parties and their respective Subsidiaries in detail reasonably satisfactory to the Administrative Agent, (iii) concurrently with each such formation or acquisition, or within 15 days after such request, duly execute and deliver, and cause each such Domestic Subsidiary and each direct and indirect parent of such Domestic Subsidiary (if it has not already done so) to duly execute and deliver, to the Administrative Agent mortgages, pledges, assignments, security agreement supplements and other security agreements, as specified by and in form and substance reasonably satisfactory to the Administrative Agent, securing payment of all the Obligations of the applicable Loan Party, such Domestic Subsidiary or such parent, as the case may be, under the Loan Documents and constituting Liens on all such properties, (iv) concurrently with each such formation or acquisition, or within 30 days after such request, take, and cause such Domestic Subsidiary or such parent to take, whatever action (including, without limitation, the recording of mortgages, the filing or recording of Uniform Commercial Code financing statements or other appropriate documents, the giving of notices and the endorsement of notices on title documents) may be necessary or advisable in the opinion of the Administrative Agent to vest in the Administrative Agent (or in any representative of the Administrative Agent designated by it) valid and subsisting Liens on the properties purported to be subject to the mortgages, pledges, assignments, security agreement supplements and security agreements delivered pursuant to this Section 5.01(m), enforceable against all third parties in accordance with their terms, (v) concurrently with each such formation or acquisition, or within 60 days after such request, deliver to the Administrative Agent, upon the request of the Administrative Agent in its sole discretion, a signed copy of a favorable opinion, addressed to the Administrative Agent and the other Secured Parties, of counsel for the Loan Parties acceptable to the Administrative Agent as to the matters contained in clauses (i), (iii) and (iv) above, as to such guaranties, guaranty supplements, mortgages, pledges, assignments, security agreement supplements and security agreements being legal, valid and binding obligations of each Loan Party party thereto enforceable in accordance with their terms, as to the matters contained in clause (iv) above, as to such recordings, filings, notices, endorsements and other actions being sufficient to create valid perfected Liens on such properties, and as to such other matters as the Administrative Agent may reasonably request, (vi) as promptly as practicable after such request, formation or acquisition, deliver, upon the reasonable request of the Administrative Agent in its sole discretion, to the Administrative Agent with respect to each parcel of real property owned or held by the entity that is the subject of such request, formation or 64 acquisition title reports, surveys and engineering, soils and other reports, and environmental assessment reports, each in scope, form and substance satisfactory to the Administrative Agent, provided, however, that to the extent that any Loan Party or any of its Domestic Subsidiaries shall have otherwise received any of the foregoing items with respect to such real property, such items shall, promptly after the receipt thereof, be delivered to the Administrative Agent, (vii) upon the occurrence and during the continuance of an Event of Default, promptly cause to be deposited any and all cash dividends paid or payable to it or any of its Subsidiaries from any of its Subsidiaries from time to time into a cash collateral account maintained with the Administrative Agent, and with respect to all other dividends paid or payable to it or any of its Subsidiaries from time to time, promptly execute and deliver, or cause such Subsidiary to promptly execute and deliver, as the case may be, any and all further instruments and take or cause such Subsidiary to take, as the case may be, all such other action as the Administrative Agent may deem necessary or desirable in order to obtain and maintain from and after the time such dividend is paid or payable a perfected, first priority lien on and security interest in such dividends, and (viii) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such other action as the Administrative Agent may reasonably deem necessary or desirable in obtaining the full benefits of, or in perfecting and preserving the Liens of, such guaranties, mortgages, pledges, assignments, security agreement supplements and security agreements. (n) As soon as possible but in any event no later than thirty (30) days after the date hereof, (i) execute and deliver, and cause of each of its applicable Subsidiaries to execute and deliver, to the Administrative Agent deeds of trust, trust deeds, mortgages, leasehold mortgages and leasehold deeds of trust, in form and substance satisfactory to the Administrative Agent, and covering the properties listed on Schedule 5.01(n) (together with each other mortgage delivered pursuant to Section 5.01(m), in each case as amended, supplemented or otherwise modified from time to time in accordance with their terms, the "Mortgages"), and (ii) in connection with each such Mortgage, deliver to the Administrative Agent each of the following: (A) evidence that counterparts of the Mortgages have been duly recorded in all filing or recording offices that the Administrative Agent may deem necessary or desirable in order to create a valid first and subsisting Lien on the property described therein in favor of the Secured Parties and that all filing and recording taxes and fees have been paid, 65 (B) fully paid American Land Title Association Lender's Extended Coverage title insurance policies (the "Mortgage Policies") in form and substance, with endorsements and in amount acceptable to the Administrative Agent, issued, coinsured and reinsured by title insurers acceptable to the Administrative Agent, insuring the Mortgages to be valid first and subsisting Liens on the property described therein, free and clear of all defects (including, but not limited to, mechanics' and materialmen's Liens) and encumbrances, excepting only Permitted Liens of the type described in clause (h) of the definition thereof, and providing for such other affirmative insurance (including endorsements for future advances under the Loan Documents and for mechanics' and materialmen's Liens) and such coinsurance and direct access reinsurance as the Administrative Agent may deem necessary or desirable, (C) American Land Title Association form surveys, dated no more than 10 days before the date of such Mortgage, certified to the Administrative Agent and the issuer of the Mortgage Policies in a manner satisfactory to the Administrative Agent by a land surveyor duly registered and licensed in the States in which the property described in such surveys is located and acceptable to the Administrative Agent, showing all buildings and other improvements, any off-site improvements, the location of any easements, parking spaces, rights of way, building set-back lines and other dimensional regulations and the absence of encroachments, either by such improvements or on to such property, and other defects, other than encroachments and other defects acceptable to the Administrative Agent, (D) an appraisal of each of the properties described in the Mortgages complying with the requirements of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 which appraisals shall be from a Person acceptable to the Lenders and otherwise in form and substance satisfactory to the Lenders, (E) engineering, soils and other reports as to the properties described in the Mortgages, in form and substance and from professional firms acceptable to the Administrative Agent, (F) the Assignments of Leases and Rents referred to in the Mortgages, duly executed by the Borrower and each other Collateral Grantor, (G) such consents and agreements of lessors and other third parties, and such estoppel letters and other confirmations, as the Administrative Agent may deem necessary or desirable, (H) evidence of the insurance required by the terms of the Mortgages, 66 (I) evidence that all other action that the Administrative Agent may reasonably deem necessary or desirable in order to create valid first and subsisting Liens on the property described in the Mortgages has been taken, and (J) an environmental assessment report, in form and substance satisfactory to the Lenders, from an environmental consulting firm acceptable to the Administrative Agent, as to any hazards, costs or liabilities under Environmental Laws to which any Loan Party may be subject, the amount and nature of which and the Borrower's plans with respect to which shall be acceptable to the Lenders, together with evidence, in form and substance satisfactory to the Lenders, that all applicable Environmental Laws shall have been complied with, it being agreed that such reports shall be initially limited to "phase I" site audits unless the Administrative Agent reasonably determines that further assessment and investigation is warranted. Notwithstanding the foregoing, the obligation of the Borrower to provide Mortgages in respect of properties listed on Schedule 5.01(n) that are leased by the Borrower or, if applicable, its Subsidiaries shall be limited to using its best efforts to obtain such Mortgages in the event that the lessor of such properties has the right to consent to such Mortgage and refuses to give such consent. In addition, as soon as possible after the date hereof, the Borrower shall use its reasonable best efforts to obtain the following, each in form and substance reasonably satisfactory to the Required Lenders: (x) waivers from the lessors of each of the real properties leased by the Borrower, acknowledging the lien of the Administrative Agent on the Collateral located on such real properties, providing the Lenders with access to such Collateral and such other matters as the Administrative Agent may reasonably request; (y) consents from the lessors to the terms of the Mortgages encumbering real properties leased by the Borrower or, if applicable, its Subsidiaries; and (z) agreements from the lessors of the computer equipment utilized by the Loan Parties allowing the Administrative Agent and the Lenders access to the software and other information on such computers if they have possession thereof. (o) Chief Executive Officer. Ensure that the Borrower employs a chief executive officer reasonably satisfactory to the Required Lenders (it being agreed that the chief executive officer in office on the date hereof is so satisfactory); provided that, if any Person ceases to be a chief executive officer, such Person shall be replaced by an interim chief executive officer within thirty days of such cessation, and a permanent chief executive officer within ninety days of such cessation, each such chief executive officer to be consented to by the Required Lenders (such consent not to be unreasonably withheld or delayed). 67 SECTION 5.02. Negative Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, each Loan Party will not, at any time: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or sign or file or suffer to exist, or permit any of its Subsidiaries to sign or file or suffer to exist, under the Uniform Commercial Code of any jurisdiction, a financing statement that names the Borrower or any of its Subsidiaries as debtor, or sign or suffer to exist, or permit any of its Subsidiaries to sign or suffer to exist, any security agreement authorizing any secured party thereunder to file such financing statement, or assign, or permit any of its Subsidiaries to assign, any accounts or other right to receive income, excluding, however, from the operation of the foregoing restrictions the following: (i) Liens created under the Loan Documents; (ii) Permitted Liens; (iii) Liens existing on the date hereof and described on Schedule 5.02(a) hereto; (iv) purchase money Liens upon equipment acquired or held by the Borrower or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such equipment or to secure Debt incurred solely for the purpose of financing the acquisition of any such equipment to be subject to such Liens, or Liens existing on any such equipment at the time of acquisition (other than any such Liens created in contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount; provided, however, that no such Lien shall extend to or cover any property other than the equipment being acquired, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; and provided further that (A) the aggregate principal amount of the Debt secured by Liens permitted by this clause (iv) shall not exceed the aggregate amount permitted under Section 5.02(b)(ii)(B) at any time outstanding and (B) at the time of acquisition of any such equipment subject thereto, the aggregate principal amount of the Debt incurred in connection with such acquisition shall not exceed 95% of the cost of such equipment, or of the then fair value thereof, whichever shall be less and that any such Debt shall not otherwise be prohibited by the terms of the Loan Documents; and 68 (v) Liens arising in connection with Capitalized Leases permitted under Section 5.02(b)(ii)(B); provided that no such Lien shall extend to or cover any Collateral or assets other than the assets subject to such Capitalized Leases; and (b) Debt. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Debt other than: (i) in the case of any of its Subsidiaries, Debt owed to the Borrower or to a wholly-owned Subsidiary of the Borrower; provided that all instruments evidencing any such Debt have been pledged and delivered to the Administrative Agent pursuant to the Security Agreement; and (ii) in the case of the Borrower and any of its Subsidiaries, (A) Debt under the Loan Documents, (B) (i) Debt secured by Liens permitted by Section 5.02(a)(iv), (ii) Capitalized Leases and in the case of Capitalized Leases to which any Subsidiary of the Borrower is a party, Debt of the Borrower of the type described in clause (i) of the definition of "Debt" guaranteeing the Obligations of such Subsidiary under such Capitalized Leases and (iii) unsecured Debt incurred in the ordinary course of business for the deferred purchase price of property or services, maturing within one year from the date created; provided that all Debt (including Capitalized Leases) permitted under this clause (B) shall not exceed in the aggregate $1,000,000 at any time outstanding, (C) the Surviving Debt, (D) indorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, and (E) Existing Debt; provided that all such Existing Debt that is not Surviving Debt is paid in full on the Funding Date. (c) Mergers, Etc. Merge into or consolidate with any Person or permit any Person to merge into it, or permit any of its Subsidiaries to do so, except that (i) any Subsidiary of the Borrower may merge into or consolidate with any other Subsidiary of the Borrower provided that, in the case of any such merger or consolidation, the Person formed by such merger or consolidation shall be a wholly-owned Subsidiary of the Borrower and (ii) any of the Borrower's Subsidiaries may merge into the Borrower and (iii) each of the Borrower and any of its Subsidiaries may permit any other Person to merge into or consolidate with it; 69 provided, however, that in each case, immediately after giving effect thereto, no event shall occur and be continuing that constitutes a Default and, in the case of any such merger to which the Borrower is a party, the Borrower is the surviving corporation. (d) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any of its Subsidiaries to sell, lease, transfer or otherwise dispose of, any assets or grant any option or other right to purchase, lease or otherwise acquire any assets, except: (i) sales of Inventory, or obsolete or worn-out equipment in the ordinary course of its business, and (ii) in a transaction authorized by subsection (c) of this Section. (e) Investments in Other Persons. Make or hold, or permit any of its Subsidiaries to make or hold, any Investment in any Person other than: (i) Investments by the Borrower in its Subsidiaries outstanding on the date hereof and additional investments by the Borrower in its wholly-owned Subsidiaries; (ii) loans and advances to employees in the ordinary course of the business of the Borrower and its Subsidiaries as presently conducted in an aggregate principal amount not to exceed $100,000 at any time outstanding; (iii) Investments by the Borrower and its Subsidiaries in Cash Equivalents in an aggregate principal amount not to exceed $1,500,000 at any time outstanding; (iv) Investments consisting of intercompany Debt permitted under Section 5.02(b)(i); (v) Investments existing on the date hereof and described on Schedule 5.02(e) hereto; (vi) Investments consisting of accounts receivable from customers rising in the ordinary course of business; and (vii) other Investments consisting of the acquisition by the Borrower or any Loan Party of all of the Equity Interests in a corporation or all or substantially all of the assets of any Person or any assets of a Person constituting a line of business or division of such Person; provided that with respect to Investments (hereinafter, "Permitted Acquisitions" made under this clause (vii) each of the following conditions shall be satisfied: 70 (A) the Borrower shall have delivered to the Administrative Agent a duly-completed and executed certificate, in form and substance satisfactory to the Administrative Agent (each, an "Acquisition Certificate"), certifying that (1) the financial conditions referred to in clause (C) below with respect to the proposed Permitted Acquisition will be satisfied, (2) no Default has occurred and is continuing or will result from the consummation of the proposed Permitted Acquisition, (3) all amounts and other consideration required to be paid, and all Obligations and liabilities required to be assumed, to consummate the proposed Permitted Acquisition and (4) all other conditions contained herein to the consummation of the proposed Permitted Acquisition will be satisfied, together with (x) a business description and summary of terms of the proposed Permitted Acquisition, and (y) evidence that the proposed Permitted Acquisition is being made pursuant to a written agreement approved by all necessary parties including the Borrower and the Person (the "Acquisition Prospect") whose stock or assets will be acquired in the proposed Permitted Acquisition; (B) the Administrative Agent shall have received, in each case in form and substance reasonably satisfactory to the Administrative Agent (including all assumptions used in the preparation thereof), with copies for each Lender, pro forma Consolidated balance sheets, statements of income and cash flows and projections of the Borrower and its Subsidiaries, calculated as of a date reasonably near to the date of the consummation proposed Permitted Acquisition for the three-year period immediately succeeding such date giving effect to the consummation of such Permitted Acquisition and all transactions contemplated in connection therewith; (C) the Borrower shall be in compliance with all financial covenants contained in Section 5.04 hereof as projected by the Borrower for the period of four consecutive Fiscal Quarters beginning on the first day of the Fiscal Quarter in which the date of the consummation of the proposed Permitted Acquisition occurs; (D) the proposed Permitted Acquisition shall be consummated in accordance with Requirements of Law, and all material consents and approvals necessary or desirable to the consummation and the business operations of the Loan Parties effect thereto shall have been obtained, including, without limitation, all consents and approvals of Governmental Authorities and, if applicable, landlords; (E) no Default shall exist at the time of the consummation of the proposed Permitted Acquisition or would result therefrom; 71 (F) the proposed Acquisition Prospect (or its Board of Directors or equivalent governing body) shall not have (i) announced it will oppose the proposed Permitted Acquisition or (ii) commenced any action, suit or proceeding which alleges that the proposed Permitted Acquisition violates, or will violate, any Requirement of Law or contractual obligation or otherwise contesting the proposed Permitted Acquisition or any of the terms thereof; (G) if either (1) the sum of (A) the product of (x) the aggregate number of shares of Borrower Common Stock issued as consideration for all Permitted Acquisitions theretofore consummated multiplied by (y) the Average Market Price of such shares as at the respective dates on which they were issued plus (B) the product of (x) the aggregate number of shares of Borrower Common Stock to be issued as consideration for the proposed Permitted Acquisition multiplied by (y) the Average Market Price of such Share as at the date immediately prior to the date on which the proposed Permitted Acquisition is consummated, exceeds $5,000,000 or (2) the sum of the total consideration for all Permitted Acquisitions theretofore consummated plus the consideration to be paid in connection with the proposed Permitted Acquisition (including, in each case, all cash and noncash purchase price, liabilities assumed, deferred or financed purchase price, purchase price characterized as noncompetition payments and the like, but excluding the value of shares of Borrower Common Stock issued as consideration for such Permitted Acquisition) exceeds $5,000,000, the Required Lenders shall have consented in writing to such proposed Permitted Acquisition; (H) any Subsidiary of any Loan Party acquired or created in connection with the proposed Permitted Acquisition shall be a wholly-owned Subsidiary of such Loan Party; (I) any business acquired or invested in pursuant to this clause (vi) shall be in the same line of business as the business of the Loan Parties immediately prior to the consummation of the proposed Permitted Acquisition; and (J) concurrently with the consummation of the proposed Permitted Acquisition, all of the requirements of Section 5.01(m) shall have been complied with. (f) Dividends, Etc. Declare or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for value any of its capital stock or any warrants, rights or 72 options to acquire such capital stock, now or hereafter outstanding, return any capital to its stockholders as such, make any distribution of assets, capital stock, warrants, rights, options, obligations or securities to its stockholders as such, or permit any of its Subsidiaries to do any of the foregoing or permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of the Borrower or any warrants, rights or options to acquire such capital stock or to issue or sell any capital stock or any warrants, rights or options to acquire such capital stock, except that, so long as no Default shall have occurred and be continuing at the time of any action described in clauses (i) and (ii) below or would result therefrom, (i) the Borrower may declare and pay dividends and distributions payable only in common stock of the Borrower, and (ii) any wholly-owned Subsidiary of the Borrower may (A) declare and pay cash dividends to the Borrower and (B) declare and pay cash dividends to any other wholly-owned Subsidiary of the Borrower of which it is a Subsidiary. (g) Change in Nature of Business. Make, or permit any of its Subsidiaries to make, any material change in the nature of its business as carried on at the date hereof. (h) Charter Amendments. Amend, or permit any of its Subsidiaries to amend, its certificate of incorporation or bylaws, except for amendments to its certificate of incorporation which increase the number of shares of common stock authorized for issuance. (i) Accounting Changes. Make or permit, or permit any of its Subsidiaries to make or permit, any change in (i) accounting policies or reporting practices, except as required by generally accepted accounting principles or (ii) Fiscal Year. (j) Prepayments, Etc. of Debt. Prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof in any manner, or make any payment in violation of any subordination terms of, any Debt, other than (i) the prepayment of the Working Capital Advances in accordance with the terms of this Agreement and (ii) regularly scheduled or required repayments or redemptions of Surviving Debt, or amend, modify or change in any manner any term or condition of any Surviving Debt, or permit any of its Subsidiaries to do any of the foregoing other than to prepay any Debt payable to the Borrower. (k) Negative Pledge. Enter into or suffer to exist, or permit any of its Subsidiaries to enter into or suffer to exist, any agreement prohibiting or conditioning the creation or assumption of any Lien upon any of its property or assets other than in favor of the Secured Parties. (l) Partnerships, Etc. Become a general partner in any general or limited partnership or joint venture, or permit any of its Subsidiaries to do so, other than any Subsidiary the sole assets of which consist of its interest in such partnership or joint venture. 73 (m) Speculative Transactions. Engage, or permit any of its Subsidiaries to engage, in any transaction involving commodity options or futures contracts or any similar speculative transactions including, without limitation, take-or-pay contracts. (n) Capital Expenditures. Make, or permit any of its Subsidiaries to make, any Capital Expenditures that would cause the aggregate of all such Capital Expenditures made by the Borrower and its Subsidiaries to exceed (i) during the period from the date hereof until June 30, 1999, $1,500,000 and (ii) in any Fiscal Year of the Borrower, commencing with the Fiscal Year ended June 30, 2000, $3,000,000. SECTION 5.03. Reporting Requirements. So long as any Advance shall remain unpaid or any Lender shall have any Working Capital Commitment hereunder, the Loan Parties will furnish to the Administrative Agent and each Lender: (a) Default Notice. As soon as possible and in any event within two days after the occurrence of each Default or any event, development or occurrence reasonably likely to have a Material Adverse Effect continuing on the date of such statement, a statement of Responsible Officer of such Loan Party setting forth details of such Default and the action that such Loan Party has taken and proposes to take with respect thereto. (b) Monthly Financials. As soon as available and in any event within 45 days after the end of each month, a Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such month and a Consolidated statement of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous month and ending with the end of such month and a Consolidated statement of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding month of the preceding Fiscal Year, all in reasonable detail and duly certified by the chief executive officer, president or chief financial officer of the Borrower. (c) Quarterly Financials. As soon as available and in any event within 45 days after the end of each of the first three quarters of each Fiscal Year, a Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such quarter and Consolidated statement of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal quarter and ending with the end of such fiscal quarter and a Consolidated statement of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding Fiscal Year, all in reasonable detail and duly certified 74 (subject to year-end audit adjustments and the absence of footnotes) by the chief financial officer of the Borrower as having been prepared in accordance with GAAP, together with (i) a certificate of said officer stating that no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrower has taken and proposes to take with respect thereto and (ii) a schedule in form satisfactory to the Administrative Agent of the computations used by the Borrower in determining compliance with the covenants contained in Sections 5.04(a) through (d), provided that in the event of any change in GAAP used in the preparation of such financial statements, the Borrower shall also provide, if necessary for the determination of compliance with Section 5.04, a statement of reconciliation conforming such financial statements to GAAP. (d) Annual Financials. As soon as available and in any event within 90 days after the end of each Fiscal Year, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, including therein a Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Year and a Consolidated statement of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for such Fiscal Year, in each case accompanied by an opinion acceptable to the Required Lenders of Deloitte & Touche LLP or other independent public accountants of recognized standing acceptable to the Required Lenders, together with (i) a certificate of such accounting firm to the Lenders stating that in the course of the regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof, (ii) a schedule in form satisfactory to the Administrative Agent of the computations used by such accountants in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Sections 5.04(a) through (d), provided that in the event of any change in GAAP used in the preparation of such financial statements, the Borrower shall also provide, if necessary for the determination of compliance with Section 5.04, a statement of reconciliation conforming such financial statements to GAAP and (iii) a certificate of the chief financial officer of the Borrower stating that no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrower has taken and proposes to take with respect thereto. (e) Annual Forecasts. As soon as available and in any event no later than 15 days before the end of each Fiscal Year, forecasts prepared by management of the Borrower, in form satisfactory to the Administrative Agent, of balance sheets, income statements and cash flow statements on a monthly basis for the Fiscal Year following such Fiscal Year then ended and on an annual basis for each Fiscal Year thereafter until the Termination Date. 75 (f) ERISA Events and ERISA Reports. Promptly and in any event within 10 days after any Loan Party or any ERISA Affiliate knows or has reason to know that any ERISA Event has occurred, a statement of the chief financial officer of the Borrower describing such ERISA Event and the action, if any, that such Loan Party or such ERISA Affiliate has taken and proposes to take with respect thereto and (ii) on the date any records, documents or other information must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA, a copy of such records, documents and information. (g) Plan Terminations. Promptly and in any event within two Business Days after receipt thereof by any Loan Party or any ERISA Affiliate, copies of each notice from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any Plan. (h) Plan Annual Reports. Promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan. (i) Multiemployer Plan Notices. Promptly and in any event within five Business Days after receipt thereof by any Loan Party or any ERISA Affiliate from the sponsor of a Multiemployer Plan, copies of each notice concerning (i) the imposition of Withdrawal Liability by any such Multiemployer Plan, (ii) the reorganization or termination, within the meaning of Title IV of ERISA, of any such Multiemployer Plan or (iii) the amount of liability incurred, or that may be incurred, by such Loan Party or any ERISA Affiliate in connection with any event described in clause (i) or (ii). (j) Litigation. Promptly after the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting any Loan Party or any of its Subsidiaries of the type described in Section 4.01(j). (k) Securities Reports. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that any Loan Party or any of its Subsidiaries sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements, that any Loan Party or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange. (l) Agreement Notices. Promptly upon receipt thereof, copies of all notices, requests and other documents received by any Loan Party under or pursuant to any indenture, loan or credit or similar agreement regarding or related to any breach or default by any party thereto or any other event that could materially impair the value of the interests or the rights 76 of any Loan Party or otherwise have a Material Adverse Effect and copies of any amendment, modification or waiver of any provision of any indenture, loan or credit or similar agreement. (m) Revenue Agent Reports. Within 10 days after receipt, copies of all Revenue Agent Reports (Internal Revenue Service Form 886), or other written proposals of the Internal Revenue Service, that propose, determine or otherwise set forth positive adjustments to the Federal income tax liability of the affiliated group (within the meaning of Section 1504(a)(1) of the Internal Revenue Code) of which the Loan Parties are a member aggregating $100,000 or more. (n) Tax Certificates. Promptly, and in any event within five Business Days after the due date (with extensions) for filing the final Federal income tax return in respect of each taxable year, a certificate (a "Tax Certificate"), signed by the President or the chief financial officer of the Borrower, stating that the common parent of the affiliated group (within the meaning of Section 1504(a)(1) of the Internal Revenue Code) of which the Loan Parties are a member has paid to the Internal Revenue Service or other taxing authority, or to any Loan Party, the full amount that such affiliated group is required to pay in respect of Federal income tax for such year and that the Loan Parties have received any amounts payable to them, and have not paid amounts in respect of taxes (Federal, state, local or foreign) in excess of the amount they are required to pay, under the Tax Agreements in respect of such taxable year. (o) Environmental Conditions. Promptly after the assertion or occurrence thereof, notice of any Environmental Action against or of any noncompliance by any Loan Party or any of its Subsidiaries with any Environmental Law or Environmental Permit that (i) could reasonably be expected to have a Material Adverse Effect or (ii) cause any property described in the Mortgages to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law. (p) Real Property. As soon as available and in any event within 30 days after the end of each Fiscal Year, a report supplementing Schedules 4.01(z) hereto, including an identification of all real and leased property disposed of by the Borrower or any of its Subsidiaries during such Fiscal Year, a list and description (including the street address, county or other relevant jurisdiction, state, record owner, book value thereof, and in the case of leases of property, lessor, lessee, expiration date and annual rental cost thereof) of all real property acquired or leased during such Fiscal Year and a description of such other changes in the information included in such Schedules as may be necessary for such Schedules to be accurate and complete. (q) Insurance. As soon as available and in any event within 30 days after the end of each Fiscal Year, a report summarizing the insurance coverage (specifying type, amount 77 and carrier) in effect for the Borrower and its Subsidiaries and containing such additional information as any Lender (through the Administrative Agent) may reasonably specify. (r) Year 2000 Compliance. Promptly upon the discovery or determination thereof by any Loan Party, notice of any computer application (including any such computer application of its or any of its Subsidiary's suppliers, vendors and customers) that is material to its or any of its Subsidiaries' business, financial condition or operations and will not be able on a timely basis to perform properly date-sensitive functions for all dates before and after January 1, 2000, except to the extent that such failure, either individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (s) Other Information. Such other information respecting the business, condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party or any of its Subsidiaries as any Lender (through the Administrative Agent) may from time to time reasonably request. SECTION 5.04. Financial Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Loan Parties will: (a) Minimum Consolidated EBITDA. Cause (i) the product of (A) a factor of two times (B) Consolidated EBITDA of the Borrower and its Subsidiaries for the six-month period ending March 31, 1999 not to be less than $8,000,000, (ii) the quotient of (A) the product of (1) a factor of four times (2) Consolidated EBITDA of the Borrower and its Subsidiaries for the nine-month period ending June 30, 1999 divided by (B) a factor of three, not to be less than $8,000,000, and (iii) Consolidated EBITDA of the Borrower and its Subsidiaries for each Measurement Period ending on any date after June 30, 1999 not to be less than the amount set forth below for such period: PERIOD ENDING AMOUNT ------------- ------ 9/30/99 - $ 8,500,000 12/31/99 - $ 9,000,000 3/31/00 - $10,000,000 6/30/00 - $11,000,000 9/30/00 - $11,500,000 12/31/00 - $12,000,000 3/31/01 - $13,000,000 6/30/01 - $14,000,000 Thereafter $14,000,000 78 (b) Net Worth. Maintain at all times an excess of Consolidated net worth over the sum of (i) $45,000,000 plus (ii) 50% of cumulative Consolidated Net Income since March 31, 1999. (c) Leverage Ratio. Maintain at all times a ratio of Consolidated Debt to Consolidated EBITDA, in each case of the Borrower and its Subsidiaries and calculated with respect to each Measurement Period, of not greater than 2.00 to 1.00; provided that Consolidated EBITDA for periods ending on or prior to March 31, 1999 shall be calculated in accordance with clause (i)(A) of Section 5.04(a), and for periods ending on or prior to June 30, 1999 shall be calculated in accordance with clause (ii)(A) of Section 5.04(a). (d) Interest Coverage Ratio. Maintain at all times a ratio of Consolidated EBITDA to Consolidated Interest Expense, in each case of the Borrower and its Subsidiaries and calculated with respect to each Measurement Period, of not less than 3.00 to 1.00; provided that (i) Consolidated EBITDA for periods ending on or prior to March 31, 1999 shall be calculated in accordance with clause (i)(A) of Section 5.04(a), and for periods ending on or prior to June 30, 1999 shall be calculated in accordance with clause (ii)(A) of Section 5.04(a) and (ii) Consolidated Interest Expense for periods ending on or prior to the first anniversary of the Funding Date shall be calculated as follows: (A) all such Consolidated Interest Expense attributable to periods prior to the Funding Date shall be disregarded and (B) all such Consolidated Interest Expense attributable to periods after the Funding Date shall be multiplied by a factor equal to a fraction the numerator of which is 365 and the denominator of which is the number of days since the Funding Date. (c) Leverage Ratio. Maintain at all times a ratio of Consolidated Debt to Consolidated EBITDA, in each case, of the Borrower and its Subsidiaries of not more than 2.00 to 1.00. (d) Excluded Assigned Agreements. Not permit at any time the aggregate amount of gross revenues received by the Loan Parties under the Assigned Contracts referred to in the definition of Excluded Assigned Agreements during any one year period to be more than thirty-five percent of the aggregate amount of all gross revenues received by the Loan Parties during such one year period. 79 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) (i) the Borrower shall fail to pay any principal of any Working Capital Advance when the same shall become due and payable, whether by scheduled maturity or at a date fixed for prepayment or by acceleration, demand or otherwise, or (ii) the Borrower shall fail to pay any interest on any Working Capital Advance or any fee owing under or in respect of this Agreement, or any Loan Party shall fail to make any other payment under or in respect of any Loan Document, whether by scheduled maturity or at a date fixed for payment or prepayment or by acceleration, demand or otherwise, in each case under this clause (ii) when the same becomes due and payable; or (b) any representation or warranty made by any Loan Party (or any of its officers) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or (c) (i) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 2.13, 5.01(d), 5.01(e), 5.01(g), 5.01(k), 5.01(l), 5.01(m), 5.01(n), 5.01(o), 5.02, 5.03, 5.04 or Article VII; or (d) any Loan Party shall fail to perform or observe any term, covenant or agreement contained in any of the Loan Documents on its part to be performed or observed that is not otherwise referred to in this Section 6.01 if such failure shall remain unremedied for at least twenty (20) days after the earlier of the date on which (i) a Responsible Officer of any of the Loan Parties first becomes aware of such failure and (ii) written notice thereof shall have been given to the Borrower by the Administrative Agent or any of the Lenders; or (e) (i) any Loan Party shall fail to pay any principal of, premium or interest on, or any other amount payable in respect of, one or more items of Debt of the Loan Parties (excluding Debt outstanding hereunder) that is outstanding in an aggregate principal amount (or, in the case of any Hedge Agreement, that has an Agreement Value) of at least $100,000 when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreements or instruments relating to all such Debt; or (ii) any other event shall occur or condition shall exist under the agreements or instruments relating to one or more items of Debt of the Loan Parties (excluding Debt outstanding hereunder) that is outstanding (or under which one or more Persons have a 80 commitment to extend credit) in an aggregate principal amount (or, in the case of any Hedge Agreement, that has an Agreement Value) of at least $100,000, and such other event or condition shall continue after the applicable grace period, if any, specified in all such agreements or instruments, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt or otherwise to cause, or to permit the holder thereof to cause, such Debt to mature; or (iii) one or more items of Debt of the Loan Parties (excluding Debt outstanding hereunder) that is outstanding (or under which one or more Persons have a commitment to extend credit) in an aggregate principal amount (or, in the case of any Hedge Agreement, that has an Agreement Value) of at least $100,000 shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled or required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (f) any Loan Party shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Loan Party seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of at least 60 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; or any event or action analogous to or having a substantially similar effect to any of the events or actions set forth above in this Section 6.01(f) (other than a solvent reorganization) shall occur under the Requirements of Law of any jurisdiction applicable to any Loan Party; or any Loan Party shall take any corporate, partnership, limited liability company or other similar action to authorize any of the actions set forth above in this Section 6.01(f); or (g) one or more judgments or orders for the payment of money in excess of $100,000 in the aggregate shall be rendered against one or more of the Loan Parties and shall remain unsatisfied and either (i) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order or (ii) there shall be any period of at least ten days during which a stay of enforcement of any such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided, however, that any such judgment or order shall not give rise to an Event of Default under this Section 6.01(g) if and for so long as (A) the amount of such judgment or order is covered by a valid and binding policy of insurance between the defendant and the insurer covering full payment thereof and (B) such 81 insurer has been notified, and has not disputed the claim made for payment, of the amount of such judgment or order; or (h) one or more nonmonetary judgments or orders (including, without limitation, writs or warrants of attachment, garnishment, execution, distraint or similar process) shall be rendered against any Loan Party that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and there shall be any period of at least ten days during which a stay of enforcement of any such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (i) any provision of any Loan Document after delivery thereof pursuant to Section 3.01 or Section 5.01(m) or Section 5.01(n) shall for any reason (other than pursuant to the terms thereof) cease to be valid and binding on or enforceable against any Loan Party intended to be a party thereto, or any such Loan Party shall so state in writing; or (j) any Collateral Document after delivery thereof pursuant to Section 3.01 or Section 5.01(m) or Section 5.01(n) shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority lien on and security interest in the Collateral purported to be covered thereby; or (k) any ERISA Event shall have occurred with respect to a Plan and the sum (determined as of the date of occurrence of such ERISA Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which an ERISA Event shall have occurred and then exist (or the liability of the Loan Parties and the ERISA Affiliates related to such ERISA Event) exceeds $100,000; or (l) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan in an amount that, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Loan Parties and the ERISA Affiliates as Withdrawal Liability (determined as of the date of such notification), exceeds $100,000; or (m) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, and as a result of such reorganization or termination the aggregate annual contributions of the Loan Parties and the ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years of such Multiemployer Plans immediately preceding the plan year in which such reorganization or termination occurs by an amount exceeding $100,000; or (n) a Change of Control shall occur; 82 then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Commitments of each Lender and the obligation of each Lender to make Working Capital Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Working Capital Notes, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the Working Capital Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (1) the Commitments of each Lender and the obligation of each Lender to make Working Capital Advances and (2) the Working Capital Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII GUARANTY SECTION 7.01. Guaranty; Limitation of Liability. (a) Each Guarantor, jointly and severally, hereby absolutely, unconditionally and irrevocably guarantees the punctual payment when due, whether at scheduled maturity or on any date of a required prepayment or by acceleration, demand or otherwise, of all Obligations of each other Loan Party now or hereafter existing under or in respect of the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, premiums, fees, indemnities, contract causes of action, costs, expenses or otherwise (such Obligations being the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Administrative Agent or any other Secured Party in enforcing any rights under this Guaranty or any other Loan Document. Without limiting the generality of the foregoing, each Guarantor's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by any other Loan Party to any Secured Party under or in respect of the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such other Loan Party. (b) Each Guarantor, and by its acceptance of this Guaranty, the Administrative Agent and each other Secured Party, hereby confirms that it is the intention of all such Persons that this Guaranty and the Obligations of each Guarantor hereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the 83 Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty and the Obligations of each Guarantor hereunder. To effectuate the foregoing intention, the Administrative Agent, the other Secured Parties and the Guarantors hereby irrevocably agree that the Obligations of each Guarantor under this Guaranty at any time shall be limited to the maximum amount as will result in the Obligations of such Guarantor under this Guaranty not constituting a fraudulent transfer or conveyance. (c) Each Guarantor hereby unconditionally and irrevocably agrees that in the event any payment shall be required to be made to any Secured Party under this Guaranty or any other guaranty, such Guarantor will contribute, to the maximum extent permitted by law, such amounts to each other Guarantor and each other guarantor so as to maximize the aggregate amount paid to the Secured Parties under or in respect of the Loan Documents. SECTION 7.02. Guaranty Absolute. Each Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Secured Party with respect thereto. The Obligations of each Guarantor under or in respect of this Guaranty are independent of the Guaranteed Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents, and a separate action or actions may be brought and prosecuted against each Guarantor to enforce this Guaranty, irrespective of whether any action is brought against the Borrower or any other Loan Party or whether the Borrower or any other Loan Party is joined in any such action or actions. The liability of each Guarantor under this Guaranty shall be irrevocable, absolute and unconditional irrespective of, and each Guarantor hereby irrevocably waives any defenses it may now have or hereafter acquire in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to any Loan Party or any of its Subsidiaries or otherwise; (c) any taking, exchange, release or non-perfection of any Collateral or any other collateral, or any taking, release or amendment or waiver of, or consent to departure from, any other guaranty, for all or any of the Guaranteed Obligations; (d) any manner of application of Collateral or any other collateral, or proceeds thereof, to all or any of the Guaranteed Obligations, or any manner of sale or other 84 disposition of any Collateral or any other collateral for all or any of the Guaranteed Obligations or any other Obligations of any Loan Party under the Loan Documents or any other assets of any Loan Party or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate structure or existence of any Loan Party or any of its Subsidiaries; (f) any failure of any Secured Party to disclose to any Loan Party any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of any other Loan Party now or hereafter known to such Secured Party (each Guarantor waiving any duty on the part of the Secured Parties to disclose such information); (g) the failure of any other Person to execute or deliver this Guaranty, any Guaranty Supplement or any other guaranty or agreement or the release or reduction of liability of any Guarantor or other guarantor or surety with respect to the Guaranteed Obligations; or (h) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by any Secured Party that might otherwise constitute a defense available to, or a discharge of, any Loan Party or any other guarantor or surety. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by any Secured Party or any other Person upon the insolvency, bankruptcy or reorganization of the Borrower or any other Loan Party or otherwise, all as though such payment had not been made. SECTION 7.03. Waivers and Acknowledgments. (a) Each Guarantor hereby unconditionally and irrevocably waives promptness, diligence, notice of acceptance, presentment, demand for performance, notice of nonperformance, default, acceleration, protest or dishonor and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and any requirement that any Secured Party protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any Loan Party or any other Person or any Collateral. (b) Each Guarantor hereby unconditionally and irrevocably waives any right to revoke this Guaranty and acknowledges that this Guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. (c) Each Guarantor hereby unconditionally and irrevocably waives (i) any defense arising by reason of any claim or defense based upon an election of remedies by any Secured Party 85 that in any manner impairs, reduces, releases or otherwise adversely affects the subrogation, reimbursement, exoneration, contribution or indemnification rights of such Guarantor or other rights of such Guarantor to proceed against any of the other Loan Parties, any other guarantor or any other Person or any Collateral and (ii) any defense based on any right of set-off or counterclaim against or in respect of the Obligations of such Guarantor hereunder. (d) Each Guarantor acknowledges that the Collateral Agent may, without notice to or demand upon such Guarantor and without affecting the liability of such Guarantor under this Guaranty, foreclose under any mortgage by nonjudicial sale, and each Guarantor hereby waives any defense to the recovery by the Collateral Agent and the other Secured Parties against such Guarantor of any deficiency after such nonjudicial sale and any defense or benefits that may be afforded by applicable law. (e) Each Guarantor hereby unconditionally and irrevocably waives any duty on the part of any Secured Party to disclose to such Guarantor any matter, fact or thing relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of any other Loan Party or any of its Subsidiaries now or hereafter known by such Secured Party. (f) Each Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by the Loan Documents and that the waivers set forth in Section 7.02 and this Section 7.03 are knowingly made in contemplation of such benefits. SECTION 7.04. Subrogation. Each Guarantor hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against the Borrower, any other Loan Party or any other insider guarantor that arise from the existence, payment, performance or enforcement of such Guarantor's Obligations under or in respect of this Guaranty or any other Loan Document, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any Secured Party against the Borrower, any other Loan Party or any other insider guarantor or any Collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from the Borrower, any other Loan Party or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this Guaranty shall have been paid in full in cash and the Working Capital Commitments shall have expired or been terminated. If any amount shall be paid to any Guarantor in violation of the immediately preceding sentence at any time prior to the latest of (a) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, and (b) the Termination Date, such amount shall be received and held in trust for the benefit of the Secured Parties, shall be segregated from other property and funds of such Guarantor and shall forthwith be paid or delivered to the Administrative Agent in the same form as so received (with any necessary endorsement or 86 assignment) to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents, or to be held as Collateral for any Guaranteed Obligations or other amounts payable under this Guaranty thereafter arising. If (i) any Guarantor shall make payment to any Secured Party of all or any part of the Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all other amounts payable under this Guaranty shall have been paid in full in cash, and (iii) the Termination Date shall have occurred, the Secured Parties will, at such Guarantor's request and expense, execute and deliver to such Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Guarantor of an interest in the Guaranteed Obligations resulting from such payment made by such Guarantor pursuant to this Guaranty. SECTION 7.05. Guaranty Supplements. Upon the execution and delivery by any Person of a guaranty supplement in substantially the form of Exhibit E hereto (each, a "Guaranty Supplement") pursuant to Section 5.01(m), 5.02(n) or otherwise, (a) such Person shall be referred to as an "Additional Guarantor" and shall become and be a Guarantor hereunder, and each reference in this Guaranty to a "Guarantor" shall also mean and be a reference to such Additional Guarantor, and each reference in any other Loan Document to a "Guarantor" shall also mean and be a reference to such Additional Guarantor, and (b) each reference herein to "this Guaranty", "hereunder", "hereof" or words of like import referring to this Guaranty, and each reference in any other Loan Document to the "Guaranty", "thereunder", "thereof" or words of like import referring to this Guaranty, shall mean and be a reference to this Guaranty as supplemented by such Guaranty Supplement. SECTION 7.06. Subordination. Each Guarantor hereby subordinates any and all debts, liabilities and other Obligations owed to such Guarantor by each other Loan Party (the "Subordinated Obligations") to the Guaranteed Obligations to the extent and in the manner hereinafter set forth in this Section 7.06: (a) Prohibited Payments, Etc. Except during the continuance of a Default (including the commencement and continuation of any proceeding under any Bankruptcy Law relating to any other Loan Party), each Guarantor may receive regularly scheduled payments from any other Loan Party on account of the Subordinated Obligations. After the occurrence and during the continuance of any Default (including the commencement and continuation of any proceeding under any Bankruptcy Law relating to any other Loan Party), however, unless the Required Lenders otherwise agree, no Guarantor shall demand, accept or take any action to collect any payment on account of the Subordinated Obligations. (b) Prior Payment of Guaranteed Obligations. In any proceeding under any Bankruptcy Law relating to any other Loan Party, each Guarantor agrees that the Secured Parties shall be entitled to receive payment in full in cash of all Guaranteed Obligations (including all interest and expenses accruing after the commencement of a proceeding under 87 any Bankruptcy Law, whether or not constituting an allowed claim in such proceeding ("Post Petition Interest")) before such Guarantor receives payment of any Subordinated Obligations. (c) Turn-Over. After the occurrence and during the continuance of any Default (including the commencement and continuation of any proceeding under any Bankruptcy Law relating to any other Loan Party), each Guarantor shall, if the Administrative Agent so requests, collect, enforce and receive payments on account of the Subordinated Obligations as trustee for the Secured Parties and deliver such payments to the Administrative Agent on account of the Guaranteed Obligations (including all Post Petition Interest), together with any necessary endorsements or other instruments of transfer, but without reducing or affecting in any manner the liability of such Guarantor under the other provisions of this Guaranty. (d) Administrative Agent Authorization. After the occurrence and during the continuance of any Event of Default (including the commencement and continuation of any proceeding under any Bankruptcy Law relating to any other Loan Party), the Administrative Agent is authorized and empowered (but without any obligation to so do), in its discretion, (i) in the name of each Guarantor, to collect and enforce, and to submit claims in respect of, Subordinated Obligations and to apply any amounts received thereon to the Guaranteed Obligations (including any and all Post Petition Interest), and (ii) to require each Guarantor (A) to collect and enforce, and to submit claims in respect of, Subordinated Obligations and (B) to pay any amounts received on such obligations to the Administrative Agent for application to the Guaranteed Obligations (including any and all Post Petition Interest). SECTION 7.07. Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, and (ii) the Termination Date, (b) be binding upon the Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by the Secured Parties and their successors, transferees and assigns. Without limiting the generality of clause (c) of the immediately preceding sentence, any Secured Party may assign or otherwise transfer all or any portion of its rights and obligations under this Agreement (including, without limitation, all or any portion of its Commitments, the Working Capital Advances owing to it and the Working Capital Note or Notes held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Secured Party herein or otherwise, in each case as and to the extent provided in Section 9.07. No Guarantor shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Secured Parties. 88 ARTICLE VIII THE AGENTS SECTION 8.01. Authorization and Action. (a) Each Lender (in its capacity as a Lender and on behalf of itself and its Affiliates as potential Hedge Banks) hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of the Working Capital Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders and all holders of Working Capital Notes; provided, however, that the Administrative Agent shall not be required to take any action (i) that exposes the Administrative Agent to personal liability or that is contrary to this Agreement or applicable Requirements of Law or (ii) as to which the Administrative Agent has not received adequate security or indemnity (whether pursuant to Section 8.05 or otherwise). If the security or indemnity furnished to the Administrative Agent for any purpose under or in respect of the Loan Documents shall, in the good faith opinion of the Administrative Agent, be insufficient or become impaired, then the Administrative Agent may require additional security or indemnity and cease, or not commence, to follow the directions or take the actions indemnified against until such additional security or indemnity is furnished. The Administrative Agent hereby agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. (b) The Administrative Agent shall also act as the "collateral agent" under the Loan Documents, and each of the Lenders (in its capacity as a Lender and on behalf of itself and its affiliates as potential Hedge Banks) hereby appoints and authorizes the Administrative Agent to act as the agent of such Lender for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Loan Parties to secure any of the Secured Obligations, together with such powers and discretion as are reasonably incidental thereto. The Administrative Agent may from time to time in its discretion appoint any of the other Lenders or any of the Affiliates of a Lender to act as its co-agent or sub-agent for purposes of holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Collateral Documents or of exercising any rights and remedies thereunder at the direction of the Administrative Agent. In this connection, the Administrative Agent, as "collateral agent", and such co-agents and sub-agents shall be entitled to the benefits of all provisions of this Article VIII (including, without limitation, Section 8.05, as though such co-agents or sub-agents were the "collateral agent" under the Loan Documents) as if set forth in full herein with respect thereto. 89 (c) The Syndication Agent shall not have any powers or discretion under this Agreement or any of the other Loan Documents other than those bestowed upon it as a co-agent or sub-agent from time to time by the Administrative Agent pursuant to subsection (b) of this Section 8.01, and each of the Lenders hereby acknowledges that the Syndication Agent shall not have any liability under this Agreement or any of the other Loan Documents. SECTION 8.02. Administrative Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct as determined in a final, nonappealable judgment by a court of competent jurisdiction. Without limitation of the generality of the immediately preceding sentence, the Administrative Agent: (a) may treat the payee of any Working Capital Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender that is the payee of such Working Capital Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 9.07; (b) may consult with legal counsel (including counsel for any Loan Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with the Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Loan Party or to inspect the property or assets (including the books and records) of any Loan Party; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.03. NationsBank, NMS and Affiliates. With respect to its Commitments, the Working Capital Advances made by it and the Working Capital Note or Notes issued to it, NationsBank shall have the same rights and powers under the Loan Documents as any other Lender and may exercise the same as though it were not the Administrative Agent; and the term "Lender" shall, unless otherwise expressly indicated, include NationsBank in its individual capacity. NationsBank, NMS and their respective affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person that may do business with or own securities of any Loan Party or any such Subsidiary, all as if NationsBank and NMS were not the Agents and without any duty to account therefor to the Lenders. 90 SECTION 8.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 8.05. Indemnification. (a) Each Lender severally agrees to indemnify the Administrative Agent (to the extent not promptly reimbursed by the Loan Parties) from and against such Lender's ratable share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Administrative Agent under the Loan Documents; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct as determined in a final, nonappealable judgment by a court of competent jurisdiction. In the case of any claim, investigation, litigation or proceeding for which indemnity under this Section 8.05(a) applies, such indemnity shall apply whether or not such claim, investigation, litigation or proceeding is brought by the Administrative Agent, any of the other Agents, any of the Lenders or a third party. Without limitation of the foregoing, each Lender severally agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Loan Parties under Section 9.04, to the extent that the Administrative Agent is not promptly reimbursed for such costs and expenses by the Loan Parties. For purposes of this Section 8.05(a), the Lenders' respective ratable shares of any amount shall be determined, at any time, according to the sum of (i) the aggregate principal amount of the Working Capital Advances outstanding at such time and owing to the respective Lenders, (ii) the aggregate unused portions of their respective Term Commitments at such time and (iii) their respective Unused Working Capital Commitments at such time. The failure of any Lender to reimburse the Administrative Agent promptly upon demand for its ratable share of any amount required to be paid by the Lender to the Administrative Agent as provided herein shall not relieve any other Lender of its obligation hereunder to reimburse the Administrative Agent for its ratable share of such amount, but no Lender shall be responsible for the failure of any other Lender to reimburse the Administrative Agent for such other Lender's ratable share of such amount. Without prejudice to the survival of any other agreement of any Lender hereunder, the agreement and obligations of each Lender contained in this Section 8.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents. 91 SECTION 8.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States or of any state thereof and having a combined capital and surplus of at least $100,000,000. If within 45 days after written notice is given of the retiring Administrative Agent's resignation or removal under this Section 8.06 no successor Administrative Agent shall have been appointed and shall have accepted such appointment, then on such 45th day (a) the retiring Administrative Agent's resignation or removal shall become effective, (b) the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (c) the Required Lenders shall thereafter perform all duties and obligations of the retiring Administrative Agent under the Loan Documents until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided above in this Section 8.06. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent and upon the execution and filing or recording of such financing statements, or amendments thereto, and such amendments or supplements to the Mortgages, and such other instruments or notices, as may be necessary or desirable, or as the Required Lenders may request, in order to continue the perfection of the Liens granted or purported to be granted by the Collateral Documents, such successor Administrative Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent shall become effective, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Working Capital Notes or any other Loan Document, nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed (or, in the case of the Collateral Documents, consented to) by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders (other than any Lender that is, at such time, a 92 Defaulting Lender), do any of the following at any time: (i) waive any of the conditions specified in Section 3.01 or, in the case of the Initial Extension of Credit, Section 3.02, (ii) change the number of Lenders or the percentage of (A) the Working Capital Commitments or (B) the aggregate outstanding principal amount of the Working Capital Advances that, in each case, shall be required for the Lenders or any of them to take any action hereunder, (iii) reduce or limit the value of any Obligations of any Guarantor under Section 7.01 of the Guaranty set forth in Article VII hereof, (iv) release all or substantially all of the Collateral in any transaction or series of related transactions or permit the creation, incurrence, assumption or existence of any Lien on all or substantially all of the Collateral in any transaction or series of related transactions to secure any Obligations other than Obligations owing to the Secured Parties under the Loan Documents, (v) amend this Section 9.01, (vi) increase the Working Capital Commitments of any Lender or subject such Lender to any additional obligations, (vii) reduce the principal of, or interest on, the Working Capital Notes held by such Lender or any fees or other amounts payable hereunder to such Lender, or (viii) postpone any date fixed for any payment of principal of, or interest on, the Working Capital Notes held by such Lender or any fees or other amounts payable hereunder to such Lender; and provided further that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement and the other Loan Documents. Notwithstanding any of the foregoing provisions of this Section 9.01, none of the defined terms set forth in Section 1.01 shall be amended, supplemented or otherwise modified in any manner that would change the meaning, purpose or effect of this Section 9.01 or any section referred to herein unless such amendment, supplement or modification is agreed to in writing by the number and percentage of Lenders (and the Administrative Agent, if applicable) otherwise required to amend such section under the terms of this Section 9.01. SECTION 9.02. Notices, Etc. (a) All notices and other communications provided for hereunder shall be in writing (including telegraphic, telecopy or telex communication) and mailed, telegraphed, telecopied, telexed or delivered, (i) if to any Loan Party, at MedE America Corporation, 90 Merrick Avenue, Suite 501, East Meadow, New York 11554 (Facsimile: 516-542-4509; Telephone: 516-542-4500), Attention: Richard P. Bankosky; (ii) if to any Initial Lender, at its Base Rate Lending Office specified opposite its name on Schedule I hereto; (iii) if to any other Lender, at its Base Rate Lending Office specified in the Assignment and Acceptance pursuant to which it became a Lender; and (iv) if to the Administrative Agent, as follows: (A) for notices regarding Working Capital Borrowings, payments, Conversions, fees, interest and other administrative matters: 93 NATIONSBANK N.A. 101 North Tryon Street Charlotte, NC 28255 Location Code: NC1-001-15-12 Attention: Kathy Murnpower Facsimile: (704) 386-6837 Telephone: (704) 409-0021; and (B) for all other notices to the Administrative Agent or the Collateral Agent (including with respect to Defaults, amendments, waivers and modifications of the Loan Documents, assignments and reports and notices under Section 5.04): NATIONSBANK N.A. c/o Bank of America National Trust and Savings Association Agency Management #10831 ` 1455 Market Street, 12th Floor San Francisco, California 94103 Attention: Dietmar Schiel, Vice President Facsimile: (415) 436-3425 Telephone: (415) 436-2769 or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Administrative Agent. All such notices and communications shall, when mailed, telegraphed, telecopied or telexed, be effective when deposited in the mails, delivered to the telegraph company, transmitted by telecopier or confirmed by telex answerback, respectively, except that notices and communications to the Administrative Agent pursuant to Article II, III or VIII shall not be effective until received by the Administrative Agent. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Working Capital Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof. (b) If any notice required under this Agreement or any of the other Loan Documents is permitted to be made, and is made, by telephone, actions taken or omitted to be taken in reliance thereon by the Administrative Agent or any of the Lenders shall be binding upon the Loan Parties notwithstanding any inconsistency between the notice provided by telephone and any subsequent writing in confirmation thereof provided to the Administrative Agent or such Lender; provided that any such action taken or omitted to be taken by the Administrative Agent or such Lender shall have been in good faith and in accordance with the terms of this Agreement. SECTION 9.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any 94 Working Capital Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Costs and Expenses. (a) Each of the Loan Parties hereby agrees to pay on demand (i) all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents (including, without limitation, (A) all due diligence, collateral review, syndication, transportation, computer, duplication, appraisal, audit, insurance, consultant, search, filing and recording fees and expenses and (B) the reasonable fees and expenses of counsel for the Administrative Agent with respect thereto, with respect to advising the Administrative Agent as to its rights and responsibilities, or the perfection, protection or preservation of rights or interests, under the Loan Documents, with respect to negotiations with any Loan Party or with other creditors of any Loan Party or any of its Subsidiaries arising out of any Default or any events or circumstances that may give rise to a Default and with respect to presenting claims in or otherwise participating in or monitoring any bankruptcy, insolvency or other similar proceeding involving creditors' rights generally and any proceeding ancillary thereto) and (ii) all costs and expenses of the Administrative Agent and each Lender in connection with the enforcement of the Loan Documents, whether in any action, suit or litigation, any bankruptcy, insolvency or other similar proceeding affecting creditors' rights generally (including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent and each Lender with respect thereto). (b) Each of the Loan Parties hereby agrees to indemnify and hold harmless each Agent, each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) the Facilities, the actual or proposed use of the proceeds of the Working Capital Advances, the Loan Documents or any of the transactions contemplated thereby, including, without limitation, and registration and sale of the Borrower Common Stock contemplated by the Registration Statement or (ii) the actual or alleged presence of Hazardous Materials on any property of any Loan Party or any Environmental Action relating in any way to any Loan Party, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by any Loan Party, its directors, shareholders or creditors or an Indemnified Party or any Indemnified Party is otherwise a party thereto and whether or not the Transaction or any of the other transactions contemplated hereby are consummated. Each of the Loan Parties also agrees not to assert any claim against any Agent, any Lender or any of their 95 Affiliates, or any of their respective officers, directors, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the Facilities, the actual or proposed use of the proceeds of the Working Capital Advances, the Loan Documents or any of the transactions contemplated thereby. (c) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.08(b)(i) or 2.09(d), acceleration of the maturity of the Working Capital Notes pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 9.07 as a result of a demand by the Borrower pursuant to Section 9.07(a), or if the Borrower fails to make any payment or prepayment of an Advance for which a notice of prepayment has been given or that is otherwise required to be made, whether pursuant to Section 2.04, 2.05 or 6.01, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion or such failure to pay or to prepay, as the case may be, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (d) If any Loan Party fails to pay when due any costs, expenses or other amounts payable by it under any Loan Document, including, without limitation, fees and expenses of counsel and indemnities, such amount may be paid on behalf of such Loan Party by the Administrative Agent or any Lender, in its sole discretion. (e) Without prejudice to the survival of any other agreement of any Loan Party hereunder or under any other Loan Document, the agreements and obligations of the Loan Parties contained in Sections 2.09 and 2.11 and this Section 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under any of the other Loan Documents. SECTION 9.05. Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Working Capital Notes due and payable pursuant to the provisions of Section 6.01, each Lender and each of its respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and otherwise apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or such Affiliate to or for the credit or the account of the Loan Parties against any and all of the Obligations of the Loan Parties now or hereafter existing under the Loan Documents, held by 96 such Lender, irrespective of whether such Lender shall have made any demand under this Agreement or such Working Capital Note or Notes and although such obligations may be unmatured. Each Lender agrees promptly to notify such Loan Party after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and its respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender and its respective Affiliates may have. SECTION 9.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Loan Parties and the Administrative Agent and when the Administrative Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Loan Parties, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 9.07. Assignments and Participations. (a) Each Lender may and, so long as no Default shall have occurred and be continuing, if demanded by the Borrower (following a demand by such Lender pursuant to Section 2.09 or 2.11) upon at least five Business Days' notice to such Lender and the Administrative Agent, will, assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Working Capital Commitment or Commitments, the Working Capital Advances owing to it and the Working Capital Note or Notes held by it); provided, however, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations under and in respect of Working Capital Facility, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender or an assignment of all of a Lender's rights and obligations under this Agreement, the aggregate amount of the Working Capital Commitments of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (iii) each such assignment shall be to an Eligible Assignee, (iv) each such assignment made as a result of a demand by the Borrower pursuant to this Section 9.07(a) shall be arranged by the Borrower after consultation with the Administrative Agent and shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Lender under this Agreement, (v) no Lender shall be obligated to make any such assignment as a result of a demand by the Borrower pursuant to this Section 9.07(a) unless and until such Lender shall have received one or more payments from either the Borrower or one or more Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Lender under this Agreement, (vi) no such assignments shall be permitted without the consent of the Syndication 97 Agent until the Syndication Agent shall have notified the Lenders that syndication of the Commitments hereunder has been completed, (vii) the Administrative Agent shall have consented to such assignment, and (viii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Working Capital Note or Notes subject to such assignment and a processing and recordation fee of $3,500. (b) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (ii) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.10, 2.12 and 9.04 (and other similar provisions of the other Loan Documents that are specified under the terms of such other Loan Documents to survive the payment in full of the Obligations of the Loan Parties under or in respect of the Loan Documents) to the extent any claim thereunder relates to an event arising prior to such assignment) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any other Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Loan Party or the performance or observance by any Loan Party of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Loan Documents as are delegated to the 98 Administrative Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender; and (viii) such assignee attaches any Internal Revenue Service form (and, if applicable, the certificate) required to be provided by it under Section 2.12 and agrees to provide from time to time any successor or other form prescribed by the Internal Revenue Service as required to be provided by it under Section 2.12. (d) The Administrative Agent, acting for this purpose (but solely for this purpose) as the agent of the Borrower, shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Working Capital Commitment of, and principal amount of the Working Capital Advances owing under each Facility to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders [may] [shall] treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee, together with any Working Capital Note or Notes subject to such assignment and payment of the processing and recordation fee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. In the case of any assignment by a Lender, within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Working Capital Note or Notes a new Working Capital Note to the order of such Eligible Assignee in an amount equal to the Working Capital Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Working Capital Commitment hereunder, a new Working Capital Note to the order of the assigning Lender in an amount equal to the Working Capital Commitment retained by it hereunder. Such new Working Capital Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Working Capital Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A hereto. (f) Each Lender may sell participations to one or more Persons (other than any Loan Party or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Working Capital Commitments, the Working Capital Advances owing to it and the Working Capital Note or Notes, if any, held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitments) shall remain unchanged, (ii) such Lender shall remain solely 99 responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Working Capital Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Working Capital Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, postpone any date fixed for any payment of principal of, or interest on, the Working Capital Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or release all or substantially all of the Collateral. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to any Loan Party or any of its Subsidiaries furnished to such Lender by or on behalf of the Borrower or any other Loan Party. (h) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Working Capital Advances owing to it and the Working Capital Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. No such creation shall release the applicable Lender from its obligations hereunder. SECTION 9.08. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.09 Confidentiality. Neither the Administrative Agent nor any Lender shall disclose any Confidential Information to any Person without the consent of the Borrower, other than (a) to the Administrative Agent's or such Lender's affiliates and their officers, directors, employees, agents and advisors and to actual or prospective Eligible Assignees and participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, (c) as requested or required by any state, federal or foreign authority or examiner regulating such Lender, (d) to any rating agency when required by it, provided that, prior to any such disclosure, such rating agency shall undertake to preserve the confidentiality of any Confidential Information relating to the Loan Parties received by it from such Lender, (e) to any other person if such disclosure is reasonably incidental to the administration of the Facilities, (f) in connection with any claim, litigation or proceeding to which the Administrative Agent or such Lender or any of their affiliates 100 may be a party or (g) to the extent necessary in connection with the exercise of any remedy under this Agreement or any other Loan Document. SECTION 9.10. Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York state court or federal court of the United States of America sitting in New York, New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York state court or, to the extent permitted by applicable law, in such federal court. Each of the parties hereto hereby irrevocably consents to the service of copies of any summons and complaint and any other process which may be served in any such action or proceeding by certified mail, return receipt requested, or by delivering a copy of such process to such party, at its address specified in Section 9.02, or by any other method permitted by applicable law. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by applicable law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Loan Documents in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party in any New York state or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 9.11. Governing Law. This Agreement and the Working Capital Notes shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 9.12. Waiver of Jury Trial. Each of the Loan Parties, the Agents and the Lenders irrevocably waive all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement, any of the other Loan Documents, any of the instruments, agreements or other documents delivered pursuant to the terms of the Loan Documents, the Working Capital Advances, the transactions contemplated hereby or thereby or the actions of any Agent or any Lender in the negotiation, administration, performance or enforcement thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. MEDE AMERICA CORPORATION By ------------------------------ Name: Title: NATIONSBANK, N.A., as Administrative Agent By ------------------------------ Name: Title: NATIONSBANC MONTGOMERY SECURITIES LLC, as Syndication Agent By ------------------------------ Name: Title: INITIAL LENDERS --------------- NATIONSBANK, N.A. By ------------------------------ Title: GUARANTORS ---------- MEDE AMERICA CORPORATION OF OHIO By ------------------------------ Name: Title: HEALTHCARE INTERCHANGE, INC. By ------------------------------ Name: Title:
SCHEDULE I COMMITMENTS AND APPLICABLE LENDING OFFICES - -------------------------------------------------------------------------------------------------------- WORKING DOMESTIC EURODOLLAR CAPITAL LENDING LENDING NAME OF INITIAL LENDER COMMITMENT OFFICE OFFICE ---------------------- ---------- ------ ------ NATIONSBANK, N.A. $25,000,000 101 North Tryon Street 101 North Tryon Street Charlotte, North Carolina Charlotte, North Carolina 28255 28255 Attention: Kathy Mumpower Attention: Kathy Mumpower - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
SCHEDULE 4.01(A) BORROWER EQUITY INTERESTS See attachment "A" for a list of WCAS Funds that hold, directly or indirectly, outstanding shares of Common Stock and Series A Preferred Stock of the Borrower ("Preferred Stock"). See attachment "B" for a list of WCAS Funds that hold, directly or indirectly, warrants to acquire shares of Common Stock of the Borrower. SCHEDULE 4.01(A), ATTACHMENT "A"
POST-SPLIT NAME COMMON PREFERRED - --------------------------------------------------------------- ----------- ---------- Welsh, Carson, Anderson & Stowe V, L.P. ....................... 1,790,748 82,057 Welsh, Carson, Anderson & Stowe VI, L.P. ...................... 1,790,748 82,057 WCAS Information Partners, LP ................................. 43,646 2,000 Patrick J. Welsh .............................................. 15,990 732 Russell L. Carson ............................................. 19,703 902 Bruce K. Anderson ............................................. 25,905 1,187 Richard H. Stowe .............................................. 3,967 181 Del Chtr Trust ttee fbo Richard H. Stowe IRA Rollover Trust ... 3,463 158 Andrew M. Paul ................................................ 8,146 373 Thomas E. McInerney ........................................... 20,481 938 Laura M. VanBuren ............................................. 412 18 James B. Hoover ............................................... 2,727 125 Robert H. Minicucci ........................................... 8,729 400 Anthony J. de Nicola .......................................... 3,750 171 Kristin M. Anderson Trust, P. Welsh/K. Anderson ttees ......... 479 21 Mark S. Anderson Trust, P. Welsh/M. Anderson ttees ............ 479 21 Daniel B. Anderson Trust, P. Welsh/D. Anderson ttees .......... 479 21 WCAS Capital Partners II, L.P. ................................ 370,993 Edgar A. Jannotta, Jr. ........................................ 2,208 101 William Blair Capital Partners V. L.P. ........................ 414,639 19,000 William Blair Leveraged Capital Fund Limited Partnership ...... 217,939 9,986 --------- ------ TOTAL ......................................................... 5,684,848 239,956 ========= =======
SCHEDULE 4.01(A), ATTACHMENT "B" Warrant, dated December 18, 1995, issued by the Borrower to Welsh, Carson, Anderson & Stowe V, L.P. ("WCAS V"), to purchase 20,950 shares of Common Stock at an exercise price of $4.58 per share. Warrant, dated December 18, 1995, issued by the Borrower to Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), to purchase 20,950 shares of Common Stock at an exercise price of $4.58 per share. Warrant, dated December 18, 1995, issued by the Borrower to William Blair Capital Partners V, L.P. ("Blair V"), to purchase 7,123 shares of Common Stock at an exercise price of $4.58 per share. Warrant, dated December 18, 1995, issued by the Borrower to William Blair Leveraged Capital Fund, Limited Partnership ("Blair LCF"), to purchase 3,509 shares of Common Stock at an exercise price of $4.58 per share. Warrant, dated January 10, 1997, issued by the Borrower to WCAS V to purchase 7,332 shares of Common Stock at an exercise price of $5.73 per share. Warrant, dated January 10, 1997, issued by the Borrower to WCAS VI to purchase 7,332 shares of Common Stock at an exercise price of $5.73 per share. Warrant, dated January 10, 1997, issued by the Borrower to Blair V to purchase 2,438 shares of Common Stock at an exercise price of $5.73 per share. Warrant, dated January 10, 1997, issued by the Borrower to Blair LCF to purchase 1,228 shares of Common Stock at an exercise price of $5.73 per share. Warrant, dated October 31, 1997, issued by the Borrower to WCAS VI to purchase 27,360 shares of Common Stock at an exercise price of $5.73 per share. Warrant, dated October 31, 1997, issued by the Borrower to Blair V to purchase 6,840 shares of Common Stock at an exercise price of $5.73 per share. SCHEDULE 4.01(A), ATTACHMENT "B" (CONTINUED) Warrant, dated October 7, 1998, issued by the Borrower to WCAS V to purchase 67,240 shares of Common Stock at an exercise price equal to the offering price to the public in the Borrower's contemplated initial public offering (if such offering is completed before March 31, 1999). Warrant, dated October 7, 1998, issued by the Borrower to Blair V to purchase 16,810 shares of Common Stock at an exercise price equal to the offering price to the public in the Borrower's contemplated initial public offering (if such offering is completed before March 31, 1999). SCHEDULE 4.01(B) SUBSIDIARIES Legal name: Healthcare Interchange, Inc. ("HII") Type of entity: corporation Jurisdiction of incorporation: Missouri Authorized Equity Interests: 66,250 shares of Class A Common Stock, $1 par value, 66,250 shares of Class B Common Stock, $1 par value, 56,000 shares of Class C Common Stock, $1 par value, and 62,500 shares of Preferred Stock, $1 par value. Outstanding Equity Interests: 35,000 shares of Class A Common Stock, 35,000 shares of Class B Common Stock, 20,001 shares of Class C Common Stock and 62,500 shares of Preferred Stock. All outstanding Equity Interests of HII are owned of record and beneficially by the Borrower. Legal Name: MedE America Corporation of Ohio ("MedE Ohio") Formerly known as: General Computer Corporation Type of entity: corporation Jurisdiction of incorporation: Ohio Authorized Equity Interests: 10,000,000 shares of Common Stock, $.10 par value, and 1,000,000 shares of Preferred Stock, $.10 par value. Outstanding Equity Interests: 100 shares of Common Stock. All outstanding Equity Interests of MedE America Corporation of Ohio are owned of record and beneficially by the Borrower. SCHEDULE 4.01(D) CONSENTS None. SCHEDULE 4.01(F) LIABILITIES NOT REFLECTED IN FINANCIAL STATEMENTS (i) Material fixed or contingent liabilities: None (ii) Liabilities for taxes: None (iii) Unusual forward or long-term commitments: The Borrower is party to a Software Licensing and Partnering Agreement, dated July 29, 1997, as amended, with Wellpoint Health Networks, Inc. Pursuant to that agreement, the Borrower will provide certain custom developed claims processing software to Wellpoint for installation at hospitals and large medical facilities. The agreement provides for a monthly per site license and maintenance fee, and further provides that Wellpoint shall be the exclusive distributor of the custom developed software in the State of California. The initial term of the agreement expires June 30, 2001. The Borrower is party to a Transaction Processing and Development Agreement, dated as of July 21, 1998, with Medic Computer Systems, Inc., pursuant to which MedE will provide transaction processing services to Medic. The agreement contemplates that certain elements of the Borrower's computer system will need to be modified to provide such services, and sets forth timetables and criteria for such modifications. The initial term of the agreement expires June 30, 2003. (iv) Anticipated losses from unfavorable commitments: None SCHEDULE 4.01(V) OPEN YEARS MedE America Corporation 1998 1997 1996 1995 MedE Ohio 1998 1997 1996 1995 HII 1998 1997 1996 1995 The information requested by this Schedule 4.01(v) is not available for the stockholders of MedE America Corporation. SCHEDULE 4.01(Y) DEBT Part A: Existing Debt (a) Indebtedness for borrowed money: The Borrower has borrowed approximately $31.1 million (as of December 31, 1998) from Bank of America NT&SA pursuant to the Credit Agreement, dated as of December 18, 1995, as amended (the "Old Credit Agreement"), between the Borrower and Bank of America NT&SA. These borrowings bear interest at a weighted average rate of 6.41% per annum (as of December 31, 1998), payable periodically as provided in the Old Credit Agreement, and mature on October 29, 1999. On February 14, 1997, the Borrower issued its 10% Senior Subordinated Note to WCAS Capital Partners II, L.P., in the principal amount of $25,000,000. This note bears interest at the rate of 10% per annum, payable quarterly. One-half of the principal amount is due on February 14, 2001 and the balance is due on February 14, 2002. (b) Deferred purchase price obligations: Pursuant to an Asset Purchase Agreement, dated as of October 20, 1997, as amended, among the Borrower, MedE Ohio, The Stockton Group, Inc. and James S. Smith, the Borrower is obligated to pay up to $2,600,000 (plus interest thereon at the rate of 7.25% per annum from the "Earn-Out Payment Date," as defined in such agreement). The Borrower expects that the amount so payable under this agreement will be $2,022,000; however, the final amount is still being determined. The Borrower and/or its Subsidiaries may have incurred purchase money indebtedness not in excess of $250,000 to finance purchases of equipment in the ordinary course of business. None of such purchase money indebtedness is in default. In connection with the purchase of certain real property and improvements in Summit County, Ohio, the Borrower owes an aggregate $312,613 (payable in installments of $19,110 per month through July 2000) pursuant to a Purchase Agreement, dated as of May 30, 1995, between MedE America Corporation of Ohio and William and Sherry Shultz d/b/a W.E.S. Properties. A copy of the Purchase Agreement has been provided to counsel for the Administrative Agent. SCHEDULE 4.01(Y) (CONTINUED) DEBT Part A (continued) (c) Notes, bonds, etc.: See Schedule 5.02(a) Pursuant to an Assets [sic] Purchase Agreement, dated as of March 1, 1996, as amended, between the Borrower and Quadax, Inc., the Borrower is obligated to pay to Quadax $6,333 per month through January 8, 2000. (d) Conditional sales agreements, etc.: None (e) Capitalized leases: See attachment "A". (f) Outstanding letters of credit, etc.: None (g) Obligations to purchase Equity Interests: In the event that no initial public offering is completed by the Borrower, the Borrower will be obligated to redeem its Preferred Stock in two equal installments on September 30, 2001 and September 30, 2002. The total amount payable in each such redemption would be approximately $20,109,464. (h) Hedge Agreements, etc.: None (i) Synthetic leases, off balance sheet leases, etc.: None (j) Contingent Obligations: None (k) Debt secured by Liens on Loan Party's assets: None SCHEDULE 4.01(Y) (CONTINUED) DEBT Part B: Surviving Debt (a) Indebtedness for borrowed money: None. (b) Deferred purchase price obligations: See the first and second items listed under item (b) of Part A above. (c) Notes, bonds, etc.: See the items listed under item (c) of Part A above. (d) Conditional sales agreements, etc.: None (e) Capitalized leases: See attachment "A". (f) Outstanding letters of credit, etc.: None (g) Obligations to purchase Equity Interests: None, assuming that the Borrower completes an IPO before September 30, 2001. (h) Hedge Agreements, etc.: None (i) Synthetic leases, off balance sheet leases, etc.: None (j) Contingent Obligations: None (k) Debt secured by Liens on Loan Party's assets: None SCHEDULE 4.01(Y), PARTS A AND B, ATTACHMENT "A"
CAPITAL LEASES: LESSOR LEASE LEASED LEASE EXPIRATION MONTLY NUMBER EQUIPMENT TERM LEASE PMT - --------------------------------------------------------------------------------------------------------------- Alco Capital Resource 16,594 Canon Copier 60 May-99 838 CIT 65,222,005 Computer Equip 60 Feb-99 1,169 CIT 65,222,002 Computer Equip 60 Jul-98 1,056 CIT 65,222,003 Computer Equip 60 Aug-98 898 CIT 65,222,004 Computer Equip 60 Sep-98 690 Wheeling Nat'l Bank 33908-02 Computer Equip 60 Oct-98 288 Wheeling Nat'l Bank 33908-01 Stratapak Drive 60 Sep-98 618 Hewlett Packard 4126-38351 Computer Equip 60 Jun-99 6,638 Icon cash flow partner 70,239.0 Computer Equip 60 Aug-99 1,191 Stratus Capital 607-60702 Stratus Equip 18 May-99 7,414 Sanwa Leasing Corp 0002-1166898 Cust Serv 5 36 Jun-99 436 Alan Acceptance 626190-20916 Acctg Server/Sales 24 Nov-99 2,657 Colonial Pacific Alan 20977 Computer Euipment 24 Dec-99 2,016 Advanta US 001-0236308 Laser Printer Stockton 60 Jan-01 684 Colonial US 126509001 Computer Equip Stockton 36 Jun-99 1,128 Dana Commerical 438466 Computer Equip 48 Nov-99 874 Net Credit May-99 935 Data Gen'l MedE inc. Data Gen'l Equipmt Apr-00 4,037 Heller Fin'l MPC Data Gen'l Equipmt Aug-98 785 Mellon leasing MPC Data Gen'l Equipmt Sep-98 4,989 Moleasco (Dental) 4556 Burster 36 Aug-99 274 Moleasco (Dental) 4797 Auto Folding Machine 36 Sep-99 199 I.C. Capital (Dental) 3339252 Computer Equip 60 Aug-00 2,578 Data General 36 Jun-01 5,824 Capital Lease Payments
CAPITAL LEASES: LESSOR JUL-98 AUG-98 SEP-98 OCT-98 NOV-98 DEC-98 JAN-99 - ---------------------------------------------------------------------------------------------------------------- Alco Capital Resource 838 838 838 838 838 838 838 CIT 1,169 1,169 1,169 1,169 1,169 1,169 1,169 CIT 1,056 CIT 898 898 CIT 690 690 690 Wheeling Nat'l Bank 288 288 288 288 Wheeling Nat'l Bank 618 618 618 Hewlett Packard 6,638 6,638 6,638 6,638 6,638 6,638 6,638 Icon cash flow partner 1,191 1,191 1,191 1,191 1,191 1,191 1,191 Stratus Capital 7,414 7,414 7,414 7,414 7,414 7,414 7,414 Sanwa Leasing Corp 436 436 436 436 436 436 436 Alan Acceptance 2,657 2,657 2,657 2,657 2,657 2,657 2,657 Colonial Pacific Alan 2,016 2,016 2,016 2,016 2,016 2,016 2,016 Advanta US 684 684 684 684 684 684 684 Colonial US 1,128 1,128 1,128 1,128 1,128 1,128 1,128 Dana Commerical 874 874 874 874 874 874 874 Net Credit 935 935 935 935 935 935 935 Data Gen'l MedE inc. 4,037 4,037 4,037 4,037 4,037 4,037 4,037 Heller Fin'l MPC 785 785 Mellon leasing MPC 4,989 4,989 4,989 Moleasco (Dental) 274 274 274 274 274 274 274 Moleasco (Dental) 199 199 199 199 199 199 199 I.C. Capital (Dental) 2,578 2,578 2,578 2,578 2,578 2,578 2,578 Data General 5,824 5,824 5,824 5,824 5,824 5,824 5,824 Capital Lease Payments 488,120 47,160 45,477 39,180 38,892 38,892 38,892 ------------------------------------------------------- ------------------------ ----
CAPITAL LEASES: LESSOR FEB-99 MAR-99 APR-99 MAY-99 JUN-99 - ------------------------------------------------------------------------------------------- Alco Capital Resource 838 838 838 838 CIT 1,169 CIT CIT CIT Wheeling Nat'l Bank Wheeling Nat'l Bank Hewlett Packard 6,638 6,638 6,638 6,638 6,638 Icon cash flow partner 1,191 1,191 1,191 1,191 1,191 Stratus Capital 7,414 7,414 7,414 7,414 Sanwa Leasing Corp 436 436 436 436 436 Alan Acceptance 2,657 2,657 2,657 2,657 2,657 Colonial Pacific Alan 2,016 2,016 2,016 2,016 2,016 Advanta US 684 684 684 684 684 Colonial US 1,128 1,128 1,128 1,128 1,128 Dana Commerical 874 874 874 874 874 Net Credit 935 935 935 935 Data Gen'l MedE inc. 4,037 4,037 4,037 4,037 4,037 Heller Fin'l MPC Mellon leasing MPC Moleasco (Dental) 274 274 274 274 274 Moleasco (Dental) 199 199 199 199 199 I.C. Capital (Dental) 2,578 2,578 2,578 2,578 2,578 Data General 5,824 5,824 5,824 5,824 5,824 Capital Lease Payments 38,892 37,723 37,723 37,723 28,536 --------------------------------------------------------------
SCHEDULE 4.01(Z) REAL PROPERTY Part A: Owned Real Property Address County State Owner - ------- ------ ----- ----- 1933 Case Pkwy., Twinsburg Summit OH Borrower 2045 Midway Dr., Twinsburg Summit OH MedE Ohio 217 W. Plane St., Bethel Clermont OH MedE Ohio Part B: Leased Real Property See attachment "A". Schedule 4.01(z), Part B, Attachment "A"
Property Address Lessor Lessee Expiration Annual Rental - ---------------- ------ ------ ---------- ------------- 90 Merrick Ave., Suite 501 New England Mutual Life Borrower 12/02 $180,000 East Meadow, NY 11554 2865 Amwiler Road, Suite 200 T&J Enterprises, LLC Borrower 2/01 $ 81,600 Atlanta, GA. 30360 2730 Transit Road Marrano/Marc Equity Group Borrower 10/01 $120,000 West Seneca, NY 14224 8 Century Drive Philip and Lois Wagner Borrower 7/99 $ 33,960 Latham, NY 12110 333 Ovington Blvd., Suite 702 HMCC Associates Borrower 2/02 $324,000 Mitchel Field, NY 11553 20350 Ventura Blvd. Suite 200 The Marks Group Borrower 12/02 $ 80.400 Woodland Hills, CA. 91364 230 River Ridge Circle Timmerman Leasing MedE Ohio 4/00 $ 66,000 Burnsville, MN. 55337 125 Venture Blvd. Troon Properties MedE Ohio 12/02 $ 81,600 Spartanburg, SC 29306 727 North First Street, Fifth Floor First Morgan L.L.C. HII 5/05 $245,000 Saint Louis, MO 63102
SCHEDULE 4.01(BB) REGISTERED INTELLECTUAL PROPERTY Borrower U.S. Patent and Trademark Office service mark registration for "MEDE AMERICA" name and logo, registration number 1,695,044, originally registered 6/16/92, expires 2008. HII U.S. Patent and Trademark Office service mark registration for "I" logo, registration number 2,130,684, registered January 20, 1998, expires 2008. SCHEDULE 5.01(N) REAL PROPERTY SUBJECT TO MORTGAGE 1933 Case Parkway Twinsburg, Ohio 2045 Midway Drive Twinsburg, Ohio 44087 2865 Amwiler Road Atlanta, Georgia 30360 333 Ovington Boulevard, Suite 702 Mitchel Field, New York 11553 SCHEDULE 5.02(A) LIENS ON COLLATERAL The Borrower owns 7 certificates of deposit issued by the Bank of Akron, having an aggregate value at maturity of $268,430. All of the Borrower's right, title and interest in and to such certificates of deposit have been pledged, pursuant to an Assignment of Bank Account, dated March 7, 1995, between Latpon Health Systems Inc. (which subsequently assigned this agreement to the Borrower) and QR Management Services Inc. ("QR"), to secure indebtedness payable to QR (the amount of such indebtedness is less than the value of such certificates). Such indebtedness arose pursuant to an Asset Purchase Agreement, dated as of February 1, 1995, between Latpon and QR. SCHEDULE 5.02(E) INVESTMENTS None EXHIBIT A FORM OF WORKING CAPITAL NOTE $_______________ Dated: _______ __, ____ FOR VALUE RECEIVED, the undersigned, MEDE AMERICA CORPORATION, a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _________________________ (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below) the aggregate principal amount of the Working Capital Advances (as defined below) owing to the Lender by the Borrower pursuant to the Credit Agreement dated as of January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; terms defined therein, unless otherwise defined herein, being used herein as therein defined) among the Borrower, MEDE AMERICA CORPORATION OF OHIO, an Ohio corporation, and HEALTHCARE INTERCHANGE, INC., a Missouri corporation, as Guarantors, the Lender and certain other lender parties party thereto, and NationsBank, N.A., as Administrative Agent for the Lender and such other lender parties on the Termination Date. The Borrower promises to pay to the Lender interest on the unpaid principal amount of each Working Capital Advance from the date of such Working Capital Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to NationsBank, N.A., as Administrative Agent, at 101 North Tryon Street, Charlotte, North Carolina (or some other location as shall be designated by the Administrative Agent in a written notice to the Borrower) in same day funds. Each Working Capital Advance owing to the Lender by the Borrower and the maturity thereof, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto, which is part of this Promissory Note; provided, however, that the failure of the Lender to make any such recordation or endorsement shall not affect the Obligations of the Borrower under this Promissory Note. This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of advances (the "Working Capital Advances") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Working Capital Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The obligations of the Borrower under this Promissory Note and the other Loan Documents, and the obligations of the other Loan Parties under the Loan Documents, are secured by the Collateral as provided in the Loan Documents. MEDE AMERICA CORPORATION By ----------------------------- Title: ADVANCES AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- AMOUNT OF UNPAID AMOUNT OF PRINCIPAL PAID PRINCIPAL NOTATION DATE ADVANCE OR PREPAID BALANCE MADE BY ---- ------- ---------- ------- ------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT B-1 FORM OF NOTICE OF BORROWING NationsBank, N.A., as Administrative Agent under the Credit Agreement referred to below 101 North Tryon Street Location Code: NCI-001-15-12 Charlotte, North Carolina 28255 [Date] Attention: Kathy Mumpower Ladies and Gentlemen: The undersigned, MEDE AMERICA CORPORATION, refers to the Credit Agreement dated as of January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; the terms defined therein being used herein as therein defined), among the undersigned, MEDE AMERICA CORPORATION OF OHIO, an Ohio corporation, and HEALTHCARE INTERCHANGE, INC., a Missouri corporation, as Guarantors, the Lenders party thereto and NationsBank, N.A., as Administrative Agent for the Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is _________ __, _____. (ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $__________. [(iv) The initial Interest Period for each Eurodollar Rate Advance made as part of the Proposed Borrowing is __________ month[s].] The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) The representations and warranties contained in each Loan Document are correct on and as of the date of the Proposed Borrowing, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of the Proposed Borrowing, in which case, as of such specific date. (B) No Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom. Manual delivery of an executed counterpart of this Notice of Borrowing by telecopier shall be effective as delivery of an original executed counterpart of this Notice of Borrowing. Very truly yours, MEDE AMERICA CORPORATION By ---------------------------------- Title: EXHIBIT B-2 FORM OF NOTICE OF CONVERSION NationsBank, N.A., as Administrative Agent under the Credit Agreement referred to below 101 North Tryon Street Location Code: NCI-001-15-12 Charlotte, North Carolina 28255 [Date of Notice of Conversion] Attention: Kathy Mumpower Ladies and Gentlemen: The undersigned, MEDE AMERICA CORPORATION, a Delaware corporation, refers to the Credit Agreement dated as of January __, 1999 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms defined therein unless otherwise defined herein being used herein as therein defined) among the undersigned, MEDE AMERICA CORPORATION OF OHIO, an Ohio corporation, and HEALTHCARE INTERCHANGE, INC., a Missouri corporation, as Guarantors, the Lenders party thereto and NationsBank, N.A., as Administrative Agent for the Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.08 of the Credit Agreement, that the undersigned hereby requests a Conversion of the Advances specified in clause (b) below under the Credit Agreement and, in that connection, sets forth below the information relating to such Conversion (the "Proposed Conversion") as required by Section 2.08(a) of the Credit Agreement: (a) The Business Day of the Proposed Conversion is requested to be _________ __, ____1. (b) The Advances requested to be Converted as part of the Proposed Conversion are the Working Capital Advances outstanding on the date of this Notice of Conversion as [Base Rate Advances] [Eurodollar Rate Advances] in an aggregate principal amount of $__________. (c) The Advances referred to in clause (b) above are requested to be Converted as part of the Proposed Conversion into [Base Rate Advances] - -------- 1 The date specified in clause (a) shall be the last day of the existing Interest Period for the Eurodollar Rate Advances requested to be Converted in the Proposed Conversion. [Eurodollar Rate Advances with an initial Interest Period having a duration of [one] [two] [three] [six] month[s]]. Very truly yours, MEDE AMERICA CORPORATION By _______________________________ Name: Title: EXHIBIT C FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement dated as of January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; the terms defined therein, unless otherwise defined herein, being used herein as therein defined) among MEDE AMERICA CORPORATION, a Delaware corporation, (the "Borrower"), MEDE AMERICA CORPORATION OF OHIO, an Ohio corporation, and HEALTHCARE INTERCHANGE, INC., a Missouri corporation, as Guarantors, the Lenders party thereto and NationsBank, N.A., as Administrative Agent for the Lenders. Each "Assignor" referred to on Schedule 1 hereto (each, an "Assignor") and each "Assignee" referred to on Schedule 1 hereto (each, an "Assignee") agrees severally with respect to all information relating to it and its assignment hereunder and on Schedule 1 hereto as follows: 1. Such Assignor hereby sells and assigns, without recourse except as to the representations and warranties made by it herein, to such Assignee, and such Assignee hereby purchases and assumes from such Assignor, an interest in and to such Assignor's rights and obligations under the Credit Agreement as of the date hereof equal to the percentage interest specified on Schedule 1 hereto of all outstanding rights and obligations under the Credit Agreement Facility specified on Schedule 1 hereto. After giving effect to such sale and assignment, such Assignee's Commitments and the amount of the Advances owing to such Assignee will be as set forth on Schedule 1 hereto. 2. Such Assignor (i) represents and warrants that its name set forth on Schedule 1 hereto is its legal name, that it is the legal and beneficial owner of the interest or interests being assigned by it hereunder and that such interest or interests are free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note held by such Assignor and requests that the Administrative Agent exchange such Note for a new Note payable to the order of such Assignee in an amount equal to the Commitment assumed by such Assignee pursuant hereto or new Notes payable to the order of such Assignee in an amount equal to the Commitment assumed by such Assignee pursuant hereto and such Assignor in an amount equal to the Commitment retained by such Assignor under the Credit Agreement, respectively, as specified on Schedule 1 hereto. 3. Such Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon any Agent, any Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) represents and warrants that its name set forth on Schedule 1 hereto is its legal name; (iv) confirms that it is an Eligible Assignee; (v) appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Loan Documents as are delegated to such Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (vi) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vii) attaches any U.S. Internal Revenue Service forms required under Section 2.11 of the Credit Agreement. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto. 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) such Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) such Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement (other than its rights and obligations under the Loan Documents that are specified under the terms of such Loan Documents to survive the payment in full of the Obligations of the Loan Parties under the Loan Documents to the extent any claim thereunder relates to an event arising prior to the Effective Date of this Assignment and Acceptance) and, if this Assignment and Acceptance covers all of the remaining portion of the rights and obligations of such Assignor under the Credit Agreement, such Assignor shall cease to be a party thereto. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to such Assignee. Such Assignor and such Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Manual delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of an original executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, each Assignor and each Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. SCHEDULE 1 to ASSIGNMENT AND ACCEPTANCE ASSIGNORS: Working Capital Facility Percentage interest assigned % % % % % Working Capital Commitment assigned $ $ $ $ $ Aggregate outstanding principal amount of Working Capital Advances assigned $ $ $ $ $ Principal amount of Working Capital Note payable to Assignor $ $ $ $ $ ASSIGNEES: Working Capital Facility Percentage interest assumed % % % % % Working Capital Commitment assumed $ $ $ $ $ Aggregate outstanding principal amount of Working Capital Advances assumed $ $ $ $ $ Principal amount of Working Capital Note payable to Assignee $ $ $ $ $
Effective Date (if other than date of acceptance by Administrative Agent): 1_________ __, ____ ASSIGNORS ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ - -------- 1 This date should be no earlier than five Business Days after the delivery of this Assignment and Acceptance to the Administrative Agent. ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ ASSIGNEES ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ Domestic Lending Office: Eurodollar Lending Office: ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ Domestic Lending Office: Eurodollar Lending Office: ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ Domestic Lending Office: Eurodollar Lending Office: ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ Domestic Lending Office: Eurodollar Lending Office: ______________________________, as Assignor [Type or print legal name of Assignor] By _______________________________________ Title: Dated:______________, ___ Domestic Lending Office: Eurodollar Lending Office: Accepted 2[and Approved] this ____ day of ___________, ____ NATIONSBANK, N.A., as Administrative Agent By _______________________________ Title: 2[Approved this ____ day of _____________, ____ MEDE AMERICA CORPORATION By _______________________________ Title: ] - -------- 2 Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee". EXHIBIT D FORM OF SECURITY AGREEMENT Dated January __, 1999 From The Grantors referred to herein as Grantors to NATIONSBANK, N.A. as Collateral Agent T A B L E O F C O N T E N T S
SECTION PAGE 1. Grant of Security.............................................................................2 2. Security for Obligations......................................................................5 3. Grantors Remain Liable........................................................................5 4. Delivery and Control of Security Collateral, Account Collateral or Agreement Collateral.......6 5. Maintaining the Pledged Accounts..............................................................7 6. Maintaining the Collateral Account............................................................8 7. Representations and Warranties................................................................8 8. Further Assurances...........................................................................10 9. As to Equipment and Inventory................................................................11 10. Insurance....................................................................................12 11. Place of Perfection; Records; Collection of Receivables......................................13 12. Voting Rights; Dividends; Etc................................................................14 13. As to the Assigned Agreements................................................................15 14. Payments Under the Assigned Agreements.......................................................17 15. Transfers and Other Liens; Additional Shares.................................................17 16. Collateral Agent Appointed Attorney-in-Fact..................................................17 17. Collateral Agent May Perform.................................................................18 18. The Collateral Agent's Duties................................................................18 19. Remedies.....................................................................................18 20. Indemnity and Expenses.......................................................................20 21. Amendments; Waivers; Additional Grantors; Etc................................................20 22. Notices; Etc.................................................................................21 23. Continuing Security Interest; Assignments under the Credit Agreement.........................21 24. Release; Termination.........................................................................21 25. Security Interest Absolute...................................................................22 26. Execution in Counterparts....................................................................23 27. The Mortgages................................................................................23 28. Governing Law................................................................................24
Schedules Schedule I - Pledged Shares and Pledged Debt Schedule II - Locations of Equipment and Inventory Schedule III - Chief Place of Business, Chief Executive Office and Federal Tax Identification Number Schedule IV - Trade Names ii SECTION PAGE Schedule V - Pledged Accounts Exhibits Exhibit A - Form of Security Agreement Supplement Exhibit B - Form of Pledged Account Letter Exhibit C - Form of Consent and Agreement Exhibit D - Form of Control Agreement (Securities Account) SECURITY AGREEMENT SECURITY AGREEMENT dated January __, 1999 made by MEDE AMERICA CORPORATION, a Delaware corporation (the "Borrower"), the other persons listed on the signature pages hereof and the Additional Grantors (as defined in Section 21) (the Borrower, the persons so listed and the Additional Grantors being, collectively, the "Grantors"), to NationsBank, N.A., as collateral agent (together with any successor collateral agent appointed pursuant to Article VIII of the Credit Agreement (as hereinafter defined), the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement). PRELIMINARY STATEMENTS. (1) The Borrower has entered into a Credit Agreement dated as of January __, 1999 (said Agreement, as it may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time, being the "Credit Agreement") with the Lenders party thereto (the "Lender Parties") and the Agents (as defined therein). (2) Pursuant to the Credit Agreement, the Grantors are entering into this Agreement in order to grant to the Collateral Agent for the ratable benefit of the Secured Parties a security interest in all of its personal property and fixtures now owned or hereafter acquired. (3) Each Grantor is the owner of the shares (the "Initial Pledged Shares") of stock set forth opposite such Grantor's name on and as otherwise described in Part I of Schedule I hereto and issued by the corporations named therein and of the indebtedness (the "Initial Pledged Debt") set forth opposite such Grantor's name on and as otherwise described in Part II of Schedule I hereto and issued by the obligors named therein. (4) The Borrower has opened a collateral securities account, (the "Collateral Account"), with NationsBank, N.A. at its office at 101 North Tryon Street, Charlotte, North Carolina 28225 (or such other address as the Collateral Agent may specify), in the name of the Collateral Agent and under the sole control and dominion of the Collateral Agent and subject to the terms of this Agreement. (5) It is a condition precedent to the making of Working Capital Advances by the Lender Parties under the Credit Agreement that the Grantors shall have granted the assignment and security interest and made the pledge and assignment contemplated by this Agreement. (6) Each Grantor will derive substantial direct and indirect benefit from the transactions contemplated by the Loan Documents. 2 (7) Terms defined in the Credit Agreement and not otherwise defined in this Agreement are used in this Agreement as defined in the Credit Agreement. Further, unless otherwise defined in this Agreement or in the Credit Agreement, terms defined in Article 8 or 9 of the Uniform Commercial Code in effect in the State of New York ("N.Y. Uniform Commercial Code") and/or in the Federal Book-Entry Regulations (as defined below) are used in this Agreement as such terms are defined in such Article 8 or 9. The term "Federal Book-Entry Regulations" means (a) the federal regulations contained in Subpart B ("Treasury/Reserve Automated Debt Entry System (TRADES)") governing book-entry securities consisting of U.S. Treasury bonds, notes and bills) and Subpart D ("Additional Provisions") of 31 C.F.R. Part 357, 31 C.F.R. ss. 357.2, ss. 357.10 through ss. 357.14 and ss. 357.41 through ss. 357.44 and (b) to the extent substantially identical to the federal regulations referred to in clause (a) above (as in effect from time to time), the federal regulations governing other book-entry securities. NOW, THEREFORE, in consideration of the premises and in order to induce the Lender Parties to make Working Capital Advances under the Credit Agreement, each Grantor hereby agrees with the Collateral Agent for the ratable benefit of the Secured Parties as follows: Section 1. Grant of Security. Each Grantor hereby assigns and pledges to the Collateral Agent for the ratable benefit of the Secured Parties, and hereby grants to the Collateral Agent for the ratable benefit of the Secured Parties a security interest in, the following, in each case, as to each type of property described below, whether now owned or hereafter acquired by such Grantor, wherever located, and whether now or hereafter existing or arising (collectively, the "Collateral"): (a) all of such Grantor's right, title and interest in and to all equipment in all of its forms, including, without limitation, all computers, CPUs, monitors, printers and other payment processing equipment, all fixtures and all parts thereof and all accessions thereto (any and all such equipment, fixtures, parts and accessions being the "Equipment"); (b) all of such Grantor's right, title and interest in and to all inventory in all of its forms, (including, but not limited to, (i) all raw materials and work in process therefor, finished goods thereof and materials used or consumed in the manufacture, production, preparation or shipping thereof, (ii) goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind (including, without limitation, goods in which such Grantor has an interest or right as consignee) and (iii) goods that are returned to or repossessed or stopped in transit by such Grantor), and all accessions thereto and products thereof and documents therefor (any and all such inventory, accessions, products and documents being the "Inventory"); (c) all of such Grantor's right, title and interest in and to all accounts, contract rights, chattel paper, instruments, deposit accounts, general intangibles and other obligations of any kind, whether or not arising out of or in connection with the sale or 3 lease of goods or the rendering of services and whether or not earned by performance, and all rights now or hereafter existing in and to all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, deposit accounts, general intangibles or obligations (any and all such accounts, contract rights, chattel paper, instruments, deposit accounts, general intangibles and obligations, to the extent not referred to in clause (d), (e) or (f) below, being the "Receivables", and any and all such leases, security agreements and other contracts being the "Related Contracts"); (d) all of such Grantor's right, title and interest in and to the following (the "Security Collateral"): (i) the Initial Pledged Shares and the certificates, if any, representing the Initial Pledged Shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Initial Pledged Shares; (ii) the Initial Pledged Debt and the instruments, if any, evidencing the Initial Pledged Debt, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Initial Pledged Debt; (iii) all additional shares of stock from time to time acquired by such Grantor in any manner (such shares, together with the Initial Pledged Shares, being the "Pledged Shares"), and the certificates, if any, representing such additional shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; (iv) all additional indebtedness from time to time owed to such Grantor (such indebtedness, together with the Initial Pledged Debt, being the "Pledged Debt") and the instruments, if any, evidencing such indebtedness, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (v) all other investment property (including, without limitation, all (A) securities, whether certificated or uncertificated, (B) security entitlements, (C) securities accounts, (D) commodity contracts and (E) commodity accounts) in which such Grantor has now, or acquires from time to time hereafter, any right, title or interest in any manner, and the certificates or instruments, if any, representing or evidencing such investment property, and all dividends, interest, 4 distributions, value, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such investment property; (e) all of such Grantor's right, title and interest in and to each agreement and each Hedge Agreement to which such Grantor is now or may hereafter become a party, in each case as such agreements may be amended, amended and restated, supplemented or otherwise modified from time to time (collectively, the "Assigned Agreements"), including, without limitation, (i) all rights of such Grantor to receive moneys due and to become due under or pursuant to the Assigned Agreements, (ii) all rights of such Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) claims of such Grantor for damages arising out of or for breach of or default under the Assigned Agreements and (iv) the right of such Grantor to terminate the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder (all such Collateral being the "Agreement Collateral"); (f) all of such Grantor's right, title and interest in and to the following (collectively, the "Account Collateral"): (i) the Collateral Account, all financial assets from time to time credited to the Collateral Account (including, without limitation, all Cash Equivalents from time to time credited to the Collateral Account), and all dividends, interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such financial assets; (ii) all Pledged Accounts and Commingled Accounts (each as hereinafter defined), all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing the Pledged Accounts; (iii) all other deposit accounts of such Grantor, all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing such deposit accounts; (iv) all notes, certificates of deposit, deposit accounts, checks and other instruments from time to time delivered to or otherwise possessed by the Collateral Agent for or on behalf of such Grantor, including, without limitation, those delivered or possessed in substitution for or in addition to any or all of the then existing Account Collateral; and 5 (v) all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Account Collateral; and (g) all proceeds of any and all of the Collateral (including, without limitation, proceeds that constitute property of the types described in clauses (a) through (f) of this Section 1 and this clause (g)) and, to the extent not otherwise included, all (i) payments under insurance (whether or not the Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral and (ii) cash. Notwithstanding anything to the contrary herein, in no event shall the Collateral include, and the Grantors shall not be deemed to have granted a security interest in, any Excluded Assigned Agreements; provided, that immediately upon any Assigned Agreement ceasing to be Excluded Assigned Agreements, the Collateral shall include, and such Grantor shall be deemed to have granted a security interest in, all of its rights, title and interests in, to and under such Assigned Agreement. Section 2. Security for Obligations. This Agreement secures, in the case of each Grantor, the payment of all Obligations of such Grantor now or hereafter existing under the Loan Documents, whether direct or indirect, absolute or contingent, and including, without limitation, any amendments, amendment and restatements, supplements, modifications, extensions, substitutions and renewals thereof, and whether for principal, reimbursement obligations, interest, fees, premiums, penalties, indemnifications, contract causes of action, costs, expenses or otherwise (all such Obligations being the "Secured Obligations"). Without limiting the generality of the foregoing, this Agreement secures, as to each Grantor, the payment of all amounts that constitute part of the Secured Obligations and would be owed by such Grantor to any Secured Party under the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving a Loan Party. Section 3. Grantors Remain Liable. Anything herein to the contrary notwithstanding, (a) each Grantor shall remain liable under the contracts and agreements included in such Grantor's Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Collateral Agent of any of the rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral and (c) no Secured Party shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement or any other Loan Document, nor shall any Secured Party be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 6 Section 4. Delivery and Control of Security Collateral, Account Collateral or Agreement Collateral. (a) All certificates or instruments representing or evidencing Security Collateral, Account Collateral or Agreement Collateral (and, to the extent requested by the Collateral Agent, any other Collateral) shall be delivered to and held by or on behalf of the Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Collateral Agent. The Collateral Agent shall have the right, upon the occurrence and during the continuance of an Event of Default, and without notice to any Grantor, to transfer to or to register in the name of the Collateral Agent or any of its nominees any or all of the Security Collateral, subject only to the revocable rights specified in Section 12(a). In addition, the Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Security Collateral for certificates or instruments of smaller or larger denominations. Also, the Collateral Agent shall have the right at any time to convert Security Collateral consisting of financial assets credited to the Securities Account to Security Collateral consisting of financial assets held directly by the Collateral Agent, and to convert Security Collateral consisting of financial assets held directly by the Collateral Agent to Security Collateral consisting of financial assets credited to the Securities Account. (b) With respect to any Security Collateral in which any Grantor has any right, title or interest and that constitutes an uncertificated security, such Grantor will cause the issuer thereof either (i) to register the Collateral Agent as the registered owner of such security or (ii) to agree in writing with such Grantor and the Collateral Agent that such issuer will comply with instructions with respect to such security originated by the Collateral Agent without further consent of such Grantor, such agreement to be in form and substance reasonably satisfactory to the Collateral Agent. (c) With respect to any Security Collateral in which any Grantor has any right, title or interest and that constitutes a security entitlement, such Grantor will cause the securities intermediary with respect to such security entitlement either (i) to identify in its records the Collateral Agent as the entitlement holder of such security entitlement against such securities intermediary or (ii) to agree in writing with such Grantor and the Collateral Agent that such securities intermediary will comply with entitlement orders (that is, notifications communicated to such securities intermediary directing transfer or redemption of the financial asset to which such Grantor has a security entitlement) originated by the Collateral Agent without further consent of such Grantor, such agreement to be in substantially the form of Exhibit D hereto or otherwise in form and substance reasonably satisfactory to the Collateral Agent (such agreement being a "Securities Account Control Agreement"). (d) With respect to any Security Collateral in which any Grantor has any right, title or interest and that constitutes a securities account, such Grantor will comply with subsection (c) of this Section 4 with respect to all security entitlements credited to such securities account. 7 Section 5. Maintaining the Pledged Accounts. So long as any Working Capital Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid or any Lender Party shall have any Commitment under the Credit Agreement: (a) Each Grantor will maintain (i) lockboxes and blocked deposit accounts (collectively, the "Pledged Accounts") only with banks (the "Pledged Account Banks") that have entered into letter agreements in substantially the form of Exhibit B hereto or otherwise in form and substance satisfactory to the Collateral Agent with such Grantor and the Collateral Agent (the "Pledged Account Letters"), and (ii) with respect to deposit accounts that hold funds that are payable to providers or third parties other than the Grantors, unblocked deposit accounts (collectively the "Commingled Accounts") only with banks (the "Commingled Account Banks") that have entered into letter agreements in form and substance satisfactory to the Collateral Agent whereby each Commingled Account Bank (i) agrees to pay all funds on deposit in such Commingled Account that are payable to such Grantor only to such Pledged Accounts as such Grantor, or upon the occurrence and during the continuance of an Event of Default, the Collateral Agent, shall direct and (ii) acknowledges the Lien in favor of the Secured Parties created hereunder on the funds of such Grantor or deposit in such Commingled Account. Within 30 days after the Initial Extension of Credit, such Grantor shall deliver to the Collateral Agent (i) each Pledged Account Letter, duly executed by such Grantor, the Collateral Agent and the Pledged Account Bank party thereto and (ii) each Commingled Account Letter, duly executed by such Grantor, the Collateral Agent and the Commingled Account Bank party thereto. (b) Each Grantor will immediately instruct each Person obligated at any time to make any payment to such Grantor for any reason (an "Obligor") to make such payment to a Pledged Account or, with respect to payments that are payable to a provider or other third party other than such Grantor, to a Commingled Account of such Grantor. So long as an Event of Default shall not have occurred and be continuing or if the Collateral Agent shall not have given the notice referred to in Subsection (c) below with respect to the Pledged Accounts, such Grantor may operate the Pledged Accounts and the Commingled Accounts in accordance with its past business practice. (c) If an Event of Default shall have occurred and be continuing each Grantor will, at the request of the Collateral Agent, instruct such Pledged Account Bank to transfer to the Collateral Account, at the end of each Business Day, in same day funds, an amount equal to the credit balance of the Pledged Account in such Pledged Account Bank. If any Grantor shall fail to give any such instructions to any Pledged Account Bank, the Collateral Agent may do so without further notice to any Grantor. (d) Upon any termination of any Pledged Account Letter or Commingled Account Letter or other agreement with respect to the maintenance of a Pledged Account 8 or Commingled Account by any Grantor or any Pledged Account Bank or Commingled Account Bank, as the case may be, such Grantor will immediately notify all Obligors that were making payments to such Pledged Account or Commingled Account to make all future payments to another Pledged Account or Commingled Account, as the case may be, or to the Collateral Account. Each Grantor agrees to terminate any or all Pledged Accounts and Pledged Account Letters and all Commingled Accounts and Commingled Account Letters upon request by the Collateral Agent. Section 6. Maintaining the Collateral Account. So long as any Working Capital Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid or any Lender shall have any Commitment under the Credit Agreement: (a) The Borrower will maintain the Collateral Account with the Collateral Agent or another commercial bank acceptable to the Collateral Agent that has entered into a Pledged Account Letter (the Collateral Agent or bank with which the Collateral Account is maintained being the "Collateral Bank"). (b) It shall be a term and condition of the Collateral Account, notwithstanding any term or condition to the contrary in any other agreement relating to the Collateral Account and except as otherwise provided by the provisions of Section 19, that no amount (including interest on Cash Equivalents credited thereto) will be paid or released to or for the account of, or withdrawn by or for the account of, the Borrower or any other Person from the Collateral Account. Section 7. Representations and Warranties. Each Grantor represents and warrants as follows: (a) All of the Equipment and Inventory of such Grantor are located at the places specified therefor in Schedule II hereto, as such Schedule II may be amended, amended and restated, supplemented or otherwise modified from time to time pursuant to Section 9(a) other than incidental office equipment (such as notebook computers, portable printers and similar portable office equipment used by employees at offsite locations in the ordinary course of business (the "Movable Equipment")). The chief place of business and chief executive office of such Grantor, and the original copies of each Assigned Agreement to which such Grantor is a party and all originals of all chattel paper that evidence Receivables of such Grantor, are located at the address specified therefor in Schedule III hereto, as such location may be amended, amended and restated, supplemented or otherwise modified from time to time pursuant to Section 11(a). Such Grantor's federal tax identification number is set forth on Schedule III hereto. All Security Collateral consisting of certificated securities and instruments have been delivered to the Collateral Agent. None of the Receivables or Agreement Collateral is 9 evidenced by a promissory note or other instrument that has not been delivered to the Collateral Agent. (b) Such Grantor is the legal and beneficial owner of the Collateral of such Grantor free and clear of any Lien, claim, option or right of others, except for the security interest created under this Agreement or permitted under the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of such Collateral or listing such Grantor or any trade name of such Grantor as debtor is on file in any recording office, except such as may have been filed in favor of the Collateral Agent relating to the Loan Documents or as otherwise permitted under the Credit Agreement. Such Grantor has the trade names listed on Schedule IV hereto. (c) Such Grantor has exclusive possession and control of the Equipment and Inventory. (d) The Pledged Shares pledged by such Grantor hereunder have been duly authorized and validly issued and are fully paid and non-assessable. The Pledged Debt pledged by such Grantor hereunder (i) to the best of our knowledge, has been duly authorized, authenticated or issued and delivered, is the legal, valid and binding obligation of the issuers thereof, and (ii) is evidenced by one or more promissary notes (which notes have been delivered to the Collateral Agent) and is not in default. (e) The Initial Pledged Shares constitute the percentage of the issued and outstanding shares of stock of the issuers thereof indicated on Schedule I hereto as of the date hereof. The Initial Pledged Debt constitutes all of the outstanding indebtedness owed to such Grantor by the issuers thereof and is outstanding, as of the date hereof, in the principal amount indicated on Schedule I hereto as of the date hereof. (f) All of the investment property owned by such Grantor as of the date hereof is listed on Schedule I hereto. (g) The Assigned Agreements to which such Grantor is a party, true and complete copies of which (other than the Hedge Agreements) have been furnished to each Secured Party, have been duly authorized, executed and delivered by all parties thereto, have not been amended, amended and restated, supplemented or otherwise modified, are in full force and effect and are binding upon and enforceable against all parties thereto in accordance with their terms. To the best of our knowledge, there exists no default under any Assigned Agreement to which such Grantor is a party by any party thereto. Each party to the Assigned Agreements to which such Grantor is a party other than the Grantors has executed and delivered to such Grantor a consent, in substantially the form of Exhibit C hereto or otherwise in form and substance satisfactory to the Collateral 10 Agent, to the assignment of the Agreement Collateral to the Collateral Agent pursuant to this Agreement. (h) Such Grantor has no Pledged Accounts or Commingled Accounts or other deposit accounts other than the Pledged Accounts and Commingled Accounts listed on Schedule V hereto. Such Grantor has instructed all existing Obligors to make all payments to either a Pledged Account or the Collateral Account, or with respect to payments that are payable to a provider or third party other than such Grantor, to a Commingled Account. (i) All filings and other actions necessary or desirable to perfect and protect the security interest in the Collateral created under this Agreement have been duly made or taken, and this Agreement creates in favor of the Collateral Agent for the benefit of the Secured Parties a valid and, together with such filings and other actions, perfected first priority (subject to Permitted Liens) security interest in the Collateral of such Grantor, securing the payment of the Secured Obligations. (j) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for (i) the grant by such Grantor of the assignment, pledge and security interest granted hereunder or for the execution, delivery or performance of this Agreement by such Grantor, (ii) the perfection or maintenance of the assignment, pledge and security interest created hereunder (including the first priority nature of such assignment, pledge or security interest), except for the filing of financing and continuation statements under the Uniform Commercial Code, which financing statements will be duly filed immediately following the date hereof and upon filing will be in full force and effect, and the actions described in Section 4 with respect to Security Collateral, which actions have been taken and are in full force and effect, or (iii) for the exercise by the Collateral Agent of its voting or other rights provided for in this Agreement or the remedies in respect of the Collateral pursuant to this Agreement, except as may be required in connection with the disposition of any portion of the Security Collateral by laws affecting the offering and sale of securities generally. (k) The Inventory that has been produced by such Grantor has been produced in compliance with all requirements of applicable law, including, without limitation, the Fair Labor Standards Act. Section 8. Further Assurances. (a) Each Grantor agrees that from time to time, at the expense of such Grantor, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Collateral Agent may reasonably request, in order to perfect and protect any pledge, assignment or security interest granted or purported to be granted hereby or to enable the 11 Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor will promptly: (i) mark conspicuously each document included in the Inventory, each chattel paper included in the Receivables, each Related Contract, each Assigned Agreement and, at the request of the Collateral Agent, each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to the Collateral Agent, indicating that such document, chattel paper, Related Contract, Assigned Agreement or Collateral is subject to the security interest granted hereby; (ii) if any Collateral shall be evidenced by a promissory note or other instrument, deliver and pledge to the Collateral Agent hereunder such note or instrument duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Collateral Agent; (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Collateral Agent may request, in order to perfect and preserve the security interest granted or purported to be granted hereunder; (iv) deliver and pledge to the Collateral Agent for benefit of the Secured Parties certificates representing the Pledged Shares accompanied by undated stock powers executed in blank; and (v) deliver to the Collateral Agent evidence that all other action that the Collateral Agent may deem reasonably necessary or desirable in order to perfect and protect the security interest created under this Agreement has been taken. (b) Each Grantor hereby authorizes the Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of such Grantor where permitted by law. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Each Grantor will furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail. Section 9. As to Equipment and Inventory. (a) Each Grantor will keep the Equipment and Inventory of such Grantor (other than Inventory sold in the ordinary course of business and Movable Equipment) at the places therefor specified in Section 7(a) or, upon 30 days' prior written notice to the Collateral Agent, at such other places in a jurisdiction where all action required by Section 8 shall have been taken with respect to such Equipment and Inventory (and, upon the taking of such action in such jurisdiction, Schedule II hereto shall be automatically amended to include such other places). (b) Each Grantor will cause the Equipment of such Grantor to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual, and will forthwith, or in the case of any loss or damage to any of such Equipment as soon as practicable after the occurrence 12 thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary or desirable to such end. Each Grantor will promptly furnish to the Collateral Agent a statement respecting any material loss or damage to any of the Equipment or Inventory of such Grantor. (c) Each Grantor will pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including, without limitation, claims for labor, materials and supplies) against, the Equipment and Inventory of such Grantor, except to the extent payment thereof is not required by Section 5.01(b) of the Credit Agreement. In producing the Inventory, each Grantor will comply with all requirements of applicable law, including, without limitation, the Fair Labor Standards Act. Section 10. Insurance. (a) Each Grantor will, at its own expense, maintain insurance with respect to the Equipment and Inventory of such Grantor in such amounts, against such risks, in such form and with such insurers, as shall be satisfactory to the Collateral Agent from time to time. Each policy for liability insurance shall provide for all losses to be paid on behalf of the Collateral Agent and such Grantor as their interests may appear, and each policy for property damage insurance shall provide for all losses (except for losses of less than $__________ per occurrence) to be paid directly to the Collateral Agent. Each such policy shall in addition (i) name such Grantor and the Collateral Agent as insured parties thereunder (without any representation or warranty by or obligation upon the Collateral Agent) as their interests may appear, (ii) contain the agreement by the insurer that any loss thereunder shall be payable to the Collateral Agent notwithstanding any action, inaction or breach of representation or warranty by such Grantor, (iii) provide that there shall be no recourse against the Collateral Agent for payment of premiums or other amounts with respect thereto and (iv) provide that at least 10 days' prior written notice of cancellation or of lapse shall be given to the Collateral Agent by the insurer. Each Grantor will, if so requested by the Collateral Agent, deliver to the Collateral Agent original or duplicate policies of such insurance and, as often as the Collateral Agent may reasonably request, a report of a reputable insurance broker with respect to such insurance. Further, each Grantor will, at the request of the Collateral Agent, duly execute and deliver instruments of assignment of such insurance policies to comply with the requirements of Section 8 and cause the insurers to acknowledge notice of such assignment. (b) Reimbursement under any liability insurance maintained by any Grantor pursuant to this Section 10 may be paid directly to the Person who shall have incurred liability covered by such insurance. In case of any loss involving damage to Equipment or Inventory when subsection (c) of this Section 10 is not applicable, the applicable Grantor will make or cause to be made the necessary repairs to or replacements of such Equipment or Inventory, and any proceeds of insurance properly received by or released to such Grantor shall be used by such Grantor, except as otherwise required hereunder or by the Credit Agreement, to pay or as reimbursement for the costs of such repairs or replacements. 13 (c) So long as no Default shall have occurred and be continuing, all insurance payments received by the Collateral Agent in connection with any loss, damage or destruction of any Inventory or Equipment will be released by the Collateral Agent to the applicable Grantor for the repair, replacement or restoration thereof, subject to such terms and conditions with respect to the release thereof as the Collateral Agent may reasonably require. To the extent that (i) the amount of any such insurance payments exceeds the cost of any such repair, replacement or restoration, or (ii) such insurance payments are not otherwise required by the applicable Grantor to complete any such repair, replacement or restoration required hereunder, the Collateral Agent will not be required to release the amount thereof to such Grantor and may hold or continue to hold such amount in the Collateral Account as additional security for the Secured Obligations of such Grantor (except that any such amount will be released by the Collateral Agent to such Grantor if, to the extent that any prepayment of Obligations is required under the Credit Agreement in connection with the receipt of such amount, such prepayment has been made). Upon the occurrence and during the continuance of any Event of Default or the actual or constructive total loss (in excess of $__________ per occurrence) of any Equipment or Inventory, all insurance payments in respect of such Equipment or Inventory shall be paid to the Collateral Agent and shall, in the Collateral Agent's sole discretion, (i) be released to the applicable Grantor to be applied as set forth in the first sentence of this subsection (c) or (ii) be held as additional Collateral hereunder or applied as specified in Section 19(b). Section 11. Place of Perfection; Records; Collection of Receivables. (a) Each Grantor will keep its principal place of business and chief executive office, and originals of the Assigned Agreements, Related Contracts and all originals of all chattel paper that evidence or constitute Receivables, at the location therefor specified in Section 7(a) or, upon 30 days' prior written notice to the Collateral Agent, at such other location in a jurisdiction where all actions required by Section 8 shall have been taken with respect to the Collateral (and, upon the taking of such action in such jurisdiction, Schedule III hereto shall be automatically amended to include such other location). Each Grantor will hold and preserve its records relating to the Collateral, the Assigned Agreements, the Related Contracts and chattel paper and, subject to Section 5.01(f) of the Credit Agreement, will permit representatives of the Collateral Agent at any time during normal business hours to inspect and make abstracts from such records and other documents. No Grantor will change or add any securities intermediary or commodity intermediary that maintains any securities account or commodity account in which any of the Collateral is credited or carried, or change or add any such securities account or commodity account, in each case without first complying with the provisions of Section 4 in order to perfect the security interest granted hereunder in such Collateral. (b) Except as otherwise provided in this subsection (b), each Grantor will continue to collect, at its own expense, all amounts due or to become due such Grantor under the Receivables and the Related Contracts. In connection with such collections, such Grantor may take (and, at the Collateral Agent's direction, will take) such action as such Grantor or the Collateral Agent may reasonably deem necessary or advisable to enforce collection of the 14 Receivables and the Related Contracts; provided, however, that the Collateral Agent shall have the right upon the occurrence and during the continuance of an Event of Default, upon written notice to such Grantor of its intention to do so, to notify the Obligors under any Receivables or Related Contracts of the assignment of such Receivables or Related Contracts to the Collateral Agent and to direct such Obligors to make payment of all amounts due or to become due to such Grantor thereunder directly to the Collateral Agent and, upon such notification and at the expense of such Grantor, to enforce collection of any such Receivables or Related Contracts, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. After receipt by any Grantor of the notice from the Collateral Agent referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including instruments) received by such Grantor in respect of the Receivables and the Related Contracts shall be received in trust for the benefit of the Collateral Agent hereunder, shall be segregated from other funds of such Grantor and shall be forthwith paid over to the Collateral Agent in the same form as so received (with any necessary indorsement) to be deposited in the Collateral Account and applied as provided in Section 19(b) and (ii) such Grantor will not adjust, settle or compromise the amount or payment of any Receivable, release wholly or partly any Obligor thereof, or allow any credit or discount thereon. No Grantor will permit or consent to the subordination of its right to payment under any of the Receivables or the Related Contracts to any other indebtedness or obligations of the Obligor thereof. Section 12. Voting Rights; Dividends; Etc. (a) So long as no Event of Default shall have occurred and be continuing: (i) Each Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Security Collateral of such Grantor or any part thereof for any purpose; provided however, that such Grantor will not exercise or refrain from exercising any such right if such action would have a material adverse effect on the value of the Security Collateral or any part thereof. (ii) Each Grantor shall be entitled to receive and retain any and all dividends, interest and other distributions paid in respect of the Security Collateral of such Grantor if and to the extent that the payment thereof is not otherwise prohibited by the terms of the Loan Documents; provided, however, that any and all (A) dividends, interest and other distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Security Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Security Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus and 15 (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Security Collateral shall be, and shall be forthwith delivered to the Collateral Agent to hold as, Security Collateral and shall, if received by such Grantor, be received in trust for the benefit of the Collateral Agent, be segregated from the other property or funds of such Grantor and be forthwith delivered to the Collateral Agent as Security Collateral in the same form as so received (with any necessary indorsement). (iii) The Collateral Agent will promptly upon request therefor execute and deliver (or cause to be executed and delivered) to each Grantor all such proxies and other instruments as such Grantor may reasonably request for the purpose of enabling such Grantor to exercise the voting and other rights that it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends or interest payments that it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of each Grantor (x) to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 12(a)(i) shall, upon notice to such Grantor by the Collateral Agent, cease and (y) to receive the dividends, interest and other distributions that it would otherwise be authorized to receive and retain pursuant to Section 12(a)(ii) shall automatically cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights and to receive and hold as Security Collateral such dividends, interest and other distributions. (ii) All dividends, interest and other distributions that are received by any Grantor contrary to the provisions of paragraph (i) of this Section 12(b) shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of such Grantor and shall be forthwith paid over to the Collateral Agent as Security Collateral in the same form as so received (with any necessary indorsement). (iii) The Collateral Agent shall be authorized to send to each Securities Intermediary as defined in and under any Control Agreement a Notice of Exclusive Control as defined in and under such Control Agreement. 16 Section 13. As to the Assigned Agreements. (a) Each Grantor will at its expense: 17 (i) perform and observe all terms and provisions of the Assigned Agreements to be performed or observed by it except to the extent that the failure to perform or observe such term or provision, either individually or in the aggregate, could not be reasonably expected to have a Material Adverse Effect, maintain the Assigned Agreements to which it is a party in full force and effect unless the Board of Directors of such Grantor shall have determined that it is no longer in the best interest of such Grantor to maintain such Assigned Agreement, enforce the Assigned Agreements to which it is a party in accordance with the terms thereof and take all such action to such end as may be requested from time to time by the Collateral Agent; and (ii) furnish to the Collateral Agent promptly upon receipt thereof copies of all material notices, requests and other documents received by such Grantor under or pursuant to the Assigned Agreements to which it is a party, and from time to time (A) furnish to the Collateral Agent such information and reports regarding the Assigned Agreements and such other Collateral of such Grantor as the Collateral Agent may reasonably request and (B) upon request of the Collateral Agent make to each other party to any Assigned Agreement to which it is a party such demands and requests for material information and reports or for action as such Grantor is entitled to make thereunder. (b) Each Grantor agrees that it will not, except to the extent otherwise permitted under the Credit Agreement: (i) cancel or terminate any Assigned Agreement to which it is a party or consent to or accept any cancellation or termination thereof; (ii) amend, amended and restated, supplement or otherwise modify any such Assigned Agreement or give any consent, waiver or approval thereunder; (iii) waive any default under or breach of any such Assigned Agreement; or (iv) take any other action in connection with any such Assigned Agreement that would impair the value of the interests or rights of such Grantor thereunder or that would impair the interests or rights of any Secured Party. (c) Each Grantor hereby consents on its behalf and on behalf of its Subsidiaries to the assignment and pledge to the Collateral Agent for benefit of the Secured Parties of each Assigned Agreement to which it is a party by any other Grantor hereunder. Section 14. Payments Under the Assigned Agreements. (a) Each Grantor agrees, and has effectively so instructed each other party to each Assigned Agreement to which it is a party, that all payments due or to become due under or in connection with such Assigned Agreement will be made directly to a Pledged Account. 18 (b) All moneys received or collected pursuant to subsection (a) above shall be (i) available to the applicable Grantor on the terms set forth in Section 5(b) so long as no Event of Default shall have occurred and be continuing or (ii) if any Event of Default shall have occurred and be continuing, applied as provided in Section 5(c) and 19(b). Section 15. Transfers and Other Liens; Additional Shares. (a) Each Grantor agrees that it will not (i) sell, assign or otherwise dispose of, or grant any option with respect to, any of the Collateral, other than sales, assignments and other dispositions of Collateral, and options relating to Collateral, permitted under the terms of the Credit Agreement, or (ii) create or suffer to exist any Lien upon or with respect to any of the Collateral of such Grantor except for the pledge, assignment and security interest created under this Agreement and Liens permitted under the Credit Agreement. (b) Each Grantor agrees that it will (i) cause each issuer of the Pledged Shares pledged by such Grantor not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to such Grantor, and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities. Section 16. Collateral Agent Appointed Attorney-in-Fact. Each Grantor hereby irrevocably appoints the Collateral Agent such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time, in the Collateral Agent's discretion, to take any action and to execute any instrument that the Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to, upon the occurrence and during the continuance of an Event of Default, obtain and adjust insurance required to be paid to the Collateral Agent pursuant to Section 10, (b) to, upon the occurrence and during the continuance of an Event of Default, ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (c) to, upon the occurrence and during the continuance of an Event of Default, receive, indorse and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) or (b) above, and (d) to, upon the occurrence and during the continuance of an Event of Default, file any claims or take any action or institute any proceedings that the Collateral Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to 19 enforce compliance with the terms and conditions of any Assigned Agreement or the rights of the Collateral Agent with respect to any of the Collateral. Section 17. Collateral Agent May Perform. If any Grantor fails to perform any agreement contained herein, the Collateral Agent may as the Collateral Agent deems necessary to protect the security interest granted hereunder in the Collateral or to protect the value thereof, but without any obligation to do so and without notice, itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent incurred in connection therewith shall be payable by such Grantor under Section 20(b). Section 18. The Collateral Agent's Duties. The powers conferred on the Collateral Agent hereunder are solely to protect the Secured Parties' interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not any Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which it accords its own property. Anything contained herein to the contrary notwithstanding, the Collateral Agent may from time to time when the Collateral Agent deems it to be necessary appoint one or more subagents (each a "Subagent") for the Collateral Agent hereunder with respect to all or any part of the Collateral. In the event that the Collateral Agent so appoints any Subagent with respect to any Collateral, (1) the assignment and pledge of such Collateral and the security interest granted in such Collateral by each Grantor hereunder shall be deemed for purposes of this Security Agreement to have been made to such Subagent for the ratable benefit of the Secured Parties, as security for the Secured Obligations of such Grantor, (2) such Subagent shall automatically be vested with all rights, powers, privileges, interests and remedies of the Collateral Agent hereunder with respect to such Collateral, and (3) the term "Collateral Agent," when used herein in relation to any rights, powers, privileges, interests and remedies of the Collateral Agent with respect to such Collateral, shall include such Subagent; provided, however, that no such Subagent shall be authorized to take any action with respect to any such Collateral unless and except to the extent expressly authorized in writing by the Collateral Agent. Section 19. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Collateral Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the N.Y. Uniform Commercial Code (whether or not the N.Y. Uniform Commercial Code 20 applies to the affected Collateral) and also may: (i) require each Grantor to, and each Grantor hereby agrees that it will at its expense and upon request of the Collateral Agent forthwith, assemble all or part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at a place and time to be designated by the Collateral Agent that is reasonably convenient to both parties; (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable; (iii) occupy any premises owned or leased by any of the Grantors where the Collateral or any part thereof is assembled or located for a reasonable period in order to effectuate its rights and remedies hereunder or under law, without obligation to such Grantor in respect of such occupation; and (iv) exercise any and all rights and remedies of any of the Grantors under or in connection with the Assigned Agreements, the Receivables and the Related Contracts or otherwise in respect of the Collateral, including, without limitation, any and all rights of such Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, the Assigned Agreements, the Receivables and the Related Contracts. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Any cash held by or on behalf of the Collateral Agent and all cash proceeds received by or on behalf of the Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Collateral Agent, be held by the Collateral Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Collateral Agent pursuant to Section 20) in whole or in part by the Collateral Agent for the ratable benefit of the Secured Parties against, all or any part of the Secured Obligations in such order as the Collateral Agent shall elect or as otherwise permitted or required by the Credit Agreement. Any surplus of such cash or cash proceeds held by or on the behalf of the Collateral Agent and remaining after payment in full of all the Secured Obligations shall be paid over to the applicable Grantor or to whomsoever may be lawfully entitled to receive such surplus. (c) All payments received by any Grantor under or in connection with any Assigned Agreement or otherwise in respect of the Collateral shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of such Grantor 21 and shall be forthwith paid over to the Collateral Agent in the same form as so received (with any necessary indorsement). (d) The Collateral Agent may, without notice to any Grantor except as required by law and at any time or from time to time, charge, set-off and otherwise apply all or any part of the Secured Obligations against any funds held in any deposit account that constitutes part of, or is otherwise related to, the Collateral Account. Section 20. Indemnity and Expenses. (a) Each Grantor agrees to indemnify and hold harmless each Secured Party and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against, and shall pay on demand, any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. (b) Each Grantor will upon demand pay to the Collateral Agent the amount of any and all reasonable expenses, including, without limitation, the reasonable fees and expenses of its counsel and of any experts and agents, that the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Collateral of such Grantor, (iii) the exercise or enforcement of any of the rights of the Collateral Agent or the other Secured Parties hereunder or (iv) the failure by such Grantor to perform or observe any of the provisions hereof. Section 21. Amendments; Waivers; Additional Grantors; Etc. (a) No amendment or waiver of any provision of this Agreement, and no consent to any departure by any Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Collateral Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Collateral Agent or any other Secured Party to exercise, and no delay in exercising any right hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. (b) Upon the execution and delivery by any Person of a security agreement supplement in substantially the form of Exhibit A hereto (each a "Security Agreement Supplement"), (i) such Person shall be referred to as an "Additional Grantor" and shall be and become a Grantor and each reference in this Agreement and the other Loan Documents to "Grantor" shall also mean and be a reference to such Additional Grantor, and (ii) the annexes 22 attached to each Security Agreement Supplement shall be incorporated into and become a part of and supplement Schedules I, II, III, IV and V hereto, and the Collateral Agent may attach such annexes as supplements to such Schedules; and each reference to such Schedules shall mean and be a reference to such Schedules as supplemented pursuant hereto. Section 22. Notices; Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telecopier or telex communication) and mailed, telegraphed, telecopied, telexed or delivered to, in the case of the Borrower or the Collateral Agent, addressed to it at its address specified in the Credit Agreement and, in the case of each Grantor other than the Borrower, addressed to it at its address set forth opposite such Grantor's name on the signature pages hereto or on the signature page to the Security Agreement Supplement pursuant to which it became a party hereto; or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and other communications shall, when mailed, telegraphed, telecopied or telexed, be effective when deposited in the mails, delivered to the telegraph company, telecopied or confirmed by telex answerback, respectively, addressed as aforesaid; except that notices and other communications to the Collateral Agent shall not be effective until received by the Collateral Agent. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or of any Security Agreement Supplement or Schedule hereto shall be effective as delivery of an original executed counterpart thereof. Section 23. Continuing Security Interest; Assignments under the Credit Agreement. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of the Secured Obligations and (ii) the Termination Date, (b) be binding upon each Grantor, its successors and assigns and (c) inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Secured Parties and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), any Lender Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement (including, without limitation, all or any portion of its Commitment, the Working Capital Advances owing to it and the Note, if any, held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender Party herein or otherwise, in each case as provided in Section 9.07 of the Credit Agreement. Section 24. Release; Termination. (a) Upon any sale, lease, transfer or other disposition of any item of Collateral of any Grantor in accordance with the terms of the Loan Documents (other than sales of Inventory in the ordinary course of business), the Collateral Agent will, at such Grantor's expense, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted hereby; provided, however, that (i) at the time of such request and such release no Default shall have occurred and be continuing, (ii) such Grantor shall have delivered to the Collateral Agent, at least five Business Days prior to the date of the 23 proposed release, a written request for release describing the item of Collateral and the terms of the sale, lease, transfer or other disposition in reasonable detail, including, without limitation, the price thereof and any expenses in connection therewith, together with a form of release for execution by the Collateral Agent and a certificate of such Grantor to the effect that the transaction is in compliance with the Loan Documents and as to such other matters as the Collateral Agent may request and (iii) the proceeds of any such sale, lease, transfer or other disposition required to be applied, or any payment to be made in connection therewith, in accordance with Section 2.05 of the Credit Agreement shall, to the extent so required, be paid or made to, or in accordance with the instructions of, the Collateral Agent when and as required under Section 2.05 of the Credit Agreement. (b) Upon the latest of (i) the payment in full in cash of the Secured Obligations and (ii) the Termination, the pledge, assignment and security interest granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantor. Upon any such termination, the Collateral Agent will, at the applicable Grantor's expense, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. Section 25. Security Interest Absolute. The obligations of each Grantor under this Agreement are independent of the Secured Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents, and a separate action or actions may be brought and prosecuted against each Grantor to enforce this Agreement, irrespective of whether any action is brought against such Grantor or any other Loan Party or whether such Grantor or any other Loan Party is joined in any such action or actions. All rights of the Collateral Agent and the other Secured Parties and the pledge, assignment and security interest hereunder, and all obligations of each Grantor hereunder, shall be irrevocable, absolute and unconditional irrespective of, and each Grantor hereby irrevocably waives (to the maximum extent permitted by applicable law) any defenses it may now have or may hereafter acquire in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents or any other amendment or waiver of or any consent to any departure from any Loan Document, including, without limitation, any increase in the Secured Obligations resulting from the extension of additional credit to any Loan Party or any of its Subsidiaries or otherwise; 24 (c) any taking, exchange, release or non-perfection of any Collateral or any other collateral, or any taking, release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Secured Obligations; (d) any manner of application of Collateral or any other collateral, or proceeds thereof, to all or any of the Secured Obligations, or any manner of sale or other disposition of any Collateral or any other collateral for all or any of the Secured Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents or any other assets of any Loan Party or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate structure or existence of any Loan Party or any of its Subsidiaries; (f) any failure of any Secured Party to disclose to any Loan Party any information relating to the business, condition (financial or otherwise), operations, performance, assets, nature of assets, liabilities or prospects of any other Loan Party now or hereafter known to such Secured Party (each Grantor waiving any duty on the part of the Secured Parties to disclose such information); (g) the failure of any other Person to execute this Agreement or any other Collateral Document, guaranty or agreement or the release or reduction of liability of any Grantor or other grantor or surety with respect to the Secured Obligations; or (h) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by any Secured Party that might otherwise constitute a defense available to, or a discharge of, such Grantor or any other Grantor or a third party grantor of a security interest. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by any Secured Party or by any other Person upon the insolvency, bankruptcy or reorganization of any Loan Party or otherwise, all as though such payment had not been made. Section 26. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. Section 27. The Mortgages. In the event that any of the Collateral hereunder is also subject to a valid and enforceable Lien under the terms of any Mortgage and the terms of such Mortgage are inconsistent with the terms of this Agreement, then with respect to such 25 Collateral, the terms of such Mortgage shall be controlling in the case of fixtures and real estate leases, letting and licenses of, and contracts and agreements relating to the lease of, real property, and the terms of this Agreement shall be controlling in the case of all other Collateral. Section 28. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, each Grantor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. MEDE AMERICA CORPORATION By _________________________________ Title: MEDE AMERICA CORPORATION OF OHIO Address for Notices: - -------------------- 2045 Midway Drive Twinsburg, Ohio 44087 By _________________________________ Title: 26 HEALTHCARE INTERCHANGE, INC. Address for Notices: - -------------------- 727 North First Street Fifth Floor Saint Louis, Missouri 63102 By _________________________________ Title: 27 SCHEDULE I TO THE SECURITY AGREEMENT PLEDGED SHARES AND PLEDGED DEBT PART I - ------------------------------------------------------------------------------------------------------- PERCENTAGE STOCK OF CERTIFICATE NUMBER OUTSTANDING GRANTOR STOCK ISSUER CLASS OF STOCK PAR VALUE NO(S) OF SHARES SHARES - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
PART II - ------------------------------------------------------------------------------------------------------- OUTSTANDING FINAL PRINCIPAL GRANTOR DEBT ISSUER DESCRIPTION OF DEBT DEBT CERTIFICATE NO(S). MATURITY AMOUNT - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
SCHEDULE II TO THE SECURITY AGREEMENT LOCATIONS OF EQUIPMENT AND INVENTORY MEDE AMERICA CORPORATION - ------------------------ LOCATIONS OF EQUIPMENT: LOCATIONS OF INVENTORY: MEDE AMERICA CORPORATION OF OHIO - -------------------------------- LOCATIONS OF EQUIPMENT: LOCATIONS OF INVENTORY: HEALTHCARE INTERCHANGE, INC. - ---------------------------- LOCATIONS OF EQUIPMENT: LOCATIONS OF INVENTORY: SCHEDULE III TO THE SECURITY AGREEMENT CHIEF PLACE OF BUSINESS, CHIEF EXECUTIVE OFFICE AND FEDERAL TAX IDENTIFICATION NUMBER Chief Place of Business and Federal Tax Grantor Chief Executive Office Identification Number - ------- ---------------------- --------------------- SCHEDULE IV TO THE SECURITY AGREEMENT TRADE NAMES GRANTOR TRADE NAMES SCHEDULE V TO THE SECURITY AGREEMENT PLEDGED ACCOUNTS - -------------------------------------------------------------------------------- NAME AND ADDRESS OF MAILING ADDRESS OF GRANTOR PLEDGED ACCOUNT BANK LOCKBOX ACCOUNT NUMBER ------- -------------------- ------- -------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT A TO THE SECURITY AGREEMENT FORM OF SECURITY AGREEMENT SUPPLEMENT [Date of Security Agreement Supplement] NationsBank, N.A., as the Collateral Agent for the Secured Parties referred to in the Credit Agreement referred to below c/o Bank of America National and Savings Association, Agency Management #10831 1455 Market Street, 12th Floor San Francisco, California 94103 MEDE AMERICA CORPORATION Ladies and Gentlemen: Reference is made to (i) the Credit Agreement dated as of January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among MEDE AMERICA CORPORATION, a Delaware corporation, as the Borrower, MEDE AMERICA CORPORATION OF OHIO, an Ohio corporation, and HEALTHCARE INTERCHANGE, INC., a Missouri corporation, as Guarantors, the Lender Parties party thereto, NationsBank, N.A., as administrative agent and as collateral agent (together with any successor agent appointed pursuant to Article VIII of the Credit Agreement, the "Collateral Agent") for the Lender Parties, and (ii) the Security Agreement dated January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security Agreement") made by the Grantors from time to time party thereto in favor of the Collateral Agent for the Secured Parties. Capitalized terms not otherwise defined herein shall have the same meanings as specified therefor in the Credit Agreement or the Security Agreement. Section 1. Grant of Security. The undersigned hereby assigns and pledges to the Collateral Agent for the benefit of the Secured Parties, and hereby grants to the Collateral Agent for the benefit of the Secured Parties, a lien on, and security interest in, all of its right, title and interest in and to all of the Collateral of the undersigned, whether now owned or hereafter acquired by the undersigned, wherever located and whether now or hereafter existing, including, without limitation, the property and assets of the undersigned set forth on the attached supplements to the Schedules to the Security Agreement. Section 2. Security for Obligations. The pledge and assignment of, and the grant of a lien on and security interest in, the Collateral by the undersigned under this Security Agreement Supplement and the Security Agreement secures the payment of all Obligations of the undersigned now or hereafter existing under or in respect of the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, reimbursement obligations, interest, premiums, penalties, fees, indemnifications, contract causes of action, costs, expenses or otherwise. Without limiting the generality of the foregoing, this Security Agreement Supplement and the Security Agreement secures the payment of all amounts that constitute part of the Secured Obligations and that would be owed by the undersigned to any Secured Party under the Loan Documents but for the fact that such Secured Obligations are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the undersigned or any Grantor. Section 3. Supplements to Security Agreement Schedules. The undersigned has attached hereto supplements to each of the Schedules to the Security Agreement, and the undersigned hereby certifies, as of the date first above written, that such supplements have been prepared by the undersigned in substantially the form of the Schedules to the Security Agreement and are complete and correct in all material respects. Section 4. Representations and Warranties. The undersigned hereby makes each representation and warranty set forth in Section 7 of the Security Agreement (as supplemented by the attached supplements) to the same extent as each other Grantor. Section 5. Obligations Under the Security Agreement. The undersigned hereby agrees, as of the date first above written, to be bound as a Grantor by all of the terms and provisions of the Security Agreement to the same extent as each of the other Grantors. The undersigned further agrees, as of the date first above written, that each reference in the Security Agreement to an "Additional Grantor" or a "Grantor" shall also mean and be a reference to the undersigned, and each reference in any of the other Loan Documents to a "Grantor" or a "Loan Party" shall also mean and be a reference to the undersigned. Section 6. Governing Law; Jurisdiction; Etc. This Security Agreement Supplement shall be governed by and construed in accordance with the laws of the State of New York. Very truly yours, [NAME OF ADDITIONAL GRANTOR] By_______________________________ Title: Address of principal place of business and chief executive office and for notices: ---------------------------------- ---------------------------------- EXHIBIT B TO THE SECURITY AGREEMENT FORM OF PLEDGED ACCOUNT LETTER ---------------, ---- [Name and address of Pledged Account Bank] [Name of the Grantor] Gentlemen/women: Reference is made to [the lockboxes listed on Schedule I hereto into which certain monies, instruments and other properties are deposited from time to time and] the deposit accounts listed on Schedule I hereto (such [lockboxes and] deposit accounts being, collectively, the "Pledged Accounts") maintained with you by ____________________ (the "Grantor"). Pursuant to the Security Agreement dated January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security Agreement"), the Grantor has granted to NationsBank, N.A., as Collateral Agent (together with any successor collateral agent appointed pursuant to Article VIII of the Credit Agreement, the "Collateral Agent") for the Secured Parties referred to in the Credit Agreement dated as of January __, 1999 (the "Credit Agreement"), with [MEDE AMERICA CORPORATION][MEDE AMERICA CORPORATION OF OHIO][HEALTHCARE INTERCHANGE, INC.] and the Grantor, sole dominion and control of the Pledged Accounts and a security interest in certain property of the Grantor, including, among other things, the following (the "Account Collateral"): each Pledged Account, all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing such Pledged Account, all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Account Collateral and all proceeds of any and all of the foregoing Account Collateral and, to the extent not otherwise included, all (i) payments under insurance (whether or not the Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Account Collateral and (ii) cash. It is a condition to the continued maintenance of the Pledged Accounts with you that you agree to this letter agreement. By executing this letter agreement, you acknowledge notice of, and consent to the terms and provisions of, the Security Agreement and the grant of the lien on, and security interest in, and the pledge and assignment of, the Account Collateral to the Collateral Agent for the benefit of the Secured Parties and you confirm to the Collateral Agent that the description of the 2 Pledged Accounts set forth on Schedule I hereto is correct and that you have not received any notice of any other lien on, security interest in, pledge or assignment of, or other claim (other than that of the Grantor) on any of the Pledged Accounts. Further, you hereby agree with the Collateral Agent that: (a) Notwithstanding anything to the contrary in any other agreement relating to any Pledged Account, each Pledged Account is and will be subject to the terms and conditions of the Security Agreement, will be maintained solely for the benefit of the Secured Parties, will have the title set forth opposite the account number therefor on Schedule I hereto and will be subject to written instructions only from an officer of the Collateral Agent. Only the Collateral Agent is authorized to withdraw amounts from, to draw upon, or, except as otherwise set forth herein, to otherwise exercise any powers with respect to the Pledged Accounts and the funds deposited therein. The Collateral Agent authorizes and directs that the sole signatories authorized to act on behalf of the Collateral Agent with respect to the Pledged Accounts are and shall be such vice presidents of the Collateral Agent as the Collateral Agent may from time to time designate in a writing acceptable to you. You may rely without liability on any such written designation, absent manifest error, unless and until you receive a written designation to the contrary. Any such written designation shall include the specimen signature of each authorized vice president of the Collateral Agent. (b) You will collect mail from each Pledged Account on each of your business days at times that coincide with the delivery of mail thereto. (c) You will follow your usual operating procedures for the handling of any remittance that contains restrictive endorsements, irregularities (such as a variance between the written and numerical amounts), undated or postdated items, missing signatures, incorrect payees, etc. received in any Pledged Account. (d) You will endorse and process all eligible checks and other remittance items not covered by paragraph (c) and deposit such checks and remittance items in the Pledged Accounts. (e) You will maintain a record of all checks and other remittance items received in each Pledged Account and, in addition to providing the Grantor with photostats, vouchers, enclosures, etc. of such checks and remittance items on a daily basis, furnish to the Collateral Agent (i) a monthly statement of each Pledged Account and (ii) a daily collection and check float report, to be mailed or telecopied to the Collateral Agent at: NationsBank, N.A., c/o Bank of America National Trust and Savings Association, Agency Management #10831, 1455 Market Street, 12th Floor, San Francisco, California 94103, Telecopier No. (415) 436-3425, Attention: Agency Management. 3 (f) At the direction of the Grantor or the Collateral Agent (which shall be given to you upon the occurrence and during the continuance of an Event of Default under the Credit Agreement) you will transfer, in same day funds, on each of your business days, all amounts collected from each Pledged Account on such day to the following account (the "Collateral Account"): MEDE AMERICA CORPORATION Account No. __________ 101 North Tryon Street Charlotte, North Carolina 28255 Attention: Kathy Mumpower Each such transfer of funds shall neither comprise only part of a remittance nor reflect the rounding off of any funds so transferred. (g) All transfers referred to in paragraph (f) above shall be made by you irrespective of, and without deduction for, any counterclaim, defense, recoupment or set-off and shall be final, and you will not seek to recover from the Collateral Agent for any reason any such payment once made. (h) All service charges and fees with respect to any Pledged Account shall be payable by the Grantor, and deposited checks returned for any reason shall not be charged to the applicable Pledged Account, but may be charged to another account maintained by the Grantor with you. (i) The Collateral Agent shall be entitled to exercise any and all rights of the Grantor in respect of the Pledged Accounts and the other Account Collateral in accordance with the terms of the Security Agreement, and you shall comply in all respects with such exercise. You hereby represent and warrant that the person executing this letter agreement on your behalf is duly authorized to do so. No amendment or waiver of any provision of this letter agreement, nor consent to any departures by you or the Grantor herefrom, shall be effective unless the same shall be in writing as signed by you, the Grantor and the Collateral Agent. This letter agreement shall be binding upon you and your successors and assigns and shall inure to the benefit of the Secured Parties and their successors, transferees and assigns. You may terminate this letter agreement upon thirty days' prior written notice to the Grantor and the Collateral Agent. Upon such termination you shall close the Pledged Accounts and transfer all funds in the Pledged Accounts to the Collateral Account or another account as instructed by 4 the Collateral Agent at such time. After any such termination, you shall nonetheless remain obligated promptly to transfer to the Collateral Account or to such other account as instructed by the Collateral Agent at such time all funds and other property received in respect of the Pledged Accounts. This letter agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this letter agreement by telecopier shall be effective as delivery of an original executed counterpart of this letter agreement. Please indicate your acknowledgment of and agreement to the provisions of this letter agreement by signing in the appropriate space provided below and returning this letter agreement to NationsBank, N.A., as Administrative Agent c/o Bank of America National Trust and Savings Association, Agency Management #10831, 1455 Market Street, 12th Floor, San Francisco, California 94103, Telecopier No.: (415) 436-2769, Attention: Agency Management. If you elect to deliver this letter agreement by telecopier, please arrange for the executed original to follow by next-day courier. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York. Very truly yours, [NAME OF GRANTOR] By __________________________________ Title: NATIONSBANK, N.A., as Collateral Agent By ___________________________________ Title: 5 Acknowledged and agreed to as of the date first above written: [NAME OF PLEDGED ACCOUNT BANK] By _____________________________ Title: SCHEDULE I TO THE PLEDGED ACCOUNT LETTER [LOCKBOX/] ACCOUNT NUMBER [LOCKBOX/] ACCOUNT NAME EXHIBIT C TO THE SECURITY AGREEMENT FORM OF CONSENT AND AGREEMENT The undersigned hereby (a) acknowledges notice of, and consents to the terms and provisions of, the Security Agreement dated January __, 1999 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security Agreement", the terms defined therein being used herein as therein defined) from [MEDE AMERICA CORPORATION][MEDE AMERICA CORPORATION OF OHIO][HEALTHCARE INTERCHANGE, INC.] (the "Grantor") and certain other grantors from time to time party thereto to NationsBank, N.A., as Collateral Agent (the "Collateral Agent") for the Secured Parties referred to therein, (ii) consents in all respects to the pledge and assignment to the Collateral Agent of all of the Grantor's right, title and interest in, to and under the Assigned Agreement (as defined below) pursuant to the Security Agreement, (iii) acknowledges that the Grantor has provided it with notice of the right of the Collateral Agent in the exercise of its rights and remedies under the Security Agreement to make all demands, give all notices, take all actions and exercise all rights of the Grantor under the Assigned Agreement, and (iv) agrees with the Collateral Agent that: (i) The undersigned will make all payments to be made by it under or in connection with the __________ Agreement dated _______________, ____ (the "Assigned Agreement") between the undersigned and the Grantor directly to the Collateral Account or otherwise in accordance with the instructions of the Collateral Agent. (ii) All payments referred to in paragraph (i) above shall be made by the undersigned irrespective of, and without deduction for, any counterclaim, defense, recoupment or set-off and shall be final, and the undersigned will not seek to recover from any Secured Party for any reason any such payment once made. (iii) The Collateral Agent or its designee shall be entitled to exercise any and all rights and remedies of the Grantor under the Assigned Agreement in accordance with the terms of the Security Agreement, and the undersigned shall comply in all respects with such exercise. (iv) The undersigned will not, without the prior written consent of the Collateral Agent, (A) cancel or terminate the Assigned Agreement or consent to or accept any cancellation or termination thereof, or (B) amend, amend and restate, supplement or otherwise modify the Assigned Agreement, except, in each case, to the extent otherwise permitted under the Credit Agreement referred to in the Security Agreement. (v) In the event of a default by the Grantor in the performance of any of its obligations under the Assigned Agreement, or upon the occurrence or non-occurrence of any event or condition under the Assigned Agreement which would immediately or with the passage of any applicable grace period or the giving of notice, or both, enable the undersigned to terminate or suspend its obligations under the Assigned Agreement, the undersigned shall not terminate the Assigned Agreement until it first gives written notice thereof to the Collateral Agent and permits the Grantor and the Collateral Agent the period of time afforded to the Grantor under the Assigned Agreement to cure such default. (vi) The undersigned shall deliver to the Collateral Agent, concurrently with the delivery thereof to the Grantor, a copy of each notice, request or demand given by the undersigned pursuant to the Assigned Agreement. (vii) Except as specifically provided in this Consent and Agreement, neither the Collateral Agent nor any other Secured Party shall have any liability or obligation under the Assigned Agreement as a result of this Consent and Agreement, the Security Agreement or otherwise. This Consent and Agreement shall be binding upon the undersigned and its successors and assigns, and shall inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Secured Parties and their successors, transferees and assigns. This Consent and Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the undersigned has duly executed this Consent and Agreement as of the date set opposite its name below. Dated: _______________, ____ [NAME OF OBLIGOR] By ______________________________ Title: EXHIBIT D TO THE SECURITY AGREEMENT FORM OF CONTROL AGREEMENT (Securities Account) CONTROL AGREEMENT dated as of ________, ____, among____________, a ___________ (the "Grantor"), NationsBank, N.A., as Collateral Agent (the "Secured Party"), and _________, a _________ ("____________"), as securities intermediary (the "Securities Intermediary"). PRELIMINARY STATEMENTS: (1) The Grantor has granted the Secured Party a security interest (the "Security Interest") in account no. _______________ maintained by the Securities Intermediary for the Grantor (the "Account"). (2) Terms defined in Article 8 or 9 of the Uniform Commercial Code in effect in the State of New York ("N.Y. Uniform Commercial Code") are used in this Agreement as such terms are defined in such Article 8 or 9. NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. The Account. The Securities Intermediary represents and warrants to, and agrees with, the Secured Party that: (a) The Securities Intermediary maintains the Account for the Grantor, and all property held by the Securities Intermediary for the account of the Grantor is, and will continue to be, credited to the Account. (b) The Account is a securities account. The Securities Intermediary is the securities intermediary with respect to the property credited from time to time to the Account. The Grantor is the entitlement holder with respect to the property credited from time to time to the Account. (c) The securities intermediary's jurisdiction with respect to the Account is, and will continue to be for so long as the Security Interest shall be in effect, the State of New York. (d) Exhibit A attached hereto is a statement of the property credited to the Account on the date hereof. (e) The Securities Intermediary does not know of any claim to or interest in the Account or any property credited to the Account, except for claims and interests of the parties referred to in this Agreement. SECTION 2. Control by Secured Party. The Securities Intermediary will comply with all notifications it receives directing it to transfer or redeem any property in the Account (each an "Entitlement Order") or other directions concerning the Account (including, without limitation, directions to distribute to the Secured Party proceeds of any such transfer or redemption or interest or dividends on property in the Account) originated by the Secured Party without further consent by the Grantor or any other person. SECTION 3. Grantor's Rights in Account. (a) The Securities Intermediary will comply with Entitlement Orders and other directions concerning the Account originated by, and only by, the Secured Party. (b) Until the Securities Intermediary receives a notice from the Secured Party that the Secured Party will exercise exclusive control over the Account (a "Notice of Exclusive Control"), the Securities Intermediary may distribute to the Grantor all interest and regular cash dividends on property in the Account. (c) If the Securities Intermediary receives from the Secured Party a Notice of Exclusive Control, the Securities Intermediary will cease distributing to the Grantor all interest and dividends on property in the Account. SECTION 4. Priority of Secured Party's Security Interest. (a) The Securities Intermediary subordinates in favor of the Secured Party any security interest, lien, or right of setoff it may have, now or in the future, against the Account or property in the Account, except that the Securities Intermediary will retain its prior lien on property in the Account to secure payment for property purchased for the Account and normal commissions and fees for the Account. (b) The Securities Intermediary will not agree with any third party that the Securities Intermediary will comply with Entitlement Orders originated by the third party. SECTION 5. Statements, Confirmations, and Notices of Adverse Claims. (a) The Securities Intermediary will send copies of all statements and confirmations for the Account simultaneously to the Grantor and the Secured Party. (b) When the Securities Intermediary knows of any claim or interest in the Account or any property credited to the Account other than the claims and interests of the parties referred to in this Agreement, the Securities Intermediary will promptly notify the Secured Party and the Grantor of such claim or interest. SECTION 6. The Securities Intermediary's Responsibility. (a) Except for permitting a withdrawal, delivery, or payment in violation of Section 3, the Securities Intermediary will not be liable to the Secured Party for complying with Entitlement Orders or other directions concerning the Account from the Grantor that are received by the Securities Intermediary before the Securities Intermediary receives and has a reasonable opportunity to act on a Notice of Exclusive Control. (b) The Securities Intermediary will not be liable to the Grantor for complying with a Notice of Exclusive Control or with an Entitlement Order or other direction concerning the Account originated by the Secured Party, even if the Grantor notifies the Securities Intermediary that the Secured Party is not legally entitled to issue the Notice of Exclusive Control or Entitlement Order or such other direction unless the Securities Intermediary takes the action after it is served with an injunction, restraining order, or other legal process enjoining it from doing so, issued by a court of competent jurisdiction, and had a reasonable opportunity to act on the injunction, restraining order or other legal process. (c) This Agreement does not create any obligation of the Securities Intermediary except for those expressly set forth in this Agreement and in Part 5 of Article 8 of the N.Y. Uniform Commercial Code. In particular, the Securities Intermediary need not investigate whether the Secured Party is entitled under the Secured Party's agreements with the Grantor to give an Entitlement Order or other direction concerning the Account or a Notice of Exclusive Control. The Securities Intermediary may rely on notices and communications it believes given by the appropriate party. SECTION 7. Indemnity. The Grantor will indemnify the Securities Intermediary, its officers, directors, employees and agents against claims, liabilities and expenses arising out of this Agreement (including, without limitation, reasonable attorney's fees and disbursements), except to the extent the claims, liabilities or expenses are caused by the Securities Intermediary's gross negligence or willful misconduct as found by a court of competent jurisdiction in a final, non-appealable judgment. SECTION 8. Termination; Survival. (a) The Secured Party may terminate this Agreement by notice to the Securities Intermediary and the Grantor. If the Secured Party notifies the Securities Intermediary that the Security Interest has terminated, this Agreement will immediately terminate. (b) The Securities Intermediary may terminate this Agreement on 60 days' prior notice to the Secured Party and the Grantor, provided that before such termination the Securities Intermediary and the Grantor shall make arrangements to transfer the property in the Account to another securities intermediary that shall have executed, together with the Grantor, a control agreement in favor of the Secured Party in respect of such property in substantially the form of this Agreement or otherwise in form and substance satisfactory to the Secured Party. (c) Sections 6 and 7 will survive termination of this Agreement. SECTION 9. Governing Law. This Agreement and the Account will be governed by the law of the State of New York. The Securities Intermediary and the Grantor may not change the law governing the Account without the Secured Party's express prior written agreement. SECTION 10. Entire Agreement. This Agreement is the entire agreement, and supersedes any prior agreements, and contemporaneous oral agreements, of the parties concerning its subject matter. SECTION 11. Amendments. No amendment of, or waiver of a right under, this Agreement will be binding unless it is in writing and signed by the party to be charged. SECTION 12. Financial Assets. The Securities Intermediary agrees with the Secured Party and the Grantor that, to the fullest extent permitted by applicable law, all property credited from time to time to the Account will be treated as financial assets under Article 8 of the N.Y. Uniform Commercial Code. SECTION 13. Notices. A notice or other communication to a party under this Agreement will be in writing (except that Entitlement Orders may be given orally), will be sent to the party's address set forth under its name below or to such other address as the party may notify the other parties and will be effective on receipt. SECTION 14. Binding Effect. This Agreement shall become effective when it shall have been executed by the Grantor, the Secured Party and the Securities Intermediary, and thereafter shall be binding upon and inure to the benefit of the Grantor, the Secured Party and the Securities Intermediary and their respective successors and assigns. SECTION 15. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [NAME OF GRANTOR] By ________________________________ Title: Address: ____________________________________ ____________________________________ NATIONSBANK, N.A., as Collateral Agent By ________________________________ Title: Address: 1455 Market Street, 12th Floor, San Francisco, California 94103 [NAME OF SECURITIES INTERMEDIARY] By ________________________________ Title: Address: ____________________________________ ____________________________________ SCHEDULE I TO THE SECURITY AGREEMENT PLEDGED SHARES AND PLEDGED DEBT PART I
STOCK NUMBER PERCENTAGE OF GRANTOR STOCK ISSUER CLASS OF STOCK PAR VALUE CERTIFICATE OF SHARES OUTSTANDING - ------- ------------ -------------- --------- ------------ --------- ----------- Borrower Healthcare Interchange, Inc. Class A Com. $1.00 A-1 35,000 100% Borrower Healthcare Interchange, Inc. Class B Com. $1.00 B-2 35,000 100% Borrower Healthcare Interchange, Inc. Class C Com. $1.00 C-6 1 0% Borrower Healthcare Interchange, Inc. Class C Com. $1.00 C-5 5,000 25% Borrower Healthcare Interchange, Inc. Class C Com. $1.00 C-6 5,000 25% Borrower Healthcare Interchange, Inc. Class C Com. $1.00 C-7 5,000 25% Borrower Healthcare Interchange, Inc. Class C Com. $1.00 C-8 5,000 25% Borrower Healthcare Interchange, Inc. Cum. Conv. $1.00 1 31,250 50% Preferred Borrower Healthcare Interchange, Inc. Cum. Conv. $1.00 3 31,250 50% Preferred Borrower MedE America Corporation Common $ .01 1 100 100% of Ohio
PART II None. SCHEDULE II TO THE SECURITY AGREEMENT LOCATIONS OF EQUIPMENT AND INVENTORY MedE America Corporation 1933 Case Parkway Twinsburg OH (Summit County) 90 Merrick Ave., Suite 501 East Meadow, NY 11554 (Nassau County) 2865 Amwiler Road, Suite 200 Atlanta, GA. 30360 (Gwinnett County) 2730 Transit Road West Seneca, NY 14224 (Erie County) 8 Century Drive Latham, NY 12110 333 Ovington Blvd., Suite 702 Mitchel Field, NY 11553 (Nassau County) 20350 Ventura Blvd. Woodland Hills, CA. 91364 See also the locations set forth below for MedE America Corporation of Ohio and Healthcare Interchange, Inc.. MedE America Corporation of Ohio 2045 Midway Dr. Twinsburg, OH 44087 (Summit County) 217 W. Plane St. Bethel, OH (Clermont County) 230 River Ridge Circle Burnsville, MN 55337 SCHEDULE II TO THE SECURITY AGREEMENT (CONTINUED) LOCATIONS OF EQUIPMENT AND INVENTORY MedE America Corporation of Ohio (continued) 125 Venture Blvd. Spartanburg, SC 29306 (Spartanburg County) Healthcare Interchange, Inc. 727 North First Street, Fifth Floor Saint Louis, MO 63102 SCHEDULE III TO THE SECURITY AGREEMENT CHIEF PLACE OF BUSINESS, CHIEF EXECUTIVE OFFICE AND FEDERAL TAX IDENTIFICATION NUMBER
CHIEF PLACE OF BUSINESS AND FEDERAL TAX GRANTOR CHIEF EXECUTIVE OFFICE IDENTIFICATION NO. - ------- ---------------------- ------------------ MedE America Corporation 90 Merrick Avenue, Suite 501 11-3270245 East Meadow, New York 11554 MedE America Corporation of Chief Executive Office: 34-1057848 Ohio 90 Merrick Avenue, Suite 501 East Meadow, New York 11554 Chief Place of Business: 2045 Midway Dr. Twinsburg, OH 44087 Healthcare Interchange, Inc. Chief Executive Office: 43-1597249 90 Merrick Avenue, Suite 501 East Meadow, New York 11554 Chief Place of Business: 727 North First Street, Fifth Floor Saint Louis, MO 63102
SCHEDULE IV TO THE SECURITY AGREEMENT TRADE NAMES GRANTOR TRADE NAMES - ------- ----------- MedE America Corporation MedE America Corporation MedE America MedE America Corporation of Ohio MedE America Corporation of Ohio General Computer Corporation* Healthcare Interchange, Inc. Healthcare Interchange, Inc. SCHEDULE V TO THE SECURITY AGREEMENT PLEDGED ACCOUNTS None. EXHIBIT E FORM OF GUARANTY SUPPLEMENT --------- --, ---- NationsBank, N.A., as Administrative Agent c/o Bank of America National Trust and Savings Association Agency Management #10831 1455 Market Street, 12th Floor San Francisco, CA 94103 Attention: Agency Management Credit Agreement dated as of January __, 1999 among MEDE AMERICA CORPORATION, a Delaware corporation (the "Borrower"), the other Loan Parties party to the Credit Agreement, the Lenders party to the Credit Agreement, and NationsBank, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to the above-captioned Credit Agreement and to the Guaranty referred to therein (such Guaranty, as in effect on the date hereof and as it may hereafter be amended, supplemented or otherwise modified from time to time, together with this Guaranty Supplement, being the "Guaranty"). The capitalized terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. Section 1. Guaranty; Limitation of Liability. (a) The undersigned hereby absolutely, unconditionally and irrevocably guarantees the punctual payment when due, whether at scheduled maturity or on any date of a required prepayment or by acceleration, demand or otherwise, of all Obligations of each other Loan Party now or hereafter existing under or in respect of the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, premium, fees, indemnities, contract causes of action, costs, expenses or otherwise (such Obligations being the 2 "Guaranteed Obligations"), and agrees to pay any and all expenses (including, without limitation, fees and expenses of counsel) incurred by the Administrative Agent or any other Secured Party in enforcing any rights under this Guaranty Supplement, the Guaranty or any other Loan Document. Without limiting the generality of the foregoing, the undersigned's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by any other Loan Party to any Secured Party under or in respect of the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such other Loan Party. (b) The undersigned, and by its acceptance of this Guaranty Supplement, the Administrative Agent and each other Secured Party, hereby confirms that it is the intention of all such Persons that this Guaranty Supplement, the Guaranty and the Obligations of the undersigned hereunder and thereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty Supplement, the Guaranty and the Obligations of the undersigned hereunder and thereunder. To effectuate the foregoing intention, the Administrative Agent, the other Secured Parties and the undersigned hereby irrevocably agree that the Obligations of the undersigned under this Guaranty Supplement and the Guaranty at any time shall be limited to the maximum amount as will result in the Obligations of the undersigned under this Guaranty Supplement and the Guaranty not constituting a fraudulent transfer or conveyance. (c) The undersigned hereby unconditionally and irrevocably agrees that in the event any payment shall be required to be made to any Secured Party under this Guaranty Supplement, the Guaranty or any other guaranty, the undersigned will contribute, to the maximum extent permitted by applicable law, such amounts to each other Guarantor and each other guarantor so as to maximize the aggregate amount paid to the Secured Parties under or in respect of the Loan Documents. Section 2. Obligations Under the Guaranty. The undersigned hereby agrees, as of the date first above written, to be bound as a Guarantor by all of the terms and conditions of the Guaranty to the same extent as each of the other Guarantors thereunder. The undersigned further agrees, as of the date first above written, that each reference in the Guaranty to an "Additional Guarantor" or a "Guarantor" shall also mean and be a reference to the undersigned, and each reference in any other Loan Document to a "Guarantor" or a "Loan Party" shall also mean and be a reference to the undersigned. Section 3. Representations and Warranties. The undersigned hereby makes each representation and warranty set forth in Section 4.01 of the Credit Agreement to the same extent as each other Guarantor. 3 Section 4. Delivery by Telecopier. Delivery of an executed counterpart of a signature page to this Guaranty Supplement by telecopier shall be effective as delivery of an original executed counterpart of this Guaranty Supplement. Section 5. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc. (a) This Guaranty Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. (b) The undersigned hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or any federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Guaranty Supplement, the Guaranty or any of the other Loan Documents to which it is or is to be a party, or for recognition or enforcement of any judgment, and the undersigned hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. The undersigned agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Guaranty Supplement or the Guaranty or any other Loan Document shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Guaranty Supplement, the Guaranty or any of the other Loan Documents to which it is or is to be a party in the courts of any other jurisdiction. (c) The undersigned irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Guaranty Supplement, the Guaranty or any of the other Loan Documents to which it is or is to be a party in any New York State or federal court. The undersigned hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding in any such court. (d) THE UNDERSIGNED HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS, THE WORKING CAPITAL ADVANCES OR THE ACTIONS OF ANY SECURED PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. Very truly yours, [NAME OF ADDITIONAL GUARANTOR] By _______________________________ Title: EX-23.1 6 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. 7 to Registration Statement No. 333-55977 of MEDE America Corporation on Form S-1 of our report dated August 5, 1998 (October 7, 1998 as to Note 6.b., December 11, 1998 as to Note 13 and January 26, 1999 as to Note 14) (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 13) relating to the consolidated financial statements of MEDE America Corporation as of June 30, 1997 and 1998 and for each of the three years in the period ended June 30, 1998 appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. Our audits of the consolidated financial statements of MEDE America Corporation referred to in our aforementioned report also included the financial statement schedule of MEDE America Corporation listed in Part II at Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Jericho, New York January 28, 1999 EX-23.2 7 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT MEDE America Corporation East Meadow, New York We consent to the use in Amendment No. 7 to Registration Statement No. 333-55977 of MEDE America Corporation on Form S-1 of our report dated October 7, 1997 relating to the statement of income of The Stockton Group, Inc. for the year ended June 30, 1997, appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Charlotte, North Carolina January 28, 1999 EX-23.3 8 EXHIBIT 23.3 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT The Board of Directors HealthCare Interchange, Inc.: We consent to the use, in Amendment No. 7 to registration statement No. 333-55977 on Form S-1 of MEDE America Corporation, of our audit report, dated September 8, 1998, except as to notes 3 and 15, which are as of October 30, 1998, on the consolidated balance sheet of HealthCare Interchange, Inc. and subsidiary as of June 30, 1998 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the nine-month period ended June 30, 1998, which report appears in the Form S-1 of MEDE America Corporation dated January 28, 1999 and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP St. Louis, Missouri January 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----