<PAGE>
LOGO ENTERPRISE SYSTEMS, INC.
600,000 SHARES
COMMON STOCK
All of the 600,000 shares of Common Stock offered hereby are being sold on an
any or all basis by Enterprise Systems, Inc. ("Enterprise" or the "Company") in
a directed public offering principally to selected institutional investors.
Robertson, Stephens & Company LLC and Wessels, Arnold & Henderson, L.L.C. (the
"Placement Agents") have been retained to act, on a best efforts basis, as the
exclusive placement agents in connection with the offering. On October 11,
1996, the last sale price of the Common Stock as reported on the Nasdaq
National Market was $22.125 per share. See "Price Range of Common Stock." The
Common Stock is traded on the Nasdaq National Market under the symbol "ESIX."
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
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PLACEMENT
PRICE TO AGENT PROCEEDS TO
PUBLIC FEE(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share......................... $23.50 $1.2925 $22.2075
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Total............................. $14,100,000 $775,500 $13,324,500
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</TABLE>
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(1) The Company has agreed to pay the Placement Agents a fee in connection with
the offering and to indemnify them against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
(2) Before deducting expenses, payable by the Company, estimated at $300,000.
--------------
There can be no assurance that the Company will be successful in selling any
or all of the shares of Common Stock offered hereby. The Company has not fixed
a minimum number of shares of Common Stock to be sold pursuant to this
offering. Therefore, the Company may sell less than all of the shares of Common
Stock offered hereby, which may significantly reduce the amount of proceeds
received by the Company.
The shares of Common Stock offered hereby are being issued and sold directly
by the Company. It is expected that payment for the shares of Common Stock sold
pursuant hereto will be made against delivery of certificates representing such
shares in Chicago, Illinois on or about October 18, 1996.
ROBERTSON, STEPHENS & COMPANY WESSELS, ARNOLD & HENDERSON
THE DATE OF THIS PROSPECTUS IS OCTOBER 11, 1996
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Placement Agents. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the registered securities to which it relates, or an
offer to, or a solicitation of, any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as
of any time subsequent to the date hereof.
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TABLE OF CONTENTS
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PAGE
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Summary................................................................... 3
Risk Factors.............................................................. 6
Recent Developments....................................................... 12
Use of Proceeds........................................................... 13
Price Range of Common Stock............................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Consolidated Pro Forma Financial Information.............................. 15
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 23
Management................................................................ 30
Certain Transactions...................................................... 38
Principal Stockholders.................................................... 39
Description of Capital Stock.............................................. 41
Shares Eligible for Future Sale........................................... 44
Plan of Distribution...................................................... 45
Legal Matters............................................................. 46
Experts................................................................... 46
Additional Information.................................................... 46
Index to Financial Statements............................................. F-1
</TABLE>
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TITAN(R), Enterprise Scheduling(R), Enterprise Systems(R), Matkon(R) and
MATKON2000(R) are registered trademarks and NOVA(TM), Nova.IDN(TM), ORBIT(TM),
Titan.IDN(TM), ORION(TM), TS2000(TM), TouchScan(TM) and Corporate
Communications System(TM) are trademarks of the Company. Windows(R) is a
registered trademark of Microsoft Corporation. HL7(R) is a registered
trademark of the American National Standards Institute. ESP(TM) and
Environment for Scheduling Personnel(TM) are trademarks of Total Care
Technologies, Inc. All other trademarks and trade names referred to in this
Prospectus are the property of their respective owners.
IN CONNECTION WITH THIS OFFERING, THE PLACEMENT AGENTS AND OTHER BROKERS OR
DEALERS PARTICIPATING IN THE OFFERING MAY OVER-ALLOT OR EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE
COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
SUMMARY
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company
including statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Backlog."
Prospective investors are cautioned that such statements, which may be
identified by words including "anticipate," "believe," "intend," "estimates,"
"expect" and similar expressions, are only predictions and that actual events
or results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
Prospectus, including the matters set forth under the caption "Risk Factors,"
which could cause actual results to differ materially from those indicated by
such forward-looking statements. The following summary is qualified in its
entirety by, and should be read in conjunction with, the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus, including the information under "Risk Factors" beginning on
page 6.
THE COMPANY
Enterprise is a healthcare information services company that develops,
markets, installs and services an integrated suite of application software
products that assist healthcare providers in managing their operations. These
resource management systems focus on cost containment and address a broad range
of non-clinical management needs, including materials management, operating
room logistics, patient and staff scheduling and financial management. The
Company's information systems operate on personal computer networks and make
extensive use of electronic data interchange, enabling its customers to
redesign their resource management functions to enhance efficiency and
productivity.
In recent years, governmental and market-driven reform initiatives have
produced significant pressures on healthcare providers to control costs. In
order to manage the economic risk of healthcare delivery, providers are being
forced to change the way they operate and are increasingly focused on measuring
and controlling the cost of delivering care. To date, there has been a lack of
emphasis on integrated information systems that effectively manage operational
costs, which the Company believes constitute a majority of providers' overall
costs. Without the necessary information, it has been difficult for healthcare
managers to allocate efficiently their resources--people, supplies, facilities,
equipment and services--or to understand their costs.
Enterprise has developed information systems that address the operational
aspects of healthcare delivery. The Company offers an integrated suite of
resource management systems that enable healthcare providers to (i) improve
productivity through the redesign and automation of operational processes and
(ii) obtain the information necessary to measure and control costs. The
Company's current product offerings address materials management, operating
room logistics, organization-wide patient and staff scheduling and financial
management, areas which the Company believes offer significant opportunities
for productivity improvement and cost savings. The Company's products are
modular in design, share a common database, and may be used independently or
bundled together in order to provide an integrated resource management system
solution.
The Company's business strategy is to strengthen its existing product lines
and to expand into additional resource management areas. The Company believes a
significant opportunity exists to penetrate further the market of approximately
2,900 large acute care hospitals and 3,100 small hospitals in the United States
and Canada. Most of the Company's existing customers do not currently use the
Company's entire product line. The Company believes that its high customer
retention rate provides an opportunity to sell additional components of its
product suite to its existing customers, which include approximately 1,000
acute care hospitals, of which approximately 270 were added as customers when
the Company acquired the Matkon materials management division of Continental
Healthcare Systems, Inc. in May 1996 (the "Matkon
3
<PAGE>
Acquisition"). Of those customers (other than customers of the Matkon division)
which have purchased the Company's current products since January 1, 1991,
approximately 97% remained customers at July 1, 1996. The Company also intends
to expand its limited presence in alternate site markets, including outpatient
clinics, ambulatory surgery centers and specialty laboratories. In addition,
the Company has entered into joint marketing agreements with group purchasing
organizations and hospital management organizations, which typically provide
for the Company's products to be recommended on a preferred or exclusive basis.
The Company intends to pursue similar agreements, joint ventures or other
arrangements (which may include investments by the Company) with certain
healthcare information system developers and resellers and certain medical
product suppliers.
The Company was organized under the laws of the State of Illinois in 1981 and
was reincorporated in the State of Delaware in October 1995. The Company's
principal executive offices are located at 1400 South Wolf Road, Wheeling,
Illinois 60090-6524. The Company's telephone number is (847) 537-4800.
RECENT DEVELOPMENTS
On January 2, 1996, the Company entered into a distribution agreement with
Total Care Technologies, Inc. to distribute a staff scheduling software product
known as ESP for Windows. The agreement provides the Company with exclusive
territorial rights in the United States healthcare market for an initial term
of 26 months with the option to renew thereafter.
On March 22, 1996, the Company entered into a license agreement with
FlexiInternational Software, Inc. that allows the Company to incorporate the
FLEXI general ledger and accounts payable applications into the Company's
products for distribution in the United States healthcare market for an initial
term of four years with the option to renew thereafter.
On May 28, 1996, the Company completed the Matkon Acquisition for a cash
purchase price of approximately $13.9 million. The Matkon division develops,
markets, installs and services a line of hospital materials management software
products which primarily run on a UNIX platform. The Company recorded charges
of $8,453,000 in the quarter ended June 30, 1996 for acquired in-process
technology in connection with the Matkon Acquisition. See "Recent
Developments."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.. 600,000 shares
Common Stock Outstanding after the 8,119,581 shares(1)
Offering............................
Use of Proceeds...................... For working capital and other general
corporate purposes, including potential
acquisitions and joint ventures. See "Use
of Proceeds."
Nasdaq National Market Symbol........ ESIX
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995(2) 1995 1996 1996(2)
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues............... $20,427 $24,712 $33,248 $40,337 $14,440 $21,043 $24,522
Software development
expenses.............. 4,237 6,377 7,536 8,973 3,376 4,043 4,783
Sales and marketing
expenses.............. 4,455 5,984 8,832 10,078 4,249 5,507 6,224
Acquired in-process
technology............ -- -- -- -- (3) -- 8,453 8,453
Total operating costs
and expenses.......... 19,141 24,550 31,783 39,265 14,858 28,433 32,071
Income (loss) from
operations............ 1,286 162 1,465 1,072 (418) (7,390) (7,549)
Net income (loss)...... 749 28 800 478 (360) (4,277) (4,546)
Net income (loss) per
common share.......... $ 0.15 $ 0.01 $ 0.13 $ 0.08 $ (0.07) $ (0.57) $ (0.61)
Shares used in
calculation of per
share data(4)......... 4,886 5,383 6,279 6,279 5,525 7,459 7,459
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 2,601 $15,626
Working capital......................................... 20,427 33,452
Total assets............................................ 45,553 58,578
Total stockholders' equity.............................. 36,984 50,009
</TABLE>
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(1) Based on the number of shares outstanding as of September 1, 1996. Excludes
910,801 shares of Common Stock issuable upon the exercise of stock options
outstanding as of September 1, 1996, at a weighted average exercise price
of $11.13 per share, and 397,163 shares of Common Stock reserved for grant
of future options or direct issuances under the Company's Long-Term
Incentive Compensation Plan. See "Management--Compensation Pursuant to
Plans."
(2) Gives effect to the Matkon Acquisition as if it had occurred as of January
1, 1995. See "Consolidated Pro Forma Financial Information."
(3) Does not reflect recorded charges of $8,453,000 in the quarter ended June
30, 1996 for acquired in-process technology in connection with the Matkon
Acquisition. See "Recent Developments."
(4) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(5) Adjusted to reflect the application of the estimated net proceeds from the
sale of 600,000 shares of Common Stock offered by the Company hereby. See
"Use of Proceeds."
Unless otherwise indicated, all references to the "Company" or "Enterprise"
refer to Enterprise Systems, Inc. and its wholly owned subsidiary. See
"Description of Capital Stock--Recapitalization."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
ABILITY TO DEVELOP NEW SOFTWARE PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The healthcare information systems market is characterized by rapid
technological change, changing customer needs, frequent new software product
introductions and evolving industry standards. Historically, the Company has
derived substantially all of its revenue from three products: NOVA (materials
management), ORBIT (operating room logistics) and TITAN (accounts payable
management). The Company believes that as the market for these products
matures, its future success will depend upon its ability to enhance current
products and to develop and introduce new software products that keep pace
with technological developments and emerging industry standards and that
address the increasingly sophisticated needs of its customers. In addition,
the introduction of competing products embodying new technologies and the
emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. Accordingly, the Company anticipates that
significant amounts of future revenue will be derived from products and
product enhancements which either do not exist today or have not been sold in
large enough quantities to ensure market acceptance. There can be no assurance
that the Company will not experience difficulties that could delay or prevent
the successful development and introduction of product enhancements or new
products, or that such enhancements or new products will adequately meet the
requirements of the marketplace or achieve market acceptance. If the Company
is unable to develop and introduce product enhancements and new products in a
timely and cost-effective manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition will be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCT CONVERSIONS TO WINDOWS
Currently, the Company is converting its remaining DOS-based products, which
include NOVA, ORBIT and TITAN, to a Windows platform. As a result of the
complexities involved in such a conversion, the new Windows versions will
require significant development and testing periods before they achieve
marketability. There can be no assurance that the Windows versions will be
completed before demand for the DOS versions slows or before the Company's
competitors are able to develop functionally equivalent products on a Windows
platform. Further, certain potential customers may delay purchasing decisions
until Windows versions of the Company's products are available. There can be
no assurance that the Company will not experience difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of the new Windows versions of its products, or that such versions
will adequately meet the requirements of the marketplace and achieve market
acceptance. In addition, the conversions will divert resources away from
developing or enhancing other products. The occurrence of any of these
potential product conversion problems could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business--Products."
NEW PRODUCT ACCEPTANCE
The Company may find that the market does not fully accept certain of its
products in their current forms and may be slow to adopt new information
systems technology. For example, the Company's TouchScan point-of-use resource
management product requires a healthcare organization to re-engineer its
operations in order to realize the full economic benefit from the product. As
a result, the volume of sales of the TouchScan product has been substantially
lower than the Company originally forecasted. If TouchScan does not achieve a
greater degree of market acceptance, the Company's growth in future revenues
may be materially and adversely affected.
6
<PAGE>
ACQUISITIONS
The Company's growth strategy may be implemented, in part, through
acquisitions of products, technologies and businesses. The success of any such
acquisition will depend on many factors, including the Company's ability to
identify suitable acquisition candidates, the purchase price, the availability
and terms of financing, and management's ability to integrate effectively the
acquired products, technologies or businesses into the Company's operations.
Significant competition for acquisition opportunities exists in the industry,
which may significantly increase the costs of potential acquisitions. Further,
acquisitions may involve a number of special risks, including, failure to
retain key acquired personnel, unanticipated events or circumstances, legal
liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company competes
for acquisition opportunities with other companies that have significantly
greater financial and management resources and experience in acquiring
products, technologies and businesses. There can be no assurance that the
Company will be able to finance or integrate successfully any acquired
products, technologies or businesses, and their identification, acquisition
and integration may cause a diversion of management time and resources. The
Company cannot assure that a given acquisition will not materially and
adversely affect the Company's business, operating results and financial
condition.
The Company recorded charges of $8,453,000 for acquired in-process
technology in connection with the Matkon Acquisition, which reduced the
Company's operating and net income for the six months ended June 30, 1996. The
Company may incur similar charges in connection with future acquisitions. See
"Recent Developments" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
VARIABLE QUARTERLY OPERATING RESULTS; SEASONALITY
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Furthermore, the Company has experienced a seasonal
pattern in its operating results, with a greater proportion of the Company's
revenue and operating profitability occurring in the second half of the year.
Accordingly, results of operations for any particular quarter may not be
indicative of results of operations for future periods. Quarterly revenues and
operating results may fluctuate as a result of a variety of factors including:
the Company's sales cycle; demand for the Company's products; the size and
timing of significant orders; competitive conditions in the industry; the
ability of the Company to develop, introduce and market new products and new
releases on a timely basis; deferrals of customer orders in anticipation of
new products or new releases; delay or deferral of customer implementations of
the Company's products; changes in customer budgets; and general economic
factors. A significant portion of the Company's expenses are relatively fixed,
and the amount and timing of increases in such expenses are based in large
part on the Company's expectations for future revenues. If revenues are below
expectations in any given quarter, the adverse effect may be magnified by the
Company's inability to adjust spending quickly enough to compensate for the
revenue shortfall. Accordingly, even a small variation from expected revenues
could have a material adverse effect on the Company's results of operations
for a given quarter. The Company plans to increase expenditures in order to
fund a larger direct sales and marketing staff, greater levels of research and
development, and development of new distribution and resale channels. To the
extent such expenses precede or are not subsequently followed by increased
revenues, the Company's operating results would be materially and adversely
affected.
The timing and amount of the Company's revenues are subject to a number of
factors that make estimation of operating results prior to the end of a
quarter extremely uncertain. In addition, certain large contracts may, in the
future, constitute a substantial portion of the operating profits for a
quarter. Contract signing may be delayed for a number of reasons outside of
the control of the Company, including customers' budgetary constraints and
internal authorization reviews. In addition, the Company's ability to complete
installation of its systems and recognize revenues is dependent on certain
factors outside the control of the Company, including the customer's ability
to allocate its internal resources to the installation process.
7
<PAGE>
Consequently, the Company's business or operating results for a particular
quarter could be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The market for healthcare information systems is intensely competitive. The
competitive factors affecting the market for the Company's software and
services include: vendor and product reputation, availability of products on
preferred computer and communications platforms, scalability, integration with
other applications, functionality and features, ease of use, quality of
support, documentation and training, product quality, product innovation,
price and the effectiveness of marketing and sales efforts. The relative
importance of each of these factors depends upon the market segment. Certain
of the Company's competitors have significantly greater financial, technical,
research and development and marketing resources. As a result, they may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion, sale and support of their products than the Company. In addition,
consolidation in the healthcare information systems industry may permit the
Company's competitors to have access to increased financial and administrative
resources and greater technological capabilities and to realize other
operational efficiencies and competitive advantages. Moreover, some purchasers
may prefer to buy computer systems from a single source provider. Because the
Company focuses exclusively on healthcare resource management systems (as
opposed to clinical or billing systems), it cannot serve as the sole source of
computer software for healthcare organizations. The Company cannot assure that
it will be able to continue to compete effectively in this environment, that
competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business--Competition."
UNCERTAINTY AND CONSOLIDATION IN HEALTHCARE INDUSTRY
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation
of healthcare providers. Many federal and state legislators have announced
that they intend to propose programs to reform the United States healthcare
system at both the federal and state level. These programs may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change the environment in which providers
operate. Healthcare providers 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 response to this environment, many healthcare providers are consolidating
to create larger healthcare delivery organizations. This consolidation reduces
the number of potential customers for the Company's products, and the
increased bargaining power of these organizations could lead to reductions in
the amounts paid for the Company's products. Further, because the Company's
product offerings have expanded into a more extensive package of integrated
products, purchases of the Company's products increasingly require approval by
a customer's executive officers as opposed to departmental managers by whom
the Company is better known. 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, operating results and financial condition.
See "Business--Government Regulation."
INABILITY TO EXPAND INTO NEW MARKETS
To date, the Company's products have been purchased primarily by acute care
hospitals. However, healthcare services are increasingly being provided at
sites other than hospitals, such as outpatient clinics, ambulatory surgery
centers and specialty laboratories. The Company intends to increase its
limited presence in these alternate site markets. Because the Company has
limited experience in non-hospital markets, it may find that significant
modifications to its products are necessary before they become useful to a
customer or that pricing may have to be adjusted downward. The Company's
business, operating results and financial condition may be materially and
adversely affected if such alternate site markets are not receptive to the
Company's products.
8
<PAGE>
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company depends significantly upon proprietary technology. The Company
relies on a combination of copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which
afford only limited protection. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult, and although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy is a potential
problem. In addition, the laws of some foreign countries in which the Company
sells or may in the future sell its products do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
The Company cannot assure that its protective measures for proprietary rights
will be adequate or that the Company's competitors will not independently
develop similar or superior technology, duplicate the Company's products or
circumvent its intellectual property rights.
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
products and competitors in the Company's industry segment grows and the
functionality of products overlaps. Although the Company has never received a
claim that it is infringing third parties' intellectual property rights, there
can be no assurance that third parties will not in the future claim
infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. Any such claims, regardless of their
merit, could be time consuming, result in costly litigation, delay or prevent
product shipments or require the Company to enter into costly royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company or at all, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Proprietary Rights."
PRODUCT LIABILITY
The software products offered by the Company may contain undetected errors
or failures when first introduced or as new versions are released. Errors or
failures that are not detected until after the commencement of commercial
shipments of a product could result in loss of or delay in market acceptance
of the product and in claims against the Company. Any of these factors could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Strategy," "--Products" and "--Product
Development and Technology."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a significant extent on certain key personnel. In
addition, the Company believes that its growth and success will depend on its
ability to attract and retain qualified management, technical, sales and
marketing personnel. Competition for such personnel is intense. The loss of
the services of one or more of the Company's key employees or the Company's
inability to attract and retain qualified personnel could have a material
adverse effect on the Company's business, operating results and financial
condition. While the Company does have employment contracts with all members
of its executive management team, and with certain key product and software
development employees, these contracts do not guarantee that these individuals
will continue their employment with the Company. The Company maintains "key
man" life insurance of $1,000,000 on the life of Glen E. Tullman, Chief
Executive Officer.
CONTROL BY OFFICERS AND DIRECTORS
Upon completion of this offering, Thomas R. Pirelli, a Director and a
founder of the Company, will beneficially own an aggregate of 1,586,630 shares
of Common Stock, representing approximately 20% of the
9
<PAGE>
outstanding Common Stock assuming 600,000 shares are sold by the Company in
this offering. The Company's other Directors, executive officers and principal
stockholders, including its 401(k) Plan, and their affiliates will
beneficially own approximately 25% of the outstanding Common Stock assuming
600,000 shares are sold by the Company in this offering. Consequently, these
stockholders, acting together, will be able to control all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Principal Stockholders" and "Description of Capital Stock--Antitakeover
Effects of Provisions of the Certificate of Incorporation, By-Laws and
Delaware Law."
UNALLOCATED PROCEEDS OF OFFERING
None of the anticipated net proceeds of this offering have been designated
for specific uses. Therefore, the Board of Directors of the Company will have
broad discretion with respect to the use of the net proceeds of this offering.
See "Use of Proceeds."
POSSIBLE VOLATILITY OF STOCK PRICE
Since the Company's initial public offering in October 1995, the market
price for the Common Stock has fluctuated substantially. The market price of
the Common Stock may continue to experience significant fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
announcements of technological innovations or new products by the Company or
its competitors, governmental regulatory actions, general trends in the
industry and other events. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many technology companies and that have often
been unrelated or disproportionate to the operational performance of these
companies. These fluctuations, as well as general economic and market
conditions, may materially and adversely affect the market price of the Common
Stock. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock. Upon completion of this offering, the Company will have 8,119,581
shares of Common Stock outstanding, assuming no exercise of options after
September 1, 1996. Substantially all of these shares will be freely tradeable
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), or may currently be sold in accordance with Rule 144 under
the Securities Act ("Rule 144"). In addition, the Company has registered on a
registration statement on Form S-8 a total of 1,114,846 shares of Common Stock
reserved for issuance under the Company's Long-Term Incentive Compensation
Plan. In October 1996, the Company's Board of Directors voted, subject to
approval by the Company's stockholders, to increase the number of shares of
Common Stock which may be issued and sold under such plan by 375,000 shares.
The Company intends to register the additional 375,000 shares under the
Securities Act. Options for 181,882 shares have been exercised as of September
1, 1996. The remaining 1,307,964 shares, when and if issued, would be freely
tradeable (unless acquired by an affiliate of the Company, in which case they
would be subject to volume and other limitations under Rule 144). The
Directors and executive officers of the Company and the Company's 401(k) Plan,
beneficially holding an aggregate of 2,771,169 shares of Common Stock as of
September 1, 1996, have entered into lock-up agreements pursuant to which such
stockholders have agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 90 days after the date of this Prospectus without
the prior written consent of Robertson, Stephens & Company LLC ("Robertson,
Stephens & Company"). However, Robertson, Stephens & Company may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. Upon expiration or early termination
of the lock-up period, these shares will be eligible for immediate sale,
subject in certain cases to volume and other limitations under Rule 144. See
"Shares Eligible for Future Sale" and "Plan of Distribution."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue shares of
preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote
10
<PAGE>
or action by the 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 preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control of the Company. In addition, certain provisions of the
Company's Certificate of Incorporation and By-Laws and of Delaware law could
have the effect of delaying, deterring or preventing a change in control of
the Company. See "Description of Capital Stock--Preferred Stock" and "--
Antitakeover Effects of Provisions of the Certificate of Incorporation, By-
Laws and Delaware Law."
HOLDING COMPANY STRUCTURE
The Company derives substantially all of its operating income and cash flows
from its subsidiary. The Company relies on dividends and other distributions
from its subsidiary to generate the funds necessary to meet its obligations.
The ability of the Company's subsidiary to make such distributions is subject
to, among other things, applicable state laws and the terms of the
subsidiary's credit facility. Claims of creditors of the Company's subsidiary,
including trade creditors, will generally have priority as to the assets of
such subsidiary over the claims of the Company. See "Description of Capital
Stock--Recapitalization."
11
<PAGE>
RECENT DEVELOPMENTS
On January 2, 1996, the Company entered into a distribution agreement with
Total Care Technologies, Inc. ("TCT") to distribute a staff scheduling
software product known as ESP for Windows ("ESP"). The agreement provides the
Company with exclusive territorial rights in the United States healthcare
market for an initial term of 26 months with the option to renew thereafter.
ESP is a Windows-based client/server product that assists users in managing
the complex staffing issues for numerous clinical and operational areas,
including nursing, dietary/food service, housekeeping, clinical technician
services, surgical services and physical and occupational therapy. The
Company's minimum royalty commitment to TCT over the initial 26-month term of
the agreement is approximately $1.2 million. As of September 27, 1996, the
Company has licensed eleven copies of TCT's staff scheduling software.
On March 22, 1996, the Company entered into a license agreement with
FlexiInternational Software, Inc. ("FLEXI") that allows the Company to
incorporate the FLEXI general ledger and accounts payable applications into
the Company's products for distribution in the United States healthcare market
for an initial term of four years with the option to renew thereafter. The
Company has an exclusive right to sell the FLEXI applications in the United
States upon meeting certain sales levels. FLEXI products are Windows-based
client/server products that operate in both the Windows NT and UNIX
environments. The Company's minimum royalty commitment to FLEXI over the
initial four year term of the agreement is approximately $2.0 million.
On May 28, 1996, the Company completed the Matkon Acquisition for a cash
purchase price of approximately $13.9 million. The Matkon division develops,
markets, installs and services a line of hospital materials management
software products which primarily run on a UNIX platform. The Matkon division
has an installed base of approximately 270 acute care hospitals. The Company
recorded charges of $8,453,000 in the quarter ended June 30, 1996 for acquired
in-process technology in connection with the Matkon Acquisition. See
"Consolidated Pro Forma Financial Information" and "Selected Financial Data."
12
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 600,000 shares of Common Stock offered
hereby are estimated to be approximately $13,024,500, after deducting
estimated fees of the Placement Agents and estimated offering expenses. The
Company expects to use the net proceeds of this offering for general corporate
purposes. A portion of the net proceeds may also be used for acquisitions of,
or joint ventures with respect to, additional businesses, products and
technologies. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, interest-bearing securities.
There can be no assurance that the Company will be successful in selling any
or all of the shares of Common Stock offered hereby. The Company has not fixed
a minimum number of shares of Common Stock to be sold pursuant to this
offering. Therefore, the Company may sell less than all of the shares of
Common Stock offered hereby, which may significantly reduce the amount of
proceeds received by the Company.
PRICE RANGE OF COMMON STOCK
The Common Stock began trading publicly on the Nasdaq National Market on
October 20, 1995 under the symbol "ESIX". The following table sets forth, for
the periods indicated, the range of high and low closing sales prices for the
Common Stock as reported by Nasdaq:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- -------
<S> <C> <C>
December 31, 1995 (from October 20, 1995)................. $37 3/4 $17 3/4
March 31, 1996............................................ $30 1/2 $23
June 30, 1996............................................. $39 5/8 $27 1/4
September 30, 1996........................................ $28 1/8 $19
</TABLE>
On October 11, 1996, the closing sales price of the Common Stock as reported
on the Nasdaq National Market was $22.125 per share. On September 1, 1996,
there were approximately 76 registered holders of the Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. The
Company currently anticipates that all of its earnings will be retained for
development of the Company's business, and does not anticipate paying any cash
dividends (other than intercompany dividends) in the foreseeable future.
Future cash dividends, if any, will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the Company's
future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and such other factors as the
Board of Directors may deem relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996 and (ii) as adjusted to reflect the receipt and application of
the net proceeds from the sale of 600,000 shares of Common Stock offered
hereby. The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................... $ -- $ --
======= =======
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 authorized
shares; no shares issued and outstanding.................. -- --
Common Stock, $.01 par value; 30,000,000 authorized shares;
7,519,581 shares issued and outstanding; 8,119,581 issued
and outstanding as adjusted(1)............................ 75 81
Additional paid-in capital................................. 39,352 52,371
Retained earnings (accumulated deficit)(2)................. (2,367) (2,367)
Deferred compensation...................................... (76) (76)
------- -------
Total stockholders' equity............................... 36,984 50,009
------- -------
Total capitalization................................... $36,984 $50,009
======= =======
</TABLE>
- --------
(1) Excludes 910,801 shares of Common Stock issuable upon the exercise of
stock options outstanding as of September 1, 1996, at a weighted average
exercise price of $11.13 per share, and 397,163 shares of Common Stock
reserved for grant of future options or direct issuances under the
Company's Long-Term Incentive Compensation Plan. See "Management--
Compensation Pursuant to Plans."
(2) Includes charges of $8,453,000 for acquired in-process technology in
connection with the Matkon Acquisition.
14
<PAGE>
CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The accompanying consolidated pro forma financial information gives effect
to the Matkon Acquisition. The consolidated pro forma statement of operations
for the fiscal year ended December 31, 1995 combines the audited consolidated
statement of operations of the Company for the fiscal year ended December 31,
1995 with the audited statement of revenues and expenses of the Matkon
division for the twelve-month period ended November 30, 1995 as if the Matkon
Acquisition had occurred at January 1, 1995. The pro forma statement of
operations for the six-month period ended June 30, 1996 combines the unaudited
consolidated pro forma statement of operations of the Company for the six-
month period ended June 30, 1996 with the unaudited statement of revenues and
expenses of the Matkon division for the six-month period ended May 31, 1996 as
if the Matkon Acquisition had occurred at January 1, 1995. The transaction has
been accounted for as a purchase and appropriate adjustments have been made to
the consolidated pro forma statements of operations to reflect the transaction
at the beginning of the respective periods combined. The consolidated pro
forma financial information presented below is not necessarily indicative of
the operating results which would have been achieved had the Matkon
Acquisition occurred at the beginning of the periods presented or of results
to be achieved in the future.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
COMPANY MATKON PRO FORMA
CONSOLIDATED DIVISION ADJUSTMENTS PRO FORMA
DECEMBER 31, NOVEMBER 30, DEBIT DECEMBER 31,
1995 1995(1) (CREDIT)(2) 1995
------------ ------------ ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Software................ $16,104 $1,497 $17,601
Services................ 16,498 3,810 20,308
Hardware................ 646 1,782 2,428
------- ------ -------
Total revenues........ 33,248 7,089 40,337
Operating costs and
expenses
Software development.... 7,536 937 $ 500 (2a) 8,973
Service and support..... 10,742 2,152 12,894
Hardware................ 786 1,885 2,671
Sales and marketing..... 8,832 1,246 10,078
Administration and
other.................. 3,887 372 390 (2b) 4,649
------- ------ -------
Total operating costs
and expenses......... 31,783 6,592 39,265
------- ------ -------
Income from operations.... 1,465 497 1,072
Interest income (expense),
net...................... 17 -- 144 (2c) (127)
------- ------ -------
Income before income
taxes.................... 1,482 497 945
Income taxes (benefit).... 682 -- (215)(2d) 467
------- ------ -------
Net income................ $ 800 $ 497 $ 478
======= ====== =======
Net income per share...... $ 0.13 $ 0.08
======= =======
Weighted average shares
outstanding.............. 6,279 6,279
======= =======
</TABLE>
- --------
See accompanying footnotes on following page.
15
<PAGE>
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
<TABLE>
<CAPTION>
COMPANY MATKON PRO FORMA
CONSOLIDATED DIVISION ADJUSTMENTS PRO FORMA
JUNE 30, MAY 31, DEBIT JUNE 30,
1996(3) 1996(1) (CREDIT)(2) 1996(3)
------------ -------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Software......................... $ 9,860 $ 795 $10,655
Services......................... 10,454 1,936 12,390
Hardware......................... 729 748 1,477
------- ------ -------
Total revenues................. 21,043 3,479 24,522
Operating costs and expenses
Software development............. 4,043 490 $250 (2a) 4,783
Service and support.............. 6,577 1,077 7,654
Hardware......................... 739 846 1,585
Sales and marketing.............. 5,507 717 6,224
Administration and other......... 3,114 63 195 (2b) 3,372
Acquired in-process technology... 8,453 -- 8,453
------- ------ -------
Total operating costs and
expenses...................... 28,433 3,193 32,071
Income (loss) from operations..... (7,390) 286 (7,549)
Interest income (expense), net.... 467 -- 289 (2c) 178
------- ------ -------
Income (loss) before income taxes. (6,923) 286 (7,371)
Income taxes (benefit)............ (2,646) -- (179)(2d) (2,825)
------- ------ -------
Net income (loss)................. $(4,277) $ 286 $(4,546)
======= ====== =======
Net loss per share................ $(0.57) $ (0.61)
======= =======
Weighted average shares
outstanding...................... 7,459 7,459
======= =======
</TABLE>
- --------
1. On May 28, 1996, the Company completed the Matkon Acquisition for a cash
purchase price of approximately $13.9 million. The Matkon Acquisition has
been reflected as though such transaction occurred on January 1, 1995. The
expected purchase price allocation includes approximately $8.4 million of
acquired in-process technology and $1.7 million of purchased software. The
allocation of purchase price represents an estimate of the fair values of
assets acquired and liabilities assumed including estimated professional
fees and other acquisition expenses expected to be incurred. The allocation
is subject to change and is not necessarily indicative of the ultimate
purchase price allocation. The charge for the acquired in-process
technology of approximately $8.4 million is not reflected in the
Consolidated Pro Forma Statement of Operations for the year ended December
31, 1995. Such amount is a charge to earnings in the period of acquisition.
2. The consolidated pro forma financial information is based on the following
assumptions and adjustments:
a. To conform Matkon's policy of capitalizing certain software development
expenses to the Company's method of software capitalization.
b. To reflect the amortization of the excess of cost over net assets
acquired and other intangible assets.
c. To reduce interest income related to cash payments made for the
acquisition.
d. To reflect the net income tax benefit relating to the adjustments
discussed above using an effective tax rate of 40%.
3. The Company's consolidated statement of operations for the six months ended
June 30, 1996 includes revenues and net income of $797,000 and $199,000,
respectively, related to the results of the operations of the Matkon
division during the period from May 29, 1996 to June 30, 1996.
16
<PAGE>
SELECTED FINANCIAL DATA
The statements of operations data for the years ended December 31, 1993,
1994 and 1995, and the balance sheet data at December 31, 1994 and 1995 are
derived from the audited consolidated financial statements included elsewhere
in this Prospectus and should be read in conjunction with those financial
statements and notes thereto. The statements of operations data for the years
ended December 31, 1991 and 1992 are derived from unaudited financial
statements not included herein. The statements of operations data for the six-
month periods ended June 30, 1995 and 1996 and the balance sheet data at June
30, 1995 and 1996 are derived from unaudited consolidated financial statements
that include, in the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
information set forth therein. The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues
Software............... $ 6,669 $ 7,304 $ 9,065 $11,762 $16,104 $ 6,988 $ 9,860
Services............... 7,740 8,567 10,653 12,343 16,498 7,240 10,454
Hardware............... 1,394 1,153 709 607 646 212 729
------- ------- ------- ------- ------- -------- --------
Total revenues....... 15,803 17,024 20,427 24,712 33,248 14,440 21,043
Operating costs and
expenses
Software development... 3,088 3,505 4,237 6,377 7,536 3,376 4,043
Service and support.... 4,907 5,607 7,187 8,629 10,742 5,133 6,577
Hardware............... 1,218 1,112 717 682 786 269 739
Sales and marketing.... 3,537 3,347 4,455 5,984 8,832 4,249 5,507
Administration......... 1,979 2,107 2,545 2,878 3,887 1,831 3,114
Acquired in-process
technology............ -- -- -- -- -- -- 8,453
------- ------- ------- ------- ------- -------- --------
Total operating costs
and expenses........ 14,729 15,678 19,141 24,550 31,783 14,858 28,433
------- ------- ------- ------- ------- -------- --------
Income (loss) from
operations............. 1,074 1,346 1,286 162 1,465 (418) (7,390)
Interest income
(expense), net......... (93) (132) (198) (114) 17 (81) 467
------- ------- ------- ------- ------- -------- --------
Income (loss) before
income taxes........... 981 1,214 1,088 48 1,482 (499) (6,923)
Income taxes (benefit).. 451 455 339 20 682 (139) (2,646)
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $ 530 $ 759 $ 749 $ 28 $ 800 $ (360) $ (4,277)
======= ======= ======= ======= ======= ======== ========
Net income (loss) per
share.................. $ 0.11 $ 0.16 $ 0.15 $ 0.01 $ 0.13 $ (0.07) $ (0.57)
======= ======= ======= ======= ======= ======== ========
Shares used in computing
net income (loss) per
share(1)............... 4,756 4,711 4,886 5,383 6,279 5,525 7,459
======= ======= ======= ======= ======= ======== ========
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,806 $ 1,665 $ 1,901 $ 1,588 $11,403 $ 1,079 $ 2,601
Working capital......... 1,776 3,303 3,046 4,924 30,368 4,279 20,427
Total assets............ 6,849 9,963 12,842 15,752 48,926 15,518 45,553
Long-term debt, less
current portion........ 2,029 1,057 291 -- -- -- --
Total stockholders'
equity................. 1,680 2,769 5,028 8,737 40,406 8,349 36,984
</TABLE>
- --------
(1)Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Enterprise was founded in 1981. The Company develops, markets, installs and
services an integrated suite of application software products that assist
healthcare providers in managing their operations. The Company derives its
revenues from software licenses, installation services, ongoing support,
maintenance and enhancement services, product education, consulting and the
sale of computer hardware. While the Company's customers currently consist
primarily of large acute care hospitals (hospitals with 150 or more beds), it
has increased its efforts to penetrate other healthcare provider markets, in
particular, small hospitals (hospitals with less than 150 beds) and alternate
site facilities such as outpatient clinics, ambulatory surgery centers and
specialty laboratories.
The selling cycle for the Company's software products has generally ranged
from six to twelve months, culminating with the signing of a license
agreement. These agreements provide for up-front fees for each of a system's
components, including the software license, installation services, initial
product education and hardware (if required), as well as annual fees for
ongoing support, maintenance and enhancements. Payment terms for up-front fees
generally provide for remittances upon contract signing, software load,
initial operational use and post-installation review. The agreements typically
provide for a minimum of one year of support, maintenance and enhancement
fees, renewable annually. Generally, fees for support and maintenance are
billed monthly, while enhancement fees are billed annually. The Company also
offers continuing product education and on-site consulting services.
Software revenues consist of software license fees. Services revenues
consist of (i) up-front fees for software installation and initial product
education, (ii) annual fees for ongoing support, maintenance and enhancements
and (iii) fees for continuing product education and consulting services.
Revenues from software licensing and installation services are recognized as
the installation services are performed. Ongoing support, maintenance and
enhancement revenue is recognized ratably over the time periods covered by the
service agreements. The Company recognizes education and consulting revenue as
the services are performed.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth revenue and expense items as a percentage of
total revenues, and the percentage change in dollar amounts of such items from
period to period.
<TABLE>
<CAPTION>
SIX
MONTHS PERCENT
YEAR ENDED ENDED INCREASE/(DECREASE)
DECEMBER 31, JUNE 30, OVER PRIOR PERIOD
---------------- ----------- -------------------------
1993 1994 1995 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Software................. 45% 48% 48% 49% 47% 30% 37% 41%
Services................. 52 50 50 50 50 15 34 44
Hardware................. 3 2 2 1 3 (14) 6 244
--- --- --- --- ---
Total revenues........... 100 100 100 100 100 21 35 46
Operating costs and
expenses
Software development..... 21 26 23 23 19 50 18 20
Service and support...... 35 35 32 35 31 20 24 28
Hardware................. 3 3 2 2 4 (5) 15 175
Sales and marketing...... 21 24 27 29 26 34 48 30
Administration........... 12 11 12 13 15 13 35 70
Acquired in-process
technology.............. -- -- -- -- 40 -- -- *
--- --- --- --- ---
Total operating costs and
expenses................ 92 99 96 102 135 28 29 91
--- --- --- --- ---
Income (loss) from
operations............... 8 1 4 (2) (35) (87) * *
Interest income (expense),
net...................... (1) -- -- (1) 2 * * *
--- --- --- --- ---
Income (loss) before
income taxes............. 7 1 4 (3) (33) (96) * *
Income taxes (benefit).... 2 -- 2 (1) (13) (94) * *
--- --- --- --- ---
Net income (loss)......... 5% 1% 2% (2)% (20)% (96)% * *
=== === === === ===
</TABLE>
- --------
*Not meaningful.
Revenues
The Company derives its revenues from software licenses, installation
services, ongoing support, maintenance and enhancement services, product
education, consulting and the sale of computer hardware. Total revenues for
the first half of 1996 were $21,043,000, an increase of $6,603,000 or 46%, as
compared to $14,440,000 for the same period in 1995. Total revenues from all
sources for 1995 were $33,248,000, an increase of $8,536,000 or 35% from 1994
total revenues of $24,712,000. Total revenues in 1994 increased $4,285,000 or
21% over 1993 revenues of $20,427,000.
Software. Software revenues for the first half of 1996 increased $2,872,000,
or 41%, as compared to the same period of 1995. In 1995, software revenues
were $16,104,000, a 37% increase over 1994. From 1993 to 1994, software
revenues increased 30% from $9,065,000 to $11,762,000. The increases are
primarily attributable to expansion of the Company's sales force and marketing
efforts.
Services. Services revenues for the first half of 1996 increased $3,214,000,
or 44%, as compared to the first half of 1995. Services revenues in 1995
increased 34% over 1994 to $16,498,000, and 1994 services revenues of
$12,343,000 represented an increase of 15% over 1993 services revenues. The
increase in services revenues is related to the increase in software revenues
coupled with an increase in consulting services revenues and growth in
recurring support fees.
Hardware. Hardware revenues for the first half of 1996 increased $517,000 as
compared to the first half of 1995. Hardware revenues in 1995 increased
$39,000 or 6% over 1994 to $646,000. From 1993 to 1994, hardware revenues
declined $102,000. Prior to 1995, hardware revenues had declined over time as
customers had increasingly elected to purchase personal computer equipment
from other sources. The increases in hardware revenues in 1995 and the first
six months of 1996 are principally attributable to sales of TouchScan, which
was introduced in 1995.
19
<PAGE>
Costs and Expenses
Software Development. Software development expenses for the first half of
1996 increased $667,000, or 20%, as compared to the first half of 1995.
Software development expenses increased to $7,536,000 in 1995 from $6,377,000
in 1994 and $4,237,000 in 1993. The increases in these expenses are primarily
related to development work on new releases of each of the Company's product
lines and the ongoing conversion of its DOS-based products to a Windows-based
platform. For the first six months of 1996, software development expenses
decreased as a percentage of total revenues from the year earlier period,
however, because a larger percentage of development effort was related to new
products, rather than enhancement of existing products, more software
development expenditures were capitalized in that period.
The Company capitalized $666,000 and $338,000 of software development costs,
net of related amortization expense, for the six months ended June 30, 1996
and 1995 and $624,000, $538,000 and $335,000 in 1995, 1994 and 1993,
respectively, in accordance with Statement of Financial Accounting Standards
No. 86. Capitalized software development costs are amortized over the
estimated life of the related products (up to four years). Amounts
capitalized, net of amounts amortized, represent 14% and 9% of total software
development expenditures for the six months ended June 30, 1996 and 1995 and
8%, 8% and 7% for 1995, 1994 and 1993, respectively.
Service and Support. Service and support expenses for the first half of 1996
increased $1,444,000, or 28%, as compared to the first half of 1995. Service
and support expenses increased to $10,742,000 in 1995 from $8,629,000 in 1994
and $7,187,000 in 1993. The increases in these expenses are primarily
attributable to the hiring of additional implementation personnel and related
travel. As a percentage of total revenues, service and support expenses
decreased from 35% in 1994 and 1993 to 32% in 1995.
Hardware. Hardware costs for the first half of 1996 increased $470,000, as
compared to the first half of 1995. Hardware costs were $786,000, $682,000 and
$717,000 in 1995, 1994 and 1993, respectively. The fluctuations in hardware
costs are attributable to the proportionate fluctuations in hardware revenues
in each year.
Sales and Marketing. Sales and marketing expenses for the first half of 1996
increased $1,258,000, or 30%, as compared to the first half of 1995. Sales and
marketing expenses increased to $8,832,000 in 1995 from $5,984,000 in 1994 and
$4,455,000 in 1993. The increases in these expenses are primarily attributable
to the expansion of the Company's sales force and related sales support and
marketing activities.
Administration. Administration expenses for the first half of 1996 increased
$1,283,000, or 70%, as compared to the first half of 1995. The increase in
administration expenses is a result of an increase in administrative services
personnel, public company related expenses, amortization of intangible assets
acquired in the Matkon Acquisition and the provision for bad debts, which has
increased with the increase in revenues. Administration expenses increased to
$3,887,000 in 1995 from $2,878,000 in 1994 and $2,545,000 in 1993. The
increases in administration expenses in these periods are primarily a result
of additions to the management team and investments in the Company's
telecommunications and computer infrastructure.
Acquired In-Process Technology. The Company recorded nonrecurring charges of
$8,453,000 in the quarter ended June 30, 1996 for acquired in-process
technology in connection with the Matkon Acquisition. See "Consolidated Pro
Forma Financial Information."
Interest. Prior to its initial public offering in 1995, the Company borrowed
primarily to finance seasonal working capital needs. A portion of the proceeds
from the initial public offering was used to repay all outstanding debt. Net
interest income for the first half of 1996 was $467,000, as compared to net
interest expense of $81,000 in the first half of 1995. The increase in net
interest income in 1996 was primarily attributable to the investment of a
portion of the initial public offering proceeds in interest-bearing
securities.
20
<PAGE>
Income Taxes. For the first half of 1996, the income tax benefit was
$2,646,000, compared to an income tax benefit of $139,000 in the first half of
1995. The Company incurred income tax expense of $682,000 (effective rate of
46%) in 1995, $20,000 (effective rate of 42%) in 1994 and $339,000 (effective
rate of 31%) in 1993. The increase in the effective rate in 1995 is
attributable to the incurrence of a greater proportion of nondeductible
travel-related expenses.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly results of operations have been seasonal, with a
greater proportion of the Company's revenue and operating profitability
occurring in the second half of the year. This seasonality is primarily
attributable to (i) hospital budgeting practices that are characterized by a
disproportionately larger amount of spending in the second half of the year
and (ii) the Company's sales force compensation program, which is based
significantly on achieving sales quotas by the end of September.
The following table sets forth certain unaudited quarterly financial data
for each of the ten quarters ending with the quarter ended June 30, 1996. In
the opinion of management, this unaudited data contains all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations for the periods presented. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Software............... $2,373 $2,328 $2,877 $4,184 $3,406 $3,582 $3,835 $ 5,281 $4,284 $ 5,576
Services............... 2,886 2,842 3,105 3,510 3,333 3,907 4,305 4,953 4,922 5,532
Hardware............... 93 124 154 236 71 141 102 332 391 338
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
Total revenues......... 5,352 5,294 6,136 7,930 6,810 7,630 8,242 10,566 9,597 11,446
Operating costs and
expenses
Software development... 1,390 1,401 1,725 1,861 1,558 1,818 2,110 2,050 1,933 2,110
Service and support.... 2,005 2,239 2,225 2,160 2,452 2,681 2,784 2,825 2,782 3,795
Hardware............... 85 145 168 284 76 193 105 412 369 370
Sales and marketing.... 1,283 1,614 1,277 1,810 2,133 2,116 2,150 2,433 2,594 2,913
Administration......... 697 640 667 874 861 970 953 1,103 1,579 1,535
Acquired in-process
technology............ -- -- -- -- -- -- -- -- -- 8,453
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
Total operating costs
and expenses.......... 5,460 6,039 6,062 6,989 7,080 7,778 8,102 8,823 9,257 19,176
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
Income (loss) from
operations............. (108) (745) 74 941 (270) (148) 140 1,743 340 (7,730)
Interest income
(expense), net......... (57) (14) (5) (38) (46) (35) (69) 167 276 191
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes........... (165) (759) 69 903 (316) (183) 71 1,910 616 (7,539)
Income taxes (benefit).. (67) (233) 19 301 (88) (51) 28 793 260 (2,906)
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
Net income (loss)....... $ (98) $ (526) $ 50 $ 602 $ (228) $ (132) $ 43 $ 1,117 $ 356 $(4,633)
====== ====== ====== ====== ====== ====== ====== ======= ====== =======
Net income (loss) per
share.................. $(0.02) $(0.10) $ 0.01 $ 0.11 $(0.04) $(0.02) $ 0.01 $ 0.15 $ 0.04 $ (0.62)
====== ====== ====== ====== ====== ====== ====== ======= ====== =======
Shares used in computing
net income (loss) per
share.................. 4,943 5,240 5,338 5,383 5,524 5,525 5,520 7,420 8,030 7,510
====== ====== ====== ====== ====== ====== ====== ======= ====== =======
</TABLE>
21
<PAGE>
The following table sets forth, as a percentage of revenue, certain unaudited
quarterly financial data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Software............... 44% 44% 47% 53% 50% 47% 47% 50% 45% 49%
Services............... 54 54 51 44 49 51 52 47 51 48
Hardware............... 2 2 2 3 1 2 1 3 4 3
--- --- --- --- --- --- --- --- --- ---
Total revenues......... 100 100 100 100 100 100 100 100 100 100
Operating costs and
expenses
Software development... 26 26 28 23 23 24 26 19 20 18
Service and support.... 37 42 36 27 36 35 34 27 29 33
Hardware............... 2 3 3 4 1 3 1 4 4 4
Sales and marketing.... 24 31 21 23 31 27 26 23 27 25
Administration......... 13 12 11 11 13 13 11 11 16 13
Acquired in-process
technology............ -- -- -- -- -- -- -- -- -- 75
--- --- --- --- --- --- --- --- --- ---
Total operating costs
and expenses.......... 102 114 99 88 104 102 98 84 96 168
--- --- --- --- --- --- --- --- --- ---
Income (loss) from
operations............. (2)% (14)% 1% 12% (4)% (2)% 2% 16% 4% (68)%
=== === === === === === === === === ===
Net income (loss)....... (2)% (10)% 1% 8% (3)% (2)% 1% 11% 4% (40)%
=== === === === === === === === === ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in 1995, the Company met its capital
needs through a combination of cash flow from operations and proceeds from
issuance of Common Stock in 1993 ($1.1 million) and 1994 ($3.5 million). The
seasonality of the Company's business has historically necessitated the use of
short-term borrowings at various times during the year. The Company currently
has an $18 million unsecured revolving credit line bearing interest at the
prime rate less 0.5% or LIBOR plus 1.25% to 1.75%, which is available to fund
short-term liquidity needs and other general corporate purposes. As of
September 30, 1996, the Company had $300,000 outstanding under the line of
credit.
On October 25, 1995, the Company completed an initial public offering of its
Common Stock. The initial public offering resulted in net proceeds to the
Company of approximately $31,282,000. Management believes that the net proceeds
from this offering, together with existing cash and cash equivalents, cash flow
from operations and borrowings under its line of credit, will be sufficient to
meet the Company's currently anticipated working capital and capital
expenditure requirements for at least the next twelve months.
On May 28, 1996, the Company completed the Matkon Acquisition for a cash
purchase price of approximately $13.9 million. The Matkon division develops,
markets, installs and services a line of hospital materials management software
products which primarily run on a UNIX platform. The Matkon Acquisition
resulted in declines in cash and investment securities, and increases in a
number of asset accounts reflecting the acquisition of tangible and intangible
assets. Increases in prepaid and deferred income taxes arise as a result of the
tax benefits from the write-off of acquired in-process technology. See "Recent
Developments."
The Company has no outstanding material purchase commitments. The Company is
obligated to make minimum royalty payments in the aggregate amount of
approximately $3.2 million under certain license agreements, of which
approximately $400,000 has been paid. See "Recent Developments."
The Company does not believe that inflation has had a material impact on its
results of operations.
PENDING ACCOUNTING STANDARD
In accordance with Statement of Financial Accounting Standards No. 123, the
Company will continue to measure compensation cost for stock options using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock issued to Employees." The disclosure requirements of
Statement No. 123 will be incorporated into the December 31, 1996 financial
statements.
22
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
GENERAL
Enterprise is a healthcare information services company that develops,
markets, installs and services an integrated suite of application software
products that assist healthcare providers in managing their operations. These
resource management systems, which are sold primarily to acute care hospitals,
focus on cost containment and address a broad range of non-clinical management
needs, including materials management, operating room logistics, patient and
staff scheduling and financial management. The Company's healthcare
information systems operate on personal computer networks and make extensive
use of electronic data interchange ("EDI"), enabling its customers to redesign
their resource management functions to enhance efficiency and productivity.
INDUSTRY BACKGROUND
Healthcare spending in the United States in 1995 is estimated to have
exceeded $1 trillion. In recent years, governmental and market-driven reform
initiatives have produced significant pressures on healthcare providers to
control costs. In the past, the financial risk of healthcare delivery was
principally absorbed by third-party payors, and providers were not focused on
cost containment. Through managed care and provider capitation arrangements,
the economic risk of healthcare delivery is shifting from payors to providers.
In order to manage this risk, providers are being forced to change the way
that they operate and are increasingly focused on measuring and controlling
the cost of delivering care. The shifting of risk has also encouraged
consolidation among healthcare providers and the emergence of integrated
healthcare organizations in order to achieve economies of scale and operating
efficiencies. See "Risk Factors--Uncertainty and Consolidation in Healthcare
Industry."
The Company believes that a significant need exists for information systems
that address the operational aspects of healthcare delivery. To date, there
has been a lack of emphasis on integrated information systems that effectively
manage these operational costs, which the Company believes constitute a
majority of providers' overall costs. Most existing healthcare information
systems address the billing and clinical aspects of healthcare delivery.
Without the necessary information, it has been difficult for healthcare
managers to allocate efficiently their resources--people, supplies,
facilities, equipment and services--or to understand their costs. These tasks
have been made more difficult by the operating complexity caused by provider
consolidation and the emergence of integrated healthcare organizations.
THE ENTERPRISE SOLUTION
Enterprise has developed information systems that address the operational
aspects of healthcare delivery. The Company offers an integrated suite of
resource management systems that assist users in more efficiently managing
people, supplies, facilities, equipment and services. These systems enable
healthcare providers to (i) improve productivity through the redesign and
automation of operational processes and (ii) obtain the information necessary
to measure and control costs. The Company's current product offerings address
materials management, operating room logistics, organization-wide patient and
staff scheduling and financial management, areas which the Company believes
offer significant opportunities for productivity improvement and cost savings.
The Company's systems can be easily integrated with a wide variety of third-
party products. The Company has developed more than two hundred interfaces for
sharing critical information among its applications and other healthcare
information systems. These interfaces ensure that the Company's systems may be
integrated into a healthcare provider's management information systems
environment, thereby eliminating the need to enter the same data more than
once for use in different applications.
23
<PAGE>
STRATEGY
The Company's objective is to continue to be a leading provider of resource
management systems by aggressively using technology to enable healthcare
providers to manage resources, redesign processes and reduce costs. See "Risk
Factors." The Company's strategy includes the following key elements:
Develop and Acquire New Products; Enhance Existing Products. The Company
intends to continue to strengthen existing product lines and expand into
additional operational management areas. This includes (i) developing and
acquiring new technologies and resource management products that complement
existing product lines, (ii) converting the Company's remaining DOS-based
products to a Windows platform, (iii) enhancing system functionality to better
address the needs of integrated healthcare organizations and (iv) developing
additional interfaces with other software products. See "Recent Developments."
Leverage Existing Customer Base. The Company's existing customer base
includes approximately 1,000 acute care hospitals, of which approximately 270
were added as customers when the Company acquired the Matkon division. See
"Recent Developments." Most of the Company's existing customers do not
currently use the Company's entire suite of products. Because of its high
customer retention rate, the Company believes that many of these customers are
candidates for additional components of its product suite and for upgrades to
Windows versions with enhanced functionality. Of those customers (other than
customers of the Matkon division) which have purchased the Company's current
products since January 1, 1991, approximately 97% remained customers at July
1, 1996.
Increase Penetration in Hospital Market. The Company believes a significant
opportunity exists to penetrate further the approximately 2,900 large acute
care hospitals in the United States and Canada. The Company also believes a
significant opportunity now exists with the approximately 3,100 small
hospitals in the United States and Canada. The Company has expanded its direct
sales force and increased its marketing efforts to capitalize on these
opportunities and has established sales teams focused on these targeted
markets.
Expand Presence in Alternate Site Markets. The Company intends to expand its
limited presence in alternate site markets, including outpatient clinics,
ambulatory surgery centers and specialty laboratories. Accordingly, the
Company has expanded its sales force and is in the process of developing
strategic relationships with medical product suppliers.
Develop Additional Distribution Channels. The Company has entered into joint
marketing agreements with group purchasing organizations and hospital
management organizations, which typically provide for these organizations to
recommend the Company's products on a preferred or exclusive basis. The
Company intends to pursue similar agreements, joint ventures or other
arrangements (which may include investments by the Company) with certain
healthcare information system developers and resellers and certain medical
product suppliers.
PRODUCTS
The Company's major product lines include materials management, operating
room logistics, organization-wide patient and staff scheduling and financial
management. Generally, the Company's products are personal computer-based and
utilize either a DOS or Windows platform, linked by a number of network
operating systems, including Novell and Microsoft Windows NT. The software
acquired in the Matkon Acquisition primarily operates on minicomputers using a
UNIX platform. The Company's products are modular in design, share a common
database, and may be used independently or bundled together in order to
provide an integrated resource management system solution that enables
healthcare managers to improve efficiency and obtain the information needed to
make strategic decisions regarding resource utilization. The Company's systems
follow the American National Standards Institute (ANSI) HL7 and X12 standards
to exchange data with other software.
24
<PAGE>
The following table describes the product lines currently offered by the
Company:
<TABLE>
<CAPTION>
INSTALLED
PRODUCT LINE PRODUCTS DESCRIPTION BASE/1/
- -------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Materials NOVA DOS-product used to manage supplies
Management from purchase to point-of-use, stream-
lining acquisition and distribution 484
through use of electronic requisition-
ing, EDI and just-in-time inventory
management.
---------------------------------------------------------------------------
MATKON 2000 UNIX-materials management product which
streamlines acquisition and distribu-
tion of supplies through the use of 124
electronic requisitioning, EDI and
just-in-time inventory management.
---------------------------------------------------------------------------
Nova.IDN Windows/client server redesign of NOVA,
enhanced to address the more complex
financial, security and access issues *
faced by Integrated Delivery Networks
(IDNs).
- -------------------------------------------------------------------------------------------
Materials TouchScan Windows/client server point-of-use sup-
Management-- ply management system providing just-
Point-of-Use in-time inventory management, cost by 14
Systems patient and procedure, automated pa-
tient charging and EDI.
---------------------------------------------------------------------------
TS2000 Windows/client server point-of-use sup-
ply management system specifically tai- 7
loring TouchScan functionality for spe-
cialty laboratories.
- -------------------------------------------------------------------------------------------
Materials Corporate Windows/client server product that ac-
Management-- Communications cumulates and analyzes purchasing in-
Contract System formation throughout an IDN to improve **
Management purchase contract negotiation and com-
pliance.
---------------------------------------------------------------------------
Interkon UNIX-system which accumulates and dis-
seminates supply contract information 2
to buying group members.
- -------------------------------------------------------------------------------------------
Financial TITAN DOS-accounts payable management prod-
Management uct, providing electronic invoice re- 287
ceipt, automated invoice matching and
electronic payment capabilities.
---------------------------------------------------------------------------
Titan.IDN Windows/client server accounts payable
and general ledger system with EDI ca- **
pability.
- -------------------------------------------------------------------------------------------
Operating Room ORBIT DOS-operating room management system,
Logistics which automates scheduling, physician 340
preference lists, supply management and
procedure charting.
---------------------------------------------------------------------------
Win/ORBIT Windows/client server upgrade for ORBIT 31
operating room scheduling product.
- -------------------------------------------------------------------------------------------
Scheduling Enterprise Schedul- Windows/client server, enterprise-wide
ing patient scheduling system incorporating
clinical sequencing protocols and en- 20
abling centralized or decentralized
scheduling.
---------------------------------------------------------------------------
ESP for Windows Windows/client server, enterprise-wide
staff scheduling which serves as a mas-
ter scheduler with a staff demographic **
database that supports an unlimited
number of work areas and staff posi-
tions.
</TABLE>
/1/As of June 30, 1996.
*Currently in beta-testing.
**Product introduced in 1996. As of September 27, 1996 the Company had
licensed the following new products:
Corporate Communications
System________________5
Titan.IDN_______________8
ESP for Windows________11
25
<PAGE>
CUSTOMER SERVICE AND SUPPORT
The Company provides its customers with services that begin prior to product
implementation and continue for the duration of product use. Service and
support helps customers realize the benefits offered by the Company's software
solutions and provides the Company with a significant base of recurring
revenue. The services offered by the Company are priced separately and include
the following:
Network Verification and Design. Prior to the installation of the Company's
software, customers normally contract for a network analysis, which includes a
survey of the customer's existing information systems, hardware and networks.
Implementation Services. The Company offers implementation services at the
time of a software purchase, including: (i) loading of the software, (ii)
analysis to identify required interfaces with other applications and the
conversion, where necessary, of data from existing systems into the required
formats and (iii) hands-on education.
Customer Education. The Company regularly conducts a wide range of product
educational seminars at its headquarters. More than 1,000 customer
representatives attended Company seminars in 1995.
Service and Support. The Company provides customer service and support after
installation of the software. Included with basic service is 24-hour, toll-
free access to customer support personnel.
Consulting. The Company provides on-site project management, including cost-
benefit analysis, system optimization review and, in some instances, long-term
staff management functions in an outsourcing capacity.
CUSTOMERS
The Company's customers include healthcare providers and medical products
suppliers located throughout the United States and in Canada. As of July 1,
1996, the Company had approximately 1,000 healthcare provider customers using
one or more of its systems, of which approximately 270 were added as customers
when the Company acquired the Matkon division in 1996. Of those customers
(other than customers of the Matkon division) which have purchased the
Company's current products since January 1, 1991, approximately 97% remained
customers at July 1, 1996. In addition, more than 90 suppliers have contracted
with or have arranged through the Company to maintain electronic data
interchange with providers. No single customer accounted for more than 5% of
the Company's revenues in either of the last two fiscal years.
Historically, the Company has focused its marketing efforts on the large
hospital market, which comprises the substantial majority of its customer
base. More recently, the Company has expanded its marketing efforts to include
small hospitals and alternate site providers such as outpatient clinics,
ambulatory surgery centers and specialty laboratories. The Company's potential
customers in the United States and Canada include approximately: (i) 2,900
large acute care hospitals (hospitals with 150 or more beds), (ii) 3,100 small
hospitals (hospitals with less than 150 beds), (iii) 7,000 outpatient clinics,
(iv) 2,100 freestanding ambulatory surgery centers and (v) 8,400 hospital-
based and free-standing specialty laboratories. Because the Company has
limited experience in non-hospital markets, it may find that significant
modifications to its products are necessary before they become useful to a
customer or that product pricing may have to be adjusted downward. See "Risk
Factors--Inability to Expand into New Markets."
SALES AND MARKETING
The Company sells its products and services through a direct sales force
located throughout the United States and in Canada that is organized according
to market segments. These segments include large hospitals, small hospitals
and clinics, specialty laboratories and groups and healthcare networks. The
sales cycle of the Company's systems and products varies substantially from
customer to customer and typically requires six to twelve months.
26
<PAGE>
Large Hospitals. The large hospital sales team consists of five sales
managers, twenty-seven sales representatives and eight sales specialists who
assist in the more technical aspects of the sales process. These sales
representatives are responsible for selling additional components of the
Company's product suite to existing customers as well as selling the entire
product suite to large hospital prospects.
Small Hospitals, Clinics, Ambulatory Surgery Centers and Specialty
Laboratories. The small hospital, clinic and ambulatory surgery center sales
team consists of a sales manager and ten sales representatives. Although the
Company has a number of existing customers in this segment, this market is a
new focus for the Company. Increasingly, potential customers are affiliated
with a healthcare network or group purchasing organizations, thereby enabling
the Company to pursue small hospitals and clinics more cost effectively. This
team also intends to focus on sales of the Company's point-of-use resource
management product to specialty laboratories.
Groups and Healthcare Networks. The group and healthcare network sales team
consists of five sales managers and three sales representatives. They are
responsible for developing business relationships between the Company and
those groups and networks that either own hospitals or exercise influence over
procurement decisions for their member institutions.
The Company has been named a preferred vendor by a number of group
purchasing organizations, including AllHealth, Health Services Corporation of
America, Horizon Healthcare, Inc., Healthcare Services of New England, Quorum
Health Resources, Inc., and University Hospital Consortium Services
Corporation, all of which provide group purchasing management services to
healthcare providers. Pursuant to these preferred vendor agreements, various
systems sold by the Company are endorsed by the group purchasing organizations
as the preferred or exclusively recommended product in a category. There are
more than 1,900 hospital members in these organizations. In addition, the
Company intends to pursue similar agreements, joint ventures or other
arrangements (which may include investments by the Company) with certain
healthcare information system developers and resellers and certain medical
product suppliers.
To support its sales force, the Company conducts comprehensive marketing
programs that include direct mail, focus groups, user conferences, site visits
and customer seminars. Decision makers for the Company's offerings are well
identified. Therefore, direct marketing techniques are emphasized to raise
marketplace awareness, influence decisions and generate qualified leads. The
marketing group consists of one manager and a staff of eight. Customer
seminars are periodically sponsored in association with Microsoft Corporation
("Microsoft") as part of its "Solution Provider" relationship with the
Company. Through this Solution Provider relationship, the Company has been
granted licenses to use Microsoft systems and applications products, server
products, development tools products and pre-release software in order to
assist the Company in providing comprehensive computer solutions to its
customers.
BACKLOG
As of June 30, 1996, the Company had approximately $24 million of backlog
(defined as unrecognized up-front fees pursuant to signed contracts) for
software and services that had not yet been delivered, of which $4 million of
backlog is attributable to the Matkon division, as compared to $13 million of
backlog as of June 30, 1995. These backlog amounts do not include revenues
related to annual support, maintenance and enhancement, continuing education
fees and hardware. Based upon its experience, the Company anticipates that a
majority of the backlog will be completed within the next twelve months.
However, the Company is unable to predict with any degree of accuracy the
amount of revenue it will achieve from its backlog in any particular quarter
because the length of the implementation cycle is dependent to a great extent
on factors outside the Company's control. These factors include the date on
which the installation starts (which the customer may delay), the amount of
internal resources that a customer commits to the installation process, the
availability of customer hardware, the structure and size of databases which
need to be converted and the number of interfaces with other information
systems. See "Risk Factors--Variable Quarterly Operating Results; Seasonality"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
27
<PAGE>
PRODUCT DEVELOPMENT AND TECHNOLOGY
The Company's product development strategy is directed at increasing the
functionality and performance of current products, adapting its products for
other healthcare market segments, integrating its products with products from
other healthcare software vendors and creating new products. The Company uses
several methods to identify new product opportunities and enhancements to
current products, including (i) targeted focus groups to collect feedback on
specific requirements, (ii) co-development arrangements with specific
customers and (iii) user conferences to achieve broad consensus on market
needs.
Through the use of co-development arrangements, the Company believes that it
is able to release products that better address current market demands.
Representative co-development partners have included Covenant Healthcare
System, Inc., Harris Methodist Health Systems, Rex Healthcare Services and
Stanford Health Services.
The Company is currently converting its NOVA and TITAN products from DOS to
a Windows client/server platform using an SQL database. Nova.IDN, the Windows-
based version of NOVA, is currently in beta-testing. Its Enterprise Scheduling
and TouchScan products already operate in this environment, while ESP for
Windows is being converted to use an SQL database. In addition, the functions
of the Company's ORBIT product will be incorporated into Enterprise
Scheduling. See "Risk Factors--Product Conversions to Windows."
Generally, the Company's software operates on IBM-compatible personal
computers, using either a DOS or Windows platform, linked by a number of
network operating systems, including Novell and Microsoft Windows NT. The
software acquired in the Matkon Acquisition primarily operates on
minicomputers using a UNIX platform. The Company's products are modular in
design, share common database elements and may be used independently or
together. The Company's systems follow the American National Standards
Institute (ANSI) HL7 and X12 standards to exchange data with other software.
All new products are being developed with a three-tiered, client/server
architecture, using object-oriented methodologies and the C++ programming
language. The new products are designed to run on 32-bit Microsoft Windows
environments and various SQL databases. See "Risk Factors--Ability to Develop
New Software Products; Rapid Technological Change" and "--New Product
Acceptance."
COMPETITION
The market for healthcare information systems is intensely competitive. The
competitive factors affecting the market for the Company's software and
services include: vendor and product reputation, availability of products on
preferred computer and communications platforms, scalability, integration with
other applications, functionality and features, ease-of-use, quality of
support, documentation and training, product quality and performance, product
innovation, price and the effectiveness of marketing and sales efforts. The
relative importance of each of these factors depends upon the market segment.
Certain of the Company's competitors have significantly greater financial,
technical, research and development and marketing resources. As a result, they
may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than the Company.
In addition, consolidation in the healthcare information systems industry may
permit the Company's competitors to have access to increased financial and
administrative resources, greater technological capabilities and to realize
other operational efficiencies and competitive advantages. Moreover,
purchasers may prefer to buy computer systems from a single source provider.
Because the Company focuses exclusively on healthcare resource information
systems (as opposed to clinical or billing systems), it cannot serve as the
sole source of computer software for healthcare organizations. The Company
believes that its experience, its use of technology to create innovative
solutions, its reputation for customer service and its ability to bring
products to market faster than its competition through joint development
partnerships with key customers will enable the Company to compete effectively
in its marketplace. See "Risk Factors--Competition."
28
<PAGE>
PROPRIETARY RIGHTS AND LICENSES
The Company depends significantly upon proprietary technology. The Company
relies on a combination of copyright, trade secret and trademark laws,
confidentiality procedures and nondisclosure and other contractual provisions
to protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company believes that, because
of the rapid pace of innovation within the computer software industry, factors
such as the technological and creative skills of its personnel, frequent
product enhancements and ongoing reliable product maintenance and support are
more important in establishing and maintaining a leadership position within
the industry than are the various legal protections of its technology. See
"Risk Factors--Dependence on Proprietary Technology; Risks of Infringement."
Typically, the Company distributes its products under software license
agreements that grant a customer a nonexclusive, nontransferable license to
use the Company's products for the customer's internal operation at designated
sites. In general, the license agreements require the Company to deposit the
source code for its software products in an escrow that may be accessed by the
customer in the event of the Company's liquidation, dissolution or bankruptcy,
or if the Company fails to cure a material breach of contract.
The Company uses the "TouchScan" name under an agreement with a third party.
This agreement does not provide for the Company's use of the name in the
specialty laboratory market. Consequently, the Company sells its point-of-use
resource management product in this market under the name "TS2000."
GOVERNMENTAL REGULATION
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation
of healthcare providers. Many federal and state legislators have announced
that they intend to propose programs to reform the United States healthcare
system at both the federal and state level. These programs may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change the environment in which providers
operate. Healthcare providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments, including
investments in the Company's products and related services. See "Risk
Factors--Uncertainty and Consolidation in the Healthcare Industry."
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
EMPLOYEES
As of September 1, 1996, the Company had 410 full-time employees, of which
74 were in sales and marketing, 102 in product development, 191 in customer
services and 43 in administration. None of the Company's employees is
represented by a labor union, and the Company is not aware of any
organizational efforts on behalf of any labor unions involving the Company's
employees.
FACILITIES
The Company leases approximately 59,000 square feet of space at its
corporate headquarters located in Wheeling, Illinois, pursuant to leases which
expire on December 31, 2001 with renewal options through December 31, 2006 and
approximately 12,100 square feet of space in Overland Park, Kansas pursuant to
a sublease which expires on June 1, 1997.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glen E. Tullman.............. 37 Chief Executive Officer and Director
Joseph E. Carey.............. 38 President and Secretary
David B. Mullen.............. 45 Chief Financial Officer
Steven M. Katz............... 46 Chief Operating Officer
David A. Carlson............. 44 Executive Vice President, Business Development
Stanley A. Crane............. 47 Executive Vice President, Software Engineering
James H. Ray................. 55 Senior Vice President, Finance and Treasurer
Thomas R. Hutchison(1)(2).... 56 Chairman of the Board and Director
Thomas R. Pirelli............ 49 Director
Robert A. Compton(2)......... 40 Director
Bernard Goldstein(1)(2)...... 65 Director
M. Fazle Husain(1)........... 32 Director
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Glen E. Tullman has served as a Director of the Company since March 1993 and
as Chief Executive Officer since October 1994. From 1983 to 1994, Mr. Tullman
was employed by CCC Information Services Inc., a computer software company
servicing the insurance industry, most recently as President and Chief
Operating Officer. He serves on the board of directors of Insurance Auto
Auctions, Inc. Mr. Tullman holds a B.A. degree from Bucknell University and a
degree from St. Antony's College, Oxford University, Oxford, England.
Joseph E. Carey has served as President of the Company since April 1993 and
has served as Secretary since November 1994. From 1987 to April 1993, Mr. Carey
held various management positions with the Company in product management and
operations. From 1986 to 1987, he was employed by BioTechnica Diagnostics, Inc.
as Director of Finance and Administration. From 1980 to 1986, he was employed
by Ernst & Young LLP, most recently as Audit Manager. Mr. Carey holds a B.B.A.
degree from the University of Notre Dame and an M.B.A. degree from the
University of Chicago.
David B. Mullen has served as Chief Financial Officer of the Company since
January 1995. From 1983 to 1995, Mr. Mullen was employed in various positions
by CCC Information Services Inc., including Vice Chairman, President and Chief
Financial Officer. Prior to that, he was employed by Ernst & Young LLP. Mr.
Mullen holds an A.B. degree from Princeton University and an M.B.A. degree from
the University of Pennsylvania.
Steven M. Katz has served as Chief Operating Officer of the Company since
November 1994. From December 1993 to November 1994, Mr. Katz was employed by
CCC Information Services Inc. as President of its Insurance Division. From
January 1993 to December 1993, he was employed as Chief Operating Officer by
Melson Technologies, Inc., a computer software company serving the real estate
industry. From 1990 to December 1992, Mr. Katz was employed by LPC/A Pitney
Bowes Co., a direct-marketing computer software company, most recently as
President. Prior to that, Mr. Katz held various positions with Xerox
Corporation and IBM. Mr. Katz holds a B.S. degree in Economics from the
University of Illinois.
30
<PAGE>
David A. Carlson, a co-founder of the Company, has served as Executive Vice
President, Business Development of the Company since November 1994. Since the
Company's inception, Mr. Carlson has held various management positions with
the Company, including Executive Vice President, Strategic Alliances; Chief
Operating Officer; and Senior Vice President, Software Development. Mr.
Carlson serves as a founding Director of the Health Level 7 (HL7)
International Standards Organization.
James H. Ray, has served as Treasurer of the Company since 1987 and as
Senior Vice President, Finance of the Company since January 1995. From 1987 to
January 1995, Mr. Ray served as Chief Financial Officer of the Company. Mr.
Ray holds a B.S. degree from the University of Illinois.
Stanley A. Crane has served as Executive Vice President, Software
Engineering of the Company since July 1995. From February 1995 to May 1995,
Mr. Crane was employed by Global Village Communications, a computer software
company, as Director of Software. Additionally, from December 1994 to June
1995, Mr. Crane provided Internet consulting services to IBM and Network
Computing Devices, Inc. From March 1993 to November 1994, Mr. Crane was
employed by Lotus Development Corporation, a computer software company, most
recently as Senior Director of Research and Development. From December 1991 to
February 1993, he was employed by WordStar International, Inc., a computer
software company, most recently as Vice President of Research and Development.
From July 1989 to November 1991, Mr. Crane was employed by Ashton-Tate, Inc.,
a computer software company, most recently as Director of Product Development
for DBASE IV. Mr. Crane holds a B.A. degree from Fort Lewis College and an
M.A. degree from the University of Wyoming.
Thomas R. Hutchison has been a Director of the Company since June 1983 and
has served as Chairman of the Board since July 1995. He serves as Chairman and
Chief Executive Officer of Hawkeye Argus, Inc., a private company with
diversified investments. From 1964 until August 1, 1995, Mr. Hutchison was
employed by Merrill Lynch and Co., Inc., most recently as First Vice
President--Private Client Group.
Thomas R. Pirelli, a co-founder of the Company, has served as a Director of
the Company since 1981. From 1981 to December 1995, Mr. Pirelli held various
positions with the Company, including Chairman of the Board, Chief Executive
Officer and President. In December 1995, Mr. Pirelli resigned as an officer
and terminated his employment with the Company. See "Management--Severance
Agreement." He currently serves as Chairman of Arial Systems Corporation, a
high technology start-up in the telecommunications industry. Prior to founding
the Company, Mr. Pirelli served as a Director of Information Systems for
American Hospital Supply Corporation. Mr. Pirelli holds a B.S.E. degree from
Princeton University.
Robert A. Compton has served as a Director of the Company since May 1993.
Since 1988, Mr. Compton has been a general partner of CID Equity Partners I,
L.P. and a general partner of CID Equity Partners II, L.P. (collectively,
"CID"). From 1985 to 1988, he served as an investment manager with First
Chicago Venture Capital. Mr. Compton serves as a Director of Sofamor Danek
Group, Inc., a medical devices manufacturer, and as a director of six private
companies. Mr. Compton is also a Director of the Ewing Marion Kauffman
Foundation.
Bernard Goldstein has served as a Director of the Company since March 1993.
Mr. Goldstein has been Managing Director of Broadview Associates LLC, an
investment banking firm, since 1979. See "Certain Transactions." Mr. Goldstein
currently serves as a Director of Apple Computer, Inc. where he is the
Chairman of the Audit Committee. Mr. Goldstein also serves as a Director of
SPSS, Inc., SunGard Data Systems, Inc. and Franklin Electronic Publishers,
Inc. He is Past President of The Information Technology Association of
America.
M. Fazle Husain has served as a Director of the Company since August 1994.
Mr. Husain is a Vice President of Morgan Stanley & Co. Incorporated, an
investment banking firm ("Morgan Stanley") where he has been employed since
1991, and of the Managing General Partner of certain partnerships affiliated
with Morgan Stanley which beneficially own Common Stock of the Company. Mr.
Husain was also employed at Morgan Stanley from 1987 until 1989. Mr. Husain
serves on the Board of Directors of Cambridge Heart, Inc.
31
<PAGE>
and several private healthcare and healthcare information technology companies.
Mr. Husain received an Sc.B. in Chemical Engineering from Brown University and
an MBA from the Harvard Graduate School of Business Administration.
The Board of Directors of the Company may consist of up to nine members and
is divided into three classes with staggered three-year terms. Currently, the
Board of Directors consists of six persons and each class consists of two
directors. Messrs. Husain and Hutchison serve in the class whose term expires
on the date of the annual meeting of stockholders next following the end of
fiscal 1996; Messrs. Pirelli and Tullman serve in the class whose term expires
on the date of the annual meeting of stockholders next following the end of
fiscal 1997; and Messrs. Goldstein and Compton serve in the class whose term
expires on the date of the annual meeting of stockholders next following the
end of fiscal 1998. The executive officers of the Company are elected at each
annual meeting of the Board of Directors and serve at the discretion of the
Board of Directors.
Two of the Company's current Directors, Messrs. Compton and Husain, were
nominated and elected to the Company's Board of Directors prior to the
Company's initial public offering in accordance with certain investment and
related agreements. See "Management--Compensation Committee Interlocks and
Insider Participation."
DIRECTOR COMPENSATION
Directors who are not executive officers of the Company are paid a fee of
$1,000 for each board meeting attended in person and are reimbursed for travel
expenses incurred in connection with attending meetings. Directors are not
entitled to additional fees for serving on committees of the Board of
Directors. Pursuant to the terms of the formula program of the Company's Long
Term Incentive Plan, each current director of the Company who was not otherwise
employed by the Company when he became a director automatically was granted an
option to purchase 15,000 shares of Common Stock upon his initial election to
the Board of Directors. These options vest in three annual installments of
5,000 shares each. Messrs. Goldstein, Hutchison and Tullman each received
options to purchase 15,000 shares of Common Stock, all of which have vested.
Outstanding options are exercisable at $4.57 per share. When CID became a
principal stockholder in April 1993, it acquired the right to appoint a nominee
to the Company's Board of Directors. Upon election of its nominee, Mr. Compton,
CID was granted an option to purchase 15,000 shares of Common Stock, all of
which are now vested. These options are exercisable at $4.57 per share. When
Morgan Stanley became a principal stockholder in March 1994, it also acquired
the right to appoint a nominee to the Company's Board of Directors. Upon the
election of such nominee (who has since resigned and been replaced by Mr.
Husain), Morgan Stanley was granted an option to purchase 15,000 shares of
Common Stock, 5,000 of which vested on each of April 21, 1995 and April 21,
1996 and 5,000 of which will vest on April 21, 1997. These options are
exercisable at $5.60 per share. Pursuant to the terms of the formula program of
the Company's Long-Term Incentive Compensation Plan, each director of the
Company appointed in the future who is not otherwise employed by the Company
automatically will be granted an option to purchase 5,000 shares of Common
Stock upon his or her initial election to the Board of Directors. The option
will vest in three equal annual installments. See "Management--Compensation
Pursuant to Plans" and "Certain Transactions."
32
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation with respect to the annual and
long-term compensation earned by the Company's Chief Executive Officer and the
four most highly compensated executive officers other than the Chief Executive
Officer during the years ended December 31, 1995 and December 31, 1994 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- ------------
OPTIONS
NAME AND PRINCIPAL FISCAL OTHER ANNUAL (# OF ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION SHARES) COMPENSATION(1)
- ------------------ ------ -------- ------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Tullman(2)...... 1995 $200,000 $42,000 -- -- --
Chief Executive Officer 1994(2) 50,000 1,000 $3,000(3) 144,846 --
Joseph E. Carey......... 1995 132,000 27,720 -- 17,500 --
President 1994 121,000 45,980 -- -- $7,653
David B. Mullen......... 1995(4) 160,410 28,072 -- 77,500 --
Chief Financial Officer
Steven M. Katz.......... 1995 170,000 29,750 -- 17,500 --
Chief Operating Officer 1994(5) 22,558 451 -- 55,000 --
David A. Carlson ....... 1995 120,900 16,322 -- 12,500 --
Executive Vice
President 1994 113,400 36,288 -- -- 7,601
Business Development
</TABLE>
- --------
(1) These amounts represent contributions to the Company's Employee Stock
Ownership Plan (the "ESOP"). The ESOP was merged into the Company's 401(k)
Savings Plan in October 1995. No contributions to the ESOP have been made
since 1994, although forfeitures by existing participants will cause
additions to other participants, including certain of the Named Executive
Officers. See "Management--Compensation Pursuant to Plans."
(2) Mr. Tullman's salary and bonus in 1994 reflect amounts paid from the
commencement of his employment with the Company in October 1994 through
fiscal year ended December 31, 1994.
(3) Mr. Tullman earned $3,000 as an outside director of the Company prior to
his employment.
(4) Mr. Mullen became the Company's Chief Financial Officer in January 1995.
(5) Mr. Katz' salary and bonus in 1994 reflect amounts paid from the
commencement of his employment with the Company in November 1994 through
the fiscal year ended December 31, 1994.
33
<PAGE>
STOCK OPTIONS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers in 1995:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------ ------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE
OPTIONS EMPLOYEES PER EXPIRATION
GRANTED(1) IN 1995 SHARE DATE 5% 10%
---------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Tullman.. -- -- -- -- -- --
Joseph E. Carey.. 7,500 4.4% $ 5.93 06/15/05 $210,483 $ 509,585
10,000 25.00 12/22/05
David B. Mullen.. 55,000(3) 19.5 5.93 01/23/05 494,207 1,228,603
7,500 5.93 06/15/05
15,000 25.00 12/22/05
Steven M. Katz... 7,500 4.4 5.93 06/15/05 210,483 509,585
10,000 25.00 12/22/05
David A. Carlson. 7,500 3.1 5.93 06/15/05 131,871 310,367
5,000 25.00 12/22/05
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) Generally, options granted under the Company's Long-Term Incentive
Compensation Plan become exercisable over a three-year period at the rate
of 33% per year and have ten-year terms so long as the optionee's
employment with the Company continues. All options were granted at fair
market value as determined by the Board of Directors of the Company on the
date of grant with the exception of the options that were granted in June
1995. After the June 1995 options were granted, the Company determined
that the fair market value of these options were $8.00 at the time of
grant, rather than $5.93. Accordingly, the Company has recorded an
adjustment for compensation expenses, but the exercise price has not been
changed.
(2) Future value of current-year grants assuming appreciation in the market
value of the Common Stock of 5% and 10% per year over the ten-year option
period. The actual value realized may be greater than or less than
potential realizable values set forth in the table.
(3) Mr. Mullen's option to purchase 55,000 shares of Common Stock provides for
vesting in four equal annual installments beginning on January 23, 1995.
34
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option holdings for
1995 with respect to each of the Named Executive Officers. No options were
exercised by the Named Executive Officers in 1995:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glen E. Tullman(2).......... 67,938 91,908 $1,682,837 $2,264,980
Joseph E. Carey............. 40,000 37,500 1,037,200 757,875
David B. Mullen............. 13,750 63,750 337,837 1,280,287
Steven M. Katz.............. 27,500 45,000 675,675 914,950
David A. Carlson............ 33,334 29,166 864,351 643,924
</TABLE>
- --------
(1) Value of unexercised options equals fair market value at December 31, 1995
(market price $30.50) of a share of Common Stock into which the option can
be converted, less exercise price, times the number of options
outstanding.
(2) Does not include options to purchase 144,846 shares of issued and
outstanding Common Stock from Thomas R. Pirelli, of which options to
purchase 57,938 shares are currently exercisable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1995, the Compensation Committee
of the Board of Directors consisted of Messrs. Hutchison, Goldstein and
Tullman until February 1995. Mr. Husain, a Director and a Vice President with
Morgan Stanley, one of the Company's principal stockholders, replaced Mr.
Tullman as a member of the Compensation Committee in February 1995. Mr.
Tullman has served as Chief Executive Officer of the Company since October
1994.
On April 30, 1993, the Company entered into an Investment Agreement with CID
Ventures, L.P., and CID Equity Capital, L.P. (collectively, the "CID
Investors"). On March 31, 1994, the Company entered into an Investment
Agreement with Morgan Stanley Venture Investors, L.P., Morgan Stanley Venture
Capital Fund II, L.P., and Morgan Stanley Venture Capital Fund II, C.V.
(collectively, the "Morgan Investors"). Pursuant to these investment
agreements, the Company issued 218,818 shares of Common Stock in April 1993 to
the CID Investors at a price of $4.57 per share for an aggregate purchase
price of $999,998.26 and 642,857 shares of Common Stock in March 1994 to the
Morgan Investors at a price of $5.60 per share for an aggregate purchase price
of $3,599,999.20. In addition, the Company, the CID Investors, the Morgan
Investors and others entered into an Amended and Restated Registration Rights
Agreement dated March 31, 1994, pursuant to which the CID and Morgan Investors
have been granted certain demand and piggyback registration rights. See
"Description of Capital Stock--Registration Rights." Messrs. Compton and
Husain were nominated and elected to the Company's Board of Directors prior to
the Company's initial public offering in accordance with these investment and
related agreements. On April 30, 1993, the Company also sold 54,704 shares of
Common Stock for an aggregate purchase price of $249,997.28 ($4.57 per share)
to Mr. Goldstein, a Director of the Company. See "Certain Transactions."
The Company entered into an agreement with Broadview Associates LLC
("Broadview"), effective as of February 1, 1996, pursuant to which Broadview
agreed to: (i) study the Company's existing corporate strategy; (ii) help
establish acquisition transaction criteria consistent with the Company's
goals; (iii) develop suggested target candidates; (iv) screen target
candidates under consideration against agreed criteria; (v) make approaches
and introductions to target candidates; and (vi) help negotiate and structure
transactions. This agreement has terminated. Pursuant to the agreement, the
Company paid Broadview a fee of $370,000 in connection with the Matkon
Acquisition. Bernard Goldstein, a Director of the Company and a member of the
Compensation Committee, is a Managing Director of Broadview.
35
<PAGE>
EMPLOYMENT AGREEMENTS
Messrs. Tullman, Carey, Mullen, Katz and Carlson have employment agreements
with the Company. The agreements fix each of the officers' base compensation
and provide for reimbursement of travel and other expenses in connection with
such officers' employment. In general, the agreements provide for annual
bonuses of up to 40% of the officer's salary upon attaining certain
performance objectives (such as total revenues and operating income)
determined by the Board of Directors at the beginning of the calendar year.
The current term of the agreements expire on August 31, 1997, are renewable
for successive periods of one year after expiration of the current term and
are terminable by the Company with cause, as defined in the employment
agreements. Upon termination by the Board of Directors without cause, the
executive will be entitled to receive a payment equal to his then current
annual base salary, in addition to all compensation earned but unpaid as of
the date of termination. If so terminated, the Company will be obligated to
pay the following amounts to the Named Executive Officers: Mr. Tullman,
$225,000; Mr. Carey, $170,000; Mr. Mullen, $200,000; Mr. Katz, $190,000; and
Mr. Carlson, $135,000. In addition, if employment of any officer is terminated
by the Company within twelve months of a change in control, the executive will
be entitled to the following additional benefits: (i) any options to purchase
Common Stock, which would otherwise be nonvested, will immediately vest, (ii)
100% of the bonus to which he would have otherwise been entitled had he been
employed on the last day of the calendar year (and then been terminated) and
(iii) payment of his health insurance premiums for the duration of the COBRA
continuation period. These employment agreements also contain confidentiality
and noncompetition provisions for the terms set forth in each agreement.
SEVERANCE AGREEMENT
On January 9, 1996, the Company entered into a severance agreement with
Thomas R. Pirelli (the "Severance Agreement"). Pursuant to the Severance
Agreement, Mr. Pirelli terminated his employment with the Company. As a
severance payment, the Company paid Mr. Pirelli $200,000, plus $19,682 as
accrued bonus for 1993 and 1994 and $35,000 as a bonus for 1995. In
consideration for such payment, Mr. Pirelli agreed to a general release of all
claims against the Company, a covenant not to sue and an agreement not to
solicit any of the Company's employees through December 31, 1997. Until
January 9, 1998, Mr. Pirelli is subject to noncompetition covenants contained
in his original employment agreement with the Company.
COMPENSATION PURSUANT TO PLANS
Long-Term Incentive Compensation Plan. The Board of Directors has adopted
the Enterprise Systems, Inc. Long-Term Incentive Compensation Plan (the "Long-
Term Plan"), which was an amendment and restatement of the Company's 1993
Stock Option Plan. The purpose of the Long-Term Plan is to promote the
interests and enhance the value of the Company by linking the personal
interests of its employees and directors with those of its stockholders, by
inducing individuals of outstanding ability and potential to join and remain
with the Company, by encouraging and enabling eligible employees and directors
to acquire proprietary interests in the Company, and by providing the
participating employees and directors with an additional incentive to promote
the success of the Company.
Awards under the Long-Term Plan may be in the form of stock options
(including both incentive stock options that meet the requirements of Section
422 of the Internal Revenue Code and nonqualified stock options), stock
awards, restricted stock grants, stock appreciation rights ("SARs") and
performance shares (collectively, "Awards"). The Long-Term Plan also includes
the formula program. The formula program provides for the automatic grant of
options to purchase shares of Common Stock to nonemployee directors of the
Company. Pursuant to the terms of the formula program, each director of the
Company who is not otherwise employed by the Company automatically will be
granted an option to purchase 5,000 shares of Common Stock upon his or her
initial election to the Board. The option will vest in three annual
installments, with the first such installment to vest on the first anniversary
of the option grant date.
36
<PAGE>
Awards will be evidenced by a written agreement, setting forth the terms and
conditions of that Award, which need not be identical for each Award. Any
Award issued under the Long-Term Plan that is forfeited, expired or terminated
prior to vesting or exercise will again become available for grant under the
Plan.
The Long-Term Plan is administered by the Compensation Committee (the
"Committee"). The Committee has discretion to determine which "key employees"
and "key non-employees" (non-employee directors, consultants or independent
contractors) will be recipients of Awards under the Long-Term Plan, and to
establish the terms, conditions and limitations of each Award (subject to the
terms of the Long-Term Plan and the applicable provisions of the Internal
Revenue Code), including the type and amount of the Award, the number of
shares of Common Stock to be subject to any Award of options or restricted
stock, or the amount of cash or rights to be included in an Award, the
exercise price of any options, and the date or dates upon which options become
exercisable or upon which any restrictions applicable to any Award lapse. The
Committee also has full power to construe and interpret the Long-Term Plan and
the Awards granted under the Long-Term Plan, and to establish rules and
regulations necessary or advisable for its administration. The determination
of the Committee with respect to any matter under the Long-Term Plan to be
acted upon by the Committee is conclusive and binding.
Awards under the Long-Term Plan may be granted only to key employees and key
non-employees of the Company and its subsidiaries. The Committee determines
whether a particular employee or non-employee qualifies as a key employee or
non-employee. Awards also may be granted to a prospective employee,
conditioned upon such person becoming an employee. Members of the Committee
are not eligible for Awards while serving on the Committee, unless the Award
is made pursuant to a formula that states the amount and price of the Common
Stock to be awarded to the members of the Committee and specifies the timing
of the Award.
The maximum number of shares of Common Stock which may be issued and sold
under the Long-Term Plan, subject to adjustment, is 1,114,846 shares. As of
September 1, 1996, participants in the Long-Term Plan held options to purchase
an aggregate of 910,801 shares of Common Stock at per share exercise prices
ranging from $4.57 to $38.50, with a weighted average exercise price per share
of $11.13. As of September 1, 1996, no shares of Common Stock have been issued
pursuant to restricted stock awards and a total of 22,163 shares of Common
Stock remain available for issuance under the plan. In general, options
automatically vest upon a change in control of the Company depending on the
terms of each individual grant. In October 1996, the Company's Board of
Directors voted, subject to approval by the Company's stockholders, to
increase the number of shares of Common Stock which may be issued and sold
under the Long-Term Plan by 375,000 shares.
401(k) Savings Plan. The Enterprise Systems, Inc. 401(k) Savings Plan (the
"401(k) Plan") is a tax qualified "cash or deferred" plan under Section 401(k)
of the Internal Revenue Code in which all of the Company's employees,
including executive officers, are eligible to participate after completing
three months of service. Participants are able to defer up to 15% of their
salary (to a maximum of $9,500 in 1996, as adjusted annually) to be
contributed to a trust fund and invested, at the participant's election, in
equity or fixed income investments offered by the administrator of the 401(k)
Plan. The Company has the discretion to match a percentage of the
contributions made to the 401(k) Plan in any year. In 1996, the Company will
match 25% of the first $1,000 of salary contributed by each employee, not to
exceed a maximum annual contribution of $250 by the Company. The employees'
contributions are fully vested and nonforfeitable at all times. A
participant's contributions become distributable upon the participant's
retirement, death, disability or other termination of employment and, under
certain emergency circumstances, may be distributed during employment.
In December 1995, the Company merged its ESOP into the 401(k) Plan with
account balances from the ESOP transferring to the 401(k) Plan. The trustee of
the 401(k) Plan is appointed from time to time by the Board of Directors and
currently is Emjay Corporation (the "Trustee"). Shares of Common Stock that
have been allocated to participants under the ESOP and which remain as part of
their account balances in the 401(k) Plan will be voted by the Trustee in
accordance with directions from each participant. Any allocated Common Stock
with respect to which voting directions are not given will be voted by the
Trustee.
37
<PAGE>
CERTAIN TRANSACTIONS
On April 30, 1993, the Company entered into an Investment Agreement with CID
Ventures, L.P., and CID Equity Capital, L.P. (collectively, "CID Investors").
On March 31, 1994, the Company entered into an Investment Agreement with
Morgan Stanley Venture Investors, L.P., Morgan Stanley Venture Capital Fund
II, L.P., and Morgan Stanley Venture Capital Fund II, C.V. (collectively, the
"Morgan Investors"). Pursuant to these investment agreements, the Company
issued 218,818 shares of Common Stock in April 1993 to the CID Investors at a
price of $4.57 per share for an aggregate purchase price of $999,998.26 and
the Company issued 642,857 shares of Common Stock in March 1994 to the Morgan
Investors at a price of $5.60 per share for an aggregate purchase price of
$3,599,999.20. In addition, the Company, the CID Investors, the Morgan
Investors and others entered into an Amended and Restated Registration Rights
Agreement, dated March 31, 1994, pursuant to which the CID and Morgan
Investors have been granted certain demand and piggyback registration rights.
See "Description of Capital Stock--Registration Rights." On April 30, 1993,
the Company also sold 54,704 shares of Common Stock for an aggregate purchase
price of $249,997.28 ($4.57 per share) to Mr. Goldstein, a Director of the
Company. See "Management--Compensation Committee Interlocks and Insider
Participation."
In April 1993, the Company and ESI Research & Development Limited
Partnership (the "Partnership") entered into a letter agreement, pursuant to
which the Company purchased from the Partnership all right, title and interest
in and to certain capital asset management software for a purchase price of
$200,000. Mr. Pirelli, a Director of the Company, was a limited partner with a
7% ownership interest in the Partnership prior to its dissolution in June
1993. The purchase price for this software was based upon a professional
valuation.
On December 29, 1988, the Company made a term loan of approximately
$3,100,000 at an interest rate of 8.94% to fund the ESOP. The ESOP serviced
the principal and interest requirements on this loan with contributions from
the Company. The final payment was made in December 1994. Company
contributions to the ESOP amounted to approximately $590,000 and $543,000 for
1993 and 1994, respectively.
The Company entered into an agreement with Broadview Associates LLC
("Broadview"), effective as of February 1, 1996, pursuant to which Broadview
agreed to: (i) study the Company's existing corporate strategy; (ii) help
establish acquisition transaction criteria consistent with the Company's
goals; (iii) develop suggested target candidates; (iv) screen target
candidates under consideration against agreed criteria; (v) make approaches
and introductions to target candidates; and (vi) help negotiate and structure
transactions. This agreement has terminated. Pursuant to the agreement, the
Company paid Broadview a fee of $370,000 in connection with the Matkon
Acquisition. Bernard Goldstein, a Director of the Company and a member of the
Compensation Committee, is a Managing Director of Broadview.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 1, 1996, and as
adjusted to reflect the sale of the shares offered hereby, by: (i) each person
who is known by the Company to beneficially own more than five percent of the
Company's 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. Except as indicated in the footnotes to this table,
the Company believes that the persons named in the table have sole voting and
investment power with respect to all Common Stock shown as beneficially owned
by them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED(2)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
NAME OWNED(1) OFFERING OFFERING
- ---- ------------ ---------- ----------
<S> <C> <C> <C>
Enterprise 401(k) Plan(3)............. 947,763 12.6% 11.7%
Glen E. Tullman(4).................... 158,599 2.1 1.9
Joseph E. Carey(5).................... 68,426 * *
David B. Mullen(6).................... 28,200 * *
Steven M. Katz(7)..................... 23,525 * *
David A. Carlson(8)................... 143,183 1.9 1.8
Thomas R. Hutchison(9)................ 115,000 1.5 1.4
Thomas R. Pirelli(10)................. 1,586,630 21.1 19.5
James H. Ray(11)...................... 50,628 * *
Stanley A. Crane(12).................. 8,334 * *
Robert A. Compton(13)................. 22,056 * *
M. Fazle Husain(14)................... -- -- --
Bernard Goldstein(15)................. 87,561 1.2 1.1
Morgan Stanley Venture Capital Fund
II, L.P.(16)......................... 652,857 8.7 8.0
All executive officers and directors
as a group
(12 persons)......................... 2,205,235 28.4 26.3
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and (except as otherwise noted)
includes voting and investment power with respect to the shares shown as
beneficially owned.
(2) Applicable percentage of ownership as of September 1, 1996 is based upon
7,519,581 shares of Common Stock outstanding. Applicable percentage
ownership after this offering is based upon 8,119,581 shares of Common
Stock outstanding. Shares of Common Stock subject to options currently
exercisable or exercisable on or before October 30, 1996 are deemed
outstanding for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Includes 20,526, 27,134, 39,975 and 29,828 401(k) Plan shares
beneficially owned by Messrs. Carey, Carlson, Pirelli and Ray,
respectively. The Trustee of the 401(k) Plan is Emjay Corporation, 725
West Glendale Avenue, Glendale, Wisconsin 53209. See "Management--
Compensation Pursuant to Plans."
(4) Includes options to purchase 131,814 shares of Common Stock, including
options to purchase 86,907 shares of Common Stock currently outstanding
and held by Thomas R. Pirelli.
(5) Includes options to purchase 47,500 shares of Common Stock and 20,526
shares of Common Stock held in the 401(k) Plan.
(6) Includes options to purchase 25,000 shares of Common Stock.
(7) Includes options to purchase 23,125 shares of Common Stock.
39
<PAGE>
(8) Includes options to purchase 52,500 shares of Common Stock, 27,134 shares
of Common Stock held in the 401(k) Plan, and 63,549 shares of Common Stock
held in the David A. Carlson Trust dated October 12, 1992.
(9) Mr. Hutchison serves as the trustee of an irrevocable trust for each of
Mr. Pirelli's two daughters and has beneficial ownership of 100,000 shares
of Common Stock held in such trusts (the "Pirelli Children Trusts"). Mr.
Pirelli is a Director and principal stockholder of the Company.
(10) Includes 86,907 shares of Common Stock subject to options held by Glen E.
Tullman, 39,975 shares of Common Stock held in the 401(k) Plan and
1,537,471 shares of Common Stock held in the Thomas R. Pirelli Trust
U/A/D January 26, 1990. Mr. Pirelli disclaims beneficial ownership in the
100,000 shares of Common Stock held in the Pirelli Children Trusts. Mr.
Pirelli's address is 909 Oakhurst, Riverwoods, Illinois 60015.
(11) Includes options to purchase 20,000 shares of Common Stock and 29,828
shares of Common Stock held in the 401(k) Plan.
(12) Includes options to purchase 8,334 shares of Common Stock.
(13) Mr. Compton holds 7,056 shares of Common Stock. CID Equity Capital III,
L.P. ("CID-III") holds options to purchase 9,645 shares of Common Stock.
CID Ventures, L.P. ("CID-V") holds options to purchase 5,355 shares of
Common Stock. Mr. Compton is a general partner of CID Equity Partners I,
L.P. ("CID-I"), which is the general partner of CID-V and he is a general
partner of CID Equity Partners II, L.P. ("CID-II"), which is the general
partner of CID-III. Accordingly, Mr. Compton may be attributed beneficial
ownership of the shares owned by CID-V and CID-III. Mr. Compton disclaims
beneficial ownership of such shares beyond his ownership interest in CID-I
and CID-II. Mr. Compton was originally elected as a director of the
Company as a nominee of CID-V and CID-III. The address of Mr. Compton,
CID-I, CID-II, CID-III and CID-V is One American Square, Suite 2850, Box
8207, Indianapolis, Indiana 46282.
(14) Mr. Husain disclaims beneficial ownership of the shares held by Morgan
Stanley.
(15) Includes options to purchase 15,000 shares of Common Stock.
(16) Morgan Stanley Venture Capital Fund II, L.P. ("MSLP") holds 402,878 shares
of Common Stock. Morgan Stanley Venture Investors, L.P. ("MSVI") holds
161,266 shares of Common Stock and options to purchase 10,000 shares of
Common Stock. Morgan Stanley Venture Capital Fund II, C.V. ("MSCV") holds
78,713 shares of Common Stock. The managing general partner of the general
partner of MSLP, MSVI and MSCV is Morgan Stanley Venture Capital II, Inc.,
a wholly owned subsidiary of Morgan Stanley Group Inc. Mr. Husain serves
as a Director of the Company as a nominee of MSLP, MSVI and MSCV. The
address of each of MSLP, MSVI and MSCV is 1221 Avenue of the Americas, New
York, New York 10020.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. As of September 1, 1996, there were 7,519,581
shares of Common Stock outstanding, held of record by approximately 76
stockholders, and no shares of Preferred Stock were outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for the election
of directors and all other matters submitted for stockholder vote, except
matters submitted to the vote of another class or series of shares. Holders of
Common Stock are not entitled to cumulative voting rights. Therefore, the
holders of a majority of the shares voting for the election of directors can
elect all of the directors if they choose to do so. The holders of Common
Stock are entitled to dividends in such amounts and at such times, if any, as
may be declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends on its Common Stock and does
not anticipate paying any cash dividends on such stock in the foreseeable
future. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all net assets
available for distribution to stockholders after payments to creditors. The
Common Stock is not redeemable and has no preemptive or conversion rights. See
"Dividend Policy."
The rights of the holders of Common Stock are subject to the rights of the
holders of any Preferred Stock which may, in the future, be issued. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
sold by the Company in this offering when issued will be, duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 1,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the voting and other rights of the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. Upon consummation of this offering, no shares of Preferred
Stock will be outstanding. The Company has no present intention to issue
shares of Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BY-
LAWS AND DELAWARE LAW
Certificate of Incorporation and By-Laws. The Company's Certificate of
Incorporation provides that the Board of Directors will be divided into three
classes of directors, each class constituting approximately one-third of the
total number of directors and with the classes serving staggered three-year
terms. In addition, the Certificate of Incorporation provides that all
stockholder action must be effected at a duly called meeting and not by a
consent in writing. The By-Laws provide that the Company's stockholders may
call a special meeting of stockholders only upon a request of stockholders
owning at least 50% of the Company's capital stock. These provisions of the
Certificate of Incorporation and By-Laws could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of
41
<PAGE>
the Company to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for the Company's shares and, as a consequence, they also
may inhibit fluctuations in the market price of the Company's shares that
could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing changes in the management of the Company.
See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover Effects
of Certificate of Incorporation, By-Laws and Delaware Law."
Delaware Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (a) by persons who are directors and also officers and (b) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such
date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of the stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder, (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder, (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability. As permitted by the Delaware General Corporation
Law, the Company's Certificate provides that directors of the Company shall
not be personally liable for monetary damages to the Company for certain
breaches of their fiduciary duty as directors, unless they violated their duty
of loyalty to the Company or its stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends or
redemptions, or derived an improper personal benefit from their action as
directors. This provision would have no effect on the availability of
equitable remedies or nonmonetary relief, such as an injunction or rescission
for breach of the duty of care. In addition, the provision applies only to
claims against a director arising out of his or her role as a director and not
in any other capacity (such as an officer or employee of the Company).
Further, liability of a director for violations of the federal securities laws
will not be limited by this provision. Directors will, however, no longer be
liable for monetary damages arising from decisions involving violations of the
duty of care which could be deemed grossly negligent.
Indemnification. The Certificate provides that directors and officers of the
Company shall be indemnified by the Company to the fullest extent authorized
by Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. The Certificate also authorizes the Company to enter
into one or more agreements with any
42
<PAGE>
person which provide for indemnification greater or different from that
provided in the Certificate. The Company has entered into indemnification
agreements with all current members of the Board of Directors.
REGISTRATION RIGHTS
Holders of 657,857 shares of Common Stock have certain demand and piggyback
registration rights with respect to the registration under the Securities Act
of shares of Common Stock ("Registrable Shares") held by them from time to
time. Certain holders of the Registrable Shares are Directors and 5% or
greater beneficial stockholders of the Company. See "Certain Transactions."
The holders of not less than 25% of the Registrable Shares may request that
the Company register all or part of their Registrable Shares under the
Securities Act. In addition, if the Company proposes to register any of its
securities under the Securities Act for its own account, holders of
Registrable Shares may require the Company to include all or a portion of
their Registrable Shares in the registration, provided, among other
conditions, that the managing underwriter (if any) of any such offering has
the right, subject to certain conditions, to limit the number of Registrable
Shares included in the registration. In general, all fees, costs and expenses
of such registrations (other than underwriting commissions, dealer's fees,
brokers' fees and applicable concessions) will be borne by the Company. The
rights of holders of Registrable Shares to demand or participate in such
registrations terminate on the earlier of (i) the date all Registrable Shares
are registered under the Securities Act and disposed of in accordance with the
registration statement covering them, or (ii) the date all Registrable Shares
are sold or transferred in accordance with the requirements of Rule 144.
RECAPITALIZATION
In October 1995, the Company reincorporated in the State of Delaware and
became a holding company with a wholly owned operating subsidiary (the
"Recapitalization"). The Recapitalization was accomplished in two steps.
First, the Company merged with a wholly owned Delaware subsidiary, with such
subsidiary being the surviving entity. Second, the Company became a holding
company by transferring substantially all of its assets and liabilities to a
new wholly owned Illinois subsidiary named "Enterprise Systems, Inc." See
"Risk Factors--Holding Company Structure."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, Chicago, Illinois.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,119,581 shares of
Common Stock outstanding, assuming no exercise of options after September 1,
1996. Substantially all of these shares will be freely tradeable without
restriction under the Securities Act or may currently be sold in accordance
with Rule 144 under the Securities Act ("Rule 144"). In addition, the Company
has registered on a registration statement on Form S-8 a total of 1,114,846
shares of Common Stock reserved for issuance under the Company's Long- Term
Plan. In October 1996, the Company's Board of Directors voted, subject to
approval by the Company's stockholders, to increase the number of shares of
Common Stock which may be issued and sold under the Long-Term Plan by 375,000
shares. The Company intends to register the additional 375,000 shares under
the Securities Act. Options for 181,882 shares have been exercised as of
September 1, 1996. The remaining 1,307,964 shares, when and if issued, would
be freely tradeable (unless acquired by an affiliate of the Company, in which
case they would be subject to volume and other limitations under Rule 144).
The Directors and executive officers of the Company and the Company's 401(k)
Plan, beneficially holding an aggregate of 2,771,169 shares of Common Stock as
of September 1, 1996, have entered into lock-up agreements pursuant to which
such stockholders have agreed not to sell or otherwise dispose of any shares
of Common Stock for a period of 90 days after the date of this Prospectus
without the prior written consent of Robertson, Stephens & Company. Upon
expiration of the lock-up period, these shares will be eligible for immediate
sale, subject in certain cases to volume and other limitations under Rule 144.
See "Plan of Distribution."
Generally, shares of Common Stock that have not been registered under the
Securities Act or that are held by affiliates of the Company (whether or not
registered) are deemed "restricted" securities under Rule 144. In general,
under Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least two
years, including a person who may be deemed an affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then outstanding shares of
Common Stock of the Company (81,196 shares after giving effect to this
offering) or the average weekly trading volume of the Common Stock as reported
through the Nasdaq National Market during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain restrictions
relating to manner of sale, notice and the availability of current public
information about the Company. In addition, under Rule 144(k) of the
Securities Act, a person who is not an affiliate of the Company at any time
within 90 days preceding a sale, and who has beneficially owned shares for at
least three years, would be entitled to sell such shares immediately following
this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144. The Commission has
proposed to amend the holding period required by Rule 144 to permit sales of
"restricted" securities after one year rather than two years (and two years
rather than three years for "non-affiliates" under Rule 144(k)).
No predictions can be made of the effect, if any, that shares eligible for
market sale will have on the market price of Common Stock prevailing from time
to time. Nevertheless, sales of substantial amounts of shares of Common Stock
in the public market could adversely affect the market price of the Common
Stock. See "Risk Factors--Shares Eligible for Future Sale."
44
<PAGE>
PLAN OF DISTRIBUTION
The shares of Common Stock being offered hereby are being offered for sale
by the Company principally to selected institutional investors. Robertson,
Stephens & Company LLC and Wessels, Arnold & Henderson, L.L.C. (the "Placement
Agents") have been retained to act, on a best efforts basis, as the exclusive
agents for the Company in arranging sales of Common Stock to be sold by the
Company in the offering. The Placement Agents may retain one or more
subplacement agents in connection with the offering. The closing of the
offering is not conditioned on the sale of any minimum number of shares of
Common Stock offered hereby.
The Placement Agents are not obligated to purchase any of the Common Stock
offered hereby. It is anticipated that the Placement Agents will obtain
indications of interest from potential investors for the amount of the
offering and that, after obtaining such indications of interest, the Company
will fix the price for the offering and the Placement Agents will confirm
orders to purchase shares of Common Stock from the Company at that price.
Orders will not be confirmed until the Registration Statement has been
declared effective. The Company may sell less than all of the shares of Common
Stock offered hereby. There is no required minimum number of shares that must
be sold as a condition to completion of the offering. Confirmations containing
requests for written commitments from investors purchasing in the offering and
final prospectuses will be distributed to all investors as soon as practicable
after pricing. No investor funds will be accepted prior to the effective date
of the Registration Statement. Upon closing, (i) the Company will deliver to
each investor the number of shares purchased by such investor in accordance
with instructions previously delivered by the Placement Agents on behalf of
the investors, (ii) each investor will deliver to the Company immediately
available funds in an amount equal to the aggregate purchase price of the
shares of Common Stock being sold to such investor and (iii) the Company will
pay the Placement Agents their fee. The offering will not continue after the
closing.
The Company has agreed to pay to the Placement Agents a fee equal to 5.5% of
the purchase price of the shares. The Company has also agreed to indemnify the
Placement Agents against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Placement Agents may be
required to make in respect thereof.
The Company, its Directors, executive officers and 401(k) Plan have agreed
that, subject to certain limited exceptions, they will not, for a period of 90
days after the date of this Prospectus, sell, offer to sell, contract to sell
or otherwise dispose of any of their shares of Common Stock (except for sales
described in or contemplated by this Prospectus) or other securities of the
Company without the prior written consent of Robertson, Stephens & Company,
except that the Company may, without such consent, grant options and issue
shares of Common Stock under the Long-Term Plan.
45
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sachnoff & Weaver, Ltd., Chicago, Illinois. Certain
legal matters in connection with the offering will be passed upon for the
Placement Agents by Alston & Bird, Atlanta, Georgia.
EXPERTS
The Consolidated Financial Statements and Schedule for the Company as of
December 31, 1994 and 1995, and for each of the years in the three-year period
ended December 31, 1995, have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
The financial statements of the Matkon Product Line of Continental Health
Systems, Inc. as of November 30, 1994 and 1995, and for the years ended
November 30, 1994 and 1995, have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, 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, reference is
made to the Registration Statement, including the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract, agreement or any other document referred to herein are not
necessarily complete; with respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office
at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of them or any
part thereof may be obtained from such office, upon payment of the fees
prescribed by the Commission. The Registration Statement, including the
exhibits and schedules thereto, is also available on the Commission's Web site
at http://www.sec.gov.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy material and other
information concerning the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Copies of reports, proxy and information
statements and other information are available on the Commission's Web site at
http://www.sec.gov.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ENTERPRISE SYSTEMS, INC.
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1994, 1995 and June 30,
1996 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996
(unaudited).............................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30,
1996 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
MATKON PRODUCT LINE OF CONTINENTAL HEALTH SYSTEMS, INC.
Independent Auditors' Report.............................................. F-14
Statements of Assets to be Acquired and Liabilities to be Assumed November
30, 1994 and 1995 and May 31, 1996 (unaudited)........................... F-15
Statements of Revenues and Expenses for the years ended November 30, 1994
and 1995 and for the six months ended May 31, 1995 and 1996 (unaudited).. F-16
Statements of Cash Flows for the years ended November 30, 1994 and 1995
and for the six months ended May 31, 1995 and 1996 (unaudited)........... F-17
Notes to Financial Statements............................................. F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Enterprise Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Enterprise
Systems, Inc. and subsidiary (the "Company") as of December 31, 1994 and 1995,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Enterprise
Systems, Inc. and subsidiary as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 12, 1996
F-2
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
ASSETS 1994 1995 1996
------ ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents............................. $ 1,588 $11,403 $ 2,601
Short-term investment securities...................... -- 9,220 2,122
Receivables, less allowance for doubtful accounts of
$302, $356 and $825.................................. 7,652 14,321 15,814
Refundable and prepaid income taxes................... 109 547 1,605
Deferred income taxes................................. 1,509 777 2,834
Prepaid commissions................................... 344 1,344 1,591
Other current assets.................................. 575 955 1,700
------- ------- -------
Total current assets................................ 11,777 38,567 28,267
------- ------- -------
Investment securities................................... -- 4,893 4,815
Property and equipment
Computer equipment.................................... 4,800 6,242 7,910
Furniture and fixtures................................ 1,217 897 971
Leasehold improvements................................ 384 499 564
------- ------- -------
Total property and equipment........................ 6,401 7,638 9,445
Less accumulated depreciation and amortization.... 3,346 4,071 4,999
------- ------- -------
3,055 3,567 4,446
------- ------- -------
Purchased and developed software, net of accumulated
amortization........................................... 874 1,498 3,947
Excess of cost over net assets acquired................. -- -- 569
Other assets............................................ 46 401 3,509
------- ------- -------
$15,752 $48,926 $45,553
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities
Notes payable......................................... $ 1,700 $ -- $ --
Current portion of long-term debt..................... 291 -- --
Accounts payable...................................... 1,116 1,285 1,222
Accrued liabilities................................... 929 2,240 3,394
Unearned revenue...................................... 2,817 4,674 3,224
------- ------- -------
Total current liabilities........................... 6,853 8,199 7,840
------- ------- -------
Deferred income taxes................................... 162 321 729
------- ------- -------
Stockholders' equity
Preferred stock, $.01 par value; authorized 1,000,000
shares; none outstanding............................. -- -- --
Common stock, $.01 par value; authorized 30,000,000
shares; issued and outstanding 5,230,158, 7,357,033
and 7,519,581 shares................................. 52 74 75
Additional paid-in capital............................ 7,575 38,513 39,352
Retained earnings (accumulated deficit)............... 1,110 1,910 (2,367)
Deferred compensation................................. -- (91) (76)
------- ------- -------
Total stockholders' equity.......................... 8,737 40,406 36,984
------- ------- -------
$15,752 $48,926 $45,553
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Software......................... $ 9,065 $11,762 $16,104 $ 6,988 $ 9,860
Services......................... 10,653 12,343 16,498 7,240 10,454
Hardware......................... 709 607 646 212 729
------- ------- ------- ------- -------
Total revenues................. 20,427 24,712 33,248 14,440 21,043
------- ------- ------- ------- -------
Operating costs and expenses
Software development............. 4,237 6,377 7,536 3,376 4,043
Service and support.............. 7,187 8,629 10,742 5,133 6,577
Hardware......................... 717 682 786 269 739
Sales and marketing.............. 4,455 5,984 8,832 4,249 5,507
Administration................... 2,545 2,878 3,887 1,831 3,114
Acquired in-process technology... -- -- -- -- 8,453
------- ------- ------- ------- -------
Total operating costs and
expenses...................... 19,141 24,550 31,783 14,858 28,433
------- ------- ------- ------- -------
Income (loss) from operations...... 1,286 162 1,465 (418) (7,390)
Interest income (expense), net..... (198) (114) 17 (81) 467
------- ------- ------- ------- -------
Income (loss) before income taxes.. 1,088 48 1,482 (499) (6,923)
Income taxes (benefit)............. 339 20 682 (139) (2,646)
------- ------- ------- ------- -------
Net income (loss).................. $ 749 $ 28 $ 800 $ (360) $(4,277)
======= ======= ======= ======= =======
Net income (loss) per share........ $ 0.15 $ 0.01 $ 0.13 $ (0.07) $ (0.57)
======= ======= ======= ======= =======
Weighted average common stock and
common
stock equivalent shares
outstanding....................... 4,886 5,383 6,279 5,525 7,459
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS COMPANY
-------------- PAID-IN (ACCUMULATED DEFERRED LOAN TO
SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION ESOP TOTAL
------ ------ ---------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992. 4,411 $44 $ 2,950 $ 803 $ -- $(1,028) $ 2,769
Repurchase of common stock. (30) -- (20) (134) -- -- (154)
Issuance of common
stock, net................ 273 3 1,147 -- -- -- 1,150
Net income................. -- -- -- 749 -- -- 749
Repayment of loan by ESOP.. -- -- -- -- -- 514 514
----- --- ------- ------- ----- ------- -------
Balance at December 31, 1993. 4,654 47 4,077 1,418 -- (514) 5,028
Repurchase of common stock. (67) (1) (45) (336) -- -- (382)
Issuance of common
stock, net................ 643 6 3,543 -- -- -- 3,549
Net income................. -- -- -- 28 -- -- 28
Repayment of loan by ESOP.. -- -- -- -- -- 514 514
----- --- ------- ------- ----- ------- -------
Balance at December 31, 1994. 5,230 52 7,575 1,110 -- -- 8,737
Repurchase of common stock. (56) -- (530) -- -- -- (530)
Issuance of common
stock, net................ 2,164 22 31,260 -- -- -- 31,282
Exercise of stock options.. 19 -- 93 -- -- -- 93
Net income................. -- -- -- 800 -- -- 800
Deferred compensation
from issuance of stock
options................... -- -- 115 -- (115) -- --
Amortization of deferred
compensation.............. -- -- -- -- 24 -- 24
----- --- ------- ------- ----- ------- -------
Balance at December 31, 1995. 7,357 74 38,513 1,910 (91) -- 40,406
Exercise of stock options
(unaudited)............... 163 1 839 -- -- -- 840
Net loss (unaudited)....... -- -- -- (4,277) -- -- (4,277)
Amortization of deferred
compensation (unaudited).. -- -- -- -- 15 -- 15
----- --- ------- ------- ----- ------- -------
Balance at June 30, 1996
(unaudited)................. 7,520 $75 $39,352 $(2,367) $ (76) $ -- $36,984
===== === ======= ======= ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss)............. $ 749 $ 28 $ 800 $ (360) $ (4,277)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation................ 815 1,249 1,595 659 928
Amortization................ 19 125 242 100 249
Deferred income taxes....... (243) (336) 891 (217) (1,649)
Acquired in-process
technology................. -- -- -- -- 8,453
Changes in assets and
liabilities:
Receivables, net.......... (840) (741) (6,669) 872 (353)
Refundable and prepaid
income taxes............. (189) (109) (438) 54 (1,058)
Prepaid commissions and
other current assets..... (234) (478) (1,380) (379) (843)
Accounts payable.......... 21 647 169 (333) (63)
Accrued liabilities....... 339 18 1,311 415 (77)
Unearned revenue.......... 304 525 1,857 (1,111) (1,450)
Other, net................ 41 (2) (355) 1 (272)
------- ------- -------- ------- --------
Net cash provided by
(used in) operating
activities............. 782 926 (1,977) (299) (412)
------- ------- -------- ------- --------
Cash flows from investing
activities:
Payment for acquisition....... -- -- -- -- (13,892)
Maturities (purchases) of
investment securities........ -- -- (14,113) -- 7,176
Purchase of property and
equipment.................... (1,598) (2,142) (2,107) (753) (1,614)
Capitalized software
development.................. (355) (664) (842) (438) (900)
Other......................... (4) (18) -- -- --
------- ------- -------- ------- --------
Net cash used in
investing activities... (1,957) (2,824) (17,062) (1,191) (9,230)
------- ------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from notes payable... 900 -- -- 1,300 --
Repayment of notes payable.... -- (1,000) (1,700) -- --
Repayment of loan by ESOP..... 514 514 -- -- --
Repayment of long-term debt... (999) (1,096) (291) (291) --
Proceeds from issuance of
common stock, net............ 1,150 3,549 31,282 -- --
Proceeds from exercise of
stock options................ -- -- 93 73 840
Repurchase of common stock.... (154) (382) (530) (101) --
------- ------- -------- ------- --------
Net cash provided by
financing activities... 1,411 1,585 28,854 981 840
------- ------- -------- ------- --------
Increase (decrease) in cash and
cash equivalents............... 236 (313) 9,815 (509) (8,802)
Cash and cash equivalents at
beginning of period............ 1,665 1,901 1,588 1,588 11,403
------- ------- -------- ------- --------
Cash and cash equivalents at end
of period...................... $ 1,901 $ 1,588 $ 11,403 $ 1,079 $ 2,601
======= ======= ======== ======= ========
Supplemental disclosures of cash
flow information:
Interest paid................. $ 267 $ 158 $ 236 $ 106 $ 13
======= ======= ======== ======= ========
Income taxes paid............. $ 734 $ 485 $ 250 $ 43 $ --
======= ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(AMOUNTS AND DISCLOSURES APPLICABLE TO JUNE 30, 1995 AND JUNE 30, 1996 ARE
UNAUDITED.)
(1) DESCRIPTION OF BUSINESS
Enterprise Systems, Inc. develops, markets, installs and services an
integrated suite of application software products that assist healthcare
providers in managing their operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Enterprise
Systems, Inc. and its subsidiary (the "Company"). All intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
Revenues from software licensing and installation fees are recognized in
accordance with Statement of Position 91-1, "Software Revenue Recognition."
After contract signing and software delivery, revenues are recognized as the
installation services are performed. Education and consulting revenues are
recognized as the related services are performed. Revenue from first year
maintenance fees implicit in new software licenses and revenue from separately
priced maintenance agreements are recognized ratably over the maintenance
periods. Services revenues include fees from software installation, ongoing
maintenance, education and consulting. Commissions are generally paid in the
month following contract signing and are recognized as the related revenue is
recognized.
Cash Equivalents and Investment Securities
Cash equivalents are comprised of certain highly liquid investments with
original maturities of less than three months. Investment securities consist
of U.S. Treasury notes and municipal bonds with original maturities generally
ranging from one to two years.
Investment securities are classified as held-to-maturity, as the Company has
the ability and intent to hold such securities until maturity. Held-to-
maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Premiums and discounts are
amortized or accreted over the life of the related security as an adjustment
to yield using the straight-line method, which approximates the effective
interest method. Interest income is recognized when earned.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives, ranging from
three to five years, of the various classes of property. Amortization of
leasehold improvements is computed over the shorter of the lease term or
estimated useful life of the asset.
Income Taxes
Deferred income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the 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 expected to apply to taxable income in the year in which
F-7
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period of enactment.
Software Development
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Costs associated with the
planning and designing phase of software development, including coding and
testing activities necessary to establish technological feasibility, are
classified as software development and expensed as incurred. Once
technological feasibility has been established, additional costs incurred in
development, including coding, testing and documentation writing, are
capitalized until general release.
Amortization of developed software is provided on a product-by-product basis
over the estimated economic life of the software, generally four years, using
the straight-line method. Amortization commences when a product is available
for general release to customers. Unamortized software development costs
determined to be in excess of the net realizable value of a product are
expensed at the date of such determination.
Computation of Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
shares outstanding and includes the dilutive effect of unexercised stock
options using the treasury stock method. Net loss per share is based on the
weighted average number of shares outstanding and does not include the effect
of unexercised stock options.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, options for common stock granted by the Company during the twelve months
immediately preceding the initial public offering (using the treasury stock
method and the mid-point of the then proposed public offering price) have been
included in the calculation of common and common equivalent shares as if they
were outstanding for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily 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 these estimates.
Fair Value of Financial Instruments
The Company's financial instruments are valued at their carrying amounts
which are reasonable estimates of fair value due to the relatively short
period to maturity of the instruments.
Interim Financial Statements
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited. In the opinion of management, the
unaudited financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial
position and results of operations for such periods. Results of operations for
interim periods are not necessarily indicative of results that will be
achieved for the entire year.
(3) INITIAL PUBLIC OFFERING
On October 25, 1995, the Company completed an initial public offering of its
common stock in which 1,800,000 shares were sold by the Company. On November
21, 1995, the Company's underwriters exercised their over-allotment option to
purchase an additional 363,750 shares of common stock. The sale of the
Company's common stock resulted in net proceeds of approximately $31,282,000.
F-8
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains (losses) and fair value
for investment securities at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Current......................... $ 9,220 $ 3 $ -- $ 9,223
Due after one year.............. 4,893 3 -- 4,896
------- ------ ----- -------
$14,113 $ 6 $ -- $14,119
======= ====== ===== =======
</TABLE>
At June 30, 1996, the unrealized holding gain was approximately $8,000
(unaudited).
The scheduled maturities for investment securities at December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
LESS THAN 1-2
1 YEAR YEARS TOTAL
--------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Notes.............................. $4,996 $ -- $ 4,996
Municipal Bonds.................................. 4,224 4,893 9,117
------ ------ -------
$9,220 $4,893 $14,113
====== ====== =======
</TABLE>
(5) RECEIVABLES
Receivables represent amounts billed and contracts receivable. Contracts
receivable represent revenues earned but not yet billed due to contractual
payment terms. A summary of receivables is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
--------------- -------------
1994 1995 (UNAUDITED)
------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable........................ $5,490 $ 9,457 $11,367
Contracts receivable....................... 2,464 5,220 5,272
------ ------- -------
7,954 14,677 16,639
Allowance for doubtful accounts............ (302) (356) (825)
------ ------- -------
$7,652 $14,321 $15,814
====== ======= =======
</TABLE>
(6) PURCHASED AND DEVELOPED SOFTWARE
Purchased and developed software consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
-------------- -------------
1994 1995 (UNAUDITED)
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchased software.......................... $ -- $ -- $1,783
Software development........................ 1,019 1,860 2,760
------ ------ ------
1,019 1,860 4,543
Less accumulated amortization............... (145) (362) (596)
------ ------ ------
$ 874 $1,498 $3,947
====== ====== ======
</TABLE>
F-9
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amortization expense included in the consolidated statements of operations
and classified as software development amounts to:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C>
December 31, 1993.......................................... $ 20
December 31, 1994.......................................... 125
December 31, 1995.......................................... 217
June 30, 1995 (unaudited).................................. 100
June 30, 1996 (unaudited).................................. 234
</TABLE>
(7) FINANCING ARRANGEMENTS
The Company has available an unsecured revolving credit line from a bank for
$18,000,000. The line is comprised of a $100,000 standby letter of credit and
a $17,900,000 revolving credit line. At December 31, 1995 and June 30, 1996,
there was outstanding $100,000 under the standby letter of credit. Borrowings
bear interest ranging from LIBOR plus 1.25% to LIBOR plus 1.75% or prime rate
less 0.5%. No borrowings were outstanding under the revolving credit line at
June 30, 1996.
The Company is required to comply with certain financial covenants under the
financing arrangements discussed above. At December 31, 1995 and June 30,
1996, the Company was in compliance with the loan covenants.
(8) INCOME TAXES
Income tax expense for the years ended December 31, 1993, 1994 and 1995 is
comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................ $ 522 $ 277 $(174)
State.............................................. 60 79 (35)
----- ----- -----
582 356 (209)
Deferred............................................. (243) (336) 891
----- ----- -----
$ 339 $ 20 $ 682
===== ===== =====
</TABLE>
The reconciliation of income taxes computed using the federal statutory rate
of 34% in 1993, 1994 and 1995 to the income tax provision is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes, at the federal income tax statutory
rate................................................. $370 $ 16 $504
State income taxes, net of federal tax benefit........ 40 52 87
Research and experimentation credits.................. (73) (18) --
Foreign tax credit.................................... (10) (17) (4)
Nondeductible expenses................................ 16 50 72
Other................................................. (4) (63) 23
---- ---- ----
$339 $ 20 $682
==== ==== ====
</TABLE>
F-10
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences which give rise to deferred tax assets and liabilities
in 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Unearned revenue......................................... $1,323 $1,152
Allowance for doubtful accounts.......................... 112 134
Other accrued liabilities................................ 108 44
Depreciation............................................. 98 169
Other.................................................... 26 43
------ ------
Total gross deferred tax assets........................ 1,667 1,542
Less valuation allowance............................... -- --
------ ------
Net deferred tax assets................................ 1,667 1,542
------ ------
Deferred tax liabilities:
Software development, net................................ 263 567
Prepaid commissions...................................... 57 519
------ ------
Total gross deferred tax liabilities................... 320 1,086
------ ------
Net deferred tax assets................................ $1,347 $ 456
====== ======
</TABLE>
The Company believes its history of profitability and taxable income and its
utilization of tax planning sufficiently supports the value of the deferred tax
assets. Accordingly, the Company has not recorded a valuation allowance as it
is more likely than not that all deferred tax assets will be recovered.
(9) COMMITMENTS
The Company leases office space under long-term lease agreements expiring
through the year 2001 with a renewal option through 2006. Future minimum rental
payments under noncancelable long-term operating leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1996....................................................... $ 644
1997....................................................... 662
1998....................................................... 681
1999....................................................... 701
2000 and after............................................. 1,463
------
$4,151
======
</TABLE>
Rental expense included in the consolidated statements of operations amounted
to:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C>
December 31, 1993.......................................... $663
December 31, 1994.......................................... 664
December 31, 1995.......................................... 880
June 30, 1995 (unaudited).................................. 522
June 30, 1996 (unaudited).................................. 547
</TABLE>
F-11
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) STOCK OPTIONS
In 1993, the Company adopted a stock option plan under which certain
employees and nonemployee directors may be granted the right to purchase
shares of common stock. In October 1995, this stock option plan was amended to
create the Company's Long-Term Incentive Compensation Plan. Stock options vest
over periods ranging from three to five years. Stock options expire ten years
from the date granted. At December 31, 1995 and June 30, 1996, there were
128,416 and 119,049 shares, respectively, reserved for future grants.
In June 1995, stock options were granted to purchase 55,000 shares of the
Company's common stock at an exercise price of $5.93 per share. Deferred
compensation has been recorded representing the difference between the fair
market value of the options at the date of grant and the exercise price.
Compensation expense representing the amortization of the deferred
compensation is recognized over the vesting period of the stock options.
Stock option transactions from January 1, 1994 to June 30, 1996 relating to
the stock option plan are summarized as follows:
<TABLE>
<CAPTION>
SHARES PRICE
-------- ---------------
<S> <C> <C>
Outstanding on January 1, 1994................. 370,000 $ 4.57
Granted...................................... 289,846 5.60 to 5.93
Canceled..................................... (30,000) 4.57 to 5.60
--------
Outstanding on December 31, 1994............... 629,846 4.57 to 5.93
Granted...................................... 398,250 5.93 to 25.00
Exercised.................................... (19,334) 4.57 to 5.93
Canceled..................................... (41,666) 4.57 to 5.93
--------
Outstanding on December 31, 1995............... 967,096 4.57 to 25.00
Granted...................................... 14,000 26.50 to 38.50
Exercised.................................... (162,548) 4.57 to 5.93
Canceled..................................... (4,633) 5.93 to 25.00
--------
Outstanding on June 30, 1996 (unaudited)....... 813,915 $ 4.57 to 38.50
========
Exercisable on June 30, 1996 (unaudited)....... 328,079
========
</TABLE>
(11) EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
Subsequent to the Company's initial public offering in 1995, the ESOP was
combined into the Company's 401(k) retirement plan and all account balances
from the ESOP were transferred to the Company's 401(k) plan. The Company's
ESOP covers certain employees with more than one year of service. The
Company's final contribution to the ESOP was $543,000 in 1994.
(12) INTEREST
Interest income (expense), net for the years ended December 31, 1993, 1994
and 1995 is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED,
JUNE 30,
-------------
1993 1994 1995 1995 1996
----- ----- ----- ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 62 $ 56 $ 269 $ 38 $ 480
Interest expense............................ (260) (170) (252) (119) (13)
----- ----- ----- ------ -----
$(198) $(114) $ 17 $ (81) $ 467
===== ===== ===== ====== =====
</TABLE>
F-12
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) BUSINESS SEGMENT INFORMATION
The Company operates in one industry segment. The Company markets its
products in the United States and in Canada. No customer accounted for 5% or
more of revenue for the years presented.
(14) SUBSEQUENT EVENTS (UNAUDITED)
On January 2, 1996, the Company entered into a distribution agreement to
distribute, install and support a staff scheduling system. The agreement
provides the Company with exclusive territorial rights to the United States
for a term of two years. The Company's minimum royalty commitment over the
term of the agreement is approximately $1.2 million.
On March 22, 1996, the Company entered into a license agreement with
FlexiInternational Software, Inc. ("FLEXI") that allows the Company to
incorporate the FLEXI general ledger and accounts payable applications into
the Company's products for distribution in the United States healthcare
market. The Company has an exclusive right to sell the FLEXI applications in
the United States upon meeting certain sales levels.
On May 28, 1996, the Company purchased certain net assets of the materials
management division of Continental Healthcare Systems, Inc. for approximately
$13.9 million. The acquisition was accounted for under the purchase method.
Accordingly, the purchase price has been allocated to identifiable tangible
and intangible assets acquired and liabilities assumed based on their
estimated fair values. Approximately $8.4 million of the purchase price was
allocated to acquired in-process technology which has been charged to
operations in the consolidated statement of operations for the quarter ended
June 30, 1996. Such allocation is subject to change and is not necessarily
indicative of the ultimate purchase price allocation.
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Continental Health Systems, Inc.
and Enterprise Systems, Inc.:
We have audited the accompanying statements of assets to be acquired and
liabilities to be assumed as of November 30, 1994 and 1995 and the statements
of revenues and expenses and cash flows for the years ended November 30, 1994
and 1995 of the Matkon Product Line of Continental Health Systems, Inc.
(Continental). These financial statements are the responsibility of
Continental'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.
As discussed in notes 1(a) and 7 to the financial statements, on May 28,
1996 Continental sold certain assets and liabilities of the Matkon Product
Line of Continental to Enterprise Systems, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets to be acquired and liabilities to be
assumed as of November 30, 1994 and 1995 and revenues and expenses and cash
flows for the years ended November 30, 1994 and 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
July 10, 1996
F-14
<PAGE>
MATKON PRODUCT LINE OF
CONTINENTAL HEALTH SYSTEMS, INC.
STATEMENTS OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30,
------------- MAY 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Receivables, less allowance for doubtful accounts
of $382, $461,
and $420.......................................... $3,345 $4,673 $7,610
Inventory.......................................... 247 33 --
------ ------ ------
Total current assets............................. 3,592 4,706 7,610
Property and equipment, net........................ 283 210 192
Software development, net of accumulated
amortization...................................... 1,068 1,735 1,995
Noncurrent receivables............................. 995 470 107
------ ------ ------
Total assets..................................... 5,938 7,121 9,904
Current liabilities:
Accounts payable and accrued expenses.............. 288 206 419
Deferred revenue................................... 1,483 1,174 3,302
------ ------ ------
Total current liabilities........................ 1,771 1,380 3,721
Commitments (note 6)
------ ------ ------
Excess of assets to be acquired over liabilities
to be assumed................................... $4,167 $5,741 $6,183
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
MATKON PRODUCT LINE OF
CONTINENTAL HEALTH SYSTEMS, INC.
STATEMENTS OF REVENUES AND EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS SIX MONTHS
ENDED ENDED
NOVEMBER 30, MAY 31,
-------------- --------------
1994 1995 1995 1996
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Software...................................... $1,094 $1,497 $ 501 $ 795
Services...................................... 3,872 3,810 1,772 1,936
Hardware...................................... 2,052 1,782 772 748
------ ------ ------ ------
Total revenue............................... 7,018 7,089 3,045 3,479
------ ------ ------ ------
Costs and expenses (note 5):
Hardware...................................... 2,092 1,885 811 846
Software development.......................... 1,087 937 498 490
Service and support........................... 2,293 2,152 1,128 1,077
Sales and marketing........................... 1,129 1,246 527 717
Administration................................ 646 362 197 108
------ ------ ------ ------
Total costs and expenses.................... 7,247 6,582 3,161 3,238
------ ------ ------ ------
Income (loss) from operations............... (229) 507 (116) 241
Other income (expense), net..................... (13) (10) (5) 45
------ ------ ------ ------
Excess (deficiency) of revenues over (under)
expenses................................... $ (242) $ 497 $ (121) $ 286
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
MATKON PRODUCT LINE OF
CONTINENTAL HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS SIX MONTHS
ENDED ENDED
NOVEMBER 30, MAY 31,
--------------- --------------
1994 1995 1995 1996
------- ------ ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Excess (deficiency) of revenues over (under)
expenses................................... $ (242) $ 497 $(121) $ 286
Adjustments to reconcile expenses in excess
of revenues to net cash used by operating
activities:
Depreciation and amortization............. 389 340 176 162
Loss (gain) on sale of property and
equipment................................ 4 (1) -- --
Changes in assets and liabilities:
Receivables, net........................ 1,800 (803) (325) (2,574)
Inventories............................. (41) 214 87 33
Accounts payable........................ 288 (82) 44 213
Deferred revenues....................... (486) (309) 94 2,128
------- ------ ----- -------
Net cash provided by (used in)
operating activities................. 1,712 (144) (45) 248
------- ------ ----- -------
Cash flows from investing activities:
Purchase of property and equipment.......... (166) (149) (139) (34)
Proceeds from disposal of property and
equipment.................................. -- 145 -- --
Capitalized software development............ (503) (929) (334) (370)
------- ------ ----- -------
Net cash used in investing activities. (669) (933) (473) (404)
------- ------ ----- -------
Cash flow provided by (used in) investing
activities -- Contribution (return) of
capital from (to) Continental Health Systems,
Inc.......................................... (1,043) 1,077 518 156
------- ------ ----- -------
Change in cash................................ -- -- -- --
Cash at beginning of period................... -- -- -- --
------- ------ ----- -------
Cash at end of period......................... $ -- $ -- $ -- $ --
------- ------ ----- -------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
MATKON PRODUCT LINE OF CONTINENTAL HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1994 AND 1995
(AMOUNTS AND DISCLOSURES APPLICABLE TO MAY 31, 1995 AND MAY 31, 1996 ARE
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The Matkon product line (Matkon) of Continental Health Systems, Inc.
(Continental) designs, develops, markets, installs and services application
software products that assist health care providers in managing their
operations.
As more fully described in note 7, Continental has entered into an agreement
to sell assets and liabilities of the Matkon product line to Enterprise
Systems, Inc. (Enterprise).
(b) Basis of Presentation
Matkon's financial results have historically been reported in a combined
manner with the results of Continental. For purposes of this presentation, the
accompanying financial statements present only those assets and liabilities of
Matkon to be acquired by Enterprise as of November 30, 1994 and 1995. The
statements of revenues and expenses of Matkon for the years ended November 30,
1994 and 1995 include only the operating results of Matkon presented on a
stand-alone basis, excluding the impact, if any, on Continental's consolidated
income tax provision.
(c) Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
(d) Property and Equipment
Property and Equipment are recorded at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or estimated useful
life of the assets.
(e) Software Development Costs
Costs incurred internally in creating computer software products are
expensed until technological feasibility has been established upon completion
of a detail program design. Thereafter, all software development costs are
capitalized and subsequently reported at the lower of amortized cost or net
realizable value. Capitalized costs are amortized based on current and future
revenue for each product, with minimum annual amortization equal to the
straight-line amortization over the estimated economic life of the product.
Continental is amortizing capitalized costs on a straight-line basis over five
years.
(f) Revenue Recognition
Revenues from software licensing and installation fees are recognized in
accordance with Statement of Position 91-1, "Software Revenue Recognition."
After contract signing and software delivery, revenues are recognized as the
installation services are performed. Custom programming and consulting
revenues are recognized as the related services are performed. Revenue from
maintenance agreements is recognized ratably over the maintenance periods.
Service revenues include fees from software installation, ongoing maintenance,
custom programming and consulting.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily 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 these estimates.
F-18
<PAGE>
MATKON PRODUCT LINE OF CONTINENTAL HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(h) Fair Value of Financial Instruments
Financial instruments consisting of current receivables and accounts payable
are carried at cost, which approximates fair value, as a result of the short-
term nature of the instruments. The fair value of the noncurrent receivables
is estimated to be $829,000 and $432,000 at November 30, 1994 and 1995,
respectively, based on Continental's estimated cost of capital.
(i) Interim Financial Statements
The financial statements as of May 31, 1996 and for the six months ended May
31, 1995 and 1996 are unaudited. In the opinion of management, the unaudited
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations for such periods. Results of operations for interim
periods are not necessarily indicative of results that will be achieved for
the entire year.
(2) PROPERTY AND EQUIPMENT
A summary of fixed assets follows as of November 30, 1995 and 1994:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements.................................... $ 7 $ 89
Furniture, fixtures and equipment......................... 411 274
Computer.................................................. 455 447
------- -------
873 810
Less accumulated depreciation............................. 590 600
------- -------
$283 $210
======= =======
</TABLE>
Depreciation expense for the years ended November 30, 1994 and 1995 was
$114,812 and $77,461, respectively.
(3) RECEIVABLES
Receivables represent amounts billed and contracts receivable. Contracts
receivable represent revenues earned but not yet billed due to contractual
payment terms. A summary of current receivables is as follows:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Accounts receivable....................................... $1,639 $1,398
Contracts receivable...................................... 2,088 3,740
------ ------
3,727 5,138
Allowance for doubtful accounts........................... 382 461
------ ------
$3,345 $4,677
====== ======
</TABLE>
(4) SOFTWARE DEVELOPMENT
Capitalized software development costs consist of the following:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Software development....................................... $2,204 $3,133
Less accumulated amortization.............................. 1,135 1,398
------ ------
$1,069 $1,735
====== ======
</TABLE>
Amortization expense for the years ended November 30, 1994 and 1995 included
in the statements of revenues and expenses was $274,471 and $262,396,
respectively.
F-19
<PAGE>
MATKON PRODUCT LINE OF CONTINENTAL HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) ALLOCATED COSTS
Matkon is one of the product lines offered by Continental. As such, certain
allocations of costs have been included in the accompanying statements of
revenues and expenses and are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 BASIS FOR ALLOCATION
----- ----- -------------------------------
(IN
THOUSANDS)
<S> <C> <C> <C>
Software development:
Development administration. $338 $744 Number of employees
===== =====
Service and support:
Client service
administration............ $358 $267 Revenue
Night support.............. -- 63 Revenue
Training................... 22 30 Revenue
Hardware installation...... 171 179 Hardware revenue
Documentation.............. 141 158 Number of employees
----- -----
Total allocated service
and support costs....... $692 $ 697
===== =====
Sales and marketing:
Marketing administration... $ 66 $ 146 Sales to new customers
Sales administration....... 174 237 Sales to new customers/upgrades
----- -----
Total allocated sales and
marketing costs......... $240 $ 383
===== =====
Administration:
Corporate administration... $206 $ 170 Number of employees
Accounting................. 223 135 Number of employees
----- -----
Total allocated
administrative costs.... $429 $ 305
===== =====
</TABLE>
The allocated costs consist primarily of overhead expenses such as executive
and support staff salaries, benefits, utilities, depreciation and rent which
are shared among the various Continental product lines.
Management believes that the allocation methods used are reasonable and
result in the allocation of all appropriate expenses to the Matkon product
line.
(6) LEASE COMMITMENTS
Matkon is obligated under operating leases, principally for its offices.
Total rental expense for operating leases for the years ended November 30,
1994 and 1995 was approximately $215,000 and $212,000, respectively.
F-20
<PAGE>
MATKON PRODUCT LINE OF CONTINENTAL HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Future minimum lease payments under the operating leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1996...................... $125
1997...................... 90
----
$215
====
</TABLE>
(7) SALE OF MATKON PRODUCT LINE
On May 28, 1996, Continental entered into an agreement to sell certain assets
and liabilities of Matkon to Enterprise for approximately $13.9 million. In
accordance with the agreement, such assets and liabilities existing at the
closing date will be transferred to Enterprise. Substantially all contracts and
leases of Matkon will be assigned to Enterprise.
F-21
<PAGE>
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