<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_______________
Commission File No. 0-26794
ENTERPRISE SYSTEMS, INC.
------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3130103
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(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification No.)
1400 South Wolf Road, Wheeling, Illinois 60090-6524
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(847) 537-4800
--------------
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 25, 1997, 8,162,418 shares of common stock were outstanding and
the aggregate market value of the common stock of the Registrant held by non-
affiliates, based upon the closing sale price of the stock on The Nasdaq
National Market, was approximately $145,000,000.
Documents Incorporated by Reference
None.
<PAGE>
Part I
Item 1. Business
General
Enterprise Systems, Inc. (the "Company"), is a healthcare information services
company that develops, implements and services an integrated suite of resource
management software to assist healthcare providers in managing operations and
reducing costs. These resource management systems, which are sold primarily to
acute care hospitals, focus on materials and financial management, operating
room logistics, patient and staff scheduling, and decision support systems.
These systems enable healthcare providers to improve productivity through the
redesign and automation of operational processes and to obtain the information
necessary to measure and control costs. The Company's healthcare information
systems operate on personal computer networks and make extensive use of
electronic data interchange ("EDI"), enabling the Company's customers to
redesign their resource management functions to enhance efficiency and
productivity.
The Company was organized under the laws of the State of Illinois in 1981. In
October 1995, the Company reincorporated in the State of Delaware and became a
holding company with a wholly owned operating subsidiary. 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 Common Stock resulted in net
proceeds to the Company of approximately $31 million.
On May 28, 1996, the Company completed its acquisition of the materials
management division of Continental Healthcare Systems, Inc. for a cash purchase
price of approximately $13.9 million (the Matkon Acquisition). 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 for acquired in-process technology in connection
with the Matkon Acquisition.
On October 20, 1996, the Company completed a public offering of its Common Stock
in which 600,000 shares were sold by the Company. The sale of the Common Stock
resulted in net proceeds to the Company of approximately $13 million.
Industry Overview
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 the 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.
To date, there has been a lack of emphasis on integrated information systems
that effectively manage the operational aspects of healthcare delivery. 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.
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Products
The Company's major product lines and products are set forth in the table below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Product Line Products Description
- -------------------------------------------------------------------------------
<S> <C> <C>
Materials Management . NOVA(R) and
Nova.IDN(TM) . Materials Management
Matkon(R) and MATKON
2000(R)
. TITAN(R) and . Payables Management
Titan.IDN(TM)
. TouchScan(TM) and . Point-of-Use Resource
TS2000(TM) Management
. Corporate
Communications . Purchasing Contract
System(TM) and InterKon Management
- --------------------------------------------------------------------------------
Operating Room Logistics . ORBIT(TM) and ORBIT
Scheduling for Windows . Operating Room Management
- --------------------------------------------------------------------------------
Scheduling . Enterprise Scheduling(R). Enterprise-wide Patient
Scheduling
. ESP(TM) for Windows(R) . Enterprise-wide Staff
Scheduling
- --------------------------------------------------------------------------------
</TABLE>
The Company's products are personal computer-based and utilize either a
Windows(R) or DOS platform, linked by a number of network operating systems,
including Novell and Microsoft Windows NT. The Company's products are modular in
design, share common databases 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.
Customer Service and Support
The Company provides its customers with a broad range of services that begin
prior to product implementation and continue for the duration of their 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 can 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
education seminars at its corporate headquarters.
Service and Support. The Company provides customer service and support
after installation of the software. Included with the basic service is 24-hour,
toll-free access to customer support personnel.
Consulting. The Company provides long-term staff management functions in an
outsourcing capacity, on-site project management, including cost-benefit
analysis and system optimization reviews.
Customers.
The Company's customers include healthcare providers located throughout the
United States and in Canada. 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. No
single customer accounted for more than 5% of the Company's revenues in any of
the last three fiscal years. The Company does not believe that the loss of any
single customer would have a material adverse effect on the Company's business.
3
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Sales and Marketing
The Company sells its products and services through a direct sales force located
throughout the United States 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 for the
Company's systems and products varies substantially from customer to customer
and typically requires six to twelve months.
Backlog
As of December 31, 1996, the Company had approximately $25 million of backlog
(defined as unrecognized up-front fees pursuant to signed contracts) for
software and services that had not yet been delivered. As of December 31, 1995,
the Company's backlog was approximately $18 million. These backlog amounts do
not include revenues related to annual support, maintenance and enhancement and
continuing education fees. Based upon its experience, the Company anticipates
that a majority of the backlog will be completed within 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.
Product Development
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 or acquiring 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.
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 management 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.
Proprietary Rights and Licenses
The Company depends significantly upon proprietary technology. The Company
relies on a combination of copyright, patent, 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
4
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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.
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(TM)."
Governmental Regulations
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.
Employees
As of February 28, 1997, the Company had 436 full-time employees, of which 81
were in sales and marketing, 118 in product development, 195 in customer
services and 42 in administration. The Company's success is highly dependent on
its ability to attract and retain qualified employees. Competition for employees
is intense in the software industry. None of the Company's employees are
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.
Item 2. Properties
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 September 30, 1998 (cancelable subsequent to June 1,
1997).
Item 3. Legal Proceedings
The Company is not a party to any material litigation, and is not aware of any
pending or threatened litigation that would have a material adverse effect on
the Company or its business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
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Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company had 131 holders of record of its Common Stock at March 12, 1997 and
approximately 1,700 beneficial owners. Since the Company's initial public
offering on October 20, 1995, the Company's common stock has been traded on the
Nasdaq National Market of The Nasdaq Stock Market under the symbol: "ESIX". As
of December 31, 1996, the Company had outstanding 8,131,248 shares of Common
Stock. Information with respect to quarterly high and low sales prices for the
Common Stock is contained in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company has never declared nor paid any cash dividends on its capital stock.
The Company currently intends to retain its net income to finance future growth
and therefore does not anticipate paying any cash dividends in the foreseeable
future.
6
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Item 6. Selected Financial Data
The following historical selected consolidated financial and operating data have
been derived from the audited consolidated financial statements as of the end of
and for each of the fiscal years in the five-year period ended December 31,
1996. The following financial data should be read in conjunction with those
financial statements and related notes and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statement of Income Data:
Revenues
Software............................... $23,638 $16,104 $11,762 $ 9,065 $ 7,304
Services............................... 25,238 16,498 12,343 10,653 8,567
Hardware............................... 3,440 646 607 709 1,153
------- ------- ------- ------- -------
Total revenues...................... 52,316 33,248 24,712 20,427 17,024
------- ------- ------- ------- -------
Operating costs and expenses
Software development................... 9,522 7,536 6,377 4,237 3,505
Service and support.................... 14,873 10,742 8,629 7,187 5,607
Hardware............................... 3,101 786 682 717 1,112
Sales and marketing.................... 11,650 8,832 5,984 4,455 3,347
Administration......................... 6,713 3,887 2,878 2,545 2,107
Acquired in-process technology......... 8,453 --- --- --- ---
------- ------- ------- ------- -------
Total operating costs and expenses.. 54,312 31,783 24,550 19,141 15,678
------- ------- ------- ------- -------
Income (loss) from operations............ (1,996) 1,465 162 1,286 1,346
Interest income (expense), net........... 749 17 (114) (198) (132)
------- ------- ------- ------- -------
Income (loss) before income taxes........ (1,247) 1,482 48 1,088 1,214
Income tax expense (benefit)............. (308) 682 20 339 455
------- ------- ------- ------- -------
Net income (loss)....................... $ (939) $ 800 $ 28 $ 749 $ 759
======= ======= ======= ======= =======
Net income (loss) per share............. $ (0.12) $ 0.13 $ 0.01 $ 0.15 $ 0.16
======= ======= ======= ======= =======
Shares used in computing net income
(loss) per share (1)............... 7,619 6,279 5,383 4,886 4,711
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents............... $15,510 $11,403 $ 1,588 $ 1,901 $1,665
Working capital......................... 39,485 30,368 4,924 3,046 3,303
Total assets............................ 66,231 48,926 15,752 12,842 9,963
Long-term debt, less current portion.... --- --- --- 291 1,057
Total stockholders' equity.............. 54,826 40,406 8,737 5,028 2,769
- ---------------------------
</TABLE>
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
7
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may be
identified by words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. The Company cautions readers that forward-
looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity, and
income, are subject to certain risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward looking
statements, due to several important factors herein identified, among others,
and other risks and factors identified from time to time in the Company's
reports filed with the SEC.
Overview
The Company develops, implements and services an integrated suite of resource
management products to assist healthcare providers in managing operations and
reducing costs. 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.
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. 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.
The Company's quarterly results of operations have been seasonal with a greater
proportion of the Company's revenues and operating profitability occurring in
the second half of the year. This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and accompanying notes.
Results of Operations
The table below sets forth for the periods indicated (i) the statement of
operations data expressed as a percentage of revenues, and (ii) the percentage
change in each line item from the prior period.
<TABLE>
<CAPTION>
Percentage of Total
Revenues
Year Ended Percentage Change
December 31, -----------------
------------------- 1996 Compared 1995 Compared
1996 1995 1994 to 1995 to 1994
------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Software............................... 45% 48% 48% 47% 37%
Services............................... 48 50 50 53 34
Hardware............................... 7 2 2 * 6
---- ---- ----
Total revenues...................... 100 100 100 57 35
---- ---- ----
Operating costs and expenses
Software development................... 18 23 26 26 18
Service and support.................... 28 32 35 38 24
Hardware............................... 6 2 3 * 15
Sales and marketing.................... 22 27 24 32 47
Administration......................... 13 12 11 73 35
Acquired in-process technology......... 16 - - * *
---- ---- ----
Total operating costs and expenses.. 103 96 99 71 29
---- ---- ----
Income (loss) from operations............ (3) 4 1 * *
Interest income, net..................... 1 * *
---- ---- ----
Income (loss) before income taxes........ (2) 4 1 * *
Income tax expense (benefit)............. 2 * *
---- ---- ----
Net income (loss)........................ (2)% 2% 1% * *
==== ==== ====
- ------------------------
</TABLE>
* Not meaningful
8
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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 from all sources
for 1996 were $52,316,000, an increase of $19,068,000 or 57% from 1995 total
revenues of $33,248,000. Total revenues in 1995 increased $8,536,000 or 35% over
1994 revenues of $24,712,000.
Software. In 1996, software revenues were $23,638,000, a 47% increase over 1995.
From 1994 to 1995, software revenues increased 37% from $11,762,000 to
$16,104,000. The increases are attributable to expansion of the Company's sales
force, product offerings and marketing efforts.
Services. Services revenues for 1996 increased $8,740,000, or 53%, over 1995 to
$25,238,000. Services revenues in 1995 of $16,498,000 represented an increase of
34% over 1994 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 in 1996 increased $2,794,000 over 1995 to
$3,440,000. Hardware revenues in 1995 increased $39,000, or 6%, over 1994 to
$646,000. The increase in hardware revenues in 1996 is principally attributable
to increased sales of TouchScan and TS2000, as well as equipment sales derived
from Matkon products.
Costs and Expenses
Software Development. Software development expenses increased to $9,522,000 in
1996 from $7,536,000 in 1995 and $6,377,000 in 1994. The increases in these
expenses 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.
The Company capitalized $1,281,000, $624,000, and $539,000, in 1996, 1995 and
1994, respectively, of software development costs, net of related amortization
expense, 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 11%, 8%, and 8% of total software development spending for
1996, 1995 and 1994, respectively.
Service and Support. Service and support expenses increased to $14,873,000 in
1996 from $10,742,000 in 1995 and $8,629,000 in 1994. The increases in these
expenses are attributable to the hiring of additional implementation personnel
and related travel. As a percentage of total revenues, service and support
expenses decreased from 35% and 32% in 1994 and 1995, respectively, to 28% in
1996.
Hardware. Hardware costs were $3,101,000, $786,000 and $682,000 in 1996, 1995
and 1994, 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 increased to $11,650,000 in
1996 from $8,832,000 in 1995 and $5,984,000 in 1994. The increases in these
expenses are attributable to the expansion of the Company's sales force and
the commissions earned, which increased due to the revenue growth over the
prior year.
Administration. Administration expenses increased to $6,713,000 in 1996 from
$3,887,000 in 1995 and $2,878,000 in 1994. During 1996, the increase in
administration expenses resulted from an increase in public company related
expenses, amortization of intangible assets acquired in the Matkon Acquisition
and provision for bad debts, which has increased with the increase in revenues.
The increase in administration expenses during 1995 was a result of additions to
the management team and investments in the Company's telecommunications and
computer infrastructure. As a percentage of total revenues, administration
expenses has remained relatively constant for the years presented.
Acquired In-Process Technology. The Company recorded a nonrecurring charge of
$8,453,000 for acquired in-process technology in connection with the Matkon
Acquisition.
9
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Interest. Prior to its initial public offering in October 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 1996 was $749,000 as compared to net interest
income of $17,000 for 1995. The increase in net interest income in 1996 was
primarily attributable to the investment of a portion of the proceeds from the
initial public offering and the subsequent directed placement offering in
interest-bearing securities.
Income Taxes. The Company reflected an income tax benefit of $308,000 (effective
rate of 25%) in 1996, compared to income tax expense of $682,000 (effective rate
of 46%) in 1995 and $20,000 (effective rate of 42%) in 1994. The change in the
effective rate in 1996 is due to the Company's treatment of the write-off of
acquired in-process technology for tax purposes. The increase in the effective
rate in 1995 is attributable to the incurrence of a greater proportion of
nondeductible travel-related expenses.
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. 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 an adjusted prime or LIBOR rate plus a certain percentage, which is
available to fund short-term liquidity needs and other general corporate
purposes. As of February 28, 1997, the Company had no outstanding borrowings
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. On October 20, 1996, the Company completed
a directed private placement of its Common Stock in which 600,000 shares of
Common Stock were sold by the Company. The sale of the Common Stock resulted in
net proceeds to the Company of approximately $13 million. Management believes
that the net proceeds from these offerings, 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 and
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.
The Company has no outstanding material purchase commitments. The Company is
obligated to make minimum royalty payments in the aggregate amount of
approximately $4.3 million under certain license agreements of which
approximately $1.0 million has been paid.
The Company does not believe that inflation has had a material impact on its
results of operations.
10
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Quarterly Results of Operations
The following table sets forth an unaudited summary of financial data for fiscal
years 1996 and 1995. This quarterly information has been prepared on the same
basis as the consolidated financial statements and, in management's opinion,
reflects all adjustments necessary for a fair presentation of the information
for the periods presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
The Company's quarterly results of operations have been seasonal, with a greater
proportion of the Company's revenues and operating income 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 calendar year, and (ii) the
Company's sales force compensation program, which is based significantly on
achieving sales quotas by the end of September.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- -------- --------
1996 (in thousands, except per share data)
- ----
<S> <C> <C> <C> <C>
Total revenues.......................... $ 9,597 $11,446 $13,945 $17,328
Income (loss) from operations........... 340 (7,730) 1,432 3,962
Net income (loss)....................... 356 (4,633) 869 2,469
Net income (loss) per share............. $ 0.04 $ (0.62) $ 0.11 $ 0.29
Shares used in computing net income
(loss) per share........................ 8,030 7,510 8,017 8,501
Common Stock Price (1)
High............................... $30 1/2 $39 5/8 $28 1/4 $25 1/2
Low................................ $ 23 $27 1/4 $18 7/8 $13 1/2
1995
- ----
Total revenues.......................... $ 6,810 $ 7,630 $ 8,242 $10,566
Income (loss) from operations........... (270) (148) 140 1,743
Net income (loss)....................... (228) (132) 43 1,117
Net income (loss) per share............. $ (0.04) $ (0.02) $ 0.01 $ 0.15
Shares used in computing net income
(loss) per share....................... 5,524 5,525 5,520 7,420
Common Stock Price (1)
High............................... N/A N/A N/A $37 3/4
Low................................ N/A N/A N/A $17 3/4
</TABLE>
- --------------------
(1) Sale prices reported on the Nasdaq National Market. Trading in the Company's
Common Stock commenced on October 20, 1995.
11
<PAGE>
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company are annexed to the report as pages F-1
to F-16. An index to such materials appears on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
The Company's executive officers and directors are as follows:
Name Age Position with the Company
- ---- --- -------------------------
Glen E. Tullman 37 Chief Executive Officer and Director
Joseph E. Carey 39 President and Secretary
David B. Mullen 46 Chief Financial Officer
Steven M. Katz 47 Chief Operating Officer
Stanley A. Crane 47 Chief Technology Officer
David A. Carlson 44 Executive Vice President
James H. Ray 55 Senior Vice President, Finance and Treasurer
Robert W. Rook, Jr. 44 Executive Vice President, Human Resources
Thomas R. Hutchison (1)(2)(3) 56 Chairman of the Board and Director
Robert A. Compton (2)(3) 41 Director
Bernard Goldstein (1)(2) 66 Director
M. Fazle Husain (1)(3) 32 Director
(1) Member of Compensation Committee of the Board of Directors
(2) Member of Audit Committee of the Board of Directors
(3) Member of Stock Option 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. from Princeton University and an M.B.A. degree from the
University of Pennsylvania.
12
<PAGE>
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 International Business Machines Corp. ("IBM"). Mr. Katz 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 and recently was named Chief
Technology Officer. 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.
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 Standard
Organization.
James H. Ray has served as Senior Vice President, Finance since January
1995. From 1987 to January, 1995, Mr. Ray served as Chief Financial Officer of
the Company. Mr. Ray also served as Secretary from 1987 until November 1994 and
Treasurer from 1987 to present. Mr. Ray holds a B.S. degree from the University
of Illinois.
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 investment 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.
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, L.P.
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 is a Director of Broadview Associates LLC, an investment banking
firm, where he previously served as a Managing Director from 1979 through 1996.
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 the 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 is 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
13
<PAGE>
from 1987 until 1989. Mr. Husain serves on the Board of Directors of Cambridge
Heart, Inc. and several private healthcare and healthcare information technology
companies.
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 consists of five persons. 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; Mr. Tullman serves 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.
Compliance With Section 16(a) Of The Securities Exchange Act of 1934
Section 16(a) of the securities Exchange Act requires the Company's
directors and executive officers, and any persons who own more than ten percent
of the Company' Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock. Such persons are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 1996, all such Section
16(a) filing requirements were complied with.
Item 11. Executive Compensation
General
The following table sets forth compensation awarded or earned by the
Company's Chief Executive Officer and the four other most highly paid executive
officers during the year ended December 31, 1996 (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ------------
Fiscal Other Annual Options All Other
Name and Principal Position Year Salary Bonus Compensation (3) (No. of Shares) Compensation/1/
- --------------------------- ------- -------- -------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Tullman(2) 1996 $214,583 $100,855 - - -
Chief Executive Officer 1995 200,000 42,000 - - -
1994(2) 50,000 1,000 $3,000 144,846 -
Joseph E. Carey 1996 155,500 73,085 - 10,000 -
President and Secretary 1995 132,000 27,720 - 17,500 -
1994 121,000 45,980 - - $7,653
David B. Mullen 1996 192,500 90,475 - 10,000 -
Chief Financial Officer 1995(4) 160,410 28,072 - 77,500 -
Steven M. Katz 1996 182,500 85,775 - 10,000 -
Chief Operating Officer 1995 170,000 29,750 - 17,500 -
1994(5) 22,558 451 - 55,000 -
David A. Carlson 1996 133,350 40,172 - - -
Executive Vice President, 1995 120,900 16,322 - 12,500 -
Business Development 1994 113,400 36,288 - - 7,601
</TABLE>
- -------------------------------
14
<PAGE>
(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)
Retirement Plan in October 1995. No contributions to the ESOP have been
made since 1994, although forfeitures by existing participants will cause
additional allocations to other participants, including certain of the
Named Executive Officers. See "Management Compensation--401(k) Retirement
Plan."
(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 the
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 on January 23,
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.
Executive Option Grants
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers in 1996.
Option Grants in Fiscal 1996
Individual Grants
-----------------
<TABLE>
<CAPTION>
Potential Realizable Value at
Percent of Assumed Annual Rates of
Number of Total Options Exercise Stock Price Appreciation for
Options Granted to Employees Price Expiration Option Term/(2)/
Name Granted/(1)/ in Fiscal 1996 Per Share Date 5% 10%
- ---- ----------- -------------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Tullman -- -- $ -- -- $ -- $ --
Joseph E. Carey 10,000 7.6% 22.25 7/16/06 139,939 354,608
David B. Mullen 10,000 7.6% 22.25 7/16/06 139,939 354,608
Steven M. Katz 10,000 7.6% 22.25 7/16/06 139,939 354,608
David A. Carlson -- -- -- -- -- --
</TABLE>
- -------------
(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 hve ten-year terms so long as the optionee's employment
with the Company continues.
(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.
Option Exercises and Holdings
The following table sets forth information concerning option exercises
and holdings with respect to each of the Named Executive Officers as of
December 31, 1996.
Option Value as of December 31, 1996
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options at Money Options at
Number of December 31, 1996 December 31, 1996/(1)/
Shares Value -------------------------- -----------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Tullman/(2)/ 57,000 $1,178,640 44,907 57,939 $789,016 $1,017,988
Joseph E. Carey 15,000 325,200 50,834 21,666 895,775 100,350
David B. Mullen 5,000 101,600 30,000 52,500 439,250 583,525
Steven M. Katz 16,875 249,900 30,209 35,416 472,194 341,938
David A. Carlson -- -- 54,167 8,333 990,425 87,850
</TABLE>
- -------------
15
<PAGE>
(1) Value of unexercised options equals fair market value of a share into which
the option can be converted at December 31, 1996 (market price $23.50),
less exercise price, times the number of options outstanding.
(2) Does not include options to purchase 144,846 shares of Common Stock
currently outstanding and held by Thomas R. Pirelli, 86,907 of which are
currently exercisable.
Employment Agreements
Each of the Named Executive Officers has an employment agreement 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 determined
by the Board at the beginning of the calendar year. The initial term of the
agreements expired on August 31, 1996, are renewable for successive periods of
one year after expiration of the initial term (each agreement was renewed for
one year after expiration of the initial term) and are terminable by the Company
with cause, as defined in the employment agreements. Upon termination by the
Board 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, $275,000; Mr. Carey, $205,000; Mr. Mullen, $230,000; Mr. Katz,
$220,000; 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 as set forth in each
agreement.
Long-Term Incentive Compensation Plan
The Board has adopted the Enterprise Systems, Inc. Long-Term Incentive
Compensation Plan (the "Plan"), which was an amendment and restatement of the
Company's 1993 Stock Option Plan. The purpose of the 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 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 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.
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 Plan that is forfeited, expired or terminated prior to
vesting or exercise will again become available for grant under the Plan.
The Plan is administered by the Option Committee of the Board (Option
Committee). The Option 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 Plan, and to
establish the terms, conditions and limitations of each Award (subject to the
terms of the Plan and the applicable provisions of the
16
<PAGE>
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. Other
than through the Award of formula options, the members of the Option Committee
must not have received any Award pursuant to the Plan or any similar plan for
one year prior to being appointed to the Option Committee, or for such other
time period necessary to fulfill the then current Rule 16b-3 requirements under
the Securities Exchange Act of 1934, as amended. The Option Committee also has
full power to construe and interpret the Plan and the Awards granted under the
Plan, and to establish rules and regulations necessary or advisable for its
administration. The determination of the Option Committee with respect to any
matter under the Plan to be acted upon by the Option Committee is conclusive and
binding.
Awards under the Plan may be granted only to key employees and key non-
employees of the Company and its subsidiaries. The Option Committee determines
whether a particular employee or non-employee qualifies as a key employee or key
non-employee. Awards also may be granted to a prospective employee, conditioned
upon such person becoming an employee. Members of the Option Committee are not
eligible for Awards while serving on the Option Committee, unless the Award is
made pursuant to a formula that either states the amount and price of the Common
Stock to be awarded to the members of the Option Committee and specifies the
timing of the Award, or sets a formula that determines the amount, price, and
timing of the Award using objective criteria.
The Option Committee, in its sole discretion, but subject to the provisions
of the Plan, determines the persons to whom Awards are granted, and the number
of shares, if any, to be covered by each Award, taking into account the nature
of the employment rendered by the individuals being considered, or the nature of
their engagement, their annual compensation or pay, their present and potential
contributions to the success of the Company, and such other factors as the
Option Committee may deem relevant.
In the event the Company pays a stock dividend or makes a distribution of
shares, or splits up, combines, reclassifies or substitutes other securities for
its outstanding shares of Common Stock, the Option Committee shall make an
appropriate adjustment to the number of shares subject to outstanding Awards and
the exercise prices thereof.
The Board may amend the Plan in any respect, except that the following
changes may not be made without stockholder approval: (i) the maximum number of
shares available for Awards may not be increased (except upon stock splits and
dividends, combinations and similar events), (ii) the requirements as to
eligibility may not be materially modified, (iii) the cost of the Plan or
benefits to Participants may not be materially modified, (iv) the period during
which Awards may be granted or exercised may not be extended, (v) the provisions
of the Plan regarding Option price may not be modified, and (vi) the class of
employees eligible to receive Incentive Options may not be modified.
The Board may terminate the Plan at any time. However, no termination or
amendment will affect the rights of participants under Awards previously granted
without a participant's consent. Unless previously terminated, the Plan will
terminate on September 27, 2005, and no Awards shall be made after that date.
The maximum number of Common Stock which may be issued and sold under the
Plan, subject to adjustment, is 1,114,846 shares. As of the February 28, 1997,
the Company had outstanding options to purchase an aggregate of 867,150 shares
of Common Stock at per share exercise prices ranging from $4.57 to $38.50. As of
February 28, 1997, no shares of Common Stock have been issued pursuant to
restricted stock awards and a total of 22,977 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.
401(k) Retirement Plan
The Enterprise Systems, Inc. 401(k) Savings Plan (the "401(k) Plan") is a
tax qualified "cash or deferred" arrangement under Section 401(k) of the
Internal Revenue Code in which all of the Company's employees,
17
<PAGE>
including executive officers, are eligible to participate after completing three
months of service. Participants will be 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
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 October 1995 the Company merged its Employee Stock Ownership Plan (the
"ESOP") into the 401(k) Plan with stock account balances from the ESOP
transferring to the 401(k) Plan. The trustee of the 401(k) Plan is Emjay
Corporation. Shares of Common Stock that have been allocated to participants
under the ESOP and which remain as part of their account balances under 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. The trustee is under a fiduciary
duty to act and vote in the best interest of the participants.
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. Pursuant to
the terms of the formula program of the Company's 1993 Stock Option 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. 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, 5,000 of which vested on January 1, 1994, 1995 and 1996. These options
are exercisable at $4.57 per share. When two partnerships controlled by CID
Equity Partners I, L.P. ("CID") became principal stockholders of the Company in
April 1993, CID acquired the right to appoint a nominee to the Board (this right
was terminated in connection with the Company's initial public offering). After
the election of its nominee, Mr. Compton, CID was granted an option to purchase
15,000 shares of Common Stock, 5,000 of which vested on January 1, 1994, 1995
and 1996. These options are exercisable at a price per share of $4.57. When
affiliates of Morgan Stanley & Co., Incorporated ("Morgan Stanley") became
principal stockholders of the Company in March 1994, they also acquired the
right to appoint a nominee to the Board (this right was also terminated in
connection with the Company's initial public offering). 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 April 21, 1995 and 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 after October 20, 1995, 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 equal annual installments.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Responsibilities and Composition of the Committee
The Compensation Committee of the Company's Board of Directors (the
"Committee") is responsible for (i) establishing compensation programs for
executive officers of the Company designed to attract, motivate and retain key
executives responsible for the Company's success; (ii) administering and
maintaining such programs in a manner that will benefit the long-term interests
of the Company and its stockholders; and (iii) determining the compensation of
the Company's executive officers. The Committee is composed entirely of
directors who have never served as employees of the Company.
18
<PAGE>
Compensation Philosophy and Objectives
The Committee believes that the Company's executive officer compensation
should be determined according to a competitive framework and based on overall
financial results, individual contributions and teamwork that help build value
for the Company's stockholders. Within this overall philosophy, the Committee
bases the compensation program on the following principles:
. Compensation levels for executive officers are benchmarked to the outside
market, utilizing information from proxy materials of companies included in
the stockholder return performance graph below. Compensation decisions are
made by referring to information in this material regarding two groups of
companies: companies with annual revenues of $25 to $250 million, with
which the Company is expected to compete for executive talent; and the
companies included in the performance graph, with which the Company can
expect to compete for investors.
. The total compensation opportunity is targeted to the mid-range of these
companies; incremental amounts may be earned above or below that level
depending upon corporate and individual performance. The Committee
considers it essential to the vitality of the Company that the total
compensation opportunity for executive officers remains competitive with
similar companies in order to attract and retain the talent needed to
manage and build the Company's business.
. Compensation is tied to performance. A significant part of the total
compensation opportunity is at risk, to be earned only if specific goals
are met.
. Incentive compensation is designed to reinforce the achievement of both
short- and long-term corporate objectives.
. Executives' interest in the business should be directly linked to the
interests and benefits received by the Company's stockholders.
Process and Compensation Components
The process utilized by the Committee in determining executive officer
compensation levels for all of these components is based upon the Committee's
subjective judgment and takes into account both qualitative and quantitative
factors. No weights are assigned to such factors with respect to any
compensation component. Among the factors considered by the Committee are the
recommendations of the Chief Executive Officer with respect to the compensation
of the Company's other key executive officers. However, the Committee makes the
final compensation decisions concerning such officers.
In making compensation decisions, the Committee considers compensation
practices and financial performance of the Peer Group (as defined below) as well
as periodic surveys prepared by a nationally recognized compensation consulting
firm. This information provides guidance to the Committee, but the Committee
does not target total executive compensation or any component thereof to any
particular point within, or outside, the range of Peer Group results. However,
the Committee believes that compensation competitive with the Peer Group for
base salaries and for total cash compensation and long-term incentive awards is
generally appropriate for the Committee to use as a framework for compensation
decisions. Specific compensation for individual officers will vary as the result
of subjective factors considered by the Committee unrelated to compensation
practices of the Peer Group. (See "Compensation Philosophy and Objectives"
above.)
The Peer Group is comprised of virtually all the public companies in the
health care information services industry. The Committee selects various
groupings of these 26 companies as it deems appropriate for different
compensation and financial performance comparisons. Substantially all of these
companies are included in the performance peer group used for the stockholder
return performance graph set forth below.
19
<PAGE>
The compensation program has three elements: annual base salary; annual
bonuses, which are based on the Company attaining certain performance
objectives; and awards under a long-term incentive compensation plan (awarded by
the Option Committee), which are based on both Company performance and
individual performance. The Committee has approved these elements of
compensation to ensure the Company's total compensation program is comparable to
and competitive with that of other companies of similar size.
Annual Compensation
Each of the executive officers has entered into an employment agreement
with the Company. In general, these employment agreements fix base compensation
and provide for bonuses contingent upon the attainment of certain performance
objectives.
Base Salary. Base salaries for executive officers are established at levels
considered appropriate in light of the scope of the duties and responsibilities
of each officer's position and taking into account Peer Group compensation
practices. The base salary of each executive officer is adjusted in or around
April of each year.
Annual Bonuses. In general, executive officers receive annual bonuses
pursuant to their employment agreements. Executive officers have an annual bonus
opportunity equal to between 0% to 80% of their respective base salaries. The
bonus payable, if any, is contingent upon the attainment of objectives
determined by the Committee at the beginning of each calendar year. Additional
amounts may be paid as a bonus if the performance objectives are exceeded. In
March 1996, the Board reviewed and approved the 1996 Management Bonus Plan,
which set specific performance goals (including total revenues and operating
income). The actual bonus opportunity that was paid to all executive officers
for services provided during the 1996 fiscal year was approximately 56%.
In February 1997 the Board approved the 1997 Management Bonus Plan. This
year's bonus opportunity is contingent upon the Company achieving certain levels
of nonhardware revenues and net income. The goal for the rate in growth of
corporate net earnings has been set at a number which was expected, at the time
of approval, to deliver superior results in comparison to the Peer Group.
Additional bonus amounts are payable if these target numbers are exceeded.
Payment of 20% of any bonus will be deferred and paid at the end of the
second year following the calendar year in which it was earned. The bonus may be
forfeited if employment is terminated under certain circumstances.
In addition, the Company has an informal profit sharing plan based on
income targets. In 1996 executive officers, upper-level management, and other
employees, received 2% of their base salary paid in 1996. In 1997 the Board
expects that employees will be paid between 1% and 2% of their base salaries,
depending on the level of income achieved by the Company.
Long-Term Incentive Compensation Plan
The Company's Long-Term Incentive Compensation Plan (the "Plan") authorizes
the Option Committee to make grants and awards of stock options, stock awards,
stock appreciation rights, restricted stock grants and performance shares. See
the detailed description of the Plan set forth above. Stock-based awards are
generally granted to executive officers on an annual basis. It has been the
practice of the Option Committee to grant stock options to executive officers
and other members of senior management. The aggregate number of shares that may
be granted to any plan participant in any one year is currently limited by the
Plan to 200,000 shares.
In determining the size of each executive officer's stock option awards,
the Option Committee considered its objective of attaining long-term incentive
compensation levels deemed appropriate by the Option Committee when compared to
Peer Group compensation levels on a size-adjusted and absolute basis. The Option
Committee also considered past stock option awards and holdings under the
Employee Stock Ownership Plan (which is now
20
<PAGE>
part of the Company's 401(k) Savings Plan). In addition, the Option Committee
took into account the Chief Executive Officer's award recommendations for the
other key executive officers.
Policy on Deductibility of Compensation
It is the responsibility of the Committee to address the provisions of
Section 162(m) of the Internal Revenue Code which, except in the case of
"performance-based compensation" and certain other types of compensation, limit
to $1,000,000 the amount of the Company's federal income tax deduction for
compensation paid to the Chief Executive Officer and the other four most highly
paid executive officers. In that regard, the Committee must determine whether
any actions with respect to Section 162(m) should be taken by the Company. At
this time, the Committee has determined that the Section 162(m) deduction
limitation will not apply in 1997 because the Company falls within the extended
reliance period for corporations that become publicly held in connection with an
initial public offering. The Committee will continue to monitor the reliance
period and will take appropriate action when it is warranted in the future.
Chief Executive Officer Compensation
The Chief Executive Officer's salary, bonus and long-term awards follow the
policies set forth above. In setting his 1997 base salary, the Committee
considered the compensation practices of the Peer Group. Mr. Tullman's 1996
annual bonus was based upon the established Company performance targets--
nonhardware revenues and earnings--set forth in the 1996 Management Bonus Plan.
Mr. Tullman was awarded a $96,563 bonus, or approximately 56% of his potential
bonus opportunity. He was not granted any awards under the Company's Long-Term
Incentive Compensation Plan.
The Committee also approved the compensation of the Company's other
executive officers for 1997, following the principles and procedures outlined in
this report./1/
COMPENSATION COMMITTEE
Bernard Goldstein
M. Fazle Husain
Thomas R. Hutchison
Compensation Committee Interlocks And Insider Participation
During the fiscal year ended December 31, 1996, there were no Compensation
Committee interlocks or insider participation.
- ------------------------
/1/ Pursuant to Item 402(a)(9) of Regulation S-K promulgated by the Securities
and Exchange Commission (the "SEC"), neither the "Compensation Committee Report
on Executive Compensation" nor the material under the caption "Stockholder
Return Performance Graph" shall be deemed to be filed with the SEC for purposes
of the Securities Exchange Act, as amended (the "Exchange Act"), nor shall such
report or such material be deemed to be incorporated by reference in any past or
future filing by the Company under the Exchange Act or the Securities Act of
1933, as amended (the "Securities Act").
21
<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total stockholder return on the Company's Common Stock against the
Nasdaq Market Index and a Company-selected peer group of healthcare information
systems providers (the "Peer Group"). The graph assumes that $100 was invested
on October 20, 1995 (the effective date of the Company's initial public
offering) at the initial public offering price of $16.00 per share, in each of
the Company's Common Stock, the Nasdaq Market Index and the Peer Group, and that
all dividends were reinvested.
Comparison of Fourteen-Month Cumulative Total Returns
Performance Graph for Enterprise Systems, Inc.
Prepared by Media General Financial Services
Produced on 3/18/97 including data to 12/31/96
[GRAPH APPEARS HERE]
ASSUMES $100 INVESTED ON OCT. 20, 1995
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1996
<TABLE>
<CAPTION>
Measurement Period Nasdaq Market Index Peer Group Enterprise Systems, Inc.
- --------------------- ------------------- ---------- ------------------------
<S> <C> <C> <C>
Measurement Point--
10/20/95 $100.00 $100.00 $100.00
FYE 12/31/95 $101.13 $118.93 $190.63
FYE 12/31/96 $125.67 $113.72 $146.88
</TABLE>
Notes:
(a) Peer Group return is weighted by market capitalization.
(b) The Peer Group is comprised of the common stock of the following
companies: Access Health, Inc., Cerner Corporation, CITATION Computer
Systems, Inc., CORE, Inc., ENVOY Corporation, HBO & Company, HCIA
Inc., Health Management Systems, Inc., HealthPlan Services
Corporation, IDX Systems Corporation, IMNET Systems, Inc., Mecon Inc.,
Medaphis Corporation, Medic Computer Systems, Inc., Medicus Systems
Corporation, PACE Health Management Systems, PHAMIS, Inc.,
Pharmaceutical Marketing Services Inc., Physician
22
<PAGE>
Computer Network, Shared Medical Systems Corp., Spacelabs Medical,
Inc., Summit Medical Systems, Inc., U.S. Servis, Inc., and Value
Health Inc.
(c) The composition of the Peer Group was revised to remove companies that
were purchased and add companies which are considered representative
of the Company's sector.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1997 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. Each person named below has an address in care of the
Company's principal executive offices. 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>
Name of Beneficial Owner
- ------------------------
Shares Beneficially Owned/(1)/
-------------------------
Officers, Directors and 5% Stockholders Number Percent
- --------------------------------------- ------ -------
<S> <C> <C>
Enterprise Systems, Inc. 401(k) Retirement Plan/(2)/........ 771,888 9.5
Glen E. Tullman/(3)/........................................ 170,599 2.1
Joseph E. Carey/(4)/........................................ 71,760 *
David B. Mullen/(5)/........................................ 47,950 *
Steven M. Katz/(6/.......................................... 30,609 *
David A. Carlson/(7)/....................................... 139,424 1.7
Stanley A. Crane/(8)/....................................... 10,001 *
James H. Ray/(9)/........................................... 23,699 *
Robert W. Rook, Jr.......................................... -- --
Thomas R. Hutchison /(10)/.................................. 115,000 1.4
Thomas R. Pirelli/(11)/..................................... 1,536,590 18.8
Robert A. Compton/(12)/..................................... 7,056 *
M. Fazle Husain/(13)/....................................... -- --
Bernard Goldstein/(14)/..................................... 97,561 1.2
Putnum Investments/(15)/.................................... 568,200 7.0
Morgan Stanley Venture Capital Fund II, L.P./(16)/.......... 657,857 8.0
All officers and directors as a group (12 persons).......... 626,752 7.4
</TABLE>
___________________________
* less than 1%
(1) Applicable percentage of ownership as of February 28, 1997 is based upon
8,162,418 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the SEC, and includes voting and
investment power with respect to the shares shown as beneficially owned.
Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days after February 28, 1997 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.
(2) Includes 20,526, 21,708, 29,496 and 17,898 401(k) Plan shares beneficially
owned by Messrs. Carey, Carlson, Pirelli and Ray, respectively. The
trustee of the 401(k) Plan is Emjay Corporation, 725 Glendale Avenue,
Glendale Wisconsin 53209. See "Management Compensation--401(k) Retirement
Plan."
(3) 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.
(4) Includes options to purchase 50,834 shares of Common Stock and 20,526
shares of Common Stock held in the 401(k) Plan.
23
<PAGE>
(5) Includes options to purchase 43,750 shares of Common Stock.
(6) Includes options to purchase 30,209 shares of Common Stock.
(7) Includes options to purchase 54,167 shares of Common Stock, 21,708 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.
(8) Includes options to purchase 10,001 shares of Common Stock.
(9) Includes options to purchase 5,001 shares of Common Stock and 17,898 shares
of Common Stock held in the 401(k) Plan.
(10) 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 "Trusts"). Mr. Pirelli is a
principal stockholder of the Company.
(11) Includes 86,907 shares of Common Stock subject to options held by Glen E.
Tullman, 29,496 shares of Common Stock held in the 401(k) Plan and
1,442,986 shares of Common Stock held in the Thomas R. Pirelli Trust U/A/D
January 26, 1990 and 44,445 shares held by the Thomas R. Pirelli
Foundation. Mr. Pirelli is a trustee of the foundation. Mr. Pirelli
disclaims beneficial ownership in the 100,000 shares of Common Stock held
in the Trusts. Mr. Pirelli's address is 909 East Oakhurst, Riverwoods,
Illinois 60015.
(12) The address of Mr. Compton is One American Square, Suite 2850, Box 82074,
Indianapolis, Indiana 46282.
(13) Mr. Husain disclaims beneficial ownership of the shares held by Morgan
Stanley.
(14) Includes options to purchase 15,000 shares of Common Stock.
(15) The address of Putnam Investments, Inc., One Post Office Square, Boston,
Massachusetts, 02109.
(16) Includes options to purchase 15,000 shares of Common Stock and 161,266
shares of Common Stock held by Morgan Stanley Venture Investors, L.P.
("MSVI") and 78,713 shares of Common Stock held by Morgan Stanley Venture
Capital Fund II, C.V. ("MSCV"). The general partner of Morgan Stanley
Venture Capital Fund II, L.P., 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 Morgan
Stanley Venture Capital Fund II, L.P., MSVI and MSCV. The address of
Morgan Stanley Venture Capital Fund II, L.P., MSVI and MSCV is 1221 Avenue
of the Americas, New York, New York 10020.
Item 13. Certain Relationships and Related Transactions
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an agreement with Broadview Associates, L.P.
("Broadview") effective as of February 1, 1996, pursuant to which Broadview
agreed to (i) study the Company's existing corporate strategy; (ii) help
establish 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. The
initial term of this agreement expired on June 30, 1996. Pursuant to the
agreement, the Company paid Broadview a fee of $380,000 in connection with the
Matkon Acquisition. Bernard Goldstein, a Director of the Company and a member of
the Committee, is the Managing Director of Broadview.
The Company entered into an agreement with Broadview effective as of
January 9, 1997, pursuant to which Broadview agreed to (i) Undertake a study of
the Company's business in order to better understand the property value and
potential acquisition candidates; (ii) make recommendations to prepare the
Company for proper investigation by potential acquirers, and (iii) discreetly
contact only the selected potential acquirers approved by the Company.
24
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The financial statements filed as part of this report are listed in the
accompanying Index to Consolidated Financial Statements. The exhibits filed as
part of this report are listed in the accompanying Exhibit Index. With respect
to the acquisition of the materials management division of Continental
Healthcare Systems, Inc., the Company filed two amendments (on November 12, 1996
and November 21, 1996) to the Current Report on Form 8-K to indicate that the
Financial Statements and pro forma financial information were filed as follows:
(a) Financial Statements of businesses to be acquired
The Financial Statements are contained in the Enterprise Systems, Inc.
Registration Statement on Form S-1 (Registration Number 333-13691) (the
"Registration Statement") filed with the United States Securities and
Exchange Commission on October 8, 1996.
(b) Pro forma financial information
The pro forma financial information is contained in the Registration
Statement.
The Financial Statement Schedule filed as part of this report is included
following the consolidated financial statements. All other schedules have been
omitted because the information is not required.
25
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 18, 1997.
ENTERPRISE SYSTEMS, INC.
By: /s/ GLEN E. TULLMAN
--------------------------
Glen E. Tullman
Chief Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Glen E. Tullman and David B. Mullen, and each of
them singly, his true and lawful attorneys in fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Enterprise Systems, Inc.) to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents of any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1997, by the following persons on
behalf of the Company and in the capacities indicated.
Signature Title
--------- -----
/s/ GLEN E. TULLMAN Chief Executive Officer, Director
- ---------------------------------- (Principal Executive Officer)
Glen E. Tullman
/s/ DAVID B. MULLEN Chief Financial Officer
- ---------------------------------- (Principal Financial and
David B. Mullen Accounting Officer)
/s/ ROBERT A. COMPTON Director
- ----------------------------------
Robert A. Compton
/s/ BERNARD GOLDSTEIN Director
- ----------------------------------
Bernard Goldstein
/s/ M. FAZLE HUSAIN Director
- ----------------------------------
M. Fazle Husain
/s/ THOMAS R. HUTCHISON Chairman of the Board, Director
- ----------------------------------
Thomas R. Hutchison
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 18, 1997.
ENTERPRISE SYSTEMS, INC.
By: /s/ GLEN E. TULLMAN
--------------------------
Glen E. Tullman
Chief Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Glen E. Tullman and David B. Mullen, and each of
them singly, his true and lawful attorneys in fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Enterprise Systems, Inc.) to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents of any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1997, by the following persons on
behalf of the Company and in the capacities indicated.
Signature Title
--------- -----
Chief Executive Officer, Director
- ---------------------------------- (Principal Executive Officer)
Glen E. Tullman
Chief Financial Officer
- ---------------------------------- (Principal Financial and
David B. Mullen Accounting Officer)
Director
- ----------------------------------
Robert A. Compton
Director
- ----------------------------------
Bernard Goldstein
Director
- ----------------------------------
M. Fazle Husain
Chairman of the Board, Director
- ----------------------------------
Thomas R. Hutchison
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 18, 1997.
ENTERPRISE SYSTEMS, INC.
By:
--------------------------
Glen E. Tullman
Chief Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Glen E. Tullman and David B. Mullen, and each of
them singly, his true and lawful attorneys in fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Enterprise Systems, Inc.) to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents of any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1997, by the following persons on
behalf of the Company and in the capacities indicated.
Signature Title
--------- -----
Chief Executive Officer, Director
- ---------------------------------- (Principal Executive Officer)
Glen E. Tullman
Chief Financial Officer
- ---------------------------------- (Principal Financial and Accounting
David B. Mullen Officer)
Director
- ----------------------------------
Robert A. Compton
Director
- ----------------------------------
Bernard Goldstein
Director
- ----------------------------------
M. Fazle Husain
Chairman of the Board, Director
- ----------------------------------
Thomas R. Hutchison
<PAGE>
ENTERPRISE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994.......................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994.................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</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, 1996 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,
1996. 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, 1996 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, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 10, 1997
F-2
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
ASSETS 1996 1995
- ---------------------------------------- -------- --------
Current assets
<S> <C> <C>
Cash and cash equivalents................. $15,510 $11,403
Short-term investment securities.......... -- 9,220
Receivables, less allowance for
doubtful accounts of $745 and $356...... 25,318 14,321
Refundable and prepaid income taxes....... -- 547
Deferred income taxes..................... 4,598 777
Prepaid commissions....................... 2,007 1,344
Other current assets...................... 1,472 955
------- -------
Total current assets................. 48,905 38,567
------- -------
Investment securities......................... 4,486 4,893
Property and equipment
Computer equipment........................ 7,589 6,242
Furniture and fixtures.................... 890 897
Leasehold improvements.................... 592 499
------- -------
Total property and equipment......... 9,071 7,638
Less accumulated depreciation
and amortization............... 4,963 4,071
------- -------
4,108 3,567
------- -------
Purchased and developed software, net
of accumulated amortization................. 4,216 1,498
Goodwill and other intangibles, net of
accumulated amortization ................... 3,451 --
Other assets.................................. 1,065 401
------- -------
$66,231 $48,926
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable......................... $ 543 $ 1,285
Accrued liabilities...................... 3,930 2,240
Unearned revenue......................... 4,947 4,674
------- -------
Total current liabilities........... 9,420 8,199
------- -------
Deferred income taxes......................... 1,985 321
------- -------
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 8,131,248 and
7,357,033 shares....................... 81 74
Additional paid-in capital............... 53,830 38,513
Retained earnings........................ 971 1,910
Deferred compensation.................... (56) (91)
------- -------
Total stockholders' equity.......... 54,826 40,406
------- -------
$66,231 $48,926
======= =======
</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>
Year Ended December 31,
---------------------------
1996 1995 1994
-------- ------- --------
Revenues
<S> <C> <C> <C>
Software.............................. $23,638 $16,104 $11,762
Services.............................. 25,238 16,498 12,343
Hardware.............................. 3,440 646 607
------- ------- -------
Total revenues..................... 52,316 33,248 24,712
------- ------- -------
Operating costs and expenses
Software development.................. 9,522 7,536 6,377
Service and support................... 14,873 10,742 8,629
Hardware.............................. 3,101 786 682
Sales and marketing................... 11,650 8,832 5,984
Administration........................ 6,713 3,887 2,878
Acquired in-process technology........ 8,453 -- --
------- ------- -------
Total operating costs and expenses. 54,312 31,783 24,550
------- ------- -------
Income (loss) from operations........... (1,996) 1,465 162
Interest income (expense), net.......... 749 17 (114)
------- ------- -------
Income (loss) before income taxes....... (1,247) 1,482 48
Income tax expense (benefit)............ (308) 682 20
------- ------- -------
Net income (loss)....................... $ (939) $ 800 $ 28
======= ======= =======
Net income (loss) per share............. $(0.12) $0.13 $0.01
======= ======= =======
Weighted average common stock and common
stock equivalent shares outstanding.... 7,619 6,279 5,383
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
(amounts in thousands)
<TABLE>
<CAPTION>
Additional Company
---------- -------
Common Stock Paid-in Retained Deferred Loan to
--------------- ------- -------- -------- -------
Shares Amount Capital Earnings Compensation ESOP Total
------ ------ ------- -------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common
stock, net........................... 600 6 12,966 -- -- -- 12,972
Exercise of stock options............. 174 1 916 -- -- -- 917
Income tax benefit relating to
the exercise of stock
options.............................. 1,435 1,435
Net loss.............................. -- -- -- (939) -- -- (939)
Amortization of deferred
compensation......................... -- -- -- -- 35 -- 35
----- --- ------- ------ ------ ------ -------
Balance at December 31, 1996............ 8,131 $81 $53,830 $ 971 $ (56) $ -- $54,826
===== === ======= ====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (939) $ 800 $ 28
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities, net of
acquisition:
Depreciation................................. 2,064 1,595 1,249
Amortization................................. 1,303 242 125
Deferred income taxes........................ (2,157) 891 (336)
Acquired in-process technology............... 8,453 -- --
Changes in assets and liabilities:
Receivables, net............................ (9,858) (6,669) (741)
Refundable and prepaid income taxes........ 547 (438) (109)
Prepaid commissions and other
current assets............................ (907) (1,380) (478)
Accounts payable........................... (742) 169 647
Accrued liabilities........................ 410 1,311 18
Unearned revenue........................... 273 1,857 525
Other, net................................. (1,138) (355) (2)
-------- -------- -------
Net cash provided by (used in)
operating activities.................... (2,691) (1,977) 926
-------- -------- -------
Cash flows from investing activities:
Payment for acquisition........................ (13,892) -- --
Maturities (purchases) of investment securities 9,627 (14,113) --
Purchase of property and equipment............. (2,511) (2,107) (2,142)
Capitalized software development............... (1,750) (842) (664)
Other.......................................... -- -- (18)
-------- -------- -------
Net cash used in investing
activities.............................. (8,526) (17,062) (2,824)
-------- -------- -------
Cash flows from financing activities:
Repayment of notes payable..................... -- (1,700) (1,000)
Repayment of loan by ESOP...................... -- -- 514
Repayment of long-term debt.................... -- (291) (1,096)
Proceeds from issuance of common stock, net.... 12,972 31,282 3,549
Proceeds from exercise of stock options........ 917 93 --
Repurchase of common stock..................... -- (530) (382)
Tax benefit relating to stock options.......... 1,435 -- --
-------- -------- -------
Net cash provided by financing
activities.............................. 15,324 28,854 1,585
-------- -------- -------
Increase (decrease) in cash and cash
equivalents.................................... 4,107 9,815 (313)
Cash and cash equivalents at beginning of year.. 11,403 1,588 1,901
-------- -------- -------
Cash and cash equivalents at end of year........ $ 15,510 $ 11,403 $ 1,588
======== ======== =======
Supplemental disclosures of cash flow
information:
Interest paid................................. $ 40 $ 236 $ 158
======== ======== =======
Income taxes paid............................. $ 88 $ 250 $ 485
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) Description of Business
Enterprise Systems, Inc. develops, implements and services an integrated
suite of resource management products to assist healthcare providers in managing
operations and reducing costs. The Company's products focus on materials and
financial management, operating room logistics, patient and staff scheduling,
and decision support systems.
(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.
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.
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, representing primarily municipal bonds, 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.
F-7
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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 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.
Purchased and Developed Software
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 purchased and 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 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 dilutive 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 offering date (using the treasury stock method and the
mid-point of the 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.
Goodwill and Other Intangibles
Goodwill represents the unamortized cost in excess of fair value of net
assets acquired and is amortized on a straight-line basis over the expected
period to be benefited, not to exceed ten years. Other acquired intangible
assets are recorded at cost and are amortized using the straight-line method
over their estimated economic lives ranging from three to ten years.
Accumulated amortization was approximately $267,000 at December 31, 1996.
F-8
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Impairment of Long-lived Assets
The Company assesses the recoverability of its long-lived assets, such as
property and equipment and intangible assets whenever events or changes in
business circumstances indicate the carrying amount of the assets, or related
group of assets, may not be fully recoverable. The assessment of recoverability
is based on management's estimate of undiscounted future operating cash flows of
its long-lived assets. If the assessment indicates that the undiscounted
operating cash flows do not exceed the net book value of the long-lived assets,
then a permanent impairment has occurred. The Company would record the
difference between the net book value of the long-lived asset and the fair value
of such asset as a charge against income in the statement of operations if such
a difference arose. The Company determined that no permanent impairments had
occurred at December 31, 1996.
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.
Stock-Based Compensation
The Company utilizes the intrinsic value-based method of accounting for its
stock-based compensation arrangements.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform to the 1996 presentation.
(3) Public Offerings of Common Stock
On October 20, 1996, the Company completed a public offering of its common
stock in which 600,000 shares were sold by the Company, resulting in net
proceeds of approximately $13 million.
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 million.
(4) Acquisition
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 Matkon Acquisition). The Matkon 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 value. 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.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1996 and 1995 are presented as if the Matkon
Acquisition had been made at the beginning of each period presented. The
unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the period presented or the future results of the combined operations.
F-9
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
<TABLE>
<CAPTION>
(in thousands except per share amounts) 1996 1995
---- ----
<S> <C> <C>
Net sales............................. $55,795 $40,337
Net earnings (loss)................... (1,208) 478
Earnings (loss) per share............. $ (0.16) $ 0.08
</TABLE>
(5) Investment Securities
The amortized cost, gross unrealized holding gains (losses) and fair value
for investment securities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
----
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-maturity:
Due after one year.... $ 4,486 $15 $ -- $ 4,501
======= === ==== =======
1995
----
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
Held-to-maturity:
Current............... $ 9,220 $ 3 $ -- $ 9,223
Due after one year.... 4,893 3 -- 4,896
------- --- ---- -------
$14,113 $ 6 $ -- $14,119
======= === ==== =======
</TABLE>
The scheduled maturities for investment securities at December 31, 1996 were
less than one year.
(6) 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>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Accounts receivable............. $17,201 $ 9,457
Contracts receivable............ 8,862 5,220
------- -------
26,063 14,677
Allowance for doubtful accounts. (745) (356)
------- -------
$25,318 $14,321
======= =======
</TABLE>
F-10
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(7) Purchased and Developed Software
Purchased and developed software consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Purchased software................ $ 1,783 $ --
Software development.............. 3,610 1,860
------- ------
5,393 1,860
Accumulated amortization.......... (1,177) (362)
------- ------
$ 4,216 $1,498
======= ======
</TABLE>
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, 1996................. $815
December 31, 1995................. 217
December 31, 1994................. 125
</TABLE>
(8) Financing Arrangements
The Company has available, through June 1, 1999, 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, 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
the prime rate (8.25% at December 31, 1996) less 0.5%. No borrowings were
outstanding under the revolving credit line.
The Company is required to comply with certain financial covenants under
the financing arrangements discussed above. At December 31, 1996, the Company
was in compliance with the loan covenants.
(9) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current
Federal....... $ 1,482 $(174) $ 277
State......... 367 (35) 79
------- ----- -----
1,849 (209) 356
Deferred........ (2,157) 891 (336)
------- ----- -----
$ (308) $ 682 $ 20
======= ===== =====
</TABLE>
F-11
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The reconciliation of income taxes computed using the federal statutory
rate of 34% in 1996, 1995 and 1994 to the income tax provision (benefit) is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income taxes, at the federal
income tax statutory rate................. $(424) $504 $ 16
State income taxes, net of federal tax
benefit................................... (25) 87 52
Nondeductible expenses...................... 106 72 50
Research and experimentation credits........ -- -- (18)
Foreign tax credit.......................... -- (4) (17)
Other....................................... 35 23 (63)
----- ---- ----
$(308) $682 $ 20
===== ==== ====
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
in 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Deferred revenue.......................... $ 485 $1,152
Allowance for doubtful accounts........... 266 134
Other accrued liabilities................. 114 44
Purchased research and development........ 3,280 --
Depreciation and amortization............. 371 169
Other..................................... 82 43
------ ------
Total gross deferred tax assets......... 4,598 1,542
Less valuation allowance................ -- --
------ ------
Deferred tax assets..................... 4,598 1,542
------ ------
Deferred tax liabilities:
Software development...................... 1,079 567
Amortization.............................. 128 --
Prepaid commissions....................... 778 519
------ ------
Total gross deferred tax liabilities.... 1,985 1,086
------ ------
Net deferred tax assets................. $2,613 $ 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.
The exercise of certain stock options results in state and federal income
tax benefits to the Company. The benefit is equal to the difference between the
market price at the date of exercise and option price at the applicable tax
rate. The current tax benefit does not flow through the consolidated statement
of operations, but is credited directly to paid-in capital. As a result of stock
option exercises during 1996, $1,435,000 was credited to paid-in capital.
F-12
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(10) Leases
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>
1997................. $ 752
1998................. 681
1999................. 701
2000................. 722
2001................. 741
------
$3,597
======
Rental expense included in the consolidated statements of operations
amounted to:
Year Ended Amount
---------- -------------
(in thousands)
December 31, 1996........ $1,052
December 31, 1995........ 880
December 31, 1994........ 664
</TABLE>
(11) Stock Options
Under the Company's stock option plan, as amended in 1995, certain
employees and nonemployee directors may be granted the right to purchase shares
of common stock. Stock options vest over periods ranging from three to five
years and expire ten years from the date granted. At December 31, 1996, there
were approximately 18,563 shares 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.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Had compensation cost for the Company's
stock option plan been determined consistent with Statement of Financial
Accounting Standards No. 123 ("FAS 123"), the Company's net earnings (loss)
available to common stockholders and earnings (loss) per common and common
equivalent shares would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(in thousands except per share data) 1996 1995
---- ----
<S> <C> <C>
Net income (loss)
As reported $ (939) $ 800
Pro forma $(1,395) $ 690
Net income (loss) per share
As reported $ (0.12) $0.13
Pro forma $ (0.18) $0.11
</TABLE>
F-13
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Under the stock option plan, the exercise price of each option generally
equals the market price of the Company's stock on the date of grant. For
purposes of calculating compensation cost consistent with FAS 123, the fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions
used for grants in fiscal 1996 and 1995: expected volatility of 40%; risk free
interest rates ranging from 5.59% to 8.28%; dividend yield of 0.00%; and
expected lives of three years. Based on these assumptions, the weighted-average
fair value of options granted during 1996 and 1995 was $7.91 and $4.82,
respectively.
Stock option transactions for the three-year period ended December 31, 1996
relating to the stock option plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted Averge
Shares Price
-------- ----------------
<S> <C> <C>
Outstanding on January 1, 1994............ 370,000 $ 4.57
Granted................................. 289,846 5.88
Canceled................................ (30,000) 4.91
-------- ------
Outstanding on December 31, 1994.......... 629,846 5.16
Granted................................. 398,750 13.62
Exercised............................... (19,334) 4.81
Canceled................................ (41,666) 5.15
-------- ------
Outstanding on December 31, 1995.......... 967,596 8.66
Granted................................. 130,750 23.03
Exercised............................... (174,215) 5.27
Canceled................................ (21,397) 15.13
-------- ------
Outstanding on December 31, 1996.......... 902,734 $11.23
======== ======
Exercisable on December 31, 1996.......... 442,133
========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Remaining Exercise Number Exercise
Range of exercise prices Shares Contractual life Price of Shares Price
- ------------------------ --------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.57 to 11.00 623,634 7.5 years $ 5.50 392,469 $ 5.17
$11.00 to 22.25 109,250 9.5 years $22.23 -- --
$22.25 to 25.50 153,850 9.0 years $24.94 49,664 $24.92
$25.50 to 38.50 16,000 9.3 years $27.77 -- --
------- --------- ------ ------- ------
902,734 8.0 years $11.23 442,133 $ 7.39
------- --------- ------ ------- ------
</TABLE>
(12) 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.
F-14
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(13) Employee Savings Plan
The Company maintains a defined contribution benefit plan (the "Plan"). The
Plan covers each employee who has completed three months of service in a 12-
month period commencing with the start of employment. Contributions to the Plan
are based on percentages of employee salaries plus, beginning in 1996, a
discretionary Company matching contribution. Vesting in the Company's
contributions is immediate. Company contributions included in the consolidated
statement of operations amounted to approximately $70,000 in 1996.
(14) Interest
Interest income (expense), net for the years ended December 31, 1996, 1995
and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
(in thousands)
Interest income... $ 789 $ 269 $ 56
Interest expense.. (40) (252) (170)
----- ----- -----
$ 749 $ 17 $(114)
===== ===== =====
</TABLE>
(15) 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.
(16) Commitments and Contingencies
On January 2, 1996, the Company entered into a distribution agreement to
distribute, install and support a staff scheduling software product. 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 of which approximately
$900,000 remains outstanding at December 31, 1996.
On March 22, 1996, the Company entered into a license agreement to
incorporate general ledger and accounts payable software applications into the
Company's products for distribution in the United States healthcare market. The
Company has an exclusive right to sell these applications in the United States
upon meeting certain sales levels. Upon meeting certain development milestones,
the Company's minimum royalty commitment over the four year term of the
agreement is approximately $2.0 million of which approximately $1.5 million
remains outstanding at December 31, 1996.
On November 19, 1996, the Company entered into a reseller agreement with a
provider of electronic data interchange software. Under this agreement, the
Company is required to resell a certain number of units over the three year
term. The Company's minimum royalty commitment over the term of the agreement is
approximately $1.1 million of which approximately $1 million remains outstanding
at December 31, 1996.
F-15
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(17) Subsequent Event (unaudited)
On March 14, 1997, the Company signed a definitive agreement to be acquired
by HBO & Company (HBOC). HBOC delivers enterprise-wide patient care, clinical,
financial and strategic management software solutions, as well as networking
technologies, electronic data interchange, outsourcing and other services to
healthcare organizations throughout the world. The acquisition, which is subject
to regulatory and stockholder approval, will be accounted for as a pooling of
interests and is scheduled to close during the second quarter of 1997. Terms of
the acquisition will provide for Company stockholders to receive shares of HBOC
common stock. The purchase price will be determined by averaging the closing
HBOC stock price for a period of twenty days ending shortly before the close of
the transaction.
F-16
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Enterprise Systems, Inc.:
Under date of February 10, 1997, we reported on the consolidated balance
sheets of Enterprise Systems, Inc. and subsidiary as of December 31, 1996 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, 1996, as contained in the Form 10-K for the year 1996. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
March 26, 1997
<PAGE>
SCHEDULE II
ENTERPRISE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Year Expenses Accounts(1) Deductions End of Year
------------ ---------- ---------- ---------- -----------
(amounts in thousands)
Allowance for Doubtful Accounts
- -------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1996................. $356 $304 $ 234 $ 149 $745
Year ended
December 31, 1995................. 302 68 -- 14 356
Year ended
December 31, 1994................. 232 148 -- 78 302
1. Related to Matkon Acquisition as
described in note 4 of the
consolidated Financial Statements.
</TABLE>
See accompanying independent auditors' report.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number
- ------
<C> <S> <C>
1.1. Form of Placement Agency Agreement between the Company and the Placement Agents. (6)
3.1. Amended and Restated Certificate of Incorporation of Enterprise Systems, Inc. (3)
3.2. Amended and Restated By-Laws of Enterprise Systems, Inc. (3)
4.1. Specimen common stock certificate (3)
4.2. Shareholders Agreement among the Company, Thomas R. Pirelli, CR Investment, Venrock
Associates, Henry S. Smith, Robert Noyce,Thomas R. Hutchison, Trustees of Grinnell
College, John Gildea, Berkeley Associates and Sidney Kahn dated June 9, 1983 (1)
4.3. Amended and Restated Registration Rights Agreement among CID Ventures,
L.P., CID Equity Capital, L.P., Morgan Stanley Venture Investors, L.P., Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II,
C.V., Harry Pomerantz, Mid-America Investment Co. and the Company dated
March 31, 1994 (1)
5.1. Opinion of Sachnoff & Weaver, Ltd. (6)
10.1. Investment Agreement among CID Ventures, L.P., CID Equity Capital,
L.P. and the Company dated April 30, 1993 (1)
10.2. Investment Agreement among Morgan Stanley Venture Investors, L.P., Morgan
Stanley Venture Capital Fund II, L.P. , Morgan Stanley Venture Capital Fund II
C.V. and the Company dated March 31, 1994 (1)
10.4. Employment Agreement between the Company and Thomas R. Pirelli (2)
10.5. Employment Agreement between the Company and Glen E. Tullman (2)
10.6. Employment Agreement between the Company and David B. Mullen (2)
10.7. Employment Agreement between the Company and Joseph E. Carey (2)
10.8. Employment Agreement between the Company and Steven M. Katz (2)
10.9. Employment Agreement between the Company and David A. Carlson (2)
10.10. Employment Agreement between the Company and Stanley A. Crane (2)
10.11. Employment Agreement between the Company and James H. Ray (6)
10.12. Enterprise Systems, Inc. Long-Term Incentive Compensation Plan (3)
10.13. Enterprise Systems, Inc. 401(k), as amended (3)
10.14. Office Lease dated May 17, 1991 between the Company and LaSalle National Trust,
N.A. as successor Trustee under Trust No. 104254 for the premises located at
Building 500, 1400 South Wolf Road, Wheeling, Illinois (1)
10.15. Office Lease Agreement among the Company Gateway/Wheeling Limited
Partnership and Comerica Bank-Illinois, as Trustee under Trust Agreement dated
December 20, 1993 and known as Trust Number 11866 dated April 11, 1994, as
amended (1)
10.16. Form of Indemnification Agreement between the Company and Company Directors (3)
10.17. Agreement for Contribution, License and Issuance of Stock between Enterprise
Systems, Inc., a Delaware corporation, and Enterprise Systems, Inc., an
Illinois corporation, dated October 17, 1995 (3)
10.20. Severance Agreement between the Company and Thomas R. Pirelli dated January 9, 1996 (5)
10.21. Distribution Agreement between the Company and Total Care Technologies,
Inc. dated January 23, 1996 (6)
10.22. Loan Agreement between Enterprise Systems, Inc., an Illinois corporation
and LaSalle National Bank dated May 31, 1996 (6)
10.23. Guaranty of Enterprise Systems, Inc., a Delaware Corporation to LaSalle
National Bank and Amendment to Guaranty dated May 31, 1996 (6)
10.24. Asset Purchase Agreement among the Company, Continental Healthcare
Systems, Inc. and Information Handling Services Group, Inc. dated May 28, 1996 (6)
10.25. Development, Technology and Software License Agreement between the Company
and Flexi International Software, Inc. dated March 22, 1996 (6)
10.26. Employment Agreement between the Company and Robert W. Rook, Jr. *
21.1. Subsidiaries of Registrant (3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
23.1. Consent of KPMG Peat Marwick LLP *
24.1. Power of Attorney (contained on the signature page hereto)
27.1. Financial Data Schedule *
</TABLE>
* Filed herewith
(1) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 33-96328 as filed with the SEC on August 30, 1995.
(2) Incorporated by reference from the Registrant's Amendment No. 1 to Form S-1
Registration Statement No. 33-96328 as filed with the SEC on September 25,
1995.
(3) Incorporated by reference from the Registrant's Amendment No. 3 to Form S-1
Registration Statement No. 33-96328 as filed with the SEC on October 4,
1995.
(4) Incorporated by reference from the Registrant's Amendment No. 4 to Form S-1
Registration Statement No. 33-96328 as filed with the SEC on October 18,
1995.
(5) Incorporated by reference from the Registrant's Annual Report on From 10-K
for the period ended December 31, 1995.
(6) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 333-13691 as filed with the SEC on October 8, 1996.
<PAGE>
Exhibit 10.26
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of the 2nd
day of January, 1997, by and between ENTERPRISE SYSTEMS, INC., an Illinois
corporation ("Corporation") and Robert W. Rook, Jr. ("Associate").
WITNESSETH:
WHEREAS, the Corporation is an Illinois corporation that specializes in the
design and development of computer software systems; and
WHEREAS, the Associate has extensive experience in the area of Human Resources
and Education; and
WHEREAS, the Corporation desires to retain the services of Associate and
Associate is willing to be employed by the Corporation;
NOW, THEREFORE, in consideration of the premises and the covenants herein
contained and other good and valuable considerations, the receipt and
sufficiency of which is hereby acknowledged;
IT IS COVENANTED AND AGREED by and between the parties herein as follows:
SECTION 1. Establishment of Employment. The Corporation hereby employs Associate
and Associate hereby agrees to remain in the employ of the Corporation for the
duration of the term of his employment hereunder, as Executive Vice President of
the Corporation (or in such other positions, titles and duties assigned to him
that are consistent with an executive management role) and to perform such
duties and services as shall be assigned to him from time to time by the
Corporation's Chief Executive Officer. The Associate shall devote his best
efforts and entire working time to the interests of the Corporation and will
perform his executive duties faithfully and efficiently subject to the general
direction of the Chief Executive Officer; provided, that Associate shall be
entitled to devote time to personal investments and professional activities, to
the extent such activities do not unduly interfere with his duties hereunder.
SECTION 2. Term of Employment. The term of Associate's employment hereunder
shall be automatically extended from year to year, all subject however, to
termination by the Corporation pursuant to SECTION 11 of this Agreement.
Associate shall have the right to terminate upon 30 days written by Associate
to the Corporation.
<PAGE>
SECTION 3. Compensation. For all services rendered by the Associate under this
Agreement, the Corporation shall pay the Associate a basic salary at the rate of
no less than $130,000 per annum payable in semi-monthly installments. The basic
salary shall be reviewed by the Chief Executive Officer of the Corporation a
minimum of once per year. The Associate also shall be eligible to participate in
any Associate stock ownership, profit sharing, pension, retirement or other plan
maintained from time to time by the Corporation for the benefit of all
Associates generally of the Corporation. The Corporation shall at all times
during the term hereof, at its expense, maintain and provide the Associate a
life insurance policy equal to two times the Associate's annual salary, to a
maximum of $300,000 payable in the event of death of the Associate to the
Associate's designated beneficiary. If the corporation owns the life insurance
policy providing the benefit set forth in this agreement, it agrees to transfer
the policy to Associate at termination of his employment.
SECTION 4. Bonuses. The Corporation shall pay a bonus equal to thirty-five
percent (35%) of salary earned for calendar year, 1997, within ninety (90) days
following the end of each year during the term hereof, beginning with calendar
1997, payable no later than March 31, 1998. Any bonus is contingent upon
attainment of the Corporation's objectives, as determined by the Board of
Directors at the beginning of such year. Additional amounts may be paid as a
bonus if the performance objectives are exceeded. The Corporation's Board of
Directors will set Corporation performance objectives prior to the end of
February 1997, and each February thereafter. Payment of twenty percent (20%) of
any bonus will be deferred and paid at the end of the second year following the
year in which it is earned; any unpaid portion to be forfeited if the Associate
voluntarily terminates employment with the Corporation or is terminated for
cause pursuant to Section 11 (a) (I) hereof prior to the due date of such
payment. The bonus plan will change periodically and, therefore, shall be based
upon the plan approved by the Board of Directors.
SECTION 5. Vacation. The Associate will be entitled to three (3) weeks paid
vacation during the initial term hereof. Thereafter, Associate shall be entitled
to vacation as set forth in the Corporation's general vacation policy for other
Associates, as amended from time to time, except that in no event shall
Associate be entitled to less than three (3) weeks vacation. Attendance at
professional meetings shall not be treated as vacation time. Additional vacation
time may be taken without pay.
SECTION 6. Disability. Associate will be provided with Short Term Disability as
specified by the policy maintained by the Corporation for the benefit of
Associates generally of the Corporation. In addition, Associate shall be
eligible for and the Corporation shall obtain on his behalf long term disability
insurance effective on the first day of the month following the date Associate
has worked full time for the Corporation for thirty (30) consecutive days. The
benefit under the long term disability insurance shall be sixty percent (60%) of
the Associate's basic monthly earnings up to a maximum benefit of $12,500 per
month.
2
<PAGE>
SECTION 7. Prohibition Against Assignment. The Associate agrees on behalf of
himself or of his executors and administrators, heirs, legatees, distributees,
and any other person or persons claiming any benefit hereunder by virtue of this
Agreement, that this Agreement and the rights, interests and benefits hereunder
shall not be assigned, transferred, pledged or hypothecated in any way by
Associate or any executor, administrator, heir, legatee, distributee or other
person claiming under Associate by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Any attempt to assign,
transfer, pledge, hypothecate or otherwise dispose of this Agreement or of any
rights, interests and benefits contrary to the foregoing provisions, or the levy
of any attachment or similar process thereupon shall be null and void and
without effect.
SECTION 8. Notice. Any and all notices, designations, consents, offers,
acceptances, or any other communication provided for herein shall be given in
writing to the other party, with the receiving party signing and returning a
written verification of receipt.
SECTION 9. Protective Covenants. The Associate acknowledges and agrees that
solely by virtue of his employment by, and relationship with, the Employer, he
will acquire "Confidential Information," as hereinafter defined, as well as
special knowledge of the Employer's relationships with its customers and
business brokers, and that, but for his association with the Employer, the
Associate will not have had access to said Confidential Information or knowledge
of said relationships. The Associate further acknowledges and agrees (i) that
the Employer has long term, near-permanent relationships with its customers and
business brokers, and that those relationships were developed at great expense
and difficulty to the Employer over several years of close and continuing
involvement; (ii) that the Employer's relationships with its customers and
business brokers are and will continue to be valuable, special and unique assets
of the Employer and that the identity of its customers and business brokers is
kept under tight security with the Employer and cannot be readily ascertained
from publicly available materials available to the Employer's competitors; and
(iii) that the Employer has the following protectable interests that are
critical to its competitive advantage in the industry and would be of
demonstrable value in the hands of a competitor: software designs, including but
not limited to designs relating to health care materials management, health care
operating room management, health care patient cost accounting, health care
capital asset management, and health care centralized patient scheduling; plans,
processes and protocols; formulae; and concepts, ideas and other matters not
known to the general public. In return for the consideration, the receipt and
sufficiency of which are hereby acknowledged, and as a condition precedent to
the Employer entering into this Agreement, and as an inducement to the Employer
to do so, the Associate hereby represents, warrants, and covenants as follows:
A. The Associate has executed and delivered this agreement as his free
voluntary act, after having determined that the provisions contained herein
are of material benefit to him, and that the duties and obligations imposed
on him hereunder are fair and reasonable and will not prevent him from
earning a comparable livelihood following the termination of his employment
with the Employer;
3
<PAGE>
B. The Associate has read and fully understands the terms and conditions
set forth herein, has had time to reflect on and consider the benefits and
consequences of entering into this Agreement, and has had the opportunity
to review the terms hereof with an attorney or other representative, if he
so chooses;
C. The execution and delivery of this Agreement by the Associate does not
conflict with, or result in a breach of or constitute a default under, any
agreement or contract, whether oral or written, to which the Associate may
be bound;
D. The Associate agrees that, during the time of his employment and for a
period of one (1) year after termination of the Associate's employment
hereunder for any reason whatsoever or for no reason, whether voluntary or
involuntary, the Associate will not, except on behalf of Employer:
(1) directly or indirectly, contact, solicit or direct any person,
firm, or corporation to contact or solicit any of the Employer's
customers, prospective customers, or business brokers (as hereinafter
defined) for the purpose of selling or attempting to sell, any
products and/or services that are the same as or similar to the
products and services provided by the Employer to its customers during
the term hereof. In addition, the Associate will not disclose the
identity of any such business brokers, customers, or prospective
customers, or any part thereof, to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever; and
(2) directly or indirectly, whether as an investor (excluding
investments representing less that five percent (5%) of the common
stock of a public company), lender, owner, stockholder, officer,
director, consultant, employee, agent, salesperson or in any other
capacity, whether part-time or full-time, become associated with any
business involved in the design, manufacture, marketing, or servicing
of products then constituting ten percent (10) or more of the annual
sales of the Employer; and
(3) solicit or accept if offered to him, with or without solicitation,
on his own behalf or on behalf of any other person, the services of
any person who is an associate of the Employer, nor solicit any of the
Employer's associates to terminate employment with the Employer; and
(4) act as a consultant, advisor, officer, manager, agent, director,
partner, independent contractor, owner, or employee for or on behalf
of any of the Employer's business brokers, customers, or prospective
customers (as hereinafter defined), with respect to or in any way with
regard to any aspect of the Employer's business and/or any other
business activities in which Employer engages during the term hereof;
<PAGE>
E. The Associate acknowledges and agrees that the scope described above is
necessary and reasonable in order to protect the Employer in the conduct of
its business and that, if the Associate becomes employed by another
employer, he shall be required to disclose the existence of this Paragraph
9 to such employer;
F. For purposes of this Paragraph 9, "customer" shall be defined as any
person, firm, or entity that purchases any type of product and/or service
from Employer or is or was doing business with the Employer or the
Associate within the twelve (12) month period immediately preceding
termination of the Associate's employment. For purposes of this Paragraph
9, "prospective customer" shall be defined as any person, firm, or entity
contacted or solicited by the Employer or the Associate (whether directly
or indirectly) or who contacted the Employer or the Associate (whether
directly or indirectly) within the twelve (12) month period immediately
preceding termination of the Associate's employment for the purpose of
having such persons, firms, or entities become a customer of the Employer.
For purposes of this Paragraph 9, "business broker" shall be defined as any
person, firm, or entity who is or was doing business with the Employer or
the Associate or was contacted or solicited by the Employer or the
Associate (whether directly or indirectly) or who contacted or solicited
the Employer or the Associate (whether directly or indirectly) within the
twelve (12) month period immediately preceding termination of the
Associate's employment;
G. The Associate agrees that both during his employment and thereafter the
Associate will not, for any reason whatsoever, use for himself or disclose
to any person not employed by the Employer any "Confidential Information"
of the Employer acquired by the Associate during his relationship with the
Employer, both prior to and during the term of this Agreement. The
Associate further agrees to use Confidential Information solely for the
purpose of performing duties with the Employment and further agrees not to
use Confidential Information for his own private use or commercial purposes
or in any way detrimental to the Employer. The Associate agrees that
"Confidential Information" includes but is not limited to: (a) any
financial, business, planning, software, operations, services, potential
services, products, potential products, designs, technical information
and/or know-how, formulas, production, purchasing, marketing, sales,
personnel, customer, broker, supplier, or other information of the
Employer; (b) any papers, data, records, processes, methods, techniques,
systems, models, samples, devices, equipment, compilations, invoices,
customer lists, or documents of the Employer; (c) any confidential
information or trade secrets of any third party provided to the Employer in
confidence or subject to other use or disclosure restrictions or
limitations; and (d) any other information, written oral, or electronic,
whether existing now or at some time in the future, whether pertaining to
current or future developments, and whether previously accessed during the
Associate's tenure with the Employer or to be accessed during his future
employment with the Employer, which pertains to the Employer's affairs or
interests or with whom or how the Employer does business. The Employer
acknowledges and agrees that Confidential Information does not include (I)
information properly in the
5
<PAGE>
public domain, or (ii) information in the Associate's possession prior to
the date of his original employment with the Employer.
H. During and after the term of employment hereunder, the Associate will
not remove from the Employer's premises any documents, records, files,
notebooks, correspondence, computer printouts, computer programs, computer
software, price lists, microfilm, or other similar documents containing
Confidential Information, including copies thereof, whether prepared by him
or others, except as his duty shall require, and in such cases, will
promptly return such items to the Employer. Upon termination of his
employment with the Employer, all such items including summaries or copies
thereof, then in the Associate's possession, shall be returned to the
Employer immediately. The Associate agrees to return of such items, which
shall be a requirement in order for the Associate to receive, at the time
of such termination, or any time thereafter, any compensation due him
pursuant to any paragraphs hereunder or otherwise.
I. The Associate recognizes and agrees that all ideas, inventions,
enhancements, plans, writings, and other developments or improvements (the
"Inventions") conceived by the Associate, alone or with others, during the
term of his employment, whether or not during working hours, that are
within the scope of the Employer's business operations or that relate to
any of the Employer's work or projects, are the sole and exclusive property
of the Employer. The Associate further agrees that (a) he will promptly
disclose all Inventions to the Employer and hereby assigns to the Employer
all present and future rights he has or may have in those Inventions,
including without limitation those relating to patent, copyright, trademark
or trade secrets; and (b) all of the Inventions eligible under the
copyright laws are "work made for hire." At the request of and without
charge to the Employer, the Associate will so all things deemed by the
Employer to be reasonably necessary to perfect title to the Inventions in
the Employer and to assist in obtaining for the Employer such patents,
copyrights or other protection as may be provided under law and desired by
the Employer, including but not limited to executing and signing any and
all relevant applications, assignments or other instruments.
Notwithstanding the foregoing, pursuant to the Employee Patent Act,
Illinois Public Act 83-493, the Employer hereby notifies the Associate that
the provisions of this Paragraph 9 shall not apply to any Inventions for
which no equipment, supplies, facility or trade secret information of the
Employer was used and which were developed entirely on the Associate's own
time, unless (a) the Invention relates (I) to the business of the Employer,
or (ii) to actual or demonstrably anticipated research or development of
the Employer, or (b) the Invention result from any work performed by the
Associate for the Employer;
J. The Associate acknowledges and agrees that all customer lists, supplier
lists, and customer and supplier information, including, without
limitation, addresses and telephone numbers, are and shall remain the
exclusive property of the Employer, regardless of whether such information
was developed, purchased, acquired, or otherwise obtained by the Employer
or the Associate. the Associate agrees to furnish
6
<PAGE>
to the Employer on demand at any time during the term of this Agreement,
and upon termination of this Agreement, his complete list of the correct
names and places of business and telephone numbers of all of its customers
served by him and located within any and or all of the territories to which
he has been assigned, including all copies thereof wherever located. The
Associate further agrees to immediately notify the Employer of the name and
address of any new customer, and report all changes of a location of old
customers, so that upon the termination of this Agreement, the Employer
will have a complete list of the correct names and addresses of all of its
customers with which the Associate has had dealings. The Associate also
agrees to furnish to the Employer on demand at any time during the term of
this Agreement, and upon the termination of this Agreement, any other
records, notes, computer printouts, computer programs, computer software,
price lists, microfilm, or any other documents related to the Employer's
business, including originals and copies thereof; and
K. It is agreed that any breach or anticipated or threatened breach of any
of the Associate's covenants contained in this Paragraph 9 will result in
irreparable harm and continuing damages to the Employer and its business
and that the Employer's remedy at law for any such breach or anticipated or
threatened breach will be inadequate and, accordingly, in addition to any
and all other remedies that may be available to the Employer at law or in
equity in such event, any court of competent jurisdiction may issue a
decree of specific performance or issue a temporary and permanent
injunction, without proving special damages or irreparable injury,
enjoining and restricting the breach, or threatened breach, of any such
covenant, including, but not limited to, any injunction restraining the
Associate from disclosing, in whole or part, any Confidential Information.
The Associate acknowledges the truthfulness of all factual statements in
this Agreement and agrees that he is estopped from and will not make any
part thereof. The Associate further agrees to pay all of the Employer's
costs and expenses, including reasonable attorneys' and accountants' fees,
incurred in enforcing such covenants.
SECTION 11. Termination. The Corporation shall have the right to discharge
Associate at any time. Unless otherwise stated under SECTION 2 of this
Agreement, or as defined hereafter:
a) The Corporation shall have the right to discharge Associate and to
cancel its obligations under this Agreement at any time upon written notice
to Associate if any of the following shall occur:
i) Associate commits significant fraud or gross misconduct which
arises in any manner out of his duties and responsibilities as an
officer or Associate of the Corporation.
b) In the event that Associate dies during the term of this Agreement, the
date of death shall constitute the date of termination.
7
<PAGE>
c) In the event the Associate becomes disabled during the period of this
Agreement, the date of disability shall constitute the date of termination.
For the purposes of this Agreement, disability shall be defined as
occurring at the time at which the Associates has been unable to be
actively employed at work for any twelve (12) week period within a six (6)
month period and qualifies for the Corporation's long term disability
insurance. Actively at work means Associate is able to perform all material
and substantial duties of regular work while working the usual number of
hours at the normal place of business, or other places of business as
directed by the Corporation.
If Associate's service with the Corporation shall be terminated for any reason
other than as set forth in Subsections 11 a), b) or c) above, including without
limitation any termination without cause, Associate shall continue to be paid
and provided the basic salary and insurance (as described in Section 3 hereof),
as in effect on the date of termination, in accordance with the following terms:
Twelve (12) months of severance pay will be given.
SECTION 12. Governing Law. This Agreement shall be subject to and governed by
the laws of the state of Illinois, irrespective of the fact that Associate may
become a resident of a different state.
SECTION 13. Binding Effect. This agreement shall be binding upon and inure to
the benefit of the Corporation and Associate and their respective heirs, legal
representatives, executors, administrators, successors and assigns.
SECTION 14. Entire Agreement. This Agreement, and the stock option agreement
between you and the Corporation, collectively constitute the entire agreement
between the parties and contains all of the agreements between the parties with
respect to the subject matter hereof, and supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the subject matter hereof. No change or modification of this Agreement shall
be valid unless the same be in writing and signed by the Associate and the
Corporation. No waiver of any provision of this Agreement shall be valid unless
in writing and signed by the person or party to be charged.
SECTION 15. Severability. If any portion or portions of this Agreement shall
be for any reason invalid or unenforceable, the remaining portion or portions
shall nevertheless be valid, enforceable and carried into effect, unless to do
so would clearly violate the present legal and valid intention of the parties
hereto.
SECTION 16. Headings. The headings in this Agreement are inserted for
convenience only and are not to be considered in construction of the provision
hereof.
SECTION 17. Change of Control. In addition to benefits provided pursuant to
Section 11 of the Agreement, if employment of the Associate is terminated by the
Company within twelve months of a change of control, the Associate 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.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
and sealed the day and year first above written.
CORPORATION ASSOCIATE
ENTERPRISE SYSTEMS, INC.
By: Glen E. Tullman By: Robert W. Rook, Jr.
------------------------------ -------------------------------
Glen E. Tullman Robert W. Rook, Jr.
Chief Executive Officer Executive Vice President
Date: 10/13/96 Date: 10/13/96
---------------------------- -----------------------------
9
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
Board of Directors and Stockholders
Enterprise Systems, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-1598) on Form S-8 of Enterprise Systems, Inc. of our reports dated February
10, 1997, relating to the consolidated balance sheets of Enterprise Systems,
Inc. and subsidiary as of December 31, 1996 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, 1996, and relating
to the financial statement schedule, which reports appear in the December 31,
1996 annual report on Form 10-K of Enterprise Systems, Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Company's Form 10-K and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,510
<SECURITIES> 0
<RECEIVABLES> 26,063
<ALLOWANCES> 745
<INVENTORY> 41
<CURRENT-ASSETS> 48,905
<PP&E> 9,071
<DEPRECIATION> 4,963
<TOTAL-ASSETS> 66,231
<CURRENT-LIABILITIES> 9,420
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 54,745
<TOTAL-LIABILITY-AND-EQUITY> 66,231
<SALES> 27,078<F1>
<TOTAL-REVENUES> 52,316
<CGS> 0
<TOTAL-COSTS> 45,859
<OTHER-EXPENSES> 8,453<F2>
<LOSS-PROVISION> 538
<INTEREST-EXPENSE> (749)
<INCOME-PRETAX> (1,247)
<INCOME-TAX> (308)
<INCOME-CONTINUING> (939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (939)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1> Includes software and hardware
<F2> Write-off of acquired in process technology
</FN>
</TABLE>
