<PAGE>
PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-3978
1,560,000 Shares
[LOGO OF AMISYS APPEARS HERE]
AMISYS Managed Care Systems, Inc.
Common Stock
------------
Of the 1,560,000 shares of Common Stock offered hereby 75,500 are being sold
by AMISYS Managed Care Systems, Inc. (the "Company" or "AMISYS") and 1,484,500
are being sold by certain of the Company's stockholders (the "Selling
Stockholders"). The Company's Common Stock is listed on the Nasdaq National
Market ("Nasdaq") under the symbol "AMCS." On May 28, 1996, the last reported
sale price of the Common Stock was $26.00 per share.
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share... $24.50 $1.40 $23.10 $23.10
- --------------------------------------------------------------------------------
Total....... $38,220,000 $2,184,000 $1,744,050 $34,291,950
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Before deducting expenses of the offering estimated at $600,000, payable
by the Company.
(2) Certain of the Selling Stockholders have granted to the Underwriters a 30-
day option to purchase up to 232,500 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent the option is
exercised, the Underwriters will offer the additional shares at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $43,916,250, $2,509,500 and $39,662,700,
respectively. See "Underwriting."
------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock offered hereby will be
made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland,
on or about June 3, 1996.
Alex. Brown & Sons
INCORPORATED
Hambrecht & Quist
Smith Barney Inc.
THE DATE OF THIS PROSPECTUS IS MAY 29, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any
amendments thereto) on Form S-1 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted or are contained in exhibits to
the Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed
as a part thereof. Statements made in this Prospectus concerning the contents
of any document referred to herein are not necessarily complete. With respect
to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Commission. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such
reports, proxy statements, and other information concerning the Company can be
inspected and copied at prescribed rates at the Commission's Public Reference
Section, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's regional offices at Seven World Trade Center, 13th floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
EXCHANGE ACT.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AMISYS (R) is a registered trademark of the Company. All other trademarks
and tradenames referred to in this Prospectus are the property of their
respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
AMISYS develops, markets and supports managed health care information systems
for payors and providers who offer managed care products and services. The
Company provides an integrated system solution, which includes the Company's
proprietary software, third-party hardware and software and implementation
services (the "AMISYS System"), that automates most of the operational
underpinnings of the Company's managed care clients. These products and
services are directed at supporting critical "risk-management" operational
functions that help ensure the proper balance of premium revenue against health
care utilization costs, availability and quality. The AMISYS System contains a
set of fully integrated applications designed to support the full range of
operations in managed care and risk-management administrative functions,
including premium billing and receivables, capitation, utilization management
and claims adjudication and payment.
Historically, the Company's client base consisted primarily of HMOs. Since
1992, as managed care initiatives have spread throughout the health care
industry, the Company has broadened its client base to include many new
entities that manage health care risk or administer managed health care
products. The Company's installed base now includes commercial and Medicaid
HMOs, indemnity insurers, integrated delivery systems ("IDSs"), physician-
hospital organizations ("PHOs"), third-party administrators ("TPAs") and other
specialty managed care organizations ("specialty carveouts"). The Company
currently has licenses with 69 AMISYS System clients supporting 76 sites
nationwide. AMISYS estimates that its clients are utilizing or installing the
AMISYS System to administer risk for approximately 7.2 million covered lives.
The core architecture of AMISYS' software allows for a high degree of
functionality and flexibility, enabling clients to add or modify insurance
products, change or modify contractual arrangements with provider networks,
manage complex benefit structures and comply with a wide range of reporting
requirements, without the need for software modifications. The AMISYS System,
through its "differential risk-management" capability, is able to adapt to the
reallocation of risk among the key participants in the health care industry:
underwriters, administrators, employer groups, governmental entities, members
and providers. The AMISYS System is designed to address a wide range of
membership sizes, using the same scalable hardware platform -- Hewlett-
Packard's HP3000 line of computers. This focus on a single integrated system
solution for a wide range of clients allows the Company to maintain and support
one core system for its entire client base, thereby maximizing enhancement and
new-release value to all clients.
The Company's strategy is to build on its strong market position and the
comprehensive scope of its client relationships by (i) increasing new sales to
the expanding risk-management marketplace, (ii) expanding sales to existing
clients, (iii) increasing its recurring revenue base, (iv) exploring strategic
acquisitions and (v) migrating the AMISYS System to client/server technology.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 75,500 shares
Common Stock offered by the Selling Stock-holders....... 1,484,500 shares
Common Stock to be outstanding after the offering....... 7,643,700 shares(1)
Use of proceeds to the Company.......................... For general corporate purposes.
The Company will not receive any
proceeds from the shares offered
by the Selling Stockholders.
Nasdaq symbol........................................... AMCS
</TABLE>
- --------
(1) Excludes 643,800 shares of Common Stock reserved for issuance under stock
options outstanding at March 31, 1996. See "Management--Executive
Compensation."
4
<PAGE>
SUMMARY FINANCIAL AND STATISTICAL INFORMATION(/1/)
<TABLE>
<CAPTION>
AMISYS
AIHI
AIHI COMBINED(2) AMISYS
------------------------- ----------- ----------------------------
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
------------------------------------- DECEMBER 31, ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ----------- ------------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
System sales........... $ 5,958 $ 8,332 $11,698 $17,960 $26,753 $5,116 $ 8,233
Support and
maintenance........... 2,772 3,221 2,556 4,475 5,034 1,132 1,395
Contract services(3)... 6,985 6,529 1,400 -- -- -- --
------- ------- ------- ------- ------- ------ -------
Total revenues........ 15,715 18,082 15,654 22,435 31,787 6,248 9,628
Gross profit(4)........ 829 4,737 6,071 10,319 14,509 2,537 4,460
Write-off of purchased
research and
development(5)........ -- -- -- 6,516 -- -- --
Write-down of
assets(6)............. -- 8,380 -- -- -- -- --
Operating income
(loss)(7)............. (4,267) (9,408) 846 (5,043) 2,175 (182) 814
Income (loss) before
income tax provision.. (4,475) (9,424) 819 (5,400) 1,675 (306) 1,144
Net income (loss)...... $(3,214) $(6,565) $ 498 $(6,095) $ 1,675 $ (306) $ 737
Net income (loss) per
share(8).............. $ (1.03) $ 0.28 $(0.05) $ 0.09
Weighted average common
shares and
equivalents........... 5,900 5,949 5,900 8,164
</TABLE>
<TABLE>
<CAPTION>
AMISYS
----------------------
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED(9)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 5,962 $ 7,106
Short-term investments.................................. 20,660 20,660
Working capital......................................... 26,879 28,023
Total assets............................................ 35,555 36,699
Stockholders' equity ................................... 28,070 29,214
</TABLE>
<TABLE>
<CAPTION>
AMISYS
AIHI
AIHI COMBINED(2) AMISYS
---- ----------- -------------------------
YEARS ENDED THREE MONTHS
DECEMBER 31, YEAR ENDED ENDED
----------------- DECEMBER 31, MARCH 31,
1993 1994 1995 1996
---- ----------- ------------ ------------
<S> <C> <C> <C> <C>
STATISTICAL DATA:
Licenses by customer type (at pe-
riod end)
Commercial HMOs................... 20 25 32 35
Providers and others.............. 12 22 33 34
---- ---- ---- ----
Total............................ 32 47 65 69
Sales and marketing personnel (at
period end)...................... 9 12 23 24
Support personnel (at period
end)............................. 38 46 61 61
Adjusted revenue growth rate(10).. 23.4% 57.4% 41.7% 54.1%
Adjusted operating margin(10)..... 5.1% 6.6% 6.8% 8.5%
</TABLE>
(See footnotes on succeeding page.)
5
<PAGE>
(1) The summary financial and statistical information represents the financial
and statistical information of the Company, the surviving corporation of a
merger between American International Healthcare, Inc. ("AIHI") and AIH
Systems, Inc. which was formed for the purpose of acquiring AIHI.
(2) Includes the results of operations of AIHI for the period prior to the
acquisition, January 1, 1994 to May 26, 1994 combined with the actual
results of the Company for the remainder of the periods shown. These
combined results represent the sum of the amounts derived by combining the
results for the period January 1, 1994 to May 26, 1994 and the period May
27, 1994 to December 31, 1994 during periods of different ownership.
(3) Represent revenues generated by a majority-owned subsidiary divested in
1993 and certain health care information consulting operations transferred
in 1992 to American International Group, Inc. ("AIG"), parent company of
AIHI.
(4) Includes gross profit (loss) of $(582,000), $363,000 and $256,000 for
1991, 1992 and 1993, respectively, generated by a majority-owned
subsidiary divested in 1993 and certain health care information consulting
operations transferred in 1992 to AIG.
(5) On May 26, 1994, the Company acquired AIHI in a transaction accounted for
as a purchase. The purchase price was allocated among the assets with $6.5
million allocated to purchased research and development. Because the
purchased research and development had not reached the stage of
technological feasibility, this amount was written off as of the same
date.
(6) Represents non-recurring, non-cash total charges of $8.4 million recorded
at June 30, 1992 to reflect the write-down of assets, primarily
capitalized software costs related to an obsolete software product
previously sold to a third party.
(7) Reflects operating expenses of $143,000, $249,000 and $130,000 for 1991,
1992 and 1993, respectively, and operating income (loss) of $(725,000),
$114,000, and 126,000 in 1991, 1992 and 1993, respectively, generated by a
majority-owned subsidiary divested in 1993 and certain health care
information consulting operations transferred in 1992 to AIG.
(8) Per share amounts are computed on the basis of Note 1 of Notes to the
Financial Statements.
(9) Adjusted to give effect to the sale of shares of Common Stock by the
Company at the public offering price of $24.50 per share (after deducting
underwriting discounts and commissions and estimated offering expenses)
and the application of the net proceeds therefrom. See "Use of Proceeds."
(10) Excludes effects of a one-time charge and divested operations. Operating
loss for the year ended December 31, 1994 is adjusted for the non-
recurring, non-cash write-off of purchased research and development.
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option and (ii) reflects a two-
for-one split of the Common Stock effected on November 6, 1995. See
"Description of Capital Stock." All references to the Company include the
Company's predecessors.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. Certain statements included
in this Prospectus concerning the Company's future financial condition and
performance are forward-looking statements and the factors discussed below
could cause actual results and developments to be materially different from
those expressed in or implied by such statements.
Significant Variability of Quarterly Operating Results; Length of Sales
Cycle. The Company's revenues and operating results may vary significantly
from quarter to quarter as a result of a number of factors, including the
relatively large size of client contracts, unpredictability in the number and
timing of systems sales, length of sales cycle and delays in commencement of
the installation process. The average sales cycle for the AMISYS System is
nine months from receipt of a request for proposal ("RFP") to contract
execution, and revenue is recognized over a period averaging ten to twelve
months from contract execution to completion of installation. The length of
the sales cycle is attributable in part to the significant dollar amount of
the purchase to clients as well as the significance of the AMISYS System to
the overall business operations of the Company's clients. During the sales
cycle, the Company expends substantial time, effort and funds preparing a
proposal, demonstrating the product and negotiating the license agreement.
Because a significant percentage of the Company's expenses are fixed, a
variation in the timing of systems sales and installations can cause
significant variations in operating results from quarter to quarter. The
Company has historically experienced a slight decrease in system sales from
the fourth quarter to the first quarter which the Company attributes to client
purchasing patterns. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Limited Operating History; Recent Losses. The Company was purchased by its
current stockholders in May 1994 from American International Group, Inc.
("AIG"). For the fiscal years ended December 31, 1991 and 1992, AIHI (which
during those periods included now-divested operations) reported net losses of
$3.2 million and $6.6 million, respectively. Following the purchase from AIG,
the Company reported a net loss for the period May 27, 1994 to December 31,
1994 of $6.4 million, due to a $6.5 million non-cash charge for the write-off
of certain purchased research and development. While the Company reported net
income of $1.7 million for the year ended December 31, 1995 and $737,000 for
the three months ended March 31, 1996, there can be no assurance that the
Company will continue to sustain profitability. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
Dependence on Principal Product. The Company has derived and expects to
continue to derive substantially all of its revenues from the sale and
associated support of one integrated software system. Dependence on a single
product makes the Company particularly susceptible to the successful
introduction of, or changes in market preferences for, competing products. A
reduction in sales of AMISYS Systems would have a material adverse effect on
the Company. See "Business--AMISYS System and Related Services" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risk of Acquisitions. Part of the Company's strategy for growth includes
acquisitions of complementary products, technologies or businesses that would
allow the Company to offer a set of integrated products that in addition to
risk management would serve the practice management and clinical data needs of
health care providers. The Company's ability to expand successfully through
acquisitions depends on many factors, including the successful identification
and acquisition of products, technologies or businesses and management's
ability to effectively integrate and operate the acquired products,
technologies or businesses. There is significant competition for acquisition
opportunities in the health care information systems industry. The Company may
compete for acquisition opportunities with other companies that have
significantly greater financial and management resources. There can be no
assurance
7
<PAGE>
that the Company will be successful in acquiring or integrating any such
products, technologies or businesses. See "Business--Strategy."
Quality Assurance and Product Acceptance. The Company devotes substantial
resources to meet the high level of client expectations for reliable software.
AMISYS' software and third-party software offered by the Company may, from
time to time, contain undetected errors or bugs. Errors or bugs in software
products may result in loss of data, delay in installation or delay in product
releases. Because of the importance of the Company's product to the successful
operations of its clients, errors or delays may have a material adverse effect
on the continued market acceptance of the AMISYS System, may expose the
Company to claims from clients and third parties and may result in a material
adverse effect on the Company's results of operations. While the Company's
license agreements contain contractual limitations on liability and the
Company maintains insurance to protect against claims associated with the use
of its products, there can be no assurance that its insurance coverage or
contractual provisions would provide adequate coverage against all possible
claims that may be asserted against the Company. See "Business--Contractual
Relationships."
Long-Term Risks Associated with Migration of Existing Product to
Client/Server Technology. Due to the complexity and size of the processing
needs of the Company's clients and the inability of previous client/server
technology to accommodate those needs, the Company is not currently
experiencing significant demand for a client/server version of the Company's
product. However, recent technological advances may render the client/server
environment capable of accommodating the complexity and scale of transactions
processed by the Company's clients and potential clients and, accordingly, the
Company believes technical migration to a client/server environment is
practical and appropriate. Such a migration will involve a significant amount
of time and the expenditure of a significant amount of the Company's
resources. There can be no assurance that the Company will be able to
successfully migrate the AMISYS System to a client/server environment, that
such migration will not result in unexpected costs, delays, or system
failures, or that demand will exist for an AMISYS client/server product. See
"Business--Research, Development and Technology."
Highly Competitive Market. The market for health care information systems is
highly competitive. The Company's competitors vary in the size, scope and
breadth of the products and services they offer. Most of the Company's sales
are derived from competitive procurement processes managed directly by
sophisticated clients or consultants that require specific, highly-detailed
presentations from all qualified vendors. There can be no assurance that
competitors will not develop or offer superior functionality with respect to
specific or overall applications, or that other features of competitive
products will not be preferred by clients. Many of the Company's current and
potential competitors have significantly greater financial, marketing and
other competitive resources than the Company. Current and potential
competitors, including providers of information technology to other segments
of the health care industry, may establish joint marketing arrangements or
other relationships to compete more effectively against the Company and new
competitors may emerge. As a result, the Company's financial condition and
results of operations may be adversely affected. See "Business--Competition."
Dependence on Key Personnel. The Company is highly dependent on certain of
its executive officers, including Kevin R. Brown, the Company's Chairman,
President and Chief Executive Officer. The loss of Mr. Brown's services or
those of one or more of the Company's other executive officers could have a
material adverse effect on the Company's financial condition and results of
operations. The Company believes that its future success will depend upon its
ability to continue to attract, motivate and retain highly-skilled managerial,
sales and marketing and technical personnel. There can be no assurance that
the Company will continue to be successful in attracting and retaining the
personnel it requires. See "Management--Executive Compensation."
Relationship with Hewlett-Packard. The Company has derived substantially all
of its revenues to date from the sale of software systems that operate on
Hewlett-Packard ("HP") computers, specifically the HP3000 series of on-line
transaction processing computers. The Company expects to continue to derive a
substantial portion of its revenues from software products running on HP
platforms for the foreseeable future. The Company's future results, therefore,
depend on continued market acceptance of HP computers, the technical support
given the HP3000 series and the financial success of HP. Any reduction in
demand for these computers or in HP's ability to deliver quality products on a
timely basis or to provide
8
<PAGE>
adequate support to these products would have a material adverse effect on the
Company. The term of the Company's standard contract with HP is one year and
the current contract with HP expires in October 1996. Although the Company
expects the HP contract to be renewed in October 1996, which would be the
tenth successive year of the contract, there can be no assurance that the
contract will be renewed or, if renewed, that the contract will then be on
equivalent terms. See "Business--Contractual Relationships."
Dependence on Managed Care Industry. The Company's business to date has been
exclusively concentrated on providing a system software product to the payors
and providers that offer managed care products and services. Thus, the
Company's success is dependent on continued demand for, and spending on,
software and related services in that industry, and the Company's growth is
dependent on the growth of that industry. Consolidation in the managed care
industry, and a corresponding decrease in potential buyers for the Company's
products and services, could have a material adverse effect on the Company.
Although the managed care market has expanded beyond HMOs, historically, the
Company's client base consisted primarily of HMOs. Further consolidation in
the HMO industry could have a material adverse effect on the Company. See
"Business--Industry Background."
Rapid Technological Change. The Company operates in a rapidly changing
technological environment in which the Company must keep pace with new
technologies, processes and competitive forces in order to be successful. In
particular, the Company's continued success will be dependent upon its ability
to maintain the AMISYS System at the forefront of new technological
developments through new applications and enhancements to the existing
product. Among other things, the Company is seeking to position the AMISYS
System to manage databases in excess of one million lives, a scale which has
not yet been commercially achieved. The Company is in the process of
constructing a database of one million members in order to test the
scalability of the AMISYS System. There can be no assurance that the Company
will be successful in this regard. See "Business--Research, Development and
Technology," "Business--Hardware Platform" and "Business--Competition."
Uncertainty in Health Care Industry; Government Health Care Reform
Proposals. The health care industry in the United States is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operations of health care organizations. During the
past several years, the health care industry has been subject to changing and
increasing governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain proposals to reform aspects of the
health care system have been and are being considered by Congress and state
legislatures. These proposals, if enacted, could change the operating
environment for the Company's clients in ways that cannot be predicted. Health
care organizations may react to changes in the administration or
interpretation of government health care programs, laws, regulations or
policies by curtailing or deferring investments, including those for the
Company's products and services. See "Business--Industry Background."
Dependence on Proprietary Software. The Company's success is dependent to a
significant extent on its ability to protect its proprietary rights to the
software incorporated in the AMISYS System. The Company depends upon a
combination of trade secret, copyright and trademark laws, license agreements,
nondisclosure and other contractual provisions and various security measures
to protect these proprietary rights. There can be no assurance that the legal
protections afforded to the Company or the precautions taken by the Company
will be adequate to prevent misappropriation of the Company's technology. In
addition, these protections do not prevent independent third-party development
of functionally equivalent or superior technologies, products or services. Any
infringement or misappropriation of the Company's proprietary software could
have a material adverse effect on the Company. In the event of litigation to
determine the validity of claims, the Company could be required to expend
significant resources to develop non-infringing technology or to obtain
licenses to technology in litigation.There is no assurance that the Company
would be successful in such development or that any such licenses would be
available on commercially reasonable terms. Although the Company is not aware
that its products, trademarks and other proprietary rights infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company and that such
claims will not have a material adverse effect on the Company's results of
operations, financial condition or business. See "Business--Proprietary Rights
and Licenses" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
9
<PAGE>
Concentration of Share Ownership; Anti-Takeover Effect. Upon completion of
this offering, the Company's directors, their affiliates and certain executive
officers will continue to beneficially own approximately 49.9% of the
Company's outstanding Common Stock. As a result, these stockholders, if acting
together, will continue to have the ability to elect all of the Company's
directors and to determine the outcome of corporate actions requiring
stockholder approval. This ability may have the effect of delaying or
preventing a change in control of the Company, or causing a change in control
of the Company which may not be favored by the Company's other stockholders.
The Company will be authorized to issue up to 5,000,000 shares of Preferred
Stock in one or more series, having terms fixed by the Board of Directors
without stockholder vote. Issuance of these shares could also be used as an
anti-takeover device. The Board of Directors has no current intentions or
plans to issue any Preferred Stock. In addition, at the closing of this
offering the Board of Directors will be divided into three classes having
staggered three-year terms. See "Principal Stockholders" and "Description of
Capital Stock."
Possible Volatility of Stock Price. The market price of the Common Stock may
experience a high level of volatility, as frequently occurs with market prices
for securities of emerging growth companies such as the Company. Factors such
as announcements of technological innovations or new products or services by
the Company or its competitors, proprietary rights developments and market
conditions for health care or technology stocks in general could have a
significant impact on the future market price of the Common Stock. Since the
Company's initial public offering of Common Stock on December 20, 1995, the
average daily trading volume in the Common Stock as reported on the Nasdaq
National Market system has been relatively low. There can be no assurance that
a more active trading market will develop in the future.
Absence of Dividends. The Company has never declared or paid any cash
dividends on its Common Stock and does not intend to do so for the foreseeable
future. See "Price Range of Common Stock and Dividend Policy."
Shares Eligible for Future Sale; Registration Rights. Upon completion of
this offering, there will be 7,643,700 shares of Common Stock of the Company
outstanding (exclusive of shares covered by outstanding options). Of these
shares, 3,860,000 shares of Common Stock, including the 1,560,000 shares
offered hereby will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except that any
shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act, generally may only be resold in compliance
with applicable provisions of Rule 144. The remaining 3,783,700 shares of
Common Stock are held by existing shareholders and are "restricted securities"
as that term is defined in Rule 144 under the Securities Act (the "Restricted
Securities"). Holders of the Restricted Securities have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock pursuant to existing
lock-up agreements which expire on June 17, 1996. Of these Restricted
Securities, 3,422,500 shares are subject to lock-up agreements which expire 90
days after the date of this Prospectus (collectively the "Lock-up
Agreements"). Alex. Brown & Sons Incorporated may, in its sole discretion and
at any time without notice, release all of or any portion of the securities
subject to the Lock-Up Agreements. Approximately 3,422,500 of the Restricted
Securities will be eligible for sale 90 days after the date of this
Prospectus, subject to compliance with the volume limitations and other
restrictions of Rule 144. The Company has granted stockholders owning these
shares registration rights pursuant to an Investment and Stockholders
Agreement dated May 27, 1994 between the Company and these holders. See
"Certain Transactions." In addition, the Company has reserved 1,350,000 shares
of Common Stock for issuance pursuant to the Company's 1994 Equity Incentive
Plan, of which 643,800 were represented by outstanding options as of March 31,
1996. The sale of a significant number of shares could adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale" and
"Certain Transactions."
Risks Relating to Patient Information. The Company's products may include
applications that may relate to confidential patient medical histories and
treatment plans. Improper disclosure of this information or failure by the
Company's product to provide accurate and timely information could result in
claims against the Company by its customers or their patients. There can be no
assurance that the Company will not be subject to such claims, that such
claims will not result in liability in excess of any insurance coverage
maintained by the Company with respect to such claims or that insurance will
cover such claims.
10
<PAGE>
THE COMPANY
The Company was founded as a Maryland corporation in 1976, under the name
Jurgovan and Blair, Inc. ("JBI"). In July 1986, AIG acquired JBI through the
merger of JBI with a wholly-owned subsidiary of AIG. In 1988, JBI was merged
with American International Healthcare, Inc. ("AIHI") with JBI surviving the
merger. Immediately following the merger, the name was changed to American
International Healthcare, Inc. In July 1992, the Company was reorganized by
AIG and became solely a software vendor. The other businesses within the
Company were transferred to other AIG companies or sold. In May 1994, AIHI was
acquired by and merged with AIH Systems, Inc., a Delaware corporation. AIHI
survived the merger and immediately changed its name to AIH Systems, Inc. The
Company adopted the name Advanta Systems, Inc. in February 1995 and changed
its name to AMISYS Managed Care Systems, Inc. in November 1995.
The Company's executive offices are located at 30 West Gude Drive, Fifth
Floor, Rockville, Maryland 20850. Its telephone number is (301) 251-8600.
USE OF PROCEEDS
The proceeds to the Company from the sale of the 75,500 shares of Common
Stock offered by it, net of underwriting discounts and estimated expenses, are
$1,144,050. The Company will use the proceeds for general corporate purposes,
including payment of expenses of the offering, estimated at $600,000.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been traded on Nasdaq under the symbol AMCS since
December 20, 1995. The following table sets forth the high and low prices, as
reported by Nasdaq, for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
Second Quarter (through May 28)............................. $27.88 $17.75
First Quarter............................................... 23.25 16.00
1995:
Fourth Quarter
(December 20 - December 31)................................ $20.00 $15.00
</TABLE>
On May 28, 1996, the last reported sale price of the Common Stock was $26.00
per share. As of April 25, 1996, there were approximately 27 holders of
record.
The Company has never declared or paid any cash dividends. The Company has a
revolving line of credit that prohibits the payment of cash dividends without
the prior consent of the lender. The Company currently intends to retain all
earnings, if any, to finance the development and growth of the Company's
business.
11
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996, the capitalization of
the Company and as adjusted to give effect to the sale by the Company of the
75,500 shares offered by the Company hereby and the receipt of the estimated
net proceeds therefrom. This table should be read in conjunction with the
Company's Financial Statements and the Notes thereto included elsewhere in
this Prospectus:
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................ $ -- $ --
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares outstanding................... -- --
Common Stock, $.001 par value, 25,000,000 shares
authorized, 7,568,200 shares issued and outstanding;
7,643,700 shares issued and outstanding as
adjusted(2)......................................... 8 8
Additional paid-in capital........................... 32,078 33,222
Accumulated deficit.................................. (4,016) (4,016)
------- -------
Total stockholders' equity ....................... 28,070 29,214
------- -------
Total capitalization............................ $28,070 $29,214
======= =======
</TABLE>
- --------
(1) Based on the public offering price of $24.50 per share for the 75,500
shares of Common Stock offered by the Company hereby and application of
net proceeds, after deducting the underwriting discounts and estimated
offering expenses payable by the Company.
(2) Excludes options outstanding at March 31, 1996, under the 1994 Equity
Incentive Plan to purchase 643,800 shares of Common Stock at a weighted
average exercise price of $1.47 per share. See "Management--Executive
Compensation."
12
<PAGE>
SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for the
Company, the surviving corporation of a merger between AIHI and AIH Systems,
Inc. The selected financial data reflects the segregation of the operating
activities for the periods of different ownership. This financial data should
be read in conjunction with the Company's financial statements, and the notes
thereto, as of December 31, 1994, and December 31, 1995 and for each of the
years in the two-year period ended December 31, 1993, the periods January 1,
1994 to May 26, 1994, May 27, 1994 to December 31, 1994 and the year ended
December 31, 1995, and the report of independent accountants thereon, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Prospectus.
The statement of operations data for the year ended December 31, 1991, and
the three month periods ended March 31, 1995 and 1996 are unaudited and
include all adjustments, consisting only of normal, recurring adjustments,
that the Company considers necessary for a fair presentation of the financial
position and results of operations for those periods. Operating results for
the three month period ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1996.
<TABLE>
<CAPTION>
AMISYS
AIHI
AIHI AMISYS COMBINED (1)
------------------------------------------ -------- ------------
MAY 27, YEAR
YEARS ENDED DECEMBER 31, JAN. 1, 1994 1994 TO ENDED
---------------------------- TO MAY 26, DEC. 31, DEC. 31,
1991 1992 1993 1994 1994 1994
----------- ------- ------- ------------ -------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
System sales.............. $ 5,958 $ 8,332 $11,698 $6,318 $11,642 $17,960
Support and maintenance... 2,772 3,221 2,556 1,730 2,745 4,475
Contract services (2)..... 6,985 6,529 1,400 -- -- --
------- ------- ------- ------ ------- -------
Total revenues........... 15,715 18,082 15,654 8,048 14,387 22,435
Cost of revenues (3)....... 14,886 13,345 9,583 4,402 7,714 12,116
------- ------- ------- ------ ------- -------
Gross profit............... 829 4,737 6,071 3,646 6,673 10,319
------- ------- ------- ------ ------- -------
Operating Expenses
Sales and marketing....... 754 880 1,097 592 738 1,330
Research and development.. 1,517 2,593 2,290 1,708 3,270 4,978
General and administrative
(4)...................... 2,825 2,292 1,838 800 1,738 2,538
Write-off of purchased
research and development
(5)...................... -- -- -- -- 6,516 6,516
Write-down of assets (6).. -- 8,380 -- -- -- --
------- ------- ------- ------ ------- -------
Total operating
expenses................ 5,096 14,145 5,225 3,100 12,262 15,362
------- ------- ------- ------ ------- -------
Operating income (loss).... (4,267) (9,408) 846 546 (5,589) (5,043)
Other (expenses) income.... (208) (16) (27) 6 (363) (357)
------- ------- ------- ------ ------- -------
Income (loss) before income
tax provision............. (4,475) (9,424) 819 552 (5,952) (5,400)
Income tax (benefit)
provision................. (1,261) (3,100) 321 219 476 695
Cumulative effect of change
in accounting for income
taxes..................... -- 241 -- -- -- --
------- ------- ------- ------ ------- -------
Net income (loss).......... $(3,214) $(6,565) $ 498 $ 333 $(6,428) $(6,095)
======= ======= ======= ====== ======= =======
Net income (loss) per share
(7)....................... $ (1.09) $ (1.03)
Weighted average common and
common equivalent shares.. 5,900 5,900
<CAPTION>
AMISYS
---------------------------
THREE MONTHS
YEAR ENDED
ENDED MARCH 31,
DECEMBER 31, --------------
1995 1995 1996
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
System sales.............. $26,753 $5,116 $8,233
Support and maintenance... 5,034 1,132 1,395
Contract services (2)..... -- -- --
------- ------ ------
Total revenues........... 31,787 6,248 9,628
Cost of revenues (3)....... 17,278 3,711 5,168
------- ------ ------
Gross profit............... 14,509 2,537 4,460
------- ------ ------
Operating Expenses
Sales and marketing....... 2,961 647 809
Research and development.. 5,502 1,174 1,696
General and administrative
(4)...................... 3,871 898 1,141
Write-off of purchased
research and development
(5)...................... -- -- --
Write-down of assets (6).. -- -- --
------- ------ ------
Total operating
expenses................ 12,334 2,719 3,646
------- ------ ------
Operating income (loss).... 2,175 (182) 814
Other (expenses) income.... (500) (124) 330
------- ------ ------
Income (loss) before income
tax provision............. 1,675 (306) l,144
Income tax (benefit)
provision................. -- -- 407
Cumulative effect of change
in accounting for income
taxes..................... -- -- --
------- ------ ------
Net income (loss).......... $ 1,675 $ (306) $ 737
======= ====== ======
Net income (loss) per share
(7)....................... $ 0.28 $(0.05) $ 0.09
Weighted average common and
common equivalent shares.. 5,949 5,900 8,164
</TABLE>
<TABLE>
<CAPTION>
AIHI AMISYS
-------------------------- -------------------------------------
DECEMBER 31,
-------------------------- DECEMBER 31, DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1996
----------- ------- ------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 48 $ 118 $1,136 $ 2,727 $ 5,354 $ 5,962
Short-term investments.. -- -- -- -- 20,400 20,660
Working capital......... (2,943) 2,400 2,315 5,110 26,092 26,879
Total assets............ 25,406 10,358 9,833 10,167 34,045 35,555
Long-term debt.......... 3,409 2,158 1,509 10,100 -- --
Stockholders' equity
(deficit).............. 8,943 2,378 2,875 (6,395) 27,317 28,070
</TABLE>
13
<PAGE>
(1) Includes the results of operations of AIHI for the period prior to the
acquisition, January 1, 1994 to May 26, 1994 combined with the actual
results of the Company for the remainder of the periods shown. These
combined results are unaudited because they represent the sum of the
amounts derived by combining the results for the audited period January 1,
1994 to May 26, 1994 and the audited period May 27, 1994 to December 31,
1994 during periods of different ownership.
(2) Represent revenues generated by a majority-owned subsidiary divested in
1993 and certain health care information consulting operations transferred
in 1992 to AIG.
(3) Includes cost of revenues of $7.6 million, $6.2 million and $1.1 million
for 1991, 1992 and 1993, respectively, generated by a majority-owned
subsidiary divested in 1993 and certain health care information consulting
operations transferred in 1992 to AIG.
(4) Includes general and administrative expenses of $143,000, $249,000 and
$130,000 for 1991, 1992 and 1993, respectively, generated by a majority-
owned subsidiary divested in 1993.
(5) On May 26, 1994, the Company acquired AIHI in a transaction accounted for
as a purchase. The purchase price was allocated among the assets with $6.5
million allocated to purchased research and development. Because the
purchased research and development had not reached the stage of
technological feasibility, this amount was written off as of the same
date.
(6) Represents non-recurring, non-cash total charges of $8.4 million recorded
at June 30, 1992 to reflect the write-down of assets, primarily
capitalized software costs related to an obsolete software product
previously sold to a third party.
(7) Per share amounts are computed on the basis of Note 1 of Notes to the
Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Background
Prior to May 27, 1994, the Company was a wholly-owned subsidiary of AIG. In
July 1992, the Company was reorganized by AIG, and it became solely a software
systems vendor with its other businesses transferred to other AIG companies or
sold. The Company was acquired on May 27, 1994 and completed an initial public
offering on December 20, 1995.
During 1993, AIHI sold for a nominal amount its 55% equity interest in a
joint venture formed to provide health care consulting services in
underdeveloped countries. Contract services revenues in 1993 represent the
revenues from the divested health care information consulting operations and
joint venture interest.
On May 26, 1994, the Company acquired AIHI in a transaction accounted for
as a purchase. The purchase price was allocated among the assets with $6.5
million allocated to purchased research and development and $1.2 million
allocated to existing software. Both of these allocations were made based on
discounted cash flow estimates of the net present value of the products.
Because the purchased research and development had not reached the stage of
technological feasibility, this amount was written off as of the same date.
The Company has a limited operating history as an independent concern
following the purchase from AIG. Following the purchase from AIG, the Company
reported a net loss for the period May 27, 1994 to December 31, 1994 of $6.4
million, due to the write-off of the purchased research and development.
Revenue Recognition
The Company develops, sells and supports an integrated information system
solution, the AMISYS System, to health care payors and providers who offer
managed care products and services. As of March 31, 1996, the Company had
licenses with 69 AMISYS System clients supporting 76 sites nationwide. The
Company's revenues are generated primarily from the sale of integrated,
enterprise-wide systems. The components of these revenues consist of a license
fee for the perpetual use of the software, sales of third-party hardware and
software and labor charges to install and configure each system to meet the
client's needs. The price of each system will vary based upon many factors
including the number of covered lives, the level of third-party products
required and the level of installation and configuration work provided by the
Company's staff.
Revenues are recognized for system sales on a percentage of completion basis
measured primarily by the ratio of (i) labor hours incurred to install each
specific contract to (ii) total estimated labor hours. When the total
estimated cost of a contract is expected to exceed the contract price, the
total estimated loss is charged to expense in the period when the information
becomes known. Because the Company generally bills for installation and
implementation on an hourly basis, these labor revenues are recognized as
billed. AMISYS Systems are installed over a period of time ranging generally
from six months to a year with an average period of approximately nine months.
Because revenues do not begin to be recognized until a client signs a contract
and because the length of the installation process depends on factors outside
the control of the Company, the Company is unable to predict accurately the
amount of revenues it expects to recognize from system sales in any particular
period.
The Company also recognizes revenues from support and maintenance fees,
custom modifications and the sale of third-party products. Support and
maintenance fees are billed monthly and recognized as revenues when billed.
Third-party products not related to system installations are billed and
recognized as revenues upon shipment to the client. Revenues from custom
modifications are generally recognized when billed.
15
<PAGE>
Backlog
As of March 31, 1996, the Company had a total backlog of $13.5 million
compared to a backlog of $6.3 million as of March 31, 1995. Backlog is
comprised of unrecognized revenues for system sales and support and
maintenance for which there are signed agreements expected to be completed
within the next twelve months. There can be no assurance that contracts
included in backlog will in fact generate the specified revenues or that these
revenues will be fully recognized within the twelve-month period.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the results of operations and the percentage
of total revenues for each period indicated prepared on the following basis:
The results of operations for AIHI for the period January 1, 1994 to May 26,
1994 and for the Company for the period May 27, 1994 to December 31, 1994 have
been combined and are presented unaudited. The results of operations for the
Company for the three month periods, ended March 31, 1995 and 1996 are
presented unaudited. The discussion of results of operations below is also set
forth on this basis, which management believes allows for comparability among
the periods presented.
<TABLE>
<CAPTION>
AMISYS
AIHI
AIHI COMBINED AMISYS
------- -------- -----------------------
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------
1993 1994 1995 1995 1996
------- -------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
System sales................... $11,698 $17,960 $26,753 $5,116 $8,233
Support and maintenance........ 2,556 4,475 5,034 1,132 1,395
Contract services.............. 1,400 -- -- -- --
------- ------- ------- ------ ------
Total revenues................ 15,654 22,435 31,787 6,248 9,628
Cost of revenues
Cost of system sales and
support and maintenance....... 8,439 12,116 17,278 3,711 5,168
Cost of contract services...... 1,144 -- -- -- --
------- ------- ------- ------ ------
Total cost of revenues........ 9,583 12,116 17,278 3,711 5,168
------- ------- ------- ------ ------
Gross profit.................... 6,071 10,319 14,509 2,537 4,460
Sales and marketing............. 1,097 1,330 2,961 647 809
Research and development........ 2,290 4,978 5,502 1,174 1,696
General and administrative...... 1,838 2,538 3,871 898 1,141
Write-off of purchased research
and development................ -- 6,516 -- -- --
Write-down of assets............ -- -- -- -- --
------- ------- ------- ------ ------
Total operating expenses...... 5,225 15,362 12,334 2,719 3,646
------- ------- ------- ------ ------
Operating income (loss)......... 846 (5,043) 2,175 (182) 814
Other income (expenses)
Interest expense............... (53) (410) (622) (156) (6)
Interest income................ 48 39 101 32 334
Other.......................... (22) 14 21 -- 2
------- ------- ------- ------ ------
Total other income (ex-
penses)...................... (27) (357) (500) (124) 330
------- ------- ------- ------ ------
Income (loss) before income tax
provision...................... 819 (5,400) 1,675 (306) 1,144
Income tax (benefit) provi-
sion.......................... 321 695 -- -- 407
Cumulative effect in change of
accounting for income taxes... -- -- -- -- --
------- ------- ------- ------ ------
Net income (loss) .............. $ 498 $(6,095) $ 1,675 $ (306) $ 737
======= ======= ======= ====== ======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
AMISYS
AIHI
AIHI COMBINED AMISYS
----- -------- ----------------------
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- ---------------
1993 1994 1995 1995 1996
----- -------- ----- ------ ------
STATEMENT OF OPERATIONS DATA AS
PERCENTAGES OF TOTAL REVENUES:
<S> <C> <C> <C> <C> <C>
Revenues
System sales........................................................................... 74.7% 80.1% 84.2% 81.9% 85.5%
Support and maintenance................................................................ 16.3 19.9 15.8 18.1 14.5
Contract services...................................................................... 9.0 -- -- -- --
----- ----- ----- ------ ------
Total revenues....................................................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues
Cost of system sales and support and maintenance....................................... 53.9 54.0 54.4 59.4 53.7
Cost of contract services.............................................................. 7.3 -- -- -- --
----- ----- ----- ------ ------
Total cost of revenues............................................................... 61.2 54.0 54.4 59.4 53.7
----- ----- ----- ------ ------
Gross profit............................................................................ 38.8 46.0 45.6 40.6 46.3
Sales and marketing..................................................................... 7.0 5.9 9.3 10.4 8.4
Research and development................................................................ 14.6 22.2 17.3 18.8 17.6
General and administrative.............................................................. 11.8 11.3 12.2 14.4 11.9
Write-off of purchased research and development......................................... -- 29.1 -- -- --
Write-down of assets.................................................................... -- -- -- -- --
----- ----- ----- ------ ------
Total operating expenses............................................................. 33.4 68.5 38.8 43.6 37.9
----- ----- ----- ------ ------
Operating income (loss)................................................................. 5.4 (22.5) 6.8 (3.0) 8.4
Other income (expenses)
Interest expense....................................................................... (0.4) (1.8) (1.9) (2.5) (0.1)
Interest income........................................................................ 0.3 0.1 0.3 0.5 3.5
Other.................................................................................. (0.1) 0.1 0.1 0.0 0.0
----- ----- ----- ------ ------
Total other (expenses)............................................................... (0.2) (1.6) (1.5) (2.0) 3.4
----- ----- ----- ------ ------
Income (loss) before income tax provision............................................... 5.2 (24.1) 5.3 (5.0) 11.8
Income tax (benefit) provision.......................................................... 2.0 3.1 -- -- 4.2
Cumulative effect in change of accounting for income taxes.............................. -- -- -- -- --
----- ----- ----- ------ ------
Net income (loss)....................................................................... 3.2% (27.2)% 5.3% (5.0)% 7.6%
- --------------------------------------------------
===== ===== ===== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues. For the three months ended March 31, 1996, revenues increased 54%
to $9.6 million from $6.2 million in the corresponding period in 1995. System
sales revenue increased 61% to $8.2 million from $5.1 million due to the
growing base of systems being installed currently and higher revenues per
system sale.
For the three months ended March 31, 1996, revenues attributable to support
and maintenance increased 23% to $1.4 million from $1.1 million in the
corresponding period in 1995. Increases in support and maintenance revenues
over the corresponding period in the prior year, due to an expanding client
base, were offset in part by declining revenues from custom modifications.
18
<PAGE>
Cost of Revenues. For the three months ended March 31, 1996, cost of
revenues increased 39% to $5.2 million from $3.7 million in the corresponding
period in 1995. During the quarter ended March 31, 1996, the number of people
engaged in the implementation, configuration and support of the AMISYS System
remained constant at 61. During the corresponding period in 1995, the number
of people engaged in the implementation, configuration and support of the
AMISYS System grew from 48 at the beginning of the period to 55 at the end of
the period. Because of this lowering of the growth rate of staff, cost of
sales as a percent of revenues declined to 54% for the three months ended
March 31, 1996 versus 59% for the corresponding period in 1995.
Sales and Marketing. For the three months ended March 31, 1996, sales and
marketing expenses increased 25% to $0.8 million from $0.6 million in the
corresponding period in 1995. This increase reflects an increase in sales and
marketing personnel to 24 at March 31, 1996 from 17 as of March 31, 1995. This
increase in personnel was due to an increase in the volume of requests for
proposals and other sales efforts. The Company has a long sales cycle for its
products which involves detailed demonstrations, contract negotiations and
considerable client contact. For the three months ended March 31, 1996, sales
and marketing expenses declined to 8% of revenues compared to 10% of revenues
during the corresponding period in 1995.
Research and Development. For the three months ended March 31, 1996,
research and development expenses increased 44% to $1.7 million from $1.2
million during the corresponding period in 1995. Expenses increased as a
result of an increase in personnel to 77 as of March 31, 1996 from 62 as of
March 31, 1995. This increase reflects the Company's efforts to migrate the
current AMISYS System to a client/server environment. Research and development
expenses as a percentage of revenues declined to 17% during the three months
ended March 31, 1996 compared to 19% during the corresponding period in 1995.
General and Administrative. For the three months ended March 31, 1996,
general and administrative expenses increased 27% to $1.1 million from $0.9
million in the corresponding period of 1995. This increase was primarily
attributable to an increase in personnel to 23 people at March 31, 1996 from
17 at March 31, 1995 to assist the Company in managing its growth. General and
administrative expenses as a percentage of revenues declined to 12% during the
three months ended March 31, 1996 compared to 14% during the corresponding
period in 1995.
Income Taxes. For the three months ended March 31, 1996, income tax expense
was $0.4 million. During the corresponding period of 1995, there was no income
tax expense due to the recording of differences between book and taxable
income arising out of the allocation of the purchase price for tax purposes
among the assets of the Company as of the May 27, 1994 purchase date. Income
tax expense for the three months ended March 31, 1996 was 36% of pre-tax
income. The effective tax rate was lower than the statutory rates due to the
timing of deductions allowed for income tax purposes as opposed to the periods
in which they are recognized as expense in the Company's financial statements.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues. In 1995, revenues increased 42% to $31.8 million from $22.4
million in 1994. System sales revenues increased 49% to $26.8 million from
$18.0 million due to 19 system sales during the year compared with 15 system
sales in 1994. Included in the 19 system sales was one sale which accounted
for more than 10% of revenues for the year.
In 1995, revenues attributable to support and maintenance increased 12% to
$5.0 million from $4.5 million in 1994. A large increase in support and
maintenance revenues over the corresponding period in the prior year, due to
an expanding client base, was offset by revenues from custom modifications.
The number of custom modifications remained relatively constant compared to
the prior year.
19
<PAGE>
Cost of Revenues. In 1995, cost of revenues increased 43% to $17.3 million
from $12.1 million in 1994. During 1995, the Company responded to increased
growth by hiring and training additional consultants and support personnel to
implement and configure the AMISYS System and to train clients. As of December
31, 1995, there were 61 people engaged in the installation and support of new
and existing clients compared to 48 as of December 31, 1994. Cost of revenues
remained constant at 54% for 1995 compared to 1994.
Sales and Marketing. In 1995, sales and marketing expenses increased 123% to
$3.0 million from $1.3 million in 1994 as a result of an increase in sales and
marketing personnel to 22 as of December 31, 1995 compared to 13 as of
December 31, 1994. This increase was due to an increase in the volume of
requests for proposals and other sales efforts. The Company has a long sales
cycle for its products which involves detailed demonstrations, contract
negotiations and considerable client contact.
Research and Development. In 1995, research and development expenses
increased 11% to $5.5 million from $5.0 million during 1994. Expenses
increased as a result of an increase in personnel to 76 as of December 31,
1995 from 46 as of December 31, 1994. This increase reflects the Company's
effort to replace contract labor with inhouse personnel.
General and Administrative. In 1995, general and administrative expenses
increased 53% to $3.9 million from $2.5 million in 1994. This increase was
primarily attributable to an increase to 23 people at December 31, 1995 from
17 people at December 31, 1994, to assist the Company in managing its growth.
Income Taxes. There is no provision for income taxes for 1995 due to the
recording of differences between book and taxable income arising out of the
allocation of the purchase price for tax purposes among the assets of the
Company as of the May 27, 1994 purchase date. As of December 31, 1995, the
valuation allowance previously reported with respect to the tax effect of
those differences was reduced in an amount equal to a portion of the current
provision, reflecting management's belief that a portion of the deferred tax
asset would more likely than not be realized. The remaining valuation
allowance exists as of December 31, 1995 because, based on the weight of all
available evidence, management believes it is more likely than not that the
remaining deferred tax asset will not be realized. To the extent that the
Company reports taxable income in future periods, or events occur which
indicate that the remaining deferred tax asset will more likely than not be
realized, the valuation allowance may be further reduced resulting in a lower
effective tax rate in those periods. The Company believes that it is more
likely than not that the deferred tax asset will not be realized because such
realization is directly dependent on the Company's future operations which in
turn are dependent on the Company's client/server product reaching
technological feasibility. Although the Company experienced a loss for the
year ended December 31, 1994, the Company recorded a tax provision to reflect
the timing of deductions allowable for tax purposes compared to book purposes.
See Note 7 of Notes to Financial Statements.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenues. In 1994, revenues increased 43% to $22.4 million from $15.7
million in 1993. Included in 1993 revenues were $1.4 million of contract
services revenues from the joint venture divested in 1993. In 1994, revenues
from system sales increased 54% to $18.0 million from $11.7 million for 1993
due to the increased number of systems sold. Support and maintenance revenues
increased 75% due to increases in custom modifications during 1994. In 1994,
total revenues for system sales and support and maintenance (which represent
AMISYS System-related revenues) increased 57% from 1993.
Cost of Revenues. In 1994, cost of revenues increased 26% to $12.1 million
from $9.6 million in 1993. Included in cost of revenues for 1993 were $1.1
million related to contract services revenues from the divested joint venture.
In 1994, cost of revenues for system sales and support and maintenance
increased 44% to $12.1 million from $8.4 million in 1993. The lower growth
rate of cost of sales compared
20
<PAGE>
to revenues was due to lower growth rates of amortization and labor. Cost of
revenues for system sales and support and maintenance as a percentage of
revenues remained constant at 54% for 1994 and 1993.
Sales and Marketing. In 1994, sales and marketing expenses increased 21% to
$1.3 million from $1.1 million in 1993. This increase was attributable in part
to the added cost of selling 15 systems in 1994 compared with 11 systems in
1993. This increase also related to the hiring of additional staff involved in
the sale and marketing of the AMISYS System. The number of staff rose to 13 at
the end of 1994 compared to 9 at the end of 1993. In 1994, sales and marketing
expenses as a percentage of system sales and support and maintenance revenues
declined to 6% from 7% in 1993.
Research and Development. In 1994, research and development expenses
increased 117% to $5.0 million from $2.3 million in 1993. This increase was
generally attributable to an increase in personnel to 46 at the end of 1994
from 38 at the end of 1993 and the cost of a significant amount of contract
development work performed during 1994. Research and development expenses
increased to 22% of system sales and support and maintenance revenues from 15%
in 1993.
General and Administrative. In 1994, general and administrative expenses
increased 38% to $2.5 million from $1.8 million in 1993. Included in general
and administrative expenses are the cost of adding personnel to build the
infrastructure of the Company and the cost of administering the Company as a
free-standing organization. Included in general and administrative expenses
for 1993 is $130,000 related to the divested joint venture. In 1994, general
and administrative expenses related to system sales and support and
maintenance declined to 11% of revenues from 12% in 1993.
Write-Off of Purchased Research and Development. On May 26, 1994, the
Company acquired AIHI in a transaction accounted for as a purchase. The
purchase price was allocated among the assets, with $6.5 million allocated to
purchased research and development. Because the purchased research and
development had not reached technological feasibility, this amount was written
off as of the same date.
Income Tax Expenses. In 1994, income tax expenses increased 117% to $695,000
compared to $321,000 in 1993, but declined as a percentage of pre-tax income
to 13% in 1994 from 39% in 1993. These rates vary due to the differences in
the timing of deductions for expenses for accounting purposes versus tax
purposes. Although the Company experienced a loss for the period ended
December 31, 1994, the Company recorded a tax provision to reflect the timing
of deductions allowable for tax purposes compared to book purposes. The
primary expenses giving rise to the book loss which were not allowable for tax
purposes were the write-off of purchased research and development costs,
expenses associated with the acquisition of AIHI and depreciation and
amortization. A valuation allowance was established at December 31, 1994 to
fully offset the deferred tax assets associated with the tax effect of future
deductible items, since it was more likely than not that the benefit would not
be realized. See Note 7 of Notes to Financial Statements.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial data
for the period May 27, 1994 to June 30, 1994, the two quarters in the six
month period ended December 31, 1994, the year ended December 31, 1995 and the
quarter ended March 31, 1996. This quarterly unaudited financial information
has been prepared on the same basis as the annual Financial Statements and, in
the opinion of the Company's management, reflects all normal recurring
adjustments necessary for the fair presentation of the information for the
periods presented. Operating results for any quarter are not necessarily
indicative of results for any future period.
The Company typically experiences fluctuations in its quarterly revenues and
expenses. These fluctuations are caused by factors including the timing of the
signing of contracts for new system installations, the ability of the client
to control the implementation process, the timing of the purchase of third-
party products and delivery by vendors and the demand for custom modification.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 27, 1994 ----------------------------------------------------------------
TO JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH
30, 1994 30, 1994 31, 1994 31, 1995 30, 1995 30, 1995 31, 1995 31, 1996
------------ --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
System sales........... $ 1,711 $5,703 $4,228 $5,116 $6,770 $7,762 $7,105 $8,233
Support and
maintenance........... 399 1,048 1,298 1,132 1,066 1,346 1,490 1,395
------- ------ ------ ------ ------ ------ ------ ------
Total revenues........ 2,110 6,751 5,526 6,248 7,836 9,108 8,595 9,628
Cost of revenues....... 1,140 3,638 2,936 3,711 4,565 4,830 4,172 5,168
------- ------ ------ ------ ------ ------ ------ ------
Gross profit........... 970 3,113 2,590 2,537 3,271 4,278 4,423 4,460
Operating expenses..... 797 2,474 2,475 2,719 2,987 3,175 3,453 3,646
Write-off of purchased
research and
development........... 6,516 -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................ (6,343) 639 115 (182) 284 1,103 970 814
Income (loss) before
income tax provision.. (6,401) 482 (33) (306) 141 987 853 1,144
Income tax provision... 130 271 75 -- -- -- -- 407
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $(6,531) $ 211 $ (108) $ (306) $ 141 $ 987 $ 853 $ 737
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On May 27, 1994 the Company raised $12.0 million, $2.4 million through the
issuance of common stock and $9.6 million through the issuance of subordinated
notes bearing interest at 6 1/4% (the "Notes"). Of these proceeds, $10.0
million was used to acquire AIHI from AIG. The terms of the Company's Notes
provided that if a qualified initial public offering of stock was completed,
the Notes would be repaid from the net proceeds. The Company raised
approximately $30.5 million in its initial public offering in December 1995.
The Notes were repaid from a portion of the proceeds of that offering.
Since May 27, 1994, the Company has utilized its own resources to fund its
operations. During the year ended December 31, 1995 and the three month period
ended March 31, 1996, the Company generated $4.6 million and $1.0 million of
cash from operations, respectively. For the full year 1994, the Company
utilized $797,000 of cash and in 1993, the Company generated $2.0 million of
cash from operations. As of December 31, 1995 and the three month period ended
March 31, 1996, the Company had $5.4 million and $6.0 million in cash invested
in short-term time deposits with commercial banks and $20.4 million and $20.7
million in other short term investments, respectively.
At March 31, 1996, the Company had $7.2 million in accounts receivable, net
of allowance for doubtful accounts, and $2.1 million in deferred revenues,
substantially all of which is expected to be earned over the next twelve
months. Accounts receivable are generally collected over a range of 60 to 100
days. The accounts receivable balance does not directly correspond to revenues
recognized as the
22
<PAGE>
Company recognizes revenues primarily using the percentage of completion basis
as the work is performed. Amounts billed to customers may be deferred and
recognized in a future period as the work is performed and ordinarily revenues
are recognized in periods subsequent to the payment of the invoice.
In September 1995, the Company entered into a $4.0 million revolving credit
and letter of credit agreement which provides a line of credit for the purpose
of funding working capital and capital expenditures and letters of credit to
secure certain payables. This agreement is secured by certain assets of the
Company and has a term of one year. The agreement contains certain financial
covenants and restrictions on dividend payments, repayment of indebtedness and
share repurchases. The Company had borrowings of approximately $200,000, under
the line of credit as of March 31, 1996. A $1.0 million letter of credit was
issued in September 1995, which has not been drawn upon.
The Company believes that short-term investments together with amounts
available under the revolving credit agreement and cash generated from
operations will be sufficient to meet anticipated needs for at least the next
18 months.
23
<PAGE>
BUSINESS
OVERVIEW
The Company develops, markets and supports managed health care information
systems for payors and providers who offer managed care products and services.
The Company provides an integrated system solution, which includes the
Company's proprietary software, third-party hardware and software and
implementation services (the "AMISYS System"), that automates most of the
operational underpinnings of the Company's managed care clients. These
products and services are directed at supporting critical "risk-management"
operational functions that help ensure the proper balance of premium revenue
against health care utilization costs, availability and quality. The Company's
AMISYS System contains a number of fully integrated applications designed to
support the full range of operations in managed care and risk-management
administrative functions, including premium billing and receivables,
capitation, utilization management and claims adjudication and payment.
Historically, the Company's client base consisted primarily of HMOs. Since
1992, as managed care initiatives have spread throughout the health care
system, the Company has broadened its client base to include many new entities
that manage health care risk or administer managed health care products. The
Company's installed base now includes commercial and Medicaid HMOs, indemnity
insurers, integrated delivery systems ("IDSs"), physician-hospital
organizations ("PHOs"), third-party administrators ("TPAs") and other
specialty managed care organizations ("specialty carveouts"). The Company
currently has licenses with 69 AMISYS System clients supporting 76 sites
nationwide. The Company estimates that its clients are utilizing or installing
the AMISYS System to administer risk for approximately 7.2 million covered
lives.
The core architecture of AMISYS' software allows for a high degree of
functionality and flexibility, enabling clients to add or modify insurance
products, change or modify contractual arrangements with provider networks,
manage complex benefit structures and comply with a wide range of reporting
requirements, without the need for software modifications. The AMISYS System,
through its "differential-risk management" capability, is able to adapt to the
reallocation of risk among the key participants in the health care industry:
underwriters, administrators, employer groups, governmental entities, members
and providers. The AMISYS System is designed to address a wide range of
membership sizes, using the same scalable hardware platform--Hewlett-Packard's
HP3000 line of computers. This focus on a single integrated system solution
for a wide range of clients allows the Company to maintain and support one
core system for its entire client base, thereby maximizing enhancement and new
release value to all clients.
The Company's strategy is to build on its strong market position and the
comprehensive scope of its client relationships by (i) increasing new sales to
the expanding risk-management marketplace, (ii) expanding sales to existing
clients, (iii) increasing its recurring revenue base, (iv) exploring strategic
acquisitions and (v) migrating the AMISYS System to client/server technology.
INDUSTRY BACKGROUND
The health care industry is in a state of significant change with
traditional roles played by payors and providers changing and merging. Since
the mid-1970s, the managed care industry has grown from approximately 50 HMOs
to an industry whose influence is reflected in the operations of almost all
health insurance and health care delivery entities. This rapid increase in
managed health care organizations is a direct result of the rapidly increasing
costs of health care over the past 20 years. The broad pressure to reduce
costs without sacrificing quality of care continues to be a primary force in
the health insurance industry, further fueled by substantial competition
between competing insurance companies and HMOs. In turn, health care delivery
organizations competing for discounted fee-for-service or capitated contracts
offered by insurance companies and HMOs have felt these pressures through
substantial reductions in revenues. These market pressures, as well as the
continued efforts to modify governmental involvement
24
<PAGE>
in the health care industry and in financing Medicaid and Medicare programs,
continue to fuel significant changes in both the health insurance and health
care delivery industries.
Two of the most profound changes are: (i) the demand by the primary entities
that finance health care (employers and federal and state governments) that
the health care industry continue to offer less expensive but high quality
health insurance options and (ii) the resulting pressures on the health care
delivery organizations (i.e., providers) to accept lower fees, causing them to
turn to full risk-management contracting alternatives. These changes have
resulted in the need by a growing number of organizations for risk-
management/managed care software to assist in meeting these challenges.
The Company believes that the need to manage risk will be a critical
function for both payors and providers. The software vendors serving the
traditional insurers, TPAs or government-funded fiscal intermediaries
(Medicaid and Medicare) and those servicing hospitals or physician practices
generally do not offer scalable and comprehensive managed care software
products. The sophistication and complexity of managed care systems has
discouraged both the hospital information systems and insurance systems
vendors from developing competitive products serving such purposes. The
resulting market dynamic has provided, and is expected to continue to provide,
growing opportunities for the Company's products and services.
In addition to the above-described market opportunities, the need to balance
cost and quality of care requires the reporting of every occurrence of service
so as to draw a clear utilization and outcome analysis of the provision of
health care. While clinically-based data systems are evolving, currently only
a risk- management system collects the occurrence of every service during the
period of time an individual is insured. Through submission of claims or
encounters, providers must furnish managed care organizations with this
information in order to be reimbursed and to justify capitation rates. This
requirement results in a managed care database that allows analysis of
utilization patterns and outcomes.
Commercial HMOs are the traditional buyers of the Company's AMISYS System.
Information system investment within this sector has increased 25% from 1.6%
of revenue in 1992 to 2.0% of revenue in 1994 due to enrollment growth and
growing business complexity. Providers have moved increasingly away from fee-
for-service reimbursement and have assumed greater responsibility and risk in
providing medical care for defined patient populations. As a result, many of
these entities have become risk managers and must perform managed care
administrative functions, such as enrollment benefits tracking and capitation
management, that require utilization of managed care information systems.
Indemnity insurance companies, including Blue Cross and Blue Shield
organizations, are increasingly offering HMO-like insurance options and
require health information systems that can support the full range of
insurance and managed care product lines. Medicare and Medicaid HMOs have
emerged in recent years as an alternative to the fiscal intermediary approach.
As these entities grow in size and sophistication, the Company believes that
many will require managed care information systems comparable to those
utilized by commercial HMOs. TPAs are increasingly forming alliances with
provider networks to offer managed care products. The Company believes that as
these initiatives lead to large-scale managed care operations, many TPAs will
utilize managed care information systems. Specialty carveouts have emerged in
recent years to assume financial risk for the specific medical needs,
including mental health, dental care and radiology, of defined patient
populations. The Company believes that an opportunity exists to provide
managed care information systems to all of these emerging entities.
STRATEGY
The Company's strategy is to build on its strong market position and the
comprehensive scope of its client relationships by (i) increasing new sales to
the expanding risk-management marketplace, (ii) expanding sales to existing
clients, (iii) increasing its recurring revenue base, (iv) exploring strategic
acquisitions and (v) migrating the AMISYS System to client/server technology.
25
<PAGE>
Important elements of the Company's strategy include:
. Increasing new sales to the expanding risk-management marketplace. The
markets for the Company's product have expanded from HMOs to now include
indemnity insurers, health care providers (PHOs and IDSs), government
financed programs, TPAs and specialty carveouts. The Company will focus
on product enhancements, services and marketing alliances to expand its
sales into each of these markets. The Company also will seek to maintain
its core strength in broad and deep system functionality while
emphasizing product packaging, quality service and enhanced system
integration services and products to target the specific needs of each
market segment. The Company hopes to further these efforts through joint
marketing relationships such as those the Company currently has with
PHAMIS, Inc. and Cerner Corporation.
. Expanding sales to existing clients. The Company's expanding base of
clients and their substantial reliance on the Company to provide
software for the majority of their managed care operating needs provides
a source of new revenues through the development and marketing by the
Company of new software applications, enhanced services including long-
term, on-site staffing and remarketing of third-party products. The
Company's software includes optional software modules that provide
enhanced applications and third-party product interfaces. The Company
continues to develop optional software applications.
. Increasing its recurring revenue base. The Company intends to increase
its recurring revenue base by (i) providing additional services and
support through enhanced service agreements, 24-hour support help,
training and configuration consulting and (ii) enabling Perot Systems
Corporation ("Perot"), under an agreement with the Company, to offer a
time share service using the AMISYS System.
. Exploring strategic acquisitions. The Company intends to offer a set of
integrated products which, in addition to risk management, will serve
the practice management and clinical data needs of providers. This
strategic initiative may be achieved through acquisitions of products or
businesses that address administrative and clinical practice management,
electronic medical record and clinical data repository functions. While
the Company continually evaluates acquisition opportunities, no such
acquisitions are currently being negotiated.
. Migrating the AMISYS System to client/server technology. The Company
believes that a significant opportunity exists to migrate the AMISYS
System to client/server technology, which meets open standards, offers
graphical user interfaces and utilizes relational database technology.
Initially, client/server technology was not well suited to the risk-
management/managed care administrative processing systems marketplace
due to the large, complex and transaction intensive processing
requirements of managed care organizations. The Company intends to
migrate the AMISYS System to client/server technology by using a new
scalable three-tier architecture that will run on HP9000, IBM 6000 and
DEC ALPHA platforms. The Company's proposed client/server system would
have database accessibility to Oracle, Sybase and Informix and would
allow the Company to supply both hardware and database-independent
solutions, while maintaining the ability to process large and complex
transaction loads.
AMISYS SYSTEM AND RELATED SERVICES
The AMISYS System is a flexible and functional risk-management/managed care
information system. The AMISYS System has a multi-option structure that
enables a user to define multiple managed care insurance product lines and
unique business configurations. This core functional architectural applies to
each of the integrated applications, from claims processing and billing to
correspondence generation and medical management. The AMISYS System makes it
possible to manage the operational underpinnings of a risk-management business
with a single system.
26
<PAGE>
Functional Architecture
The key to the AMISYS System's flexibility is its multi-option structure
whose key components are:
Business Unit--independent geographic Product Line--type of insurance
or profit center product
Carrier--the underwriter of risk Region--distinct geographic
Delivery System--contracted provider population
networks Risk Population--identified member
populations
The multi-option structure allows the AMISYS System to: (i) identify unique
populations within product lines and properly isolate those populations to
manage risk, provide utilization and cost reports and determine underwriting
characteristics; (ii) structure and maintain multiple business relationships
between participants in the managed care marketplace; (iii) simultaneously
process data using different rules for each set of business relationships;
(iv) report and roll-up data by each business relationship; (v) allow for
changes in business relationships and contract arrangements; (vi) provide
multiple health care insurance options with single-source administration and
accountability and (vii) perform differential risk management and/or
administration of risk.
Major Functional Components
Medical Management. The medical management applications focus on
facilitating appropriate authorization of services and clinical case tracking
of high risk and high cost cases. This application set allows the user to
control the utilization of inpatient or special outpatient services in a
variety of ways and at varying levels of intensity. The Case Management module
contains full recommendation log functionality, assuring that proper medical
approval is tracked and reflected in the Claims Adjudication applications. The
entire Medical Management application set is integrated with all other
applications in the system.
Flexibility of Benefit, Provider Pricing, Capitation and Premium Rate
Management. The Benefit, Provider Pricing, Capitation and Premium Rate
Management applications of the system are significantly enhanced by the use of
a proprietary tool that allows for flexible definition of all the parameters
used in the configuration of these key system functions. This tool, called key
words, fully integrates with the core multi-option architecture of the system
and accounts for the flexibility of the entire product.
Claims or Encounter Adjudication, Claims Payable and Electronic Batch
Claims. Multi-option core architecture provides pricing flexibility in the
claims applications arena. This configuration allows the AMISYS System to
provide automatic on-line and batch claims adjudication, readjudication and
adjustments. In addition, the system includes Liability Recovery/Credit
Banking applications that allow for proper tracking, recovery and crediting of
coordination of benefits and other third-party reimbursement. The claims
payable functions contain a range of features to manage the disbursement and
financial control of claims payments. All of these functions are applicable to
medical, hospital, drug and dental claims.
General Reporting, Utilization Reporting and Data Warehousing. The AMISYS
System offers a wide range of reporting packages that provide comprehensive
reporting capabilities, including: (i) 250 reports which are standard with the
system and include production, membership, general utilization cost, premium
receivable and cost allocation reports; (ii) TPA and employer group reports;
(iii) Data Warehouse supported by a relational database that stores
utilization, premiums, membership and provider data that allows for a wide
range of reports and (iv) the HEDIS 2.5 Reporting System developed by the
Company that allows for flexible HEDIS reporting.
Indemnity Insurer, TPA and PPO Special Functions. The ability of the Company
to sell the AMISYS System to indemnity insurers and TPAs is in part dependent
upon offering traditional functions along with the AMISYS System's advanced
managed care capabilities. To address these markets, the AMISYS System offers:
(i) fully integrated Life AD&D billing facilitating an integrated Health and
Life AD&D premium bill;
27
<PAGE>
(ii) split premium billing allowing for partial direct premium payment by an
employee; (iii) TPA management allowing for proper tracking of funding levels
by self-insured employer groups; (iv) specific and aggregate stop-loss
allowing for tracking and management of stop-loss activity levels and
reimbursements and (v) for PPO processing, face-sheet generation and
member/provider "on-the-fly" editing.
Applications
AMISYS System applications are grouped below by key operational functions:
- --------------------------------------------------------------------------------
- ------------------ -------------- --------------- ---------------
Membership/Billing Provider Medical Claims
Management Management Management
- ------------------ -------------- --------------- ---------------
Membership Provider Certification/ Claims Adjudication
Enrollment Contracting Authorization . Medical
Benefits & Pricing Medical Management . Hospital
Management Management . Case Management . Drug
Premium Billing Provider . Concurrent Review . Dental
and Accounts Credentialing . Discharge Planning . DRG Pricing
Receivable Capitation . Quality Improvement Batch Claims
Broker . Appeals Claims Payable
Commission Liability Recovery/
Medicare Accretion/ Credit Banking
Deletion Batch Third-Party
Interface Claims Load
- ------------------- ------------------------- ------------------------
Indemnity, TPA
Special Systems and PPO Special Functions Reporting/Data Warehouse
- ------------------- ------------------------- ------------------------
Customer/Provider Integrated Life, AD&D Production and Standard
Service Billing Operations Reports (250
Inquiry TPA Fund Management reports)
Correspondence Specific and Aggregate Stop TPA Reports
Generation Loss Data Warehouse &
Security PPO Processing Utilization Reporting
Data Archival HEDIS 2.5 Reporting
Imaging Workflow
for Claims or
Member Services
- --------------------------------------------------------------------------------
In addition to the foregoing applications, the AMISYS System also offers the
following third-party interfaces: HPR Inc.'s Code Review, Patterns of
Treatment; GMIS Inc.'s Claims Check; Medicode's Rebundling Product/MDR Fee
Schedules; EDI Inc.'s Claims, Electronic Funds Transfer and APS Inc.'s
Practice Management System.
SALES AND MARKETING
The Company markets and sells its products primarily through its own direct
sales force. Currently, there are 24 staff members assigned to the Company's
Sales and Marketing Group. The Company's sales force consists of regional
sales executives who focus primarily on new business sales but who also have
responsibility for sales to the current client base. The sales executives are
backed by a sales support team as well as a hardware and third-party sales
team. The Company's proposal development group and marketing staff also work
closely with the sales executives. All department activities are managed by
the Vice President, Sales and Marketing.
The majority of sales prospects are generated from client requests for
proposals. The remainder typically comes from industry leads and demand-
generation activities such as trade shows and seminars. The typical sales
cycle spans a period of nine months from proposal request to contract
execution. There are several benchmarks reached during the sales process,
including short list, finalist and vendor of choice.
28
<PAGE>
The Company's sales and marketing staff dedicates significant amounts of
resources during this process, including an evaluation of the potential
client, presentations and demonstrations of the AMISYS System, client site
visits, corporate visits and contract negotiations.
The Company has entered into non-exclusive agreements with Cerner
Corporation and PHAMIS, Inc., under which the AMISYS System will be offered as
a part of the system solutions packages offered by these companies. The
Company has also entered into an agreement with Perot under which Perot offers
the AMISYS System on a time share basis to smaller managed care clients and
pays monthly member fees to the Company. See "Business-Contractual
Relationships."
CLIENT SERVICES
The Company seeks to provide a comprehensive range of services to its
clients, through its client services and support capabilities. The Client
Services Group, which currently includes 61 people, has four key
responsibilities: (i) pre-contracting business needs assessment; (ii) system
implementation; (iii) ongoing client support and (iv) special services to
clients with specific needs. The Company operates a nationwide services
operation with offices in Rockville, Maryland and Seattle, Washington,
supporting clients in approximately 25 states.
To address the nationwide scope of support and the close relationship the
Company develops with its clients, the Client Services Group is structured
into east, northcentral, southwest and west regional teams. A nationwide help
desk operates out of the Company's Rockville headquarters. A special services
group also based in Rockville addresses nationwide conversion, hardware
configuration and business analysis needs.
Prior to the execution of a client contract and for four to nine months
thereafter, the Company's regional service group works closely with the client
to implement the system. The assessment may involve an evaluation of benefit
offerings, provider contracting arrangements, utilization management policy
review, premium structure review and review of several of the client's other
operational areas. Upon completion of the evaluation, the Company's staff
works with the client to configure the AMISYS System, complete the conversion
and train the client in the configuration, use and operation of the AMISYS
System. Implementation fees are based upon an hourly charge for labor, with
the total hours determined during the business assessment.
Following implementation, the Company offers ongoing support services for
both functional use of the product and software maintenance. Support fees are
paid monthly and, in general, contracted annually. The pricing structure of
the support fees are based upon a fixed percentage of the license fee and
total number of sites to be supported per client.
Because many of the Company's clients are growing and the industry and
competitive environments are changing, clients often require special services
to address one-time needs such as additions of significant new business
opportunities. These special services are supplied by the regional service
teams on an hourly billing basis.
29
<PAGE>
CLIENTS
Historically, the Company's client base consisted primarily of HMOs. Since
1992, as managed care initiatives have spread throughout the health care
system, the Company has broadened its client base to include many new entities
that manage health care risk or administer managed health care products. The
Company's installed base now includes commercial and Medicaid HMOs, indemnity
insurers, IDSs, PHOs, TPAs and specialty carveouts. The Company currently has
licenses with 69 AMISYS System clients supporting 76 sites nationwide. The
Company estimates that its clients are utilizing or installing the AMISYS
System to administer risk for approximately 7.2 million covered lives. Some of
the Company's representative clients include:
COMMERCIAL HMOS MEDICAID HMOS
Harvard/Pilgrim Community Comprehensive Health Systems,
Health Plan Inc. (The Wellness Plan)
Health Systems International, M-Care, Inc. (University of
Inc. Michigan)
TennCare (BC/BS Tennessee)
INDEMNITY INSURERS THIRD PARTY ADMINISTRATORS
John Alden Life Insurance First Health Strategies, Inc.
Company Kirke-Van Orsdel, Inc.
Jefferson Pilot Life Insurance
Company
Blue Cross/Blue Shield of
Colorado
INTEGRATED DELIVERY SYSTEMS PPOS/SPECIALTY CARVEOUTS
Memorial Sisters of Charity Community Care Network, Inc.
Health Network I Merritt Behavioral Care Systems
Tenet Healthcare Corp. Corp.
The Company has retained all of its AMISYS System clients except three that
were acquired and integrated into the acquiror's systems. The following chart,
showing the number of system sales to clients in each of the last six years
and the first three months of 1996, illustrates the growing diversity of the
Company's clients.
AMISYS SYSTEM LICENSE SALES
(By year contracted)
<TABLE>
<CAPTION>
NO
LONGER
THREE USING
MONTHS AMISYS NET
1990 1991 1992 1993 1994 1995 1996 TOTAL SYSTEM(1) TOTAL
---- ---- ---- ---- ---- ---- ------ ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial HMOs......... 4 5 9 4 5 8 3 38 (3) 35
IDSs/Providers.......... 0 1 0 4 5 3 0 13 0 13
Medicaid HMOs........... 0 0 2 2 0 5 0 9 0 9
Indemnity Insurers...... 1 0 0 0 3 2 1 7 0 7
PPOs/Specialty
Carveouts.............. 0 0 0 1 2 0 0 3 0 3
TPAs.................... 0 0 1 0 0 1 0 2 0 2
--- --- --- --- --- --- --- --- --- ---
Total................... 5 6 12 11 15 19 4 72 (3) 69
=== === === === === === === === === ===
</TABLE>
- --------
(1) These clients were acquired by other firms.
30
<PAGE>
RESEARCH, DEVELOPMENT AND TECHNOLOGY
The Company's product development efforts focus on: (i) enhancements to the
AMISYS System through new applications and improvements to existing
applications; (ii) maintenance of software and (iii) product migration to
client/server technology. The Company believes that timely development of new
applications and enhancements is essential to maintain its competitive
position in the market. In support of these efforts, 77 employees,
representing 40% of the Company's staff, are in the Research and Development
Group.
In developing new product enhancements, the Company works closely with
clients to determine their ongoing product needs. The Company believes that
these collaborative efforts lead to improved functionality and a superior
product. The Company also works closely with HP to ensure compatibility with
new operating systems and hardware upgrades.
The Company's current product research and development enhancement efforts
are directed towards developing new applications each year for sale to the
existing client base and new clients. The Company expects to introduce
wellness tracking, a data repository and a generalized interface engine.
The Company is actively developing a migration of the AMISYS System to a
client/server open environment. The migration of the AMISYS System is being
undertaken to address the long-term strategic need to take full advantage of
client/server and relational database technology, as they evolve in their
ability to handle large and transaction intensive systems. This migration of
the AMISYS System is expected to leverage the Company's current product
investment because it allows for the actual migration, rather than the
rewrite, of approximately 60% of the existing AMISYS System code. The
resulting product will meet open standards, provide graphical user interface,
use RDBMS technology and take advantage of client/server scalability.
Software development costs, which are primarily comprised of salaries and
related costs, are expensed until technological feasibility is established and
then capitalized until a marketable product is completed. Based on the
Company's product development process, technological feasibility is
established upon completion of a working model. Amortization of capitalized
software costs begins when the related product is available for general
release to clients and is provided for each product based on the greater of
the amount computed using (i) the ratio of current gross revenues to total
current and anticipated future gross revenues for the related software or (ii)
the straight-line method over a five-year life or the product's estimated
economic life, if shorter. Amortization of software development costs was $1.5
million, $1.1 million and $448,000 for the years ended December 31, 1992 and
1993, and for the period January 1, 1994 to May 26, 1994, respectively.
The Company's research and development expenses, including all software
development costs which were expensed as incurred, were $2.6 million and $2.3
million for the years ended December 31, 1992 and 1993, respectively, and $1.7
million, $3.3 million, $5.5 million and $1.7 million for the period January 1,
1994 to May 26, 1994, the period May 27, 1994 to December 31, 1994, the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively.
HARDWARE PLATFORM
The AMISYS System currently operates on the Hewlett-Packard HP3000 family of
computers. The computers in this family range from the HP3000/918 LX, which
supports from four to eight users, to the HP3000/995, which supports over
1,000 users.
The HP3000 family is a high-performance on-line transaction processing
system that is particularly important in applications such as claims
processing. The majority of the models are field upgradeable to the next
larger model through a simple change of the main processing board. The memory,
disk drives and other peripheral hardware components are interchangeable among
various models. Additional software modifications of the AMISYS System are not
required in order to expand to the next larger model.
31
<PAGE>
The Company is seeking to position the AMISYS System to manage databases in
excess of one million lives, a scale which has not yet been commercially
achieved. There can be no assurance that the Company will be successful in
this regard. The Company considers HP to have advanced upwardly compatible
hardware which allows for large capacity processing without the environmental
and personnel requirements of mainframe systems.
CONTRACTUAL RELATIONSHIPS
License Agreements
The AMISYS System is offered to clients through license agreements. Pursuant
to these agreements, the Company grants to each client a non-exclusive, non-
transferable perpetual license to the AMISYS System and third-party software
on a user or geographic-specific basis, together with installation, software
modifications and training. Under these agreements, clients are required to
maintain the confidentiality of the Company's trade secrets and proprietary
information. The license agreements provide for initial support of the
Company's product for a specified period following installation. Payment terms
include milestone payments during the installation process, typically the
commencement of installation, delivery of hardware and system operation. In
certain contracts, additional payments are due upon the client's achievement
of certain membership size levels.
Client Support Agreements
In addition to license agreements, the Company typically enters into client
support agreements having terms from one to five years, but providing for
prior termination at the option of the client. These agreements provide for
the provision of support services, including hot-line support, a designated
account manager, on-site system review, training and software maintenance.
Clients pay a fixed monthly fee, normally a percentage of the original license
fee, with additional charges payable upon the addition of new geographic
sites. In addition, the contracts call for a yearly cost of living percentage
increase.
Hewlett-Packard Agreement
The Company's contract with HP provides for hardware purchases by the
Company under discounts varying by HP product. The Company's contracts with HP
have had one-year terms, with the most recent contract due to expire in
October 1996. The Company is an HP "Channel/Partner" and believes its
relations with HP are good.
Strategic Agreements
In October 1994, the Company entered into a non-exclusive strategic alliance
with Cerner Corporation to provide the risk-management/managed care system for
Cerner's comprehensive Integrated Health Organization solution. The term of
the agreement is five years which may be extended by mutual agreement. Either
party may terminate the agreement upon 30 days' written notice to the other
party. As part of the agreement, the Company granted a software license to
Cerner to enable Cerner to conduct product demonstrations of the AMISYS
System. Each party has agreed to keep confidential any proprietary information
obtained from the other party during the performance of the agreement.
In July 1995, the Company entered into a non-exclusive joint marketing
agreement with PHAMIS, Inc. to provide the risk-management/managed care system
for PHAMIS's Integrated Delivery System solution. The agreement provides for
graduated marketing fees, which are based on a percentage of any license fees
generated from the joint marketing arrangement. The term of the agreement is
two years. Either party may terminate the agreement upon 90 days' written
notice to the other party. Each party has agreed to keep confidential any
proprietary information obtained from the other party during the performance
of the agreement.
32
<PAGE>
In November 1995, the Company entered into an agreement with Perot pursuant
to which Perot was granted an AMISYS System license that enables it to offer a
time share service to companies undertaking new or emerging managed care
initiatives. The agreement allows Perot to market the time share service and
pay monthly fees to the Company for each covered life processed using the
AMISYS System.
COMPETITION
The market for the sale of health care information systems is highly
competitive. The Company believes its most significant competitors are
Computer Science Corporation, Health Systems Design Corp., Erisco (a division
of The Dun & Bradstreet Corp.), The Compucare Company and IDX Systems
Corporation. The Company also competes with in-house systems developed by
large managed care organizations. Competitive factors in the Company's market
include breadth of product features, product quality and functionality, client
service and support, price, financial stability and capacity to produce
ongoing product enhancements. Certain of the Company's competitors and
potential competitors have greater financial, technical, marketing and sales
resources than the Company.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secret, trademark and copyright
laws, license agreements, nondisclosure and other contractual provisions and
technical measures to protect its proprietary rights. The Company distributes
the AMISYS System under software license agreements that typically grant
clients non-exclusive and non-transferable licenses to use the product. Use of
the product is typically restricted to computers at specified locations and is
subject to terms and conditions prohibiting unauthorized reproduction or
transfer of software products. The Company also seeks to protect its trade
secrets and other proprietary information through non-disclosure agreements
with employees and consultants. Despite these precautions, there can be no
assurance that misappropriation of the Company's proprietary technology will
not occur. Although the Company believes that its intellectual property rights
do not infringe upon the proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims against the
Company, and such claims could result in material adverse effects upon the
Company.
EMPLOYEES
At March 31, 1996, the Company had a total of 185 employees, 23 of whom were
engaged in administration, 24 in sales and marketing, 77 in research and
development and 61 in client support. None of the Company's employees are
subject to a collective bargaining agreement. The Company believes that its
relations with its employees are good.
PROPERTIES
The Company leases approximately 46,000 square feet of office space in
Rockville, Maryland for its corporate headquarters. The Company also leases
approximately 3,800 square feet in Seattle, Washington for regional sales. The
Company believes that its current facilities are adequate for its current
needs and that additional suitable space will be available as required.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and certain other significant employees of
the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kevin R. Brown........... 48 Chairman, President and Chief Executive Officer
Michael L. Carlay........ 52 Vice President, Sales and Marketing
Homer Fiuzat............. 38 Vice President, Development
Earle W. Kirkland........ 39 Vice President, New Technologies
Kathy Hall Lyons......... 35 Vice President, Human Resources
Robert J. Sullivan....... 47 Vice President, Chief Financial Officer,
Secretary and Treasurer
Mark A. Walters.......... 36 Vice President, Client Services
Peter J. Barris(1)....... 44 Director
Howard E. Cox, Jr.(1).... 52 Director
Gary Greenfield(2)....... 40 Director
Donald B. Hebb,
Jr.(1)(2)............... 54 Director
Arthur J. Marks(1)(2).... 51 Director
Thomas O. Pyle........... 55 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Brown joined the Company in 1989 as Senior Vice President of Systems
Products and Services and was named President and Chief Executive Officer in
1992. He was named Chairman of the Board of Directors in June 1995. Mr. Brown
has approximately 16 years of experience in the managed care field. Before
joining the Company, Mr. Brown was the Vice President of HMO System Products
for The Compucare Company, a health care software provider, from 1986 to 1989
and from 1982 to 1986 he served as Compucare's Facilities Management Site
Director for Kaiser-Permanente (Mid-Atlantic Region). Mr. Brown was the
Membership and Billing Manager for Harvard Community Health Plan in Boston,
Massachusetts from 1979 to 1982.
Mr. Carlay joined the Company as Vice President, Sales and Marketing in
January 1995. Prior to joining the Company, he served as Vice President of
IBAX Healthcare Systems, a developer of hospital information systems software,
from 1991 to 1994. Prior to joining IBAX, he was a sales and marketing
executive at IBM Corp.
Mr. Fiuzat joined the Company in June 1990 and has served as Vice President,
Development since April 1994. From 1990 to 1994, he was the Company's Director
of Software Sales Support. Prior to joining the Company, Mr. Fiuzat spent six
years with The Compucare Company in various positions including four years as
Director of Development for HMO Systems.
Mr. Kirkland has been Vice President, New Technologies for the Company since
April 1995. From 1993 to 1995, he was Director of Systems for Health Systems
Design Corp., a health care software provider, where he assisted in the
development of a client/server software product. For the five years prior to
that date, he was Manager of Systems Development for Norrell Corporation, a
home health care company.
Ms. Hall Lyons joined the Company as Vice President, Human Resources in May
1995. For approximately two years prior to joining the Company, Ms. Hall Lyons
was an independent consultant advising corporations on human resources and
organization development issues. For the ten years prior
34
<PAGE>
to that date, she was employed with Vitro Corporation, a systems engineering
corporation, in various capacities. From 1991 to 1993, Ms. Hall Lyons was Vice
President of Human Resources of Vitro Corporation and was responsible for all
personnel decisions.
Mr. Sullivan joined the Company as Vice President, Chief Financial Officer
in October 1994 and was named Secretary and Treasurer in June 1995. From 1991
until 1994, Mr. Sullivan was an Executive Vice President and the Chief
Financial Officer of Option Care Inc., a homecare company. From 1990 to 1991,
he was a Vice President and the Chief Financial Officer of E.J. Financial
Enterprises, the principal stockholder in Option Care, Inc.
Mr. Walters joined the Company in May 1995 as Vice President, Client
Services. Prior to joining the Company, Mr. Walters spent fifteen years with
EDS, Inc., a systems developer, the last five years of which he directed a
managed care system product group.
Mr. Barris has been a Director of the Company since May 1994. He has been a
General Partner of New Enterprise Associates, a venture capital firm, since
1992. From 1988 to 1990, Mr. Barris was the President and Chief Operating
Officer of Legent Corporation, a software utilities company. Mr. Barris is a
Director of UUNET Technologies, Inc. and Datalogix International, Inc.
Mr. Cox has been a Director of the Company since May 1994. He is General
Partner of Greylock Equity Limited Partnership, a venture capital firm, and
has been associated with Greylock and partnerships affiliated with Greylock
for the past 24 years. Mr. Cox is a Director of Stryker Corporation, HPR Inc.
and Arbor Healthcare.
Mr. Greenfield has been a Director of the Company since June 1995. He is the
President, Chief Operating Officer and a Director of INTERSOLV Inc., a
provider of desktop development tools. Mr. Greenfield is also a Director of
Hyperion Software, Inc.
Mr. Hebb has been a Director of the Company since May 1994. Since December
1993, he has been principally employed as Managing General Partner of ABS
Partners, L.P., the general partner of ABS Capital Partners, L.P., a private
equity fund. Prior to that date, he was principally employed as a Managing
Director of Alex. Brown & Sons Incorporated investing private equity funds,
and prior thereto served as President and Chief Executive Officer of Alex.
Brown Incorporated, the parent of Alex. Brown & Sons Incorporated. Mr. Hebb is
a Director of American Radio Systems, Inc. and PowerCerv Corporation.
Mr. Marks has been a Director of the Company since May 1994. He has been a
General Partner of New Enterprise Associates, a venture capital firm, since
1984. He is a director of Platinum Software Corporation, NETRIX Corporation
and Progress Software Corporation.
Mr. Pyle has been a Director of the Company since June 1995. He is a Senior
Advisor to the Boston Consulting Group. Mr. Pyle was the Chief Executive
Officer of Harvard Community Health Plan from 1978 to 1991. He was Chief
Executive Officer of MetLife Healthcare Management Company from 1993 to 1994.
Mr. Pyle is a Director of Millipore Corp., Unilab Corp. and Lincare Holdings,
Inc.
The Compensation Committee of the Company's Board of Directors determines
the Company's executive compensation policies and practices and changes in
compensation and benefits for senior management. The Compensation Committee
also administers the Company's 1994 Equity Incentive Plan. See "Management--
Executive Compensation."
As of the closing date of the initial public offering, the Board of
Directors was divided into three classes: Messrs. Brown, Hebb and Pyle are
designated as Class I Directors; Messrs. Cox and Marks are designated as
Class II Directors and Messrs. Barris and Greenfield are designated as Class
III Directors. At each annual meeting of stockholders, one class of Directors
will be elected to a three-year term to succeed
35
<PAGE>
the Directors of the same class whose terms are then expiring. The terms of
the current Class I Directors, Class II Directors and Class III Directors will
expire at the annual meetings of stockholders to be held in 1996, 1997 and
1998, respectively.
The Audit Committee reviews the internal accounting procedures of the
Company, consults with the Company's independent accountants and reviews the
services provided by such accountants.
Messrs. Marks, Hebb and Cox were elected pursuant to an Investment and
Stockholders Agreement dated May 27, 1994 by and among the Company and the
holders of its then Class A Common Stock (the "Investors") and pursuant to a
Management Investment and Stockholders' Agreement by and among the Company and
the holders of its then Class B Common Stock, both entered into in connection
with the management buyout of the Company. The voting provisions of these
Agreements terminated upon the closing of the initial public offering of the
Company's securities. Officers are elected to serve, subject to the discretion
of the Board of Directors, until their successors are appointed. There are no
family relationships among the directors, officers or significant employees of
the Company.
BOARD COMPENSATION
All of the Directors are reimbursed for expenses incurred in connection with
their attendance at Board and Committee meetings. Mr. Pyle and Mr. Greenfield
receive $2,000 for attendance at each Board meeting. All other Directors
currently receive no other compensation for serving as Directors. In August
1995, Messrs. Greenfield and Pyle each were awarded options under the 1994
Equity Incentive Plan to purchase 22,000 shares of Common Stock. These
options, which have a weighted average exercise price of $1.61 per share (the
fair market value thereof as of the date of grant), will vest at the rate of
20% per year beginning in August 1996. The Company has adopted, subject to
approval by stockholders at its 1996 annual meeting, a Directors Equity Plan
under which non-employee Directors will receive annual grants of stock
options.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain summary information concerning the
compensation paid to the Company's Chief Executive Officer and its four other
most highly compensated executive officers (the "Named Executive Officers")
for the fiscal years shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME(1) YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS COMPENSATION
------- ---- --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kevin R. Brown.......... 1995 $185,000 $60,000 -- -- --
Chairman, President and 1994 185,000 50,000 -- -- --
Chief Executive Officer
Michael L. Carlay....... 1995 175,000 40,000 $70,700(4) 120,000 --
Vice President, Sales 1994 -- -- -- --
and Marketing
Homer Fiuzat............ 1995 110,250 25,000 -- 34,700 --
Vice President, 1994 105,575 20,000 -- --
Development
Robert J. Sullivan...... 1995 142,000 23,000 63,000(4) -- --
Vice President, Chief 1994 142,000(2) 4,000 -- -- --
Financial Officer,
Secretary and Treasurer
Mark A. Walters......... 1995 120,000(3) 25,000 -- 69,400 --
Vice President, Client 1994 -- -- -- -- --
Services
</TABLE>
36
<PAGE>
- --------
(1) This table presents information concerning the Company's Chief Executive
Officer and its four other most highly compensated executive officers
(determined by reference to total annual salary and bonuses earned by such
officers).
(2) Represents the annualized salary Mr. Sullivan would have received had he
joined the Company on January 1, 1994.
(3) Represents the annualized salary Mr. Walters would have received had he
joined the Company on January 1, 1995.
(4) Represents the amount received for the reimbursement of non-recurring
relocation expenses, net of taxes payable in respect of such amounts.
STOCK OPTIONS
Option Grants. The following table contains information with respect to
stock option grants to each of the Named Executive Officers during the year
ended December 31, 1995. All such grants are made under the Company's 1994
Equity Incentive Plan (the "Plan"). Under the Plan, options to purchase up to
an aggregate of 1,350,000 shares of Common Stock are available for grants to
employees of the Company. Options to purchase a total of 654,200 shares of
Common Stock were held by 48 employees of the Company, including the Named
Executive Officers, as of December 31, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------------- ---------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING SECURITIES UNDERLYING
OPTIONS OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE(1) 5% 10%
---- ---------- --------------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kevin R. Brown.......... -- -- -- -- -- --
Michael L. Carlay....... 120,000 18.34% $0.0625 01/05 $3,706,380 $5,906,233
Homer Fiuzat............ 30,000 5.30 1.525 08/05 882,720 1,432,683
3,000 -- 2.50 09/05 85,347 140,343
1,700 -- 9.00 11/05 37,313 68,478
Robert J. Sullivan...... -- -- -- -- -- --
Mark A. Walters......... 60,000 10.61 1.20 05/05 1,784,940 2,884,866
6,000 -- 2.50 09/05 170,694 280,687
3,400 -- 9.00 11/05 74,627 136,956
</TABLE>
- --------
(1) All options included in this table will vest in equal installments over a
five-year period beginning one year after the date of each grant.
Option Exercises and Year-end Values. The following table provides
information regarding the value of all unexercised options held at December
31, 1995 by the Named Executive Officers. No stock options were exercised by
any Named Executive Officers during the fiscal year.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
------------------------- -------------------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Kevin R. Brown.............. -- -- -- --
Michael L. Carlay........... 120,000 -- $2,272,800 --
Homer Fiuzat................ 27,760 6,940 472,600 118,150
Robert J. Sullivan.......... -- -- -- --
Mark A. Walters............. 69,400 -- 1,201,000 --
</TABLE>
- --------
(1) Based upon the closing price of the Common Stock of $19.00 on December 29,
1995.
37
<PAGE>
Board Committees
In November 1995, the Board of Directors established an Audit Committee and
a Compensation and Stock Option Committee (the "Compensation Committee").
Before the establishment of the Audit and Compensation Committees, the full
Board of Directors considered the matters delegated to such committees. The
Audit Committee is comprised of Messrs. Greenfield, Hebb and Marks. The Audit
Committee examines and considers matters relating to the financial affairs of
the Company, including reviewing the Company's annual financial statements,
the scope of the independent annual audit and the independent auditors' letter
to management concerning the effectiveness of the Company's internal financial
and accounting controls. Prior to November 1, 1995, the full Board of
Directors considered all Audit Committee matters. During the year ended
December 31, 1995, the Audit Committee held no meetings.
The Compensation Committee is comprised of Messrs. Barris, Cox, Hebb and
Marks. The Compensation Committee considers and makes recommendations to the
Board of Directors with respect to programs for human resource development and
management organization and succession, approves changes in senior executive
compensation, considers and makes recommendations to the Board of Directors
with respect to general compensation matters and policies and employee benefit
and incentive plans. Prior to the establishment of the Compensation Committee,
the full Board of Directors considered the matters delegated to such
committee. During the year ended December 31, 1995, the Compensation Committee
held no meetings.
1994 Equity Incentive Plan
In May 1994, the Company's Board of Directors adopted the 1994 Equity
Incentive Plan (the "Plan"), which was amended in November 1995. The
stockholders of the Company approved the Plan, as amended, in November 1995.
The purpose of the Plan is to improve business results by providing eligible
individuals with an opportunity to acquire an increased personal interest in
the Company's business. Payment of the exercise price for options granted
under the Plan may be made in cash, shares of Common Stock or a combination of
both.
All employees, officers and consultants are eligible to receive options or
restricted shares of Common Stock under the Plan (collectively, "Incentive
Awards"). The Plan is currently administered by the Compensation Committee of
the Board. The Plan is intended to qualify under Rule 16b-3 under the Exchange
Act. The Compensation Committee will select recipients of Incentive Awards and
will determine the nature of the Incentive Award granted, the number of shares
granted or subject to each option, the option vesting schedule and other terms
and conditions of each Incentive Award. The Board of Directors may amend or
discontinue the Plan and the Board may amend awards or provide substitute
awards provided that such amendment or substitution does not adversely affect
rights under any outstanding Incentive Award.
The number of shares that may be issued pursuant to Incentive Awards under
the Plan shall not exceed an aggregate of 1,350,000 shares. All options
granted pursuant to the Plan are exercisable in accordance with a vesting
schedule which is set at the time of the issuance of the option and may not be
exercised more than ten years from the date of grant. Options granted under
the Plan may be incentive stock options intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended, or options not intended to
so qualify. The Plan requires the exercise price of incentive stock options to
be at least equal to the fair market value of the Common Stock on the date of
the grant. In the case of options granted to a stockholder, either directly or
indirectly, holding in excess of 10% of the Common Stock, the option exercise
price must be at least equal to 110% of the fair market value of the Common
Stock on the date of grant and such option may not be exercised more than five
years from the date of grant.
Generally, all unexercised options terminate three months following the date
an optionee ceases to be employed by the Company or any affiliate or
subsidiary of the Company other than by reason of disability or death (but not
later than the expiration date) whether or not such termination is voluntary.
38
<PAGE>
Generally, any option held by an employee who dies or who ceases to be
employed because of disability must be exercised by the employee or his
representative within six months after the employee dies or ceases to be an
employee (but not later than the expiration date). The Board may, however,
provide that an option may be exercised over a longer period of time following
termination of employment (but no later than the option expiration date).
Incentive Awards are not transferable, except by the decedent's estate in the
event of death. Restricted stock may be transferred or assigned after any
applicable restriction on the shares has terminated.
During 1995, the Company granted options to purchase Common Stock under the
Plan to the following Named Officers: Mr. Fiuzat, 34,700 shares; Mr. Carlay;
120,000 shares; and Mr. Walters, 69,400 shares.
The Board of Directors has adopted and has recommended that the Company's
stockholders approve at the Company's 1996 Annual Meeting of Stockholders a
Directors' Stock Option Plan (the "Director Plan"). Stock options granted
under the Director Plan will give the optionholder the right to purchase
Common Stock at a price not less than the fair market value of Common Stock on
the date on which the option is granted. The period for exercising an option
begins six months after the option is granted and generally ends ten years
from the date the option is granted. Options granted under the Plan become
"vested" in the optionholder immediately and are exercisable beginning six
months after the option grant date. An aggregate of 300,000 shares of Common
Stock are reserved for issuance under the Director Plan subject to adjustment
in the event of any changes in the Common Stock of the Company by reason of
stock dividends, split-ups, recapitalization, mergers, consolidations,
combinations or other exchanges of shares and the like. Each director who is
serving on the Board of Directors after adoption of the Director Plan will
receive an option to purchase 3,000 shares of stock on the day following the
1996 annual meeting of stockholders. In addition, each director will also be
entitled to an option to receive options to purchase 3,000 shares of stock on
the day following each succeeding annual meeting of stockholders provided that
he or she is a director on the date of such grant.
Key Person Life Insurance
The Company is the owner and beneficiary of a term life insurance policy in
the amount of $4,000,000 covering Mr. Brown.
Employment Agreements
Mr. Brown and the Company entered into an agreement in May 1994 which
provides that Mr. Brown will serve "at will" as President and Chief Executive
Officer of the Company. The agreement provides that in the event that Mr.
Brown's employment is terminated by the Board of Directors, Mr. Brown is
entitled to severance benefits equal to the amount of his annual salary for a
period of one year. A separate agreement provides that Mr. Brown will not,
during the course of his employment with the Company and for a period of up to
18 months thereafter, compete with the Company in the business of providing
information processing software with respect to managed health care
administration to third parties including serving as an employee, officer,
director, consultant, stockholder or general partner of any person other than
the Company.
The Company has agreements with each of the remaining executive officers of
the Company which generally provide for twelve months of severance pay if the
executive is terminated other than for cause.
Noncompetition and Nondisclosure Agreements
Each executive officer of the Company has signed agreements pursuant to
which he or she has agreed (i) to assign all of the employee's interest in any
developments, discoveries, inventions and certain other interests developed by
the employee during the course of his or her employment and for two years
after termination of employment which relate to the business or activities of
the Company, (ii) not to disclose or use any proprietary information of the
Company and (iii) not to compete with the Company for a period of not more
than twelve months.
39
<PAGE>
CERTAIN TRANSACTIONS
The Company was acquired on May 26, 1994 from AIG for a cash purchase price
of $10.0 million (the "Acquisition"). The Acquisition was effected through the
purchase of all of the outstanding stock of AIHI by AIH Systems, Inc. followed
by the merger of AIH Systems, Inc. into AIHI. Following the merger, the name
of the surviving entity, AIHI, was changed to AIH Systems, Inc.
An aggregate of 4,800,000 shares of Class A Common Stock and 450,000 shares
of Class B Common Stock of AIH Systems, Inc. were issued in connection with
the acquisition, and were exchanged for an equivalent number of shares in AIHI
as part of the merger. These shares were issued for a purchase price
equivalent to $0.50 per Class A share and $0.0625 per Class B Share. The
relative rights and preferences of the Class A and Class B Common Stock were
the same with the following two exceptions: (i) Class A Common Stock bore a
liquidation preference in an amount equal to the greater of $0.50 per share or
the liquidation value the holder would be entitled to if the Class A Common
Stock were converted into Class B Common Stock and (ii) Class A Common Stock
was convertible into Class B Common Stock in the event of a qualifying public
offering of Class B Common Stock. Subsequently, the Class B Common Stock was
redesignated as Common Stock. The Class A Common Stock converted into Common
Stock upon closing of the initial public offering. See "Description of Capital
Stock." In the future, the Board of Directors will either seek the approval of
a majority of its disinterested members with respect to any transactions with
affiliated parties or will undertake the transaction only if such transaction
is determined by the Board of Directors to be on terms no less favorable to
the Company as could have been obtained with unaffiliated parties.
The purchasers of the Class A Common Stock and Class B Common Stock (now
classified as Common Stock) included, among others, the following directors,
executive officers and holders of more than 5% of the Common Stock (on an as
converted basis):
<TABLE>
<CAPTION>
COMMON STOCK ISSUED UPON
CONVERSION OF CLASS A
NAME COMMON STOCK (SHARES)
---- ------------------------
<S> <C>
Greylock Equity Limited Partnership(1)............ 2,000,000
New Enterprise Associates VI, Limited Partnership
and affiliates(2)................................ 2,000,000
ABS Capital Partners, L.P.(3)..................... 800,000
<CAPTION>
CLASS B
NAME COMMON STOCK (SHARES)
---- ------------------------
<S> <C>
Kevin R. Brown.................................... 360,000
Clifford F. Tabor................................. 30,000
Homer Fiuzat...................................... 30,000
Elaine Gibson..................................... 30,000
</TABLE>
In connection with the Acquisition, the holders of Class A Common Stock
purchased an aggregate of $9.6 million in Notes. In accordance with their
terms, these Notes were repaid from the proceeds of the Company's initial
public offering. AIG purchased a $500,000 Note that also was repaid from the
proceeds of the initial public offering. The purchasers of the Notes included
the following directors, officers and holders of more than 5% of the Common
Stock:
<TABLE>
<CAPTION>
NAME PRINCIPAL AMOUNT OF NOTES
---- -------------------------
<S> <C>
Greylock Equity Limited Partnership(1)........... $4,000,000
New Enterprise Associates VI, Limited Partnership
and affiliates(2)............................... 4,000,000
ABS Capital Partners, L.P.(3).................... 1,600,000
</TABLE>
- --------
(1) Mr. Cox is a general partner of this entity.
(2) Messrs. Barris and Marks are general partners of the general partner of
New Enterprise Associates VI, Limited Partnership.
(3) Mr. Hebb is managing general partner of the general partner of this
entity.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 15, 1996 by (i) each
director, (ii) the Named Executive Officers, (iii) all persons known to the
Company to be beneficial owners of more than 5% of its outstanding Common
Stock (iv) the Selling Stockholders and (v) all directors and executive
officers as a group. Under the rules of the Commission, a person is deemed a
"beneficial owner" of a security if such person has or shares the power to
vote or direct the voting of such security or the power to dispose or direct
the disposition of such security. A person is also deemed to be a beneficial
owner of any securities of which that person has the right to acquire
beneficial ownership within 60 days. More than one person may be deemed to be
a beneficial owner of the same securities.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
--------------------------- --------------------
NAMES AND ADDRESSES OF PERCENT OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNERS NUMBER CLASS TO BE SOLD NUMBER CLASS
---------------------- ------------- ------------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Greylock Equity Limited 2,000,000 26.43% 569,837 1,430,163 18.71%
Partnership............
1 Federal Street
Boston, MA 02110
New Enterprise 2,000,000 26.43 569,837 1,430,163 18.71
Associates VI, Limited
Partnership and
affiliates.............
1119 St. Paul Street
Baltimore, MD 21202
ABS Capital Partners, 800,000 10.57 227,826 572,174 7.49
L.P. ..................
135 East Baltimore
Street
Baltimore, MD 21202
T. Rowe Price 373,400 4.93 -- 373,400 4.89
Associates, Inc.(1) ...
100 East Pratt Street
Baltimore, Maryland
21202
Peter J. Barris(2)...... 2,000,000 26.43 -- 1,430,163 18.71
Kevin R. Brown.......... 324,000 4.28 60,000 264,000 3.48
Michael L. Carlay(6).... 24,000 * 24,000 -- *
Howard E. Cox, Jr.(3)... 2,000,000 26.43 -- 1,430,163 18.71
Homer Fiuzat(5)......... 43,880 * 12,000 31,880 *
Elaine Gibson........... 30,000 * 6,000 24,000 *
Gary Greenfield......... 2,000 * -- 2,000 *
Donald B. Hebb, Jr.(4).. 800,000 10.57 -- 572,174 7.49
Arthur Marks(2)......... 2,000,000 26.43 -- 1,430,163 18.71
Robert J. Sullivan...... 75,000 1.00 15,000 60,000 *
Mark A. Walters(7)...... 14,280 * -- 14,280 *
All Directors and offi-
cers as a group
(13 persons)(8)........ 5,319,860 70.31% 3,843,360 49.91%
</TABLE>
- --------
* Less than 1%.
(1) Based upon a Schedule 13G filed on February 14, 1996. These securities are
owned by various individual and institutional investors which T. Rowe
Price Associates, Inc. ("Price Associates") serves as investment advisor
with power to direct investments and/or sole power to vote the securities.
For purposes of reporting requirements of the Securities Exchange Act of
1934, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in
fact, the beneficial owner of such securities.
(2) Represents shares held of record by New Enterprise Associates VI, Limited
Partnership ("NEA"), of whose general partner Messrs. Barris and Marks
are general partners, and shares held by other affiliates of NEA.
(3) Represents shares held of record by Greylock Equity Limited Partnership
("Greylock") of which Mr. Cox is a general partner.
41
<PAGE>
(4) Represents shares held of record by ABS Capital Partners, L.P. ("ABS") of
whose general partner Mr. Hebb is a general partner.
(5) Includes options to acquire 13,880 shares of Common Stock, exercisable
within 60 days.
(6) Includes options to acquire 24,000 shares of Common Stock, exercisable
within 60 days.
(7) Includes options to acquire 13,880 shares of Common Stock, exercisable
within 60 days.
(8) Includes options to acquire 88,460 shares of Common Stock, exercisable
within 60 days.
STOCKHOLDERS' AGREEMENTS
In connection with the Acquisition, AIH Systems, Inc. and AIHI entered into
stockholder agreements in May 1994 with certain members of management (the
"Management Investors") and with certain institutional investors (the
"Institutional Investors"). Two of the Management Investors, Mr. Brown and Mr.
Fiuzat, are executive officers of the Company. Mr. Brown also is a director.
The Institutional Investors include NEA, of whose general partner Mr. Barris
and Mr. Marks are general partners, Greylock, of which Mr. Cox is a general
partner, and ABS, of which Mr. Hebb is an indirect general partner.
Under the stockholder agreement to which the Management Investors are
parties, the shares of Common Stock owned by each Management Investor are
subject to purchase by the Institutional Investors at the original purchase
price paid therefor ($0.0625) at the option of the Company in the event of the
termination of employment of the Management Investor. This purchase option
expires as to 20% of the shares owned by the Management Investors in each year
beginning May 27, 1995, except that the purchase option expired with respect
to 60% of the shares owned by Mr. Brown in August 1995.
In addition, under the stockholder agreements, the Company has agreed that
upon the request of holders of a majority of the shares held by the
Institutional Investors, the Company will register the sale of Common Stock
owned by the requesting parties on two occasions. Institutional Investors also
have the right to participate in any Company-initiated registration except
under certain circumstances. The Company also agreed that in the event the
Company becomes eligible to use Form S-3 under the Securities Act, the Company
will, upon the request of holders of not less than 10% of the shares held by
the Institutional Investors, cause one registration statement per year to be
in effect to cover sales of at least $250,000 in Common Stock by the
Institutional Investors.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share on all matters
to be voted upon by the stockholders. Stockholders do not have cumulative
voting rights in the election of directors. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available
therefor. The Company has not paid, and does not presently intend to pay, cash
dividends on its Common Stock. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions available to the Common
Stock. All outstanding shares of Common Stock are fully paid and non-
assessable, and the shares of Common Stock to be issued upon completion of
this offering will be fully paid and non-assessable. See "Management--
Executive Compensation," "Management--Employment Agreements" and "Certain
Transactions." As of April 23, 1996, there were 27 holders of Common Stock.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock from time to time in one or more series and to
establish the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued shares of undesignated Preferred Stock and to
fix the number of shares constituting any series and the designation of such
series, without any further vote or action by the stockholders. Any future
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. At present, the Company has no plans to issue any
Preferred Stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Certificate and By-laws limit the liability of directors and
officers to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, including
gross negligence, except liability for (i) breach of the directors' and
officers' duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) the
unlawful payment of a dividend or unlawful stock purchase or redemption and
(iv) any transaction from which the director or officer derives an improper
personal benefit. Delaware law does not permit a corporation to eliminate a
director's or an officer's duty of care, and this provision of the Company's
Certificate has no effect on the availability of equitable remedies, such as
injunction or rescission, based upon a director's breach of the duty of care.
The Company's Certificate and By-laws authorize the Company to purchase and
maintain insurance for the purposes of indemnification. The Company intends to
apply for directors' and officers' insurance, although there can be no
assurance that the Company will be able to obtain such insurance on reasonable
terms or at all. At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent for which indemnification
will be required or permitted under the Company's Certificate. The Company is
not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
43
<PAGE>
CORPORATE ANTI-TAKEOVER PROVISIONS
Section 203 of the Delaware Corporation Law
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that
such stockholder became an interested stockholder, unless (i) the corporation
has elected in its original certificate of incorporation not to be governed by
Section 203 (the Company did not make such an election), (ii) the business
combination was approved by the Board of Directors of the corporation before
the other party to the business combination became an interested stockholder,
(iii) upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or held in
employee benefit plans in which the employees do not have a confidential right
to tender or vote stock held by the plan) or (iv) the business combination was
approved by the Board of Directors of the corporation and ratified by two-
thirds of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of the
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an "interested stockholder," transactions with an "interested
stockholder" involving the assets or stock of the corporation or its majority-
owned subsidiaries and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as a stockholder who, together with affiliates and associates, owns
(or, within three years prior, did own) 15% or more of a Delaware
corporation's voting stock. Section 203 could prohibit or delay a merger,
takeover or other change in control of the Company and therefore could
discourage attempts to acquire the Company.
Stockholder Meetings and Other Provisions
The Certificate provides that all actions taken by the stockholders must be
taken at an annual or special meeting of stockholders and may not be effected
by any consent in writing by such stockholders. Under the By-laws, special
meetings of the stockholders of the Company may be called only by a majority
of the members of the Board of Directors, the Chairman or holders of 30% of
the voting stock of the Company. Stockholders are required to comply with
certain advance notice provisions with respect to any nominations of
candidates for election to the Company's Board of Directors or other proposals
submitted for stockholder vote. In addition, the Certificate provides that the
Board of Directors is divided into three classes having staggered terms, and
that directors may only be removed by a vote of 80% of the outstanding Common
Stock. The Certificate provides that the authorized number of Directors may be
changed only by resolution of the Board of Directors. These provisions may
have the effect of deterring hostile takeovers or delaying changes in control
or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 7,643,700 shares of
Common Stock outstanding, excluding 643,800 shares issuable upon exercise of
options held by directors, officers and employees of the Company at March 31,
1996. Of these shares, 3,860,000 shares will be freely transferable without
restriction or further registration under the Securities Act, unless purchased
by "affiliates" of the Company as that term is defined under Rule 144 of the
Securities Act. All the remaining shares of Common Stock are "restricted
securities" within the meaning of Rule 144. All of the Restricted Securities
are subject to existing lock-up agreements which expire on June 17, 1996 of
which 3,422,500 of the Restricted Securities are subject to lock-up agreements
which expire 90 days after the date of this Prospectus (collectively the
"Lock-up Agreements"). Alex. Brown & Sons Incorporated may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the Lock-up Agreements. Approximately 3,422,500 of these
shares will be eligible for sale in the public market 90 days after the date
of this Prospectus in reliance upon Rule 144, subject to volume and other
restrictions contained therein and the remainder will become so eligible from
time to time thereafter.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates of the
Company, who beneficially own shares that were not acquired by the Company or
an affiliate thereof within the previous two years, is entitled to sell within
any three-month period commencing 90 days from the date of this Prospectus a
number of shares that does not exceed the greater of (i) one percent of the
then outstanding Common Stock (approximately 764,370 shares immediately after
this offering) or (ii) the average weekly trading volume in the Common Stock
in the over-the-counter market during the four calendar weeks preceding such
sale and may only sell such shares through unsolicited brokers' transactions
or transactions with a market maker. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person who is not an
affiliate of the issuer for at least 90 days and who has beneficially owned
such shares for at least three years is entitled under Rule 144 to sell such
shares without regard to the volume or other resale requirements described
above.
The Company is unable to estimate the number of shares of Common Stock that
will be sold under Rule 144 or otherwise because this will depend in part on
the market price for the Common Stock, the personal circumstances of the
sellers and other factors.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the 1994
Equity Incentive Plan, thereby permitting the resale of such shares by non-
affiliates in the public market without restriction under the Securities Act.
Such registration statement is expected to become effective no earlier than 30
days after the date of this Prospectus. The Company has reserved up to
1,350,000 shares of Common Stock for issuance under the 1994 Equity Incentive
Plan. As of March 31, 1996, options to purchase 643,800 shares of Common Stock
were outstanding under the 1994 Equity Incentive Plan.
In addition, Rule 144A under the Securities Act permits, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of their shares to certain "qualified institutional buyers" as defined
in Rule 144A.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below through their Representatives, Alex. Brown & Sons
Incorporated, Hambrecht & Quist LLC and Smith Barney Inc. have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated....................................... 520,000
Hambrecht & Quist LLC................................................. 520,000
Smith Barney Inc...................................................... 520,000
---------
Total............................................................... 1,560,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $.80 per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
Certain of the Selling Stockholders have granted to the Underwriters an
option exercisable not later than 30 days after the date of this Prospectus to
purchase up to an aggregate of 232,500 additional shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. To the extent the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the above table bears to
1,560,000, and the Selling Stockholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the 1,560,000
shares are being offered.
The Company and certain Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
All of the Restricted Securities are subject to certain lock-up agreements
which expire on June 17, 1996 of which 3,422,500 are subject to lock-up
agreements which expire 90 days after the date of this Prospectus
(collectively the "Lock-up Agreements"). Pursuant to the Lock-up Agreements,
holders of the Restricted Securities have agreed not to offer, sell or
otherwise dispose of the shares of Common Stock subject to the Lock-up
Agreements without the prior consent of Alex. Brown & Sons Incorporated, one
of the Representatives of the Underwriters. Alex. Brown & Sons Incorporated
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the Lock-up Agreements. See "Shares
Eligible for Future Sale."
46
<PAGE>
In connection with this offering, certain Underwriters and selling group
members (if any), or their respective affiliates who are qualified registered
market makers on Nasdaq may engage in passive market making transactions in the
Common Stock on Nasdaq in accordance with Rule 10b-6A under the Exchange Act,
during the two business day period before commencement of offers or sales of
the Common Stock. Passive market making transactions must comply with
applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the
highest independent bid for such security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
LEGAL MATTERS
The legal validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Hogan & Hartson L.L.P., Baltimore, Maryland.
Certain legal matters will be passed upon for the Underwriters by Arnold &
Porter, Washington, D.C.
EXPERTS
The balance sheets of AMISYS Managed Care Systems, Inc. as of December 31,
1994 and 1995, and the related statements of operations, stockholder's equity
(deficit) and cash flows for the period May 27, 1994 through December 31, 1994,
and the year ended December 31, 1995, respectively; and the statements of
operations, stockholders' equity (deficit), and cash flows of AIHI, a wholly
owned subsidiary of AIG, for the year ended December 31, 1993 and the period
from January 1, 1994 through May 26, 1994, included in this Registration
Statement, and the related financial statement schedule, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
47
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
AMISYS Managed Care Systems, Inc.
We have audited the accompanying balance sheets of AMISYS Managed Care
Systems, Inc. ("the Company") as of December 31, 1994 and December 31, 1995
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the period from May 27, 1994 to December 31, 1994 and for the
year ended December 31, 1995, respectively. We have also audited the
accompanying statements of operations, stockholder's equity (deficit) and cash
flows of American International Healthcare, Inc. ("AIHI"), a wholly owned
subsidiary of American International Group, Inc., for the year endedDecember
31, 1993 and for the period from January 1, 1994 to May 26, 1994 (see Note 1).
These financial statements are the responsibility of the Company's and AIHI's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company and AIHI for
the periods described above and the results of operations and cash flows of
the Company and AIHI for the periods described above, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
February 21, 1996
F-2
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
DECEMBER 31, 1994 AND 1995, AND MARCH 31, 1996
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents..................... $ 2,727 $ 5,354 $ 5,962
Short-term investments........................ 20,400 20,660
Accounts receivable, net...................... 6,218 6,362 7,184
Deferred income taxes......................... -- 251 251
Prepaid expenses and other.................... 227 453 307
------- ------- -------
Total current assets........................ 9,172 32,820 34,364
------- ------- -------
Property and equipment, net..................... 288 970 969
Purchased software, net......................... 707 255 222
------- ------- -------
Total assets................................ $10,167 $34,045 $35,555
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.............................. $ 1,645 $ 2,164 $ 1,402
Accrued salaries and wages.................... 163 495 560
Accrued expenses.............................. 1,523 1,745 3,064
Income taxes payable.......................... 20 118 385
Deferred revenue, net......................... 711 2,206 2,074
------- ------- -------
Total current liabilities................... 4,062 6,728 7,485
------- ------- -------
Deferred income taxes........................... -- -- --
Notes payable to related party.................. -- -- --
Subordinated notes payable...................... 10,100 -- --
------- ------- -------
Total liabilities........................... 14,162 6,728 7,485
------- ------- -------
Commitments and contingencies...................
Class A common stock, $.01 par value; 4,800,000
shares authorized, issued, and outstanding as
of September 30, 1995 and December 31, 1994,
redeemable at $0.50 per share.................. 2,400 -- --
------- ------- -------
Stockholders' equity (deficit)..................
Common stock, $.001 par value; 25,000,000
shares authorized, 7,565,000 and 7,568,200
issued and outstanding as of December 31,
1995 and March 31, 1996, respectively........ -- 8 8
Class B common stock, $.001 par value;
10,000,000 shares authorized; 525,000 shares
issued and outstanding as of December
31,1994...................................... 1 -- --
Additional-paid in capital.................... 32 32,062 32,078
Accumulated deficit........................... (6,428) (4,753) (4,016)
------- ------- -------
Total stockholders' equity (deficit)........ (6,395) 27,317 28,070
------- ------- -------
Total liabilities and stockholders' equity
(deficit).................................. $10,167 $34,045 $35,555
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-3
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL AMISYS MANAGED CARE
HEALTHCARE, INC. SYSTEMS, INC.
----------------------- -----------------------------------------------------
FOR THE JANUARY 1, MAY 27, 1994 FOR THE FOR THE THREE FOR THE THREE
YEAR ENDED 1994 TO TO YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, MAY 26, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ---------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues
System sales.......... $11,698 $6,318 $ 11,642 $ 26,753 $ 5,116 $ 8,233
Support and
maintenance.......... 2,556 1,730 2,745 5,034 1,132 1,395
Contract services..... 1,400 -- -- -- -- --
------- ------ --------- --------- --------- ---------
Total revenues...... 15,654 8,048 14,387 31,787 6,248 9,628
------- ------ --------- --------- --------- ---------
Cost of revenues
Cost of system sales,
support, and
maintenance.......... 8,439 4,402 7,714 17,278 3,711 5,168
Cost of contract
services............. 1,144 -- -- -- -- --
------- ------ --------- --------- --------- ---------
Total cost of
revenues........... 9,583 4,402 7,714 17,278 3,711 5,168
------- ------ --------- --------- --------- ---------
Gross profit............ 6,071 3,646 6,673 14,509 2,537 4,460
Sales and marketing... 1,097 592 738 2,961 647 809
Research and
development.......... 2,290 1,708 3,270 5,502 1,174 1,696
General and
administrative....... 1,838 800 1,738 3,871 898 1,141
Write-off of purchased
research and
development.......... -- -- 6,516 -- -- --
------- ------ --------- --------- --------- ---------
Total operating
expenses........... 5,225 3,100 12,262 12,334 2,719 3,646
------- ------ --------- --------- --------- ---------
Operating (loss)
income................. 846 546 (5,589) 2,175 (182) 814
Other (expenses) income
Interest expense...... (53) (23) (387) (622) (156) (6)
Interest income....... 48 15 24 101 32 334
Other................. (22) 14 -- 21 -- 2
------- ------ --------- --------- --------- ---------
Total other
(expenses) income.. (27) 6 (363) (500) (124) 330
------- ------ --------- --------- --------- ---------
(Loss) income before
income tax provision
and cumulative effect
of change in accounting
for income taxes....... 819 552 (5,952) 1,675 (306) 1,144
Income tax (benefit)
provision............ 321 219 476 -- -- 407
------- ------ --------- --------- --------- ---------
Net (loss) income....... $ 498 $ 333 $ (6,428) $ 1,675 $ (306) $ 737
======= ====== ========= ========= ========= =========
Net (loss) income per
common share and common
share equivalent....... $ (1.09) $ 0.28 $ (0.05) $ 0.09
========= ========= ========= =========
Weighted average number
of common shares
outstanding............ 5,899,950 5,949,128 5,899,950 8,164,481
========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-4
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994, THE YEAR ENDED DECEMBER 31,
1995
AND FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
-------------- ------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993................... 2 $ 20 $ 3,763 $(1,406) $ 2,377
Net income.............. -- -- -- 498 498
----- ---- ------- ------- -------
Balance, December 31,
1993................... 2 20 3,763 (908) 2,875
Forgiveness of amounts
due to affiliate....... -- -- 1,300 -- 1,300
Net income.............. -- -- -- 333 333
----- ---- ------- ------- -------
Balance, May 26, 1994... 2 $ 20 $ 5,063 $ (575) $ 4,508
===== ==== ======= ======= =======
- --------------------------------------------------------------------------------------
Balance, May 27, 1994... -- -- -- -- -- -- --
Issuance of Class B
common stock........... -- -- 525 $ 1 $ 32 -- $ 33
Net loss................ -- -- -- -- -- $(6,428) (6,428)
----- ---- ---- ---- ------- ------- -------
Balance, December 31,
1994................... -- -- 525 1 32 (6,428) (6,395)
Redesignation of Class B
common stock to Common
Stock.................. 525 $ 1 (525) (1) -- -- --
Cancellation of
restricted stock
award.................. (24) -- -- -- -- -- --
Conversion of Class A
common stock to Common
Stock.................. 4,800 5 -- -- 2,395 -- 2,400
Issuance of Common
Stock, net of costs.... 2,264 2 -- -- 29,631 -- 29,633
Deferred stock
compensation........... -- -- -- -- 4 -- 4
Net income.............. -- -- -- -- -- 1,675 1,675
----- ---- ---- ---- ------- ------- -------
Balance, December 31,
1995................... 7,565 8 -- -- 32,062 (4,753) 27,317
Exercise of stock
options................ 3 -- -- -- 4 -- 4
Deferred stock
compensation........... -- -- -- -- 12 -- 12
Net income.............. -- -- -- -- -- 737 737
----- ---- ---- ---- ------- ------- -------
Balance, March 31, 1996
(unaudited)............ 7,568 $ 8 -- $-- $32,078 $(4,016) $28,070
===== ==== ==== ==== ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-5
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL AMISYS MANAGED CARE
HEALTHCARE, INC. SYSTEMS, INC.
----------------------- -----------------------------------------------------
JANUARY 1,
FOR THE 1994 MAY 27, FOR THE YEAR FOR THE THREE FOR THE THREE
YEAR ENDED TO 1994 TO ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, MAY 26, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ---------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net (loss) income...... $ 498 $ 333 $(6,428) $ 1,675 $ (306) $ 737
Adjustment to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities, net of
disposals:
Provision for doubtful
accounts.............. 3 5 114 183 13 27
Deferred tax asset
valuation allowance... -- -- -- (648) -- --
Depreciation and
amortization.......... 1,475 596 585 830 240 187
Write-off of purchased
research and
development........... -- -- 6,516 -- -- --
Gain on sale of
subsidiary............ (26) -- -- -- -- --
Deferred stock
compensation.......... -- -- -- 4 -- 12
(Decrease) increase in
cash resulting from
changes in assets and
liabilities:
Accounts receivable.... (627) 362 (1,711) (327) (1,381) (849)
Income tax receivable.. (37) -- -- (171) -- --
Deferred income taxes.. 16 (234) -- 397 -- --
Deposits, prepaid
expenses and other.... 101 (293) 62 (55) 69 146
Accounts payable and
accrued expenses...... 1,978 (1,186) 191 1,073 590 622
Income taxes payable... (827) -- 20 98 (20) 267
Deferred revenue....... (572) 24 247 1,495 33 (132)
------ ------ ------- -------- ------ ------
Net cash provided by
(used in) operating
activities........... 1,982 (393) (404) 4,554 (762) 1,017
------ ------ ------- -------- ------ ------
Cash flows from
investment activities:
Purchase of property
and equipment......... (222) (46) (134) (1,060) (328) (153)
Capitalized software
development costs..... (419) (100) -- -- -- --
Proceeds from sale of
subsidiary, net of
cash included in sale
of $83................ (13) -- -- -- -- --
Purchases of available-
for-sale securities... -- -- -- (20,400) -- (260)
Purchase of AIHI, net
of cash acquired of
$1,515................ -- -- (8,768) -- -- --
------ ------ ------- -------- ------ ------
Net cash provided by
(used in) investing
activities........... (654) (146) (8,902) (21,460) (328) (413)
------ ------ ------- -------- ------ ------
Cash flows from
financing activities:
Advances received from
affiliates............ 339 918 -- -- -- --
Issuance of common
stock, net of costs... -- -- 2,433 29,633 -- 4
Issuance of
subordinated notes.... -- -- 9,600 -- -- --
Repayment of
subordinated notes.... -- -- -- (10,100) -- --
Repayment of notes
payable............... (649) -- -- -- -- --
------ ------ ------- -------- ------ ------
Net cash (used in)
provided by financing
activities........... (310) 918 12,033 19,533 -- 4
------ ------ ------- -------- ------ ------
Net increase in cash and
cash equivalents....... 1,018 379 2,727 2,627 (1,090) 608
Cash and cash
equivalents at
beginning of period.... 118 1,136 -- 2,727 2,727 5,354
------ ------ ------- -------- ------ ------
Cash and cash
equivalents at end of
period................. $1,136 $1,515 $ 2,727 $ 5,354 $1,637 $5,962
====== ====== ======= ======== ====== ======
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $ 54 $ 24 $ 387 $ 622 $ 156 $ 3
====== ====== ======= ======== ====== ======
Cash paid for income
taxes................. $ 690 $ 193 $ 621 $ 63 $ -- $ 150
====== ====== ======= ======== ====== ======
Noncash investing and
financing activities:
Conversion of Class A
Common Stock.......... $ -- $ -- $ -- $ 2,400 $ -- $ --
====== ====== ======= ======== ====== ======
Subordinated notes
issued to seller...... $ -- $ -- $ 500 $ -- $ -- $ --
====== ====== ======= ======== ====== ======
Forgiveness of amounts
due to affiliate...... $ -- $1,300 $ -- $ -- $ -- $ --
====== ====== ======= ======== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-6
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AMISYS Managed Care Systems, Inc. (the "Company") is a health care
information systems company that develops, sells and supports the AMISYS
system, a comprehensive managed health care administration and risk management
information system. The principal markets for the AMISYS system are U.S. based
companies within the managed health care industry.
Basis of Presentation
The accompanying financial statements represent the accounts of the Company,
formerly American International Healthcare, Inc. ("AIHI"), the surviving
corporation of a merger between AIHI and AIH Systems, Inc. ("AIH") which was
incorporated on May 23, 1994 for the purpose of acquiring AIHI. On May 27,
1994, AIH purchased 100% of the issued and outstanding shares of AIHI from
American International Group, Inc. ("AIG"), parent company of AIHI. The
financial statements reflect the segregation of the operating activities for
the periods related to the different owners. The post acquisition financial
statements reflect the purchase accounting adjustments as described in Note 2.
For the year ended December 31, 1993, the results of operations include the
accounts of Healthcare Enterprise International, Inc. ("HEI"), a 55% owned
subsidiary which was sold during fiscal year 1993. All significant
intercompany transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and
revenues and expenses recognized during the reporting period. Actual results
could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of the Company's management, the March 31, 1995 and 1996
unaudited interim financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
results of operations for the three months ended March 31, 1995 and 1996 are
not necessarily indicative of the results to be expected for the full year or
for any future period. The financial information included in the notes to the
financial statements for these periods is unaudited.
Split of Common Stock
On November 1, 1995, the Board of Directors authorized and the stockholders
approved: (i) a two-for-one stock split of the outstanding shares of the
Company's common stock, and (ii) a change in the number of authorized shares
of Class A common stock and Class B common stock to 4,800,000 shares and
10,000,000 shares, respectively. All references to common stock, options, and
per share data have been restated to give effect to the stock split.
Registration Statement
On April 15, 1996, the Board of Directors authorized the filing of a
registration statement (the "Registration Statement") with the Securities and
Exchange Commission for the public offering of shares of the Company's Common
Stock.
F-7
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Revenue Recognition
Revenues are derived primarily from the sale of information systems which
include software, hardware, installation labor and consulting services.
Contracts for the installation of AMISYS information systems are negotiated
individually and are non-cancelable. The Company recognizes revenues from the
sale of information systems using the percentage- of-completion method as the
work is performed, measured primarily by the ratio of labor hours incurred to
total estimated labor hours for each specific contract. When the total
estimated cost of a contract is expected to exceed the contract price, the
total estimated loss is charged to expense in the period when the information
becomes known.
Revenues from the sale of additional hardware subsequent to the initial
AMISYS software license are recognized upon shipment in satisfaction of non-
cancelable agreements and upon determination that collectibility is probable.
Revenues from software support and maintenance contracts are recognized
ratably as the services are rendered.
Contract services revenues in the year ended December 31, 1993 from HEI
(Refer to Note 13) were recognized based on its respective contracts,
primarily using the percentage-of-completion method as the work was performed.
Amounts billed in advance of satisfying revenue recognition criteria are
classified as deferred revenue in the accompanying balance sheet. Costs
incurred in excess of the contract percent complete are classified as costs
incurred on deferred revenue. Deferred revenue is presented net of costs
incurred on deferred revenue.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of 3 months or less to be cash equivalents. Cash and cash equivalents include
time deposits with commercial banks used for temporary cash management
purposes.
Short-Term Investments
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). There was no cumulative effect as a result of
adopting SFAS 115 as of January 1, 1995.
At December 31, 1995 short-term investments which mature within one year and
consist of tax-exempt municipal bond funds and tax-exempt municipal bonds have
been categorized as available-for-sale and are recorded at fair value. Fair
values for available-for-sale securities are based on quoted market prices.
The estimated fair value of each investment approximates the cost, and
therefore there are no unrealized gains or losses as of December 31, 1995.
Under SFAS 115, unrealized gains and losses for available-for-sale securities
are reported net of any related income tax effect, as a separate component of
stockholders' equity. Realized gains and losses on the sale of available-for-
sale securities are included in the determination of net income in the period
of disposition using the specific identification cost method. If the decline
in fair value of an
F-8
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
available-for-sale security is considered other than temporary, the cost basis
of that security is written down to fair value as a new cost basis and the
amount of the write-down is accounted for as a realized loss.
Available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------ ------------------
FAIR VALUE COST FAIR VALUE COST
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Tax-exempt municipal bonds .............. $15,800 $15,800 -- --
Tax-exempt municipal bonds funds......... 4,600 $ 4,600 -- --
Money market funds....................... -- -- $20,660 $20,660
------- ------- ------- -------
$20,400 $20,400 $20,660 $20,660
======= ======= ======= =======
</TABLE>
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of cash and trade accounts receivable. The
Company places its temporary cash investments in
one or more financial institutions. The Company has not experienced any losses
on these investments to date.
The Company has not experienced significant losses related to receivables
from individual customers or groups of customers in the health care industry.
Due to these factors, no additional credit risk beyond amounts provided for
collection losses is believed by management to be inherent in the Company's
accounts receivable. The largest customer at December 31, 1994, 1995 and the
period ending March 31, 1996 represent 10%, 24% and 14%, respectively, of the
total accounts receivable balance. Revenues from one customer represent 18% of
total revenues for the year ended December 31, 1995.
Property and Equipment
Computer equipment, office furniture and fixtures, and leasehold
improvements are recorded at cost. Depreciation and amortization of furniture
and equipment is recorded using the straight-line method over a useful life of
three to five years. Leasehold improvements are amortized over the lesser of
their estimated useful life or the lease term.
Repairs and maintenance costs are charged to expense as incurred. Upon sale
or retirement of property and equipment, the costs and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss
on such disposition is included in the determination of net income.
Software Development Costs
Software development costs, which are primarily comprised of salaries and
related costs, are expensed until technological feasibility is established and
then capitalized until a marketable product is completed. Technological
feasibility is established upon completion of a working model. Amortization of
capitalized software costs begins when the related product is available for
general release to customers and is provided for each product based on the
greater of the amount computed using (i) the ratio of current gross revenues
to total current and anticipated future gross revenues for the related
software or (ii) the straight-line method over a five-year life or the
product's estimated economic life, if shorter.
F-9
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Company has not capitalized software development costs for the period
ended December 31, 1994, the year ended December 31, 1995 or the three month
period ended March 31, 1996, as no product development activities were
considered to have reached technological feasibility during these periods.
As of May 27, 1994, all unamortized capitalized software development costs
were written off as a result of the determination of the fair value of assets
at the date of acquisition. Refer to Note 2 "Acquisition" for further
discussion. Amortization of software development costs was $1,107, and $448
for the year ended December 31, 1993, and for the period January 1, 1994 to
May 26, 1994, respectively.
Purchased Software
Purchased software represents the fair market value of all rights to the
AMISYS software product that were acquired when the Company was purchased from
AIG. Purchased software costs are amortized on a straight line basis over
their estimated useful life. The Company assesses the net realizable value and
useful life of purchased software at each Balance Sheet Date. Effective July
1, 1995, the Company changed its estimate of the useful life of purchased
software to increase it from 18 to 42 months. The effect of this change in
estimate was to decrease amortization expense and increase net income by $160
or $.03 per Common Share for the year ended December 31, 1995.
Purchased software consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- --------------
<S> <C> <C> <C>
Capitalized cost........ $1,157 $1,157 $1,157
Accumulated
amortization........... 450 902 935
------ ------ ------
Purchased software,
net.................... $ 707 $ 255 $ 222
====== ====== ======
</TABLE>
The amount amortized during the periods from May 27, 1994 to December 31,
1994, the year ended December 31, 1995 and the three months ended March 31,
1996 was $450, $452 and $33, respectively.
Significant Supplier
The Company purchases substantially all of its hardware for resale from a
major hardware manufacturer. Purchases from this manufacturer were
approximately $4,581, $1,788, $2,875, $10,751, $1,477, and $1,576 for the year
ended December 31, 1993, the periods January 1, 1994 to May 26, 1994, May 27,
1994 to December 31, 1994, the year ended December 31, 1995, and the
three month periods ended March 31, 1995 and 1996, respectively.
Research and Development
Research and development costs are charged to expenses as incurred.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109").
Under SFAS 109, 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 by
applying enacted statutory tax rates, that are applicable to the future years
in
F-10
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
which deferred tax assets or liabilities are expected to be settled or
realized, to the differences between the financial statement carrying amount
and the tax bases of existing assets and liabilities. Under SFAS 109, the
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in net income in the period in which the tax rate change is
enacted. The statement also requires a valuation allowance against net
deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets may not be realized.
Income taxes for the three months ended March 31, 1996 are determined based
on the Company's estimated annual effective tax rate as applied to its results
of operations.
Net Income Per Common Share
Primary net income (loss) per common share has been computed based upon the
weighted average number of common stock and common stock equivalents
outstanding during each period. Common stock equivalents recognize the
potential dilutive effects of future exercise of common stock options.
Pursuant to the rules of the Securities and Exchange Commission, common and
common equivalent shares issued during the 12 months immediately preceding the
date of the Company's initial public offering have been included in the
calculation of common and common equivalent shares as if they were outstanding
for all periods prior to the date of the initial public offering (using the
treasury stock method and the public offering price of $14.50 per share).
Accounting Standards Issued
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, regarding accounting for asset impairments,
effective January 1, 1996. Adoption of this statement is not expected to have
a material impact on the Company's financial statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS
123"). SFAS 123 allows companies which grant stock options a choice to either
continue the current accounting treatment under Accounting Principles Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), or
adopt a new set of fair value accounting rules for recognizing compensation
expense related to stock awards. Companies continuing under APB 25 must
measure option values and disclose the proforma effects that the new fair
value accounting would have on earnings if recorded. The Company has
determined that it will continue the current accounting treatment under APB 25
and will provide pro forma disclosures of the effect the new fair value
accounting would have on earnings if SFAS 123 had been adopted. The impact of
the adoption of this statement on the financial statements cannot be
reasonably estimated at this time. The requirements of SFAS 123 are effective
for financial statements for fiscal years beginning after December 15, 1995.
F-11
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the classifications used in the current period.
2. ACQUISITION
On May 27, 1994, 100% of the stock of AIHI was purchased from AIG. This
transaction was accounted for using the purchase method of accounting. The
total purchase price of $15,730, including assumed liabilities of $4,947 and
acquisition costs of $283, has been allocated to the Company's assets and
liabilities based upon their estimated fair values as of the date of purchase.
Adjustments necessary to reflect the fair value and purchase price
allocations have been reflected in the post-acquisition financial statements.
Approximately $1,200 of the purchase price was allocated to AIHI's existing
AMISYS software technology and is being amortized over its projected remaining
useful life. Approximately $6,500 was allocated to in-process product
development of a client/server version of the same software based on the
determination of the future product's net present value. The Company used a
discounted cash flow model to determine the valuation of both products. At the
time of the purchase, management determined that the purchased research and
development had not reached technological feasibility and there was no
alternative future use for this technology. Accordingly, this in-process
product development was written-off as of May 27, 1994.
3. ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, 1996
1994 1995 (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Trade accounts receivable............. $4,960 $5,792 $5,348
Unbilled receivable................... 1,472 967 2,261
------ ------ ------
Total accounts receivable............. 6,432 6,759 7,609
Allowance for doubtful accounts....... (214) (397) (425)
------ ------ ------
Accounts receivable, net.............. $6,218 $6,362 $7,184
====== ====== ======
</TABLE>
While the Company negotiates its agreements with customers on an individual
basis, most agreements call for a substantial initial payment and subsequent
payments as set forth in the contract. Unbilled receivables represent amounts
recognized as revenues under generally accepted accounting principles in
excess of amounts billed under the individual contract.
F-12
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, 1996
1994 1995 (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Computer equipment..................... $329 $1,056 $1,208
Office furniture and fixtures.......... 80 361 361
Leasehold improvements................. 14 66 67
---- ------ ------
423 1,483 1,636
Less: accumulated depreciation......... 135 513 667
---- ------ ------
Property and equipment, net............ $288 $ 970 $ 969
==== ====== ======
</TABLE>
Depreciation and amortization expenses were $368, $148, $135, $378 and $154
for the year ended December 31, 1993, the periods January 1, 1994 to May 26,
1994 and May 27, 1994 to December 31, 1994, the year ended December 31, 1995
and the three months ended March 31, 1996, respectively.
Refer to Note 2 "Acquisition" regarding adjustment of property and equipment
to their estimated fair value.
5. DEFERRED REVENUE
Costs and billings to date on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, 1996
1994 1995 (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Deferred revenue...................... $1,545 $5,125 $4,247
Costs incurred on deferred revenue.... 834 2,919 2,173
------ ------ ------
Deferred revenue, net................. $711 $2,206 $2,074
====== ====== ======
</TABLE>
6. NOTES PAYABLE
Credit Agreement
The Company has a $4 million credit agreement with a bank commencing August
18, 1995 and expiring September 1, 1996. The credit agreement consists of a $3
million revolving loan, of which $1 million may be used for the issuance of a
letter of credit, and a $1 million equipment line of credit. Borrowings under
the revolving line of credit bear interest at the Federal Funds Rate plus
2.25% and are
F-13
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
collateralized by the underlying asset base of the Company. The terms of the
credit agreement prohibit payment of dividends without the prior consent of
the bank and contain other restrictive covenants, the most significant of
which requires the Company to maintain a minimum ratio of liabilities to
tangible net worth. The Company has borrowings of $200 under the equipment
line of credit arrangement at March 31, 1996 which bears interest at a
weighted average annual rate of interest of 7.05%. The Company has not made
any borrowings under the revolving loan of the line of credit arrangement
since its inception. The bank issued a $1 million letter of credit on
September 19, 1995. The letter of credit has not been drawn as of March 31,
1996.
Subordinated Notes Payable
In connection with the purchase of AIHI, the Company issued a class of
subordinated notes dated May 27, 1994, of which $500 becomes due and payable
on May 27, 1999 and $9,600 becomes due and payable May 27, 2001. These notes,
which were issued primarily to the Company's stockholders, had an annual
interest rate of 6.25% per year with interest payable monthly. The Company
repaid these notes on December 26, 1995 with the proceeds of the initial
public offering of the Company's Common Stock.
The terms of these notes provided for mandatory prepayment should the
Company complete an initial public offering of common stock or should there be
a change in control as defined in the agreement. The terms of the notes also
prohibited the payment of dividends and the repurchase of any class of the
Company's stock, warrants, rights, calls or options while there were any
amounts outstanding under these notes.
Note Payable to Related Party
As of December 31, 1993 and through May 26, 1994, AIHI had a $3 million
demand note agreement with American International Group Funding, Inc.
("AIGF"), a subsidiary of AIG. Under the terms of the note agreement, AIHI
could request borrowings of up to $3 million with interest payable monthly at
.375% above AIGF's actual monthly borrowing costs. At December 31, 1993, this
rate was equal to 3.548%. The demand note was used to fund working capital.
The note balance of $1,300 was forgiven by AIGF on May 26, 1994 prior to the
sale of AIHI, and is included in the Statement of Stockholders' Equity
(Deficit) as a contribution of additional paid-in-capital.
F-14
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 27 TO YEAR ENDED
DECEMBER 31, JANUARY 1 TO DECEMBER 31, DECEMBER 31,
1993 MAY 26, 1994 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current provision
Federal................................................................ $ 572 $ 325 $421 $ 318
State.................................................................. 75 17 55 86
----- ----- ---- -----
647 342 476 404
----- ----- ---- -----
Deferred benefit
Federal................................................................ (288) (123) -- (318)
State.................................................................. (38) -- -- (86)
----- ----- ---- -----
(326) (123) -- (404)
- -------------------------------------------------- ----- ----- ---- -----
Provision for income taxes............................................... $ 321 $ 219 $476 $ --
===== ===== ==== =====
</TABLE>
The provision for income taxes varies from the amount of income tax expense
computed by applying the applicable U.S. federal income tax rate of 34% to
pretax income as follows:
<TABLE>
<CAPTION>
YEAR
YEAR ENDED MAY 27 TO ENDED
DECEMBER 31, JANUARY 1 TO DECEMBER 31, DECEMBER 31,
1993 MAY 26, 1994 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statutory U.S. Tax Rate.................................................. 34% 34% (34%) 34%
State income taxes ...................................................... -- 4% (5%) 5%
Valuation allowance for net deferred tax assets.......................... -- -- 45% (39%)
Other.................................................................... 5% 2% 2% --
- --------------------------------------------------
--- --- ---- ----
39% 40% 8% --%
=== === ==== ====
</TABLE>
F-15
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred income taxes arise from temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements. The tax effects of the primary temporary differences giving rise
to the Company's net deferred tax (liability) asset are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
DEFERRED TAX ASSET
Write-off of purchased research and development............. $ 2,572 $ 2,343
Accounts receivable, due to allowance for doubtful
accounts................................................... 18 135
Accrued compensation........................................ 99 --
Accrued liabilities not currently deductible................ -- 180
Property and equipment, due to differences in depreciation
methods.................................................... 21 37
Intangible assets, due to differences in amortization....... 105 97
Other....................................................... -- --
------- -------
2,815 2,792
DEFERRED TAX LIABILITY
Unbilled revenue, deferred for tax.......................... -- (349)
Other....................................................... (73) (98)
------- -------
Total deferred tax (liability) asset........................ 2,742 2,345
Less: valuation allowance................................... (2,742) (2,094)
------- -------
Net deferred tax (liability) asset.......................... $ -- $ 251
======= =======
</TABLE>
As of December 31, 1994 and 1995 and March 31, 1996, the deferred tax asset
is comprised primarily of the write-off of purchased research and development
costs, which are not allowable for tax purposes, but instead represent
purchase price associated with the acquisition of AIHI, which, for tax
purposes is allocable to a purchased intangible asset under Internal Revenue
Code Section 197, and is amortized over 15 years.
F-16
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS
Operating Leases
The Company occupies its office space and uses certain of its equipment
under terms of non-cancelable operating leases expiring at various dates
through 2000. Future minimum lease payments under non-cancelable operating
leases at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.................................. $ 768
1997.................................. 143
1998.................................. 59
1999.................................. 61
2000.................................. 51
------
TOTAL................................. $1,082
======
</TABLE>
Rent expense under non-cancelable operating leases amounted to $526, $237,
$388, $510, $169, and $187 net of sublease rental income of $186, $64, $95 and
$110 for year ended December 31, 1993, the periods January 1, 1994 to May 26,
1994, May 27, 1994 to December 31, 1994, the year ended December 31, 1995 and
the periods ended March 31, 1995 and 1996, respectively.
Royalties
The Company has agreements under which it has agreed to pay royalties to
certain customers who financed the development of optional modules which may
be included in the AMISYS software product. These agreements provide for
royalty payments to these customers of up to 50% of the product revenue or a
fixed amount per module sold. The royalty expense recognized related to these
modules for the year ended December 31, 1993, the periods January 1, 1994 to
May 26, 1994, May 27 to December 31, 1994, the year ended December 31, 1995
and the periods ended March 31, 1995 and 1996 was $205, $151, $273, $405, $72,
and $81, respectively.
9. CLASS A COMMON STOCK
In May 1994, the Company issued 4,800,000 shares of Class A common stock at
$0.50 per share and received total cash proceeds of $2,400,000. At December
31, 1994 Class A common stock consists of 4,800,000 shares authorized, issued,
and outstanding.
Each share of Class A common stock was automatically converted into one
share of Common Stock upon the closing of the underwritten public offering
pursuant to an effective registration statement dated December 20, 1995 under
the Securities Act of 1933.
F-17
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Class A common stock was convertible into common stock at the conversion
rate as defined in the Company's Certificate of Incorporation. As of December
31, 1994, each share of Class A common stock was convertible into one share of
Class B common stock (currently classified as Common Stock). Accordingly,
4,800,000 shares of common stock was reserved for issuance. The Class A common
stock was redeemable at $0.50 per share (as adjusted to reflect stock splits,
stock dividends, reverse stock splits and similar transactions) at the
stockholders' option upon the earlier of the tenth anniversary of its issuance
or the full payment of the subordinated notes. Each share of Class A common
stock was entitled to receive any dividends declared by the Board of
Directors. In the event that a dividend was declared with respect to common
stock by the Board of Directors, each share of Class A common stock was
automatically entitled to receive such dividends as would have been payable as
if the Class A common stock had been converted to common stock.
In the event of liquidation of the Company the holders of shares of Class A
common stock were entitled to receive the greater of $0.50 per share (as
adjusted to reflect stock splits, stock dividends, reverse stock splits and
similar transactions) or the amount to which such holders would have been
entitled if such shares had been converted to common stock, in preference to
any distributions to the holders of common stock.
10. STOCKHOLDERS' EQUITY
Common Stock
At December 31, 1995 and March 31, 1996, Common Stock consists of 25,000,000
shares authorized, 7,565,000 and 7,568,200 issued and outstanding,
respectively. At December 31, 1994, common stock consists of 10,000,000 shares
authorized and 525,000 issued and outstanding of Class B Common Stock.
On November 21, 1995, the Company's certificate of incorporation was amended
to redesignate the Class B common stock into Common Stock, without
classification. On December 20, 1995, the Company completed its initial public
offering of 2,264,000 shares of Common Stock with proceeds to the Company
(after underwriting discounts and before offering expenses) of $30,530. The
offering closed on December 26, 1995. Upon the closing of the public offering,
all of the 4,800,000 shares of Class A common stock were converted into Common
Stock on a share-for-share basis. In addition, upon closing of the offering,
the Company's certificate of incorporation was amended and restated to
eliminate Class A common stock and to authorize the Company to issue
25,000,000 shares of Common Stock, $.001 par value, and 5,000,000 shares of
Preferred Stock, $.01 par value.
Prior to May 27, 1994, AIHI's stock consisted of one class of Common Stock
of which 2,000 shares were authorized, issued and outstanding.
Equity Incentive Plan
The Board of Directors has adopted the 1994 Equity Incentive Plan ("the
Plan"). Under the Plan, 750,000 shares of common stock have been reserved for
issuance at the discretion of the Board of
F-18
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Directors in the form of stock options, restricted and unrestricted stock
awards, and performance awards. Option prices shall be at no less than 100% of
the fair market value at date of grant and vest annually over a five year
period. On November 1, 1995, the Board of Directors approved an amendment to
the Plan to increase the total number of shares available for issuance by
600,000 shares.
As of December 31, 1995 and March 31, 1996 options for 654,200 and 643,800
shares, respectively, have been granted under the Plan. No stock awards or
performance share awards have been granted under the Plan for the year ended
December 31, 1995 or the three month period ended March 31, 1996.
<TABLE>
<CAPTION>
SHARES 1994
AVAILABLE PLAN OPTION PRICE
FOR GRANT ACTIVITY PER SHARE
--------- -------- ------------
<S> <C> <C> <C>
Balances at May 27, 1994.................. 750,000 -- --
Granted................................. (75,000) 75,000 $ .0625
Exercised............................... -- (75,000) .0625
-------- ------- ------------
Balances at December 31, 1994............. 675,000 -- --
Granted................................. (664,200) 664,200 .0625-12.50
Plan amendment.......................... 600,000 -- --
Cancelled............................... 10,000 (10,000) --
-------- ------- ------------
Balances at December 31, 1995............. 620,800 654,200 --
Exercised............................... -- 3,200 1.525
Cancelled............................... -- 7,200 1.525
-------- ------- ------------
Balances at March 31, 1996 (unaudited).... 620,800 643,800 $.0625-12.50
======== ======= ============
</TABLE>
At December 31, 1995 and March 31, 1996 options to purchase approximately
63,000 and 87,000 shares, respectively, of Common Stock were exercisable
pursuant to the Plan at prices ranging from $.0625 to $12.50. The Board of
Directors of the Company determined that options granted at prices ranging from
$1.52 to $2.50 were considered to be issued at the fair market value of the
Company's Common Stock on the date of each grant. In the fourth quarter of 1995
and the first quarter of 1996, the Company recognized compensation expense with
respect to certain vested options in the amount of $4 and $12, respectively, an
amount determined to be the difference between the option price and the fair
market value of the option at the date of the grant. In 1996, the Company
intends to recognize compensation expense of approximately $45, on an annual
basis, related to certain other vested options.
11. RETIREMENT PLANS
The Company has a 401(k) Retirement Savings Plan in which all full-time
employees of the Company are eligible to participate. In addition, AIHI
employees were eligible to participate in a 401(K) Retirement Savings Plan
administered by AIG. Eligibility requirements were substantially the same as
under the Company's plan. Participants become eligible to participate in the
plan on the first day of employment
F-19
<PAGE>
AMISYS MANAGED CARE SYSTEMS, INC.
(FOR THE PERIOD MAY 27, 1994 TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)
AND
AMERICAN INTERNATIONAL HEALTHCARE, INC.
A WHOLLY OWNED SUBSIDIARY OF AMERICAN INTERNATIONAL GROUP, INC.
(FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD
JANUARY 1, 1994 TO MAY 26, 1994)
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(DOLLARS IN THOUSANDS)
with the Company and are eligible for employer matching upon joining the plan.
The Company matches 33% of participant contributions, up to 6% of each
participant's wages. Expenses recognized related to these plans were $141,
$64, $21, $90 and $34 for the year ended December 31, 1993, the periods
January 1, 1994 to May 26, 1994, and May 27, 1994 to December 31, 1994, the
year ended December 31, 1995 and the three months ended March 31, 1996,
respectively.
12. RELATED PARTY TRANSACTIONS
On December 26, 1995, the Company repaid $10,100 of subordinated notes
issued to certain of the Company's stockholders in connection with the
acquisition of AIHI from AIG. The notes were repaid from the proceeds of the
Common Stock offering in accordance with the terms of the note agreement.
General and administrative expenses include service charges from American
International Group, Inc. of $132 for the fiscal year ended December 31, 1993.
Service charges represent the allocation of general and administrative costs
incurred on behalf of AIHI. The allocation of costs was generally based on
employee headcount and total payroll expenses incurred by AIHI. Management
estimates that actual costs incurred by AIHI would not materially differ from
allocated costs during the period of ownership by AIG had AIHI operated as an
unaffiliated entity.
At December 31, 1993, AIHI owed American International Credit Corporation,
an affiliate of AIG, $209 and $622 for the purchase of furniture and equipment
and salaries and wages paid on behalf of AIHI, respectively. The outstanding
balance was repaid in full in 1994.
In addition, AIHI had a demand note agreement with AIGF. Refer to Note 6 for
further discussion of related party notes payable.
13. DISPOSITION
In September 1993, AIHI disposed of HEI, a health care information
consulting company, for a sales price of $120. Contract services revenue in
the Statements of Operations for the year ended December 31, 1993, includes
net sales for the subsidiary of $1,400. Contract services cost of revenue was
$1,144.
F-20
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CON- NECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCK-
HOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLI-
CATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-
QUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
The Company................................................................ 11
Use of Proceeds............................................................ 11
Price Range of Common Stock and Dividend Policy............................ 11
Capitalization............................................................. 12
Selected Financial Data.................................................... 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 15
Business................................................................... 24
Management................................................................. 34
Certain Transactions....................................................... 40
Principal and Selling Stockholders......................................... 41
Description of Capital Stock............................................... 43
Shares Eligible for Future Sale............................................ 45
Underwriting............................................................... 46
Legal Matters.............................................................. 47
Experts.................................................................... 47
Financial Statements....................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,560,000 Shares
[LOGO OF AMISYS APPEARS HERE]
Managed Care
Systems, Inc.
Common Stock
-------------
PROSPECTUS
-------------
Alex. Brown & Sons
INCORPORATED
Hambrecht & Quist
Smith Barney Inc.
May 29, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
