UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
Commission File No. 0-27614
MEDICUS SYSTEMS CORPORATION
A Delaware Corporation IRS Employer Identification No.36-4056769
One Rotary Center, Suite 1111
Evanston, Illinois 60201
(847) 570-7500
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. _X_ Yes ___ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
As of August 21, 1997, there were 5,483,207 shares of common stock
outstanding, and the aggregate market value of the common stock (based upon the
August 21, 1997 closing sale price on the Nasdaq National Market) held by
non-affiliates was approximately $23,290,034.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on November 18, 1997 (Part III).
<PAGE>
PART I
ITEM 1. BUSINESS
General
Medicus Systems Corporation ("Medicus" or the "Company") develops, markets,
and supports a family of specialized integrated software products utilized by
healthcare financial administrators, physicians and nursing executives, health
information and other administrative departments to capture, structure and
analyze clinical, operational and financial information. Medicus' specialized
software applications and services allow these professionals to measure, monitor
and manage organizational performance and optimize outcomes. Many of these
products incorporate features that enable them to facilitate the exchange of
data with information systems used by other Medicus clients. Medicus also
provides product-related maintenance and support services. During the year, the
Company discontinued the line of business which managed the information systems
of healthcare delivery organizations.
Medicus' products are currently used by more than 1,200 clients. Clients
include hospitals, academic medical centers, managed care organizations,
community care networks, integrated health systems, primary care and
multi-specialty physician groups, government agencies, and other organizations.
Basis of Presentation
Prior to March 1, 1996, the Company's predecessor (the "Predecessor
Corporation") operated a software and related services business and a small
managed care business. In February 1995, the Predecessor Corporation adopted a
formal plan to discontinue its managed care business, transfer the assets and
liabilities of this business to a newly-formed subsidiary, and distribute the
shares of this newly-formed subsidiary to its stockholders. In November 1995,
following meetings with the Internal Revenue Service and in order to insure
qualification of the transaction as a tax-free spin-off, the form of the
transaction was changed. Instead of transferring the assets and liabilities of
its managed care business to a newly-formed subsidiary, the Predecessor
Corporation formed a new Delaware subsidiary, Medicus Systems Software, Inc., to
which it transferred all of its assets and liabilities excluding only the
defined assets and liabilities of its managed care business. In turn, the stock
of this newly-formed subsidiary was distributed on a share-for-share basis to
the stockholders of the Predecessor Corporation (the "Distribution"), the name
of the subsidiary was changed to Medicus Systems Corporation, and the name of
the Predecessor Corporation was changed to Managed Care Solutions, Inc. ("MCS").
Simultaneously, the outstanding stock of the Predecessor Corporation was split
in reverse one-for-three so that following the Distribution, the Predecessor
Corporation's stockholders owned one share of the Company (the successor, in
substance, to the Predecessor Corporation which owned all of the assets and was
liable for all obligations of the Predecessor Corporation except those
specifically related to the Predecessor Corporation's managed care business) and
one-third of a share of MCS for every share of the Predecessor Corporation
previously owned.
Although the Company is, in substance, the Predecessor Corporation's
successor, the financial statements of the Company have been prepared as if the
Company had operated as a free-standing entity for all the periods presented
(excluding certain incremental corporate expenses that would have been incurred
had it operated on a stand-alone basis). Accordingly, the financial statements
include those assets, liabilities, revenues and expenses directly attributable
to the Company's operations and exclude those specifically related to the
managed care business. The Company has adopted this presentation because the
Company believes that this presentation most fairly represents its financial
condition, results of operations and changes in stockholders' equity and cash
flows. The financial statements included herein for periods prior to the
Distribution do not necessarily reflect what the financial position and results
of operation of the Company would have been had it operated as a stand-alone
entity during the periods covered, and may not be indicative of future
operations or financial position.
<PAGE>
Software Products and Services
Provider organizations are continuously challenged by purchasers to
demonstrate improvement toward optimal financial and clinical outcomes as they
compete for managed care contracts. Medicus' specialized products are designed
to capture, structure and analyze data in such a way as to assist providers in
optimizing the outcomes that are most important to buyers. Medicus focuses on
providing products in specialized market niches that are critical to the
information and decision support needs of healthcare providers. The Company
employs standard interface systems to accomplish the necessary integration with
existing transaction processing systems.
Clinical Data Systems (CDS)
CDS is an integrated encoding system and data repository that enables the
healthcare provider to classify, capture, validate, and analyze clinical data.
The system is a tool that implements a uniform clinical database to measure and
monitor patient, clinical and financial outcomes. This expert encoding system
aids in optimizing prospective payment reimbursement for both inpatient and
ambulatory care services. It captures and validates clinical indicators,
severity and risk factors as well as patient demographics data, diagnoses and
procedures. Clinical data forms the basis upon which (i) the healthcare provider
identifies cases for clinical appropriateness studies, (ii) the Joint Commission
on Accreditation of Healthcare Organizations (JCAHO), The National Committee on
Quality Assurance utilizing its Health Plan and Employer Data and Information
Set (HEDIS), and state agencies measure performance, and (iii) the health care
provider estimates service volumes and costs in competing for managed care
contracts. By validating data at the point of capture and linking it to a
Diagnosis Related Group (DRG), the clinical data system creates an accurate and
complete data repository that provides the information required to manage costs
and improve clinical effectiveness and service efficiency.
As of May 31, 1997, the Company had licensed CDS software for use by 600
hospitals and other users. These other users include the Health Care Financing
Administration (HCFA), several professional peer review organizations, the
American Hospital Association (AHA), and numerous consulting and auditing firms.
The CDS product line currently includes two integrated modules:
The WinCoder+ module is a Windows-based encoding tool released in 1995. The
WinCoder+ module supports integrated data encoding, editing and
diagnosis-related grouping for all patient types, including inpatient
admissions, emergency room admissions, referrals, and ambulatory admissions and
procedures. Utilizing "expert-system" logic, WinCoder+ delivers advice and
classification guidance to identify errors of omission in clinical documentation
in an effort to optimize Medicare and capitated reimbursement. The system also
captures reliable and consistent clinical data for both the financial and
clinical users. The WinCoder+ product includes a Clinical and Financial
Optimizer which uses "expert-system" logic to assist the user in identifying
errors of omission in clinical documentation, and proposes related codes or
other alternatives which may be applicable and result in more appropriate
reimbursement.
The WinCOLLECT module organizes and structures a uniform clinical data set
to describe a patient population, including its clinical and financial
characteristics, and to evaluate the quality and appropriateness of care.
WinCOLLECT is a data capture system that validates entries for internal
consistency at the point of collection. Because each organization has unique
requirements and is responding to volatile external forces, this module supports
user customization with user-defined tables and calculated fields. WinCOLLECT is
a core technology for the healthcare organization to support medical records,
quality assurance, physician credentialing, utilization review, discharge
planning, infection control and risk management functions. This module captures
the clinical data necessary to meet the external reporting requirements of
JCAHO, HCFA, professional review organizations, state data agencies and other
organizations.
<PAGE>
The CDS products are licensed under non-exclusive perpetual licenses.
Leasing options are also offered. Total client fees for CDS products range from
$15,000 to $250,000 and are comprised of license fees charged per module and per
user, implementation, hardware and technical fees. At the time a license is
granted, Medicus generally enters into a one-year maintenance and support
agreement for an annual fee that is based on a percentage of the then current
license fee and which is renewable at then current rates for successive one-year
terms.
Decision Support Systems (DSS)
This division offers two lines of products, Enterprise Analyst and Resource
Case Management. As of May 31, 1997, Medicus had licensed its DSS software for
use by 150 hospital customers.
The Company recently introduced to the market the Enterprise Analyst - the
next generation of Decision Support Systems to assist integrated healthcare
delivery systems in responding to the rapidly changing healthcare environment
via a powerful client/server architecture and one of the most comprehensive
functionalities available today.
The Enterprise Analyst is a fully integrated, enterprise wide decision
support system application designed to allow our customers to maximize all
components of value - quality, outcomes and cost containment. With the
Enterprise Analyst , healthcare organizations capture, manage, and analyze
clinical and operational costs, case mix data, payer contracts, physician
profiles, resource utilization, and patient care outcomes data. The Enterprise
Analyst is comprised of three integrated modules:
Enterprise Costing allows a healthcare enterprise to measure, monitor and
compare costs across the continuum of care for all care settings. This product
allows healthcare managers to easily obtain the information needed to make
optimal decisions regarding resource allocation and cost containment. The system
supports flexible cost determination based on a range of methodologies including
micro-costing, engineered standards, relative value units, activity based
costing, and ratio of cost to charges.
Enterprise Case Mix and Contract Management (CM2) is a powerful, new
combination case mix and contract management system. CM2 features a fully
integrated clinical and financial database. The system is designed to analyze
clinical outcomes against key variables such as revenues, costs, severity,
physician to discover the techniques that result in desirable outcomes and lower
costs. CM2 is designed to calculate reimbursement based on payer contract terms,
track contractual allowances accurately to provide precise profitability
measures and variance analyses of payer contracts, generate payer and patient
letters, and provide a contract modeling capability that can handle any
reimbursement model for more accurate negotiations.
Enterprise Performance Measurement and Modeling (PMM) effectively
integrates strategic planning with the operational planning process across the
enterprise. PMM works in a distributed environment and provides a dynamic
statistics file for comprehensive flexible budgeting and financial modeling. The
system supports enterprise wide detailed wage and salary planning, financial
forecasting, cost allocation, contractual allowance determination, and
procedural rate setting.
Resource Case Management, a line of DSS products, provides case managers
and other personnel the ability to evaluate and manage patient care resources on
a daily basis. The Resource Case Management system is comprised of three
integrated modules each of which addresses a distinct and logical part of the
case management and analysis process:
The Pathway Generator module analyzes historical case data and generates
resource pathways.
The Pathway Monitor module tracks actual resource consumption and related
variation, reports performance, and assigns pathways to cases.
The Reimbursement module calculates expected reimbursement.
<PAGE>
The DSS products are licensed under non-exclusive perpetual licenses. Total
client fees for DSS products range from $25,000 to $300,000, depending on the
size of the healthcare organization, and are comprised of license fees charged
for the specific modules that are licensed, along with implementation and
technical fees. At the time a license is granted, the Company generally enters
into a one-year maintenance and support agreement for an annual fee that is
typically based on a percentage of the then current license fee and which is
renewable at then current rates for successive one-year terms.
Patient Focused Systems (PFS)
This division's main product is InterAct 2000, which is a modular system of
software tools and methodologies designed to manage patient care resource
utilization through workload measurement, staffing against budget, cost and
productivity reporting, and employee scheduling. As of May 31, 1997, PFS
software products were licensed to 450 healthcare organizations. InterAct 2000
includes two integrated modules:
The Workload/Productivity module incorporates a proprietary, research-based
workload measurement methodology applicable to all medical/surgical, mental
health, ambulatory, perinatal, and dialysis populations. This module uses an
organization's own financial and quality of care objectives to generate
assessments of workload and staffing needs against the department's resource
utilization budget. Workload/Productivity tracks direct care provider costs so
managers can understand and control variances in revenue, expenses and
productivity. It also provides data for comparing and benchmarking resource
utilization relative to similar institutions or departments.
Workload/Productivity enables the user to fulfill JCAHO patient care resource
management requirements.
The Personnel/Scheduler module creates balanced staff schedules based on a
specific scheduling algorithm and a set of user defined rules.
Personnel/Scheduler also maintains ongoing personnel records with available
interfaces to payroll and time and attendance systems.
The PFS products are licensed under non-exclusive perpetual licenses. Total
client fees for PFS products range from $20,000 to $100,000, depending on the
size of the healthcare organization, and are comprised of license fees charged
for the specific modules that are licensed along with implementation and
technical fees. At the time a license is granted, Medicus generally enters into
a one-year maintenance and support agreement for an annual fee that is based on
a percentage of the then current license fee and which is renewable at then
current rates for successive one-year terms.
Discontinued Operation
Medicus formerly offered information management services to operate all or
part of the information systems division of selected healthcare provider
organizations. These services were generally performed on the client's premises
by Medicus personnel that functioned as though they were the client's employees.
While the information systems management market presents several attractive
opportunities, it is dominated by many companies with significantly greater
financial and technical resources. As a result, price competition is strong and
sales cycles are traditionally much longer in this sector than in the Company's
core software and service product areas. Because of this, and the fact that
information systems management is not a strong fit with the Company's main focus
on healthcare decision support system opportunities, the Company decided to
discontinue this line of business. The Company will continue providing services
under its existing contract until May 31, 1998, the expiration date of the
contract.
<PAGE>
Maintenance and Support Services
Medicus provides training and support services during client implementation
and thereafter, as required. Maintenance and support services include software
updates, enhancements and services which are purchased by substantially all of
the Company's clients under renewable annual contracts. The Company maintains
logging, notification, and follow-up procedures to track client problems
encountered in implementing and operating its products. It also conducts client
conferences to exchange ideas regarding product usage and product extensions.
Management believes that these conferences are valuable in gathering ideas for
future products as well as enhancements to the Company's current product line.
Recurring Revenue
The Company's recurring revenue (defined as revenue generated pursuant to a
multi-year contract or pursuant to an ongoing contract, such as the Company's
standard form of annual maintenance and technical support agreements, which
contemplate continued renewals) was $10.1 million, $9.4 million and $9.0 million
for the three fiscal years ended May 31, 1997, 1996 and 1995, respectively.
Backlog
As of May 31, 1997 and 1996, the Company's backlog (which consists of
signed contracts or purchase orders for products and services which are expected
to be realized as revenue over the next twelve months plus remaining revenue on
annual maintenance and support contracts) was approximately $9.2 million and
$8.1 million, respectively. Included in backlog is $4.2 million and $4.9 million
of deferred maintenance and support for the fiscal years ended May 31, 1997 and
1996, respectively.
Markets
The primary market for the Company's products and services includes
hospitals, integrated delivery systems and academic medical centers. Table I
below summarizes the Company's primary and secondary markets for its main
product lines and the number of clients that have been licensed to use each of
the Company's three main software products and services.
<PAGE>
<TABLE>
<CAPTION>
Table I
THE COMPANY'S MAJOR MARKETS
Products and Services Primary Markets Secondary Markets
--------------------- --------------- -----------------
<S> <C> <C>
Clinical Data Systems All hospitals - more than 5,000 Physician group practices,
potential customers, of which ambulatory care facilities,
600 are clients governmental review
agencies and consulting
firms
Decision Support Systems All hospitals - more than 5,000 Managed care
potential customers, of which organizations and
150 are clients physician group practices
Patient Focused Systems Hospitals with more than Hospitals with fewer than
50 beds - more than 3,850 50 beds, outpatient ambulatory
potential customers, of which care clinics, nursing homes and
450 are clients mental health facilities
</TABLE>
<PAGE>
<PAGE>
As healthcare delivery systems and their respective information systems
have become more integrated, the Company has also placed an increasing emphasis
on the integration of its products by implementing a strategy focused on
upgrading its client base to new versions of its software and cross-selling
additional products to its more than 1,200 existing customers. Because many of
these clients use only one or two of the Company's products, priced between
$15,000 and $300,000, the Company believes this strategy presents an excellent
growth opportunity.
Market Environment
The shift of patient care delivery to less costly settings, such as
outpatient clinics and physician offices, has accelerated the consolidation
trend of healthcare delivery organizations. Employers and government purchasers
of healthcare services have dramatically shifted providers' financial incentives
by capping expenditures through various contract pricing mechanisms.
Additionally, these consumers are devising new, objective indicators for
measuring clinical performance. Healthcare delivery organizations have responded
by radically restructuring care delivery processes. To support these delivery
process changes, providers need access to better data and more information
analysis tools.
Successful healthcare organizations require new cost, profitability and
performance measurement systems to understand their patient populations and the
cost and outcomes of the care they provide. Market forces are significantly
altering the relationships among physicians, hospitals, employers and insurers
(private and government). New paradigms for care delivery, such as case
management, critical or clinical pathways and outcomes monitoring, require a
link between service costs and clinical outcomes. The demand for products such
as the Company's financial and clinical decision support products is growing
rapidly within the context of this increasingly competitive and price-sensitive
market.
Competition
The healthcare decision support software and services market is highly
competitive. The Company competes with several firms in each of its market
niches, although no one firm competes directly in all niches in which the
Company offers products. Competing firms vary in size and in geographic
coverage. A number of them have greater financial and management resources than
the Company. The Company believes that the principal factors affecting
competition are product functionality, analytical methodologies, flexibility and
ease of use, product enhancements, reliability and quality of implementation and
technical support, documentation, size of installed client base, competitive
pricing, and corporate reputation. The Company believes that it competes
favorably in these areas.
Marketing and Sales
Medicus sells its products through its own direct sales organization. The
Company's sales force has historically been organized along product lines but is
being reorganized to sell the full range of the Company's products. Individual
product sales are made by sales personnel and managers. Large sales
opportunities are pursued by a team including a corporate officer and sales and
technical personnel. The Company's products are also marketed under agreements
with accounting firms, consultants and hospital alliances.
The Company establishes market presence by publishing articles, presenting
talks at professional meetings, assuming leadership positions in professional
organizations, participating in trade shows and advertising in trade magazines.
Prospective clients are identified through these and other methods including
direct mail, telemarketing, product seminars, and requests for proposals from
healthcare organizations.
<PAGE>
Technology
The Company's software products, which operate on microcomputers in both a
standalone and network environment utilizing Windows NT, MS-DOS and UNIX
operating systems, are developed with the objective of providing efficient
operation, portability among mainstream hardware platforms and networks,
flexibility in supporting client needs, integrated modularity, and cost
effective support and enhancements. For this reason, VB, C, C++ and SmallTalk
programming languages are utilized for software development. Relational database
management systems for software products are SQL-compatible, with Oracle being
the Company's database system of choice. The support of industry standard
technologies as well as Company-developed proprietary development tools allow
effective and efficient product development and integration among current and
future products. The Company's experience with system interfaces and the
methodologies used for interfacing systems allows effective and rapid
connectivity of Company modules with other client systems.
Product Development
The software industry is characterized by rapid technological change and
the need for a continuing high level of expenditures for the development and
improvement of software products and services. Medicus' approach to designing
and developing successful products is market driven and based on working in
close collaboration with its clients. In developing its products, the Company
utilizes common software design and development tools and techniques.
In order to maintain and improve the market acceptance of its products and
services, the Company believes it must maintain its commitment to product
development and enhancement. For the three fiscal years ended May 31, 1997, 1996
and 1995, the Company spent $4.6 million, $4.1 million and $4.1 million,
respectively, on research and development, representing 56%, 39% and 30% of
software products and services revenue. These expenditures include expensed,
capitalized and client-funded research and development spending.
As of May 31, 1997, the Company employed 40 professional computer
programmers and technical personnel. Most of the Company's technical personnel
are involved, at different times and in varying degrees, in product development
and enhancement.
Product Protection
The Company owns various trademarks and servicemarks, including the
federally registered servicemark "Medicus." It does not own any patents or
registered copyrights. The Company believes that patent and copyright
protection, even if available, are less important in its industry than
innovative software engineering skills, technological and engineering experience
and marketing capabilities. The Company relies largely upon its license
agreements with clients and its own security systems, confidentiality procedures
and employee nondisclosure agreements to maintain the trade secrecy of its
products. While the enforceability of such agreements cannot be assured, the
Company believes that they provide a deterrent to unauthorized use of the
Company's proprietary information.
Employees
As of May 31, 1997, the Company employed 161 persons, of whom 65 were based
at the Company's Evanston, IL corporate offices, 45 were based at the Company's
Alameda, CA office, 16 were based at the Company's Chesterfield, MO office, and
35 were based at various other sales and service centers.
<PAGE>
ITEM 2. PROPERTIES
The Company's principal office is located in leased space in Evanston
containing approximately 23,200 square feet of space. The lease expires on June
30, 2006. The annual rent for fiscal 1998 for this space is $468,000.
The Company also leases space for offices in Alameda, CA and Chesterfield,
MO. The leases for these two facilities expire on October 31, 1999 and April 30,
1998, respectively, and have an aggregate annual rent of $340,000 for fiscal
1998.
ITEM 3. LEGAL PROCEEDINGS
On July 11, 1997, St. Joseph Hospital filed a lawsuit, St. Joseph Hospital
v. Medicus Systems Corporation, File No. 97-36574, in the District Court of
Harris County, Texas. The Company accepted service of the complaint on August
12, 1997. The complaint alleges primarily breach of a contract to provide case
management software, and seeks unspecified damages, including attorney's fees.
The Company vigorously denies any liability, and intends to file its answer
denying the plaintiff's claims prior to September 8, 1997, the date such answer
is due. The chief executive officers of the Company and the plaintiff have
recently met to discuss the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders during
the Medicus Systems Corporation Annual Meeting of Stockholders held March 19,
1997:
<TABLE>
<CAPTION>
Votes Cast Authority
Description of Matter For Withheld
- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
1. Election of Directors
William G. Brown 6,134,711 160,232
Jon E.M. Jacoby 6,134,897 160,046
Richard C. Jelinek 6,134,897 160,046
John P. Kunz 6,134,897 160,046
Risa Lavizzo-Mourey 6,134,897 160,046
Walter J. McNerney 6,134,797 160,146
Gail L. Warden 6,134,897 160,046
Votes Cast Votes Cast Broker
For Against Withheld Non-Votes
---------- ---------- -------- ---------
2. Proposal to approve the Company's
1996 C.E.O. Replacement Stock Option
Plan 3,972,182 309,015 87,477 1,926,269
3. Proposal to approve the Company's
1996 C.E.O. Special Stock Option Plan 4,046,681 251,180 89,168 1,907,914
4. Proposal to approve the amendments to
and restatement of the Company's 1989,
1991, 1993, 1993 Performance and 1994
Stock Option Plans 5,878,995 311,162 16,096 88,690
5. Proposal to approve the Company's
1997 Employee Stock Option and
Restricted Stock Plan 3,714,827 754,942 12,513 1,812,661
6. Proposal to approve agreements pursuant
to which the Company would repurchase
Common Stock and Voting Preferred
Stock from Richard C. Jelinek 4,304,924 43,168 20,583 1,926,268
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under
the symbol "MECS". Trading commenced March 1, 1996 as a result of the
Distribution.
The following table sets forth, for the periods indicated, the high and low
reported sale prices for the common stock as reported on the Nasdaq National
Market since the Distribution on March 1, 1996.
Fiscal Year 1996 High Low
Fourth Quarter $ 9.00 $ 5.25
Fiscal Year 1997
First Quarter 6.50 4.75
Second Quarter 6.31 4.50
Third Quarter 7.50 4.38
Fourth Quarter 6.50 5.25
There were 185 holders of record and approximately 2,160 beneficial holders
of the Company's common stock as of August 21, 1997.
The Predecessor Corporation (prior to March 1, 1996) and the Company
(beginning March 1, 1996) declared quarterly dividends of $0.03 per share in
each of the quarters in fiscal years 1995 and 1996. The Board of Directors of
the Company has determined not to pay dividends on the common stock for the
foreseeable future.
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek
and a trust of which Mr. Jelinek is a beneficiary (the "Trust") one million
shares of Common Stock and 500 shares of Voting Preferred Stock. Also, Mr.
Jelinek agreed to resign as Chairman and agreed, among other things, not to
attempt to seek voting control of the Company for a period of five years. (Mr.
Jelinek continues to serve as a Director.) In exchange, the Company agreed to
pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0 million in 8%
two-year promissory notes, and to issue to Mr. Jelinek and the Trust 400,000
five-year warrants to purchase Common Stock at $8.00 per share. The Company's
Board of Directors approved the Agreement on January 2, 1997, and the Company's
stockholders approved the Agreement at the Annual Meeting of Stockholders on
March 19, 1997. Neither the warrants nor the shares of Common Stock issuable
upon exercise of the warrants were registered under the Securities Act of 1933,
pursuant to the exemption contained in Section 4(2) of that Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the
financial statements of the Company and the Report on Form 10 filed on January
25, 1996. The financial statements for each of the years in the five-year period
ended May 31, 1997 have been audited by Price Warehouse LLP, independent
accountants. Revenues and operating income (loss) have been restated to exclude
results from the Company's discontinued operation. Also, the assets and
liabilities related to this separate line of business are presented as net
assets of discontinued operations on the 1997 and 1996 Balance Sheet. This
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Company's Financial Statements and Notes.
<PAGE>
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- --------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues $ 18,269,700 $ 19,794,179 $ 22,507,267 $ 21,336,870 $ 18,140,323
Operating income (loss) (7,355,865) (7,444,704) 3,540,262 4,379,146 3,225,905
Net income (loss) (4,220,018) (3,725,991) 3,024,493 3,224,711 2,116,869
Loss per common share* $ (0.70) - - - -
Pro forma earnings (loss) per common
share* - $ (0.57) $ 0.45 $ 0.51 $ 0.39
Balance Sheet:
Working capital $ 2,090,534 $ 12,627,354 $ 17,149,499 $ 21,983,507 $ 9,411,327
Total assets 22,848,672 27,688,565 30,881,842 35,509,776 17,804,670
Stockholders' equity 9,501,609 18,201,237 22,304,371 25,574,678 11,460,792
</TABLE>
* Loss per common share and pro forma earnings (loss) per common share are
based upon the actual capital structure of the Company since March 1, 1996, and
the capital structure of the Predecessor Corporation prior to March 1, 1996.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This report contains statements that may be considered forward-looking,
such as the discussion of the Company's strategic goals, new products and cash
flows. These statements speak of the Company's plans, goals or expectations,
refer to estimates, or use similar terms. Actual results could differ materially
from the results indicated by these statements because the realization of those
results is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed in
more detail below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations' and under "Item 1 - Business." All
forward-looking statements included in this document are based upon information
presently available, and the Company assumes no obligation to update any
forward-looking statement.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the percent of
revenue represented by certain line items in the Company's Statements of
Operations and (ii) the percentage change in each line item from the prior
period.
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
Percent of Revenues ------------------------------
For the years ended May 31, 1996 to 1995 to
------------------------------------------
1997 1996 1995 1997 1996
------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software products and services 44.6% 52.4% 60.0% (21.5)% (23.1)%
Maintenance and support services 55.4 47.6 40.0 7.4 4.5
------------- --------------- -------------- --------------- --------------
100.0 100.0 100.0 (7.7) (12.1)
------------- --------------- -------------- --------------- --------------
Costs and expenses:
Software products and services <F1> 36.0 37.5 30.5 (24.5) (5.5)
Maintenance and support services <F1> 50.4 59.1 48.5 (8.4) 27.2
------------- --------------- -------------- --------------- --------------
44.0 47.8 37.7 (15.0) 11.3
Marketing, general and
administrative 54.9 57.0 37.0 (11.1) 35.6
Research and development 16.8 9.3 9.6 67.0 (14.6)
Restructuring charges 15.3 23.5 - (39.9) N/M
Stock repurchase 9.3 - - N/M N/M
------------- -------------- -------------- --------------- --------------
140.3 137.6 84.3 (5.9) 43.6
------------- --------------- -------------- --------------- --------------
Operating income (loss) (40.3) (37.6) 15.7 (1.2) N/M
Interest and other income 2.0 2.8 3.0 (33.9) (18.2)
------------- --------------- -------------- --------------- --------------
Income (loss) from continuing operations
before income taxes (38.3) (34.8) 18.7 1.4 N/M
Provision for (benefit from) income
taxes (14.1) (14.2) 6.7 (8.8) N/M
------------- --------------- -------------- --------------- --------------
Income (loss) from continuing operations (24.2) (20.6) 12.0 8.5 N/M
Discontinued operation, net of taxes 1.1 1.8 1.4 (42.6) 7.1
------------- --------------- -------------- --------------- --------------
Net income (loss) (23.1)% (18.8)% 13.4% N/M N/M
============= =============== ============== =============== ==============
<FN>
<F1> Shown as a percent of related revenues.
</FN>
</TABLE>
(1) Shown as a percent of related revenues.
Operating revenues are derived from two sources: (1) license fees and the
related services for licensing the Company's software products; and (2)
maintenance and support services related to such software products.
<PAGE>
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Software Products and Services
Software products and services revenues decreased 22% to $8.1 million in
fiscal 1997 compared to $10.4 million in fiscal 1996. The decrease in revenues
was attributable, in part, to the delay in the release of certain new
Windows-based products, including the next generation of Decision Support
Systems. Also contributing to the decline was a continued lengthening of the
sales cycle, due to complex implementation plans related to the increasing
number of clients migrating from the DOS-based to Windows-based products,
principally in the CDS division. Additionally, the Company experienced a
continuing weakness in its existing markets and product lines, resulting from
price pressures and consolidations in the healthcare industry and in the managed
care environment. Costs and expenses for software products and services
decreased 25% to $2.9 million compared to $3.9 million in fiscal 1996. Costs and
expenses as a percentage of related revenue were 36% and 38% for fiscal 1997 and
1996, respectively. The decrease was due to cost containment measures initiated
by management and a lower volume of services provided.
Maintenance and Support Services
Maintenance and support services revenues increased 7% to $10.1 million in
fiscal 1997 compared to $9.4 million in fiscal 1996. The increase was primarily
due to the continuing migration of clients to the Company's Windows-based
products, along with modest price increases for certain products. Costs and
expenses decreased 8% to $5.1 million in fiscal 1997 compared to $5.6 million in
fiscal 1996. Costs and expenses as a percentage of related revenue were 50% and
59% for fiscal 1997 and 1996, respectively. The decrease was primarily due to a
shift in focus of technical personnel from maintenance activities to development
activities to complete certain new Windows-based products.
Marketing, General and Administrative
Marketing, general and administrative expenses decreased 11% to $10.0
million in fiscal 1997 compared to $11.3 million in fiscal 1996. The decrease
primarily was due to higher expenses in the prior year related to the increase
in the provision for doubtful accounts, and expenses related to the separation
of the managed care business.
Research and Development
Total expenditures for research and development (including amounts
capitalized and funded by clients) increased 12% to $4.6 million in fiscal 1997
from $4.1 million in fiscal 1996. Research and development costs charged to
expense were $3.1 million in fiscal 1997 compared to $1.8 million in fiscal
1996. The Company did not obtain funding from clients under development service
agreements during the twelve months ended May 31, 1997, compared to $218,000
obtained in fiscal 1996, for its research and development efforts. These
development service agreements provide for retention of ownership of the
products developed by the Company. The Company capitalized software development
costs of $1.8 million in fiscal 1997 and $2.0 million in fiscal 1996 pursuant to
Statement of Financial Accounting Standards No. 86. Costs capitalized in fiscal
1997 were partially offset by $240,000 in provisions recorded as part of the
abandonment of certain development efforts. Total research and development
expenditures (including amounts capitalized and funded by clients) were 56% and
39% of software products and services revenues during fiscal 1997 and 1996,
respectively. During fiscal 1997, the Company's development efforts focused on
the Clinical Data Systems and Decision Support Systems product lines. During
fiscal 1996, the Company's development efforts focused on the Resource Case
Management System, Medicus Architecture (MACH 1), and the Decision Support
Systems product line.
<PAGE>
Restructuring Charges
As part of an ongoing evaluation, the Company refined its strategic
planning process during fiscal 1997, and assessed continuing obligations
associated with the implementation of its strategic plan. The Company continued
the process of implementing its plans during 1997 and, following the stock
repurchase from its founder in the quarter ended February 28, 1997, recorded
$2.8 million in restructuring charges to complete its plan, including accruing
costs to reorganize the Company's business units, to abandon certain development
efforts, and to increase the allowance for doubtful accounts. Specifically, the
Company decided to relocate operations for its Clinical Data Systems ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs associated with the relocation, which is expected to be completed during
the next nine months, included costs to cancel existing lease agreements, to
terminate employees and to write down abandoned assets. The Company did not
accrue estimated incremental costs of approximately $1.3 million associated with
the relocation. Such costs relate to the orderly transition of the division,
will be incurred during fiscal 1998 and are not accruable as part of the
restructuring charge under generally accepted accounting principles. In
addition, the Company increased it reserves for product line exit costs and
severance costs that relate to the remaining customers of the previously
discontinued Clinical Case Management Systems ("CCM") product line. Also,
certain product development efforts for the Company's Patient Focused Systems
("PFS") products were abandoned, and the associated development costs, which had
been previously capitalized, along with other related product line exit costs
were expensed. The Company has increased its allowance for doubtful accounts due
to the potential for certain additional billed and unbilled accounts becoming
uncollectible as a result of the decisions discussed above. Direct costs and
expenses of the restructuring were 15% of fiscal 1997 revenues.
Stock Repurchase
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek,
and a trust of which he is a beneficiary (the "Trust"), one million shares of
Common Stock and 500 shares of Voting Preferred Stock. Also, Mr. Jelinek agreed
to resign as Chairman and agreed, among other things, not to attempt to seek
voting control of the Company for a period of five years. In exchange, the
Company agreed to pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0
million in 8% two-year promissory notes, and to issue to Mr. Jelinek and the
Trust 400,000 five-year warrants to purchase Common Stock at $8.00 per share.
The Company's results of operations for the year ended May 31, 1997
included $1,690,042 in related costs and expenses, as a result of the Agreement.
Amounts in excess of the market price of the Common Stock and the exercise price
of the Voting Preferred Stock, aggregating $1,319,000, have been expensed. Also
included are $371,042 in investment banking and other professional fees incurred
to consummate the Agreement.
Interest and Other Income
Interest and other income decreased 34% to $367,000 in fiscal 1997 compared
to $556,000 in fiscal 1996, primarily due to lower average cash balances.
Income Taxes
The Company's effective income tax rate benefit decreased to 37% in fiscal
1997 compared to 41% in fiscal 1996. The decrease was primarily attributable to
the fiscal 1997 net operating loss and stock repurchase transaction.
Discontinued Operation
Results from the Company's discontinued line of business decreased 43% to
$199,000 in fiscal 1997 compared to $347,000 in fiscal 1996, primarily due to
lower revenues from the contract to manage the information systems functions at
Bethesda, Inc. in Cincinnati, Ohio.
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Software Products and Services
Software products and services revenues decreased 23% to $10.4 million in
fiscal 1996 compared to $13.5 million in fiscal 1995. The decrease in revenue
was attributable, in part, to a general weakness in the Company's primary
markets and product lines, resulting from continued consolidations in the
healthcare industry and growing price pressures in the current managed
healthcare environment. Also contributing to the decline were delays in the
release of certain Windows-based products, higher than expected turnover in the
sales force, the increasing complexity and size of new contracts and the related
lengthening of the sales cycle. Additionally, the Company continued to
experience increased competition in many of its markets. Costs and expenses for
software products and services decreased 6% to $3.9 million compared to $4.1
million in fiscal 1995. Costs and expenses as a percentage of related revenue
were 38% and 31% for fiscal 1996 and 1995, respectively. The increase was due to
the mix of software, hardware and implementation revenue.
Maintenance and Support Services
Maintenance and support services revenues increased 5% to $9.4 million in
fiscal 1996 compared to $9.0 million in fiscal 1995. The increase was primarily
due to a larger installed base of licensed products and modest price increases
for the Company's maintenance and support services. Costs and expenses increased
27% to $5.6 million compared to $4.4 million in fiscal 1995. Costs and expenses
as a percentage of related revenue were 59% and 49% for fiscal 1996 and 1995,
respectively. The increase was primarily due to a shift in focus of technical
personnel to maintenance activities from development activities during fiscal
1996, and incremental expenses related to supporting clients on the Company's
new Windows-based products as well as the technology platforms historically
support by the Company.
Marketing, General and Administrative
Marketing, general and administrative expenses increased 36% to $11.3
million in fiscal 1996 compared to $8.3 million in fiscal 1995. The increase
primarily resulted from an increase in the provision for doubtful accounts,
following a comprehensive analysis necessitated by the current market conditions
in the healthcare industry, and expenses related to the separation of the
managed care business.
Research and Development
Total expenditures for research and development (including amounts
capitalized and funded by clients) remained constant at $4.1 million in fiscal
1996 and 1995. Research and development costs charged to expense were $1.8
million in fiscal 1996 compared to $2.2 million in fiscal 1995. The Company
obtained funding from clients under product development service agreements of
$218,000 and $509,000 in fiscal 1996 and 1995, respectively, for its research
and development efforts. These development service agreements provide for
retention of ownership of the products developed by the Company. The Company
capitalized software development costs of $2.0 million in fiscal 1996 and $1.4
million in fiscal 1995 pursuant to Statement of Financial Accounting Standards
No. 86. Total research and development expenditures (including amounts
capitalized and funded by clients) were 39% and 30% of software products and
services revenues during fiscal 1996 and 1995, respectively. During fiscal 1996,
the Company's development efforts focused on the Resource Case Management
System, Medicus Architecture (MACH 1), and the Decision Support Systems product
line. During fiscal 1995, the Company's development efforts focused on the
Clinical Case Management System, the Resource Case Management System, the
WinCoder+ and Workload/Productivity modules.
<PAGE>
Restructuring Charges
During February, 1996, the Company commenced a process to evaluate its
current strategic position, including the markets it expects to pursue and its
product offerings in those chosen markets. As a result of decisions made as part
of this evaluation process, the Company recorded $4.7 million in restructuring
charges, representing costs and expenses to exit certain product lines, to
abandon certain product development efforts and to provide for liabilities
resulting from the strategic redirection of the Company, including severance
costs. Specifically, the Company decided to exit the Clinical Case Management
Systems and the Executive Information Systems product lines. Additionally,
product development efforts for the Clinical Data Systems Wincoder V2 project
and portions of the MACH 1 project, which will no longer be utilized in the
Medicus product line, were abandoned and their associated development costs,
which had been previously capitalized, were expensed. Severance costs associated
with an officer and several employees, in addition to the write-off of a portion
of the Contract Management System, were also included in the restructuring
charge. Direct costs and expenses of the restructuring were 24% of fiscal 1996
revenues.
Interest and Other Income
Interest and other income decreased 18% to $556,000 in fiscal 1996 compared
to $680,000 in fiscal 1995, primarily due to lower average cash balances.
Income Taxes
The Company's effective income tax rate increased to 41% in fiscal 1996
compared to 36% in fiscal 1995. The increase was primarily attributable to the
fiscal 1996 suspension of the research and development tax credit.
Discontinued Operation
Results from the Company's discontinued line of business increased 7% to
$347,000 in fiscal 1996 compared to $324,000 in fiscal 1995, primarily due to
higher revenues from the contract to manage the information systems functions at
Bethesda, Inc. in Cincinnati, Ohio.
FINANCIAL CONDITION
Liquidity and Capital Resources
As a result of the Company's commitment to expand its software products and
services, funds are required to support its ongoing product research and
development activities and the infrastructure required to serve its customer
base. Historically, cash generated from its operations has been an important
contributor to these needs. As a result of the market factors adversely
affecting fiscal 1997 results, as well as the stock repurchase transaction, the
Company was required to use a significant portion of its cash reserves. It is
expected that, following the restructuring efforts described herein, the Company
will return to a situation where cash from operations will provide an important
source of liquidity to support its normal capital needs, although numerous
factors, including any reductions in revenues from currently anticipated
amounts, could affect the amount of such cash available.
<PAGE>
At May 31, 1997, the Company had available cash reserves of approximately
$1.2 million. In addition, the Company had a $2.5 million standby credit
facility available. $1.0 million of the principal amount of the Company's 8%
promissory notes, issued in connection with the Company's stock repurchase
agreement, is due in March 1998. In addition, the Company anticipates cash
outlays of approximately $3.2 million in the next nine months, resulting
primarily from its decision to reorganize its business units and to exit certain
product lines.
The Board of Directors of the Company has determined not to pay dividends
on the common stock for the foreseeable future. While the Company has
experienced negative cash flows from operating activities during the past two
fiscal years, management believes that, as a result of significant reductions in
expenses, its cash flows will improve. While there can be no assurance that this
will occur, the Company currently believes that it will have adequate financial
resources available from operations and the available credit facility to provide
sufficient liquidity to meet its ordinary capital requirements for the
foreseeable future, including the March 1998 payment on the promissory notes and
cash outlays related to the Company's restructuring plan.
During its second fiscal quarter, the Company bills its clients in advance
for the next calendar year's maintenance and support services provided on its
software products. This generates an increase in the Company's accounts
receivable and deferred revenue balances during those periods, and increases
cash balances in subsequent months as the related accounts receivable are
collected.
Impact of Inflation
To date, inflation has not had a material impact on the Company's revenues
or income.=====================================================================
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS Page
Report of Independent Accountants F-2
Balance Sheets as of May 31, 1997 and 1996 F-3
Statements of Operations for the years ended May 31,
1997, 1996 and 1995 F-4
Statements of Changes in Stockholders' Equity for
the years ended May 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995 F-7
Notes to Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Medicus Systems Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Medicus Systems
Corporation at May 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended May 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Chicago, Illinois
July 23, 1997
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
May 31, 1997 and 1996
A S S E T S 1997 1996
---------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,205,135 $ 765,312
Short-term investments - 7,705,380
Accounts receivable and unbilled services, net of allowance for doubtful
accounts of $1,713,008 and $1,222,463, respectively 10,500,676 8,451,675
Inventories 214,264 235,398
Prepaid expenses and other 258,725 638,669
Prepaid and deferred income taxes 2,147,416 2,650,076
Due from Managed Care Solutions, Inc. - 647,408
Net assets of discontinued operation 111,381 1,020,764
---------------- ---------------
14,437,597 22,114,682
---------------- ---------------
Property and equipment, at cost less accumulated depreciation 2,335,175 2,794,932
Internally developed software, at cost less accumulated amortization
of $2,110,378 and $1,729,141, respectively 3,087,849 2,152,419
Installment accounts receivable, due after one year, less unearned
interest of $154,647 and $147,963, respectively 533,488 398,897
Deferred income taxes 2,454,563 227,635
---------------- ---------------
$22,848,672 $27,688,565
================ ===============
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current liabilities:
Accounts payable $ 597,787 $ 188,777
Accrued compensation 453,035 1,487,551
Accrued restructuring charges 2,247,416 1,527,461
Other accrued liabilities 1,138,226 970,140
Deferred revenue 6,910,599 5,313,399
Notes payable 1,000,000 -
---------------- ---------------
12,347,063 9,487,328
---------------- ---------------
Notes payable 1,000,000 -
---------------- ---------------
Stockholders' equity:
Preferred stock $1,000 par, 500 shares authorized and issued 500,000 -
Common stock $.01 par:
Authorized - 10,000,000 shares
Issued - 6,487,159 shares and 6,456,447 shares, respectively 64,872 64,564
Capital in excess of par value 22,063,715 21,880,994
Capital in excess of par value - warrant 944,000 -
Less treasury stock:
Preferred stock, at cost - 500 shares (500,000) -
Common stock, at cost - 1,007,002 and 7,002 shares, resp (5,687,418) (62,418)
Unrealized loss on short-term investments - (18,361)
Accumulated deficit (7,883,560) (3,663,542)
---------------- ---------------
9,501,609 18,201,237
---------------- ---------------
$22,848,672 $27,688,565
================ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
For the years ended May 31, 1997, 1996 and 1995
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenues:
Software products and services $ 8,148,858 $ 10,374,977 $ 13,495,033
Maintenance and support services 10,120,842 9,419,202 9,012,234
--------------- ---------------- ---------------
18,269,700 19,794,179 22,507,267
--------------- ---------------- ---------------
Costs and expenses:
Software products and services 2,936,115 3,889,458 4,117,822
Maintenance and support services 5,098,992 5,563,821 4,374,432
--------------- ---------------- ---------------
8,035,107 9,453,279 8,492,254
Marketing, general and
administrative 10,034,473 11,287,826 8,325,563
Research and development 3,065,552 1,835,575 2,149,188
Restructuring charges 2,800,391 4,662,203 -
Stock repurchase 1,690,042 - -
--------------- ---------------- ---------------
25,625,565 27,238,883 18,967,005
--------------- ---------------- ---------------
Operating income (loss) (7,355,865) (7,444,704) 3,540,262
Interest and other income 367,430 555,742 679,547
--------------- ---------------- ---------------
Income (loss) from continuing operations
before income taxes (6,988,435) (6,888,962) 4,219,809
Provision for (benefit from) income taxes (2,569,365) (2,816,313) 1,519,131
--------------- ---------------- ---------------
Income (loss) from continuing operations (4,419,070) (4,072,649) 2,700,678
Discontinued operation, net of taxes 199,052 346,658 323,815
--------------- ---------------- ---------------
Net income (loss) $ (4,220,018) $ (3,725,991) $ 3,024,493
=============== ================ ===============
Earnings (loss) per common and common
equivalent share, pro forma for 1996
and 1995
Continuing operations $ (0.73) $ (0.62) $ 0.40
Discontinued operation 0.03 0.05 0.05
--------------- ---------------- ---------------
$ (0.70) $ (0.57) $ 0.45
=============== ================ ===============
Weighted average common and common equivalent
shares outstanding 6,007,023 6,539,988 6,704,251
=============== ================ ===============
</TABLE>
The accompanying notes are an integral
part of these statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended May 31, 1997, 1996 and 1995
Capital in Unrealized
Preferred Common Capital in Excess of Treasury Treasury Loss on
Stock Par Stock Excess of Par Value Stock Stock Short-term Accum. Group
Value Par Value Par Value Warrant (Preferred) (Common) Investments Deficit Equity Total
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1994 25,574,678 25,574,678
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Net income 3,024,493 3,024,493
Payments to Predece-
ssor Corporation,
net (6,236,370) (6,236,370)
Market value adjust-
ment of short-term
investments, net
of income taxes (58,430) (58,430)
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Balance, May 31, 1995 (58,430) 22,362,801 22,304,371
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Net loss prior to
February 29,
1996 distribution (253,772) (253,772)
Payments to Predec-
essor Corporation,
net (404,534) (404,534)
Market value adjust-
ment of short-term
investments, net
of income taxes 57,379 57,379
February 29, 1996
distribution of
common stock 64,320 21,702,593 (62,418) (21,704,495) -
Net loss subsequent
to February 29,
1996 distribution (3,472,219) (3,472,219)
Sale of stock under
employee stock
purchase plan 79 42,574 42,653
Sale of stock under
employee stock
option plan,
including tax
benefits 165 112,835 113,000
Vested portion of
stock options
applicable to
compensation 22,992 22,992
expense
Declaration of
dividends (191,323) (191,323)
Market value adjust-
ment of short-term
investments, net
of income taxes (17,310) (17,310)
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Balance, May 31, 1996 - 64,564 21,880,994 - - (62,418) (18,361) (3,663,542) - 18,201,237
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Net loss (4,220,018) (4,220,018)
Stock repurchase $500,000 944,000 (500,000) (5,625,000) (4,681,000)
Sale of stock under
employee stock
purchase plan 308 171,759 172,067
Vested portion of
stock options app-
licable to
compensation
expense 10,962 10,962
Mrkt value adjustment
of short-term
investments, net
of income taxes 18,361 18,361
-------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Balance,May 31,1996 500,000 64,872 22,063,715 944,000 (500,000) (5,687,418) - (7,883,560) - 9,501,609
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended May 31, 1997, 1996 and 1995
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,220,018) $ (3,725,991) $ 3,024,493
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of
property and equipment 1,097,274 683,281 592,411
Amortization of software 381,238 1,229,408 538,933
Deferred income taxes (62,612) (2,410,259) 383,374
Restructuring charges 1,446,781 4,208,496 -
Stock repurchase 1,319,000 - -
Provision for doubtful accounts 368,361 1,483,173 -
Changes in current assets and current liabilities:
Accounts receivable and unbilled services (1,917,262) (1,740,049) (495,179)
Due from Managed Care Solutions, Inc. 647,408 (647,408) -
Inventories 21,134 (25,451) 67,641
Prepaid expenses and other current assets (1,371,036) (351,855) (290,798)
Installment accounts receivable (134,591) 162,557 (290,685)
Accounts payable 409,268 (433,420) 187,697
Accrued compensation (1,034,516) 768,542 (320,241)
Other accrued liabilities 212,033 195,687 (141,065)
Deferred revenue 1,597,200 299,375 300,080
------------------- ------------------- -------------------
Net cash provided by (used in) operating activities (1,240,338) (303,914) 3,556,661
------------------- ------------------- -------------------
Cash flows from investing activities:
Additions to property and equipment (619,932) (806,997) (871,222)
Additions to internally developed software (1,593,494) (2,301,701) (1,956,169)
Purchase of short-term investments (86,846,102) (42,565,224) (78,747,517)
Proceeds from sale of short-term investments 89,798,110 39,903,650 61,760,000
Proceeds from maturity of short-term investments 4,784,360 5,033,377 23,683,611
------------------- ------------------- -------------------
Net cash provided by (used in) investing activities 5,522,942 (736,895) 3,868,703
------------------- ------------------- -------------------
Cash flows from financing activities:
Sale of preferred stock 500,000 - -
Sale of common stock 157,219 38,830 -
Stock repurchase (4,500,000) - -
Payments from Predecessor Corporation - 761,984 1,295,470
Payments to Predecessor Corporation - (1,359,386) (7,338,969)
Dividends paid - (191,323) -
------------------- ------------------- -------------------
Net cash used in financing activities (3,842,781) (749,895) (6,043,499)
------------------- ------------------- -------------------
Net increase (decrease) in cash and cash equivalents 439,823 (1,790,704) 1,381,865
Cash and cash equivalents:
Beginning of period 765,312 2,556,016 1,174,151
------------------- ------------------- -------------------
End of period $ 1,205,135 $ 765,312 $ 2,556,016
=================== =================== ===================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION
Prior to March 1, 1996, the Company's predecessor (the "Predecessor
Corporation") operated a software and related services business and a small
managed care business. In connection with a series of transactions which
occurred on March 1, 1996, the Predecessor Corporation formed a new Delaware
subsidiary, Medicus Systems Software, Inc., to which it transferred all of its
assets and liabilities excluding only the defined assets and liabilities of its
managed care business. In turn, the stock of this newly-formed subsidiary was
distributed on a share-for-share basis to the stockholders of the Predecessor
Corporation (the "Distribution"), the name of the subsidiary was changed to
Medicus Systems Corporation (the "Company"), and the name of the Predecessor
Corporation was changed to Managed Care Solutions, Inc. ("MCS"). The Company is
liable for all obligations of the Predecessor Corporation except those
specifically related to the Predecessor Corporation's managed care business.
Although the Company is, in substance, the Predecessor Corporation's
successor, the financial statements of the Company have been prepared as if the
Company had operated as a free-standing entity for all the periods presented
(excluding certain incremental corporate expenses that would have been incurred
had it operated on a stand-alone basis). Accordingly, the financial statements
include those assets, liabilities, revenues and expenses directly attributable
to the Company's operations and exclude those specifically related to the
managed care business. The Company believes this presentation most fairly
represents its financial condition, results of operations and changes in
stockholders' equity and cash flows. The financial statements included herein
for periods prior to the Distribution do not necessarily reflect what the
financial position and results of operations of the Company would have been had
it operated as a stand-alone entity during the periods covered, and may not be
indicative of future operations or financial position.
The Company and MCS signed a services agreement, pursuant to which the
Company (i) made available to MCS certain services, including tax, accounting,
data processing, cash management, employee benefits, monitoring, operational,
supervisory, insurance purchasing and claims administration consulting services,
and (ii) provided certain financial services to MCS, including analysis and
advice regarding potential financial transactions (including but not limited to
proposed issuance of debt or equity securities, proposed merger or asset
acquisition or sale transactions and dividend, stock split or similar
transactions), assistance in budget and forecast preparation, relations with
financial analysts, financial press, and investors, and crisis management and
control. Such services commenced on March 1, 1996, and continued for one year.
MCS paid the Company $700,000 for such services. In order to compensate the
Company for fixed costs incurred in making such services available, MCS paid
such fees whether or not it elected to utilize the services. MCS also reimbursed
the Company for its out-of-pocket expenses in connection therewith. The services
agreement also provided that the Company would not be liable for any losses or
damages suffered in respect of services to be performed thereunder, other than
by reason of its willful misconduct or gross negligence in performing such
services. Marketing, general and administrative expenses were reduced by
$525,000 and $175,000 in the years ended May 31, 1997 and 1996, respectively, as
a result of this agreement.
<PAGE>
NOTE 2 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Medicus develops, markets, and supports a family of specialized integrated
software products utilized by healthcare financial administrators, physicians
and nursing executives, health information and other administrative departments
in the United States and Canada. The Company's software products and services
enable clients to capture, structure and analyze clinical, operational and
financial information thereby allowing these professionals to measure, monitor
and manage organizational performance and optimize outcomes. Medicus also
provides product-related maintenance and support services.
Revenue recognition
Revenue from software license agreements is recognized upon contract
execution, product delivery and client acceptance in instances where no
remaining obligations under the agreement exist. In instances where minor
obligations remain under a license agreement after the delivery of the product,
a pro rata portion of the revenue is deferred until the minor obligations have
been fulfilled. When the software product has been delivered but significant
obligations are present under a license agreement, the full amount of revenue
under the agreement is deferred and recognized as the related services are
performed. Revenue from maintenance and support agreements is recognized ratably
over the term of the contract.
Inventories
Inventories, which consist primarily of data processing equipment and
forms, are stated at the lower of cost or market value, cost being determined
using specific identification.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon an estimated useful life of five years.
Gains or losses resulting from sales or retirements are recorded as incurred, at
which time related costs and accumulated depreciation are removed from the
accounts. Renewals and betterments are capitalized and depreciated. Maintenance
and repairs are charged to expense as incurred.
Purchased software used in operations is stated at cost. Amortization is
computed using the straight-line method based upon an estimated useful life of
three to five years. The amortization charged to expense in 1997, 1996 and 1995
totaled $305,415, $371,095 and $315,313, respectively.
Internally developed software
Costs of internally developed software (net of accumulated amortization)
aggregating $3,087,849 and $2,152,419 as of May 31, 1997 and 1996, respectively,
consist of certain production costs of computer software to be sold, leased or
otherwise marketed which have been capitalized in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 86. Capitalized
software costs are amortized on a product-by-product basis. Amortization is
computed based upon the ratio of current revenues to total anticipated revenues
or the straight-line method over the estimated life of the product (typically
three years), whichever provides the greater amortization. Amortization expense
for capitalized software costs totaled $381,237, $784,209 and $222,595 during
1997, 1996 and 1995, respectively.
<PAGE>
Research and development
Research and development costs, principally the design and development of
proprietary software prior to the establishment of technological feasibility,
are expensed as incurred. Routine maintenance expenses incurred in connection
with specific software applications related to individual contracts are charged
to costs of software products and services as incurred.
Income taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The statement requires an
asset and liability approach for financial accounting and reporting for income
taxes.
Earnings per share
Since the capital structure of the Company is comparable to that existing
prior to the Distribution, earnings (loss) per common share is based upon the
actual capital structure of the Company for the period from March 1, 1996
through May 31, 1997, and the capital structure of the Predecessor Corporation
for the period from June 1, 1995 through February 29, 1996. Pro forma earnings
(loss) per common share is based upon the capital structure of the Predecessor
Corporation, and does not necessarily reflect the results of operations of the
Company had it operated as a stand-alone entity during the periods presented,
and may not be indicative of future operations. Weighted average shares used in
the calculation of earnings (loss) per share represent common stock and common
stock equivalents. Common stock equivalents include shares issuable on the
exercise of stock options and the warrant (when dilutive), using the treasury
stock method from the date of grant.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses recognized during the periods presented. Actual results could differ
from those estimates.
Fair value of financial instruments
The carrying amounts reported in the balance sheets for cash, short-term
investments, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued expenses and notes payable approximate fair value
because of the immediate or short-term maturity of these financial instruments.
Statements of cash flows
For purposes of the Statements of Cash Flows, the Company considers cash
and cash equivalents to be cash and overnight investments. Actual cash paid for
income taxes for the years ended May 31, 1997, 1996 and 1995 was $90,561,
$539,559 and $1,427,700, respectively.
Reclassifications
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation. These
reclassifications had no effect on previously reported total assets, total
liabilities, stockholders' equity or results of operations.
<PAGE>
NOTE 3 - DISCONTINUED OPERATION
Effective May 31, 1997 the Company adopted a plan to discontinue its
contract services line of business. This separate line of business consisted of
information systems management contracts with two customers (one customer during
the year ended May 31, 1997). As a result of this decision, the net assets of
the contract services line of business have been reclassified in the Balance
Sheet at May 31, 1997 and 1996. Also, the results of operations of the contract
services business have been reclassified in the Statements of Operations for the
three years ended May 31, 1997.
The assets and liabilities of the discontinued operation consist mainly of
the following:
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1996
---------------------- ---------------------
<S> <C> <C>
Accounts receivable and unbilled services $ 288,457 $ 1,212,747
Prepaid expenses and other 45,702 70,725
Property and equipment 37,032 54,617
Accounts payable and other accrued liabilities (212,771) (276,960)
Accrued compensation (47,039) (40,365)
---------------------- ---------------------
$ 111,381 $ 1,020,764
====================== =====================
</TABLE>
The following table summarizes selected financial data of the contract
services business for the years ended May 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Revenues $ 10,043,000 $ 11,271,000 $11,322,000
Operating income 324,000 573,000 506,000
Income tax expense 124,610 226,331 182,146
</TABLE>
The contract services line of business is expected to continue operating
until the expiration of its remaining contract on May 31, 1998. This line of
business is not expected to incur losses or generate significant income prior to
its termination.
NOTE 4 - RESTRUCTURING CHARGES
During the third quarter of fiscal 1996, the Company commenced a process to
evaluate its strategic position, including the markets it will pursue and
product offerings in those chosen markets. As a result of decisions made in the
quarter ended February 29, 1996, the Company began a plan resulting in the
recording of approximately $1.6 million in charges to exit certain product lines
and abandon certain development efforts.
Specifically, the Company decided to exit the Executive Information Systems
product line, recording charges to write down related customer accounts and
accrue future costs to provide maintenance associated with existing contractual
obligations. In addition, product development efforts for the Optimizer project
and portions of the MACH 1 project, which will no longer be utilized in the
Medicus product line, were abandoned and their associated development costs,
which had been previously capitalized, were expensed.
During the fourth quarter of fiscal year 1996, the Company continued the
process resulting in additional charges of $3.1 million. The Company decided to
exit the Clinical Case Management Systems product line and abandon development
efforts for the Clinical Data Systems Wincoder V2 project. Severance costs
associated with an officer and several employees, in addition to the write-off
of a portion of the Contract Management System, were also included in the
restructuring charge.
<PAGE>
As part of an ongoing evaluation, the Company refined its strategic
planning process during fiscal 1997, and assessed continuing obligations
associated with the implementation of the plan. The Company continued the
process of implementing its plans during 1997 and, following the stock
repurchase from its founder in the quarter ended February 28, 1997, recorded
$2.8 million in charges to complete its plan, including accruing certain costs
to reorganize the Company's business units, to abandon certain development
efforts, and to increase the allowance for doubtful accounts. Specifically, the
Company decided to relocate operations for its Clinical Data Systems ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs accrued associated with the relocation, which is expected to be completed
during the next twelve months, included costs to cancel existing lease
agreements, to terminate employees and to write down abandoned assets. In
addition, the Company increased its reserves for product line exit costs and
severance costs that relate to the remaining customer of the previously
discontinued Clinical Case Management Systems ("CCM") product line. Also,
certain product development efforts for the Company's Patient Focused Systems
("PFS") products were abandoned, and the associated development costs, which had
been previously capitalized, along with other related product line exit costs
were expensed. The Company has increased its allowance for doubtful accounts due
to the potential for certain additional billed and unbilled accounts to become
uncollectible as a result of the decisions discussed above.
The restructuring charges included in the Statements of Operations for the
years ended May 31, 1997 and May 31, 1996, respectively, were comprised of the
following items:
<TABLE>
<CAPTION>
May 31, May 31,
1997 1996
---------------------- ---------------------
<S> <C> <C>
Product line exit costs $ 798,000 $ 856,633
Business unit reorganization costs 705,697 -
Employee termination and severance costs 569,868 1,117,086
Accounts receivable and reserves 450,000 787,206
Capitalized software write-downs 276,826 1,901,278
---------------------- ---------------------
$ 2,800,391 $ 4,662,203
====================== =====================
</TABLE>
The Company's revised strategic plan included the termination of three
officers and thirty-nine employees in 1997 and one officer and three employees
in 1996.
At May 31, 1996, restructuring liabilities in the Balance Sheet aggregated
$1,527,461. During the year ended May 31, 1997, the Company increased its
reserve for employee termination and severance costs and product line exits
costs by $569,868 and $798,000, respectively, primarily due to the Company's
decision to relocate its CDS division and increase its CCM product line reserve.
The Company also recorded a $705,697 charge for business unit reorganization
costs associated with the relocation. The Company did not accrue estimated
incremental costs of approximately $1.3 million associated with the relocation.
Such costs relate to the orderly transition of the division, will be incurred
during fiscal 1998 and are not accruable as part of the restructuring charge
under generally accepted accounting principles. During the year ended May 31,
1997 the Company paid $763,844, $233,950 and $31,100 in severance benefits,
product line exit costs, and business unit reorganization costs, respectively.
The Company also reduced its reserve for severance obligations and continuing
obligations on product line exit costs by $124,716 and $200,000, respectively,
as a result of favorable settlements with two of its employees and negotiations
with its customers.
The components of the restructuring reserve at May 31, 1997, which the
Company expects will be paid during the next twelve months, and at May 31, 1996
are as follows:
May 31, May 31,
1997 1996
---------- ------------
Product line exit costs $ 774,425 $ 410,375
Business unit reorganization costs 674,597 -
Employee termination and severance costs 798,394 1,117,086
---------- ------------
$2,247,416 $ 1,527,461
========== ============
<PAGE>
NOTE 5 - STOCK REPURCHASE
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek,
and a trust of which he is a beneficiary (the "Trust"), one million shares of
Common Stock and 500 shares of Voting Preferred Stock. Also, Mr. Jelinek agreed
to resign as Chairman and agreed, among other things, not to attempt to seek
voting control of the Company for a period of five years. (Mr. Jelinek continues
to serve as a Director.) In exchange, the Company agreed to pay Mr. Jelinek and
the Trust $4.5 million in cash and $2.0 million in 8% two-year promissory notes,
and to issue to Mr. Jelinek and the Trust 400,000 five-year warrants to purchase
Common Stock at $8.00 per share. The Company's Board of Directors approved the
Agreement on January 2, 1997, and the Company's stockholders approved the
Agreement at the Annual Meeting of Stockholders on March 19, 1997.
The Company's results of operations for the year ended May 31, 1997
included $1,690,042 in related costs and expenses, as a result of the Agreement.
The fair value of consideration exchanged in excess of the market price of the
Common Stock and the exercise price of the Voting Preferred Stock, aggregating
$1,319,000, has been expensed. Also included are $371,042 in investment banking
and other professional fees incurred to consummate the Agreement. The Company
recorded the charge in the quarter ended February 28, 1997.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of May 31, 1997 and 1996 were comprised of the
following:
1997 1996
-------------- --------------
Equipment $ 4,358,224 $ 3,797,976
Furniture and fixtures 674,796 645,260
Leasehold improvements 276,355 294,052
Purchased software used in operations 2,105,910 2,058,068
-------------- --------------
7,415,285 6,795,356
Less - accumulated depreciation 5,080,110 4,000,424
-------------- --------------
$ 2,335,175 $ 2,794,932
============== ==============
NOTE 7 - INCOME TAXES
The provision for (benefit from) income taxes from continuing operations
consisted of the following:
Year Ended May 31,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
Currently payable:
Federal $ (2,183,016) $ (344,770) $ 838,701
State (323,737) (61,284) 297,056
-------------- ------------- -------------
(2,506,753) (406,054) 1,135,757
Deferred (62,612) (2,410,259) 383,374
-------------- ------------- -------------
$ (2,569,365) $ (2,816,313) $ 1,519,131
============== ============= =============
A reconciliation of total taxes based on the federal statutory rate and the
Company's actual total provision (benefit) was as follows:
<PAGE>
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------------------
1997 1996 1995
----------------- ------------------ ------------------
<S> <C> <C> <C>
Income tax at the federal statutory
rate of 34% $ (2,266,022) $ (2,147,430) $ 1,606,762
State taxes, net of federal benefit (197,944) (281,377) 202,736
Research and development tax credit (111,439) - (179,659)
Effect of stock repurchase 191,760 - -
Other, net (61,110) (161,175) 71,438
----------------- ------------------ ------------------
$ (2,444,755) $ (2,589,982) $ 1,701,277
================= ================== ==================
</TABLE>
The components of the deferred income tax provision (benefit) from
continuing operations were as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------------------
1997 1996 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
Provision for doubtful accounts $ (161,354) $ (255,654) $ -
Net operating loss carried forward (244,148) (937,554) -
Capitalization of software costs
for financial reporting purposes 505,930 (350,483) 481,153
Depreciation (14,751) (53,416) (58,122)
Financial reporting reserve recognized
in advance of tax deduction (148,289) (813,152) (39,657)
------------------ ------------------- ------------------
$ (62,612) $ (2,410,259) $ 383,374
================== =================== ==================
</TABLE>
The deferred income tax assets and liabilities were comprised of the
following:
<TABLE>
<CAPTION>
As of May 31,
-----------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Provision for doubtful accounts $ (659,508) $ (498,154) $ (242,500)
Financial reporting reserve recognized in
advance of tax deduction (1,066,896) (918,609) (105,457)
Net operating loss carried forward (3,544,223) (937,554) -
Research and development credit carryforward (111,439) - -
short-term investments - (12,628) (40,184)
--------------- --------------- ---------------
Total deferred tax assets (5,382,066) (2,366,945) (388,141)
--------------- --------------- ---------------
Capitalization of software costs for
financial reporting purposes 1,188,822 682,892 1,033,375
Depreciation 12,277 27,028 80,444
--------------- --------------- ---------------
Total deferred tax liabilities 1,201,099 709,920 1,113,819
--------------- --------------- ---------------
Total net deferred taxes $ (4,180,968) $ (1,657,025) $ 725,678
=============== =============== ===============
</TABLE>
In connection with the Distribution, the Company and MCS agreed to share
the tax burdens of the Predecessor Corporation, based upon the taxable income of
the separate businesses prior to the Distribution. The Company and MCS are also
prohibited from taking any actions which are inconsistent with the tax-free
nature of the Distribution.
The Company will be able to utilize tax net operating losses incurred
subsequent to the Distribution to the extent the Company has taxable income
subsequent to the Distribution.
<PAGE>
Management has determined that the net deferred tax asset more likely than
not will be realized in the future and, therefore, has not provided any
valuation allowances against these assets. The Company's net operating loss
carryforwards of $3,544,223 expire in 2011 and 2012, while research and
development tax credits expire in 2012.
NOTE 8 - NOTES PAYABLE AND LINE OF CREDIT
On December 5, 1996, the Company reached an agreement in principle with its
founder, Richard C. Jelinek, to purchase from Mr. Jelinek, and a trust of which
he is a beneficiary (the "Trust"), one million shares of Common Stock and 500
shares of Voting Preferred Stock. In exchange, the Company agreed to pay Mr.
Jelinek and the Trust $4.5 million in cash and $2.0 million in 8% two-year
promissory notes, and issued to Mr. Jelinek and the Trust 400,000 five-year
warrants to purchase Common Stock at $8.00 per share. The scheduled maturities
are $1 million March 19, 1998 and $1 million March 19, 1999. Interest costs
incurred and paid on the promissory notes totaled $32,258 for the year ended May
31, 1997.
In April 1997, the Company entered into an agreement with a bank that
provides for a secured, revolving line of credit up to a maximum of $2.5
million. The credit facility, which has an initial maturity date of October
1998, bears interest at the bank's prime rate and provides the bank with a first
security interest in all assets of the Company. Certain financial covenants and
reporting requirements are also included in the agreement. As of May 31, 1997,
the Company had not utilized the line of credit.
NOTE 9 - STOCKHOLDERS' EQUITY
The following table summarizes information regarding stockholders' equity
as of May 31, 1997:
<TABLE>
<CAPTION>
Dividend
Total Par Votes Right Per
Shares Shares Par Value Value Per Share
Authorized Issued Per Share Outstanding Share Per Annum
<S> <C> <C> <C> <C> <C> <C>
Voting preferred stock <F1> 500 - $ 1,000.00 - 44,000 (1)
Preferred stock <F2> 1,000,000 - .01 - (2) (2)
Common stock 10,000,000 6,487,159 .01 $ 64,872 1 -
<FN>
<F1>The previous chairman of the board and chief executive officer exercised an
option to purchase all of the authorized and unissued shares of voting preferred
stock at $1,000 per share on March 19, 1997. The Company, as part of the stock
repurchase agreement, immediately repurchased these shares. The voting preferred
stock is currently held in treasury.
<F2>The Board of Directors has the authority to determine the rights and
preferences of this preferred stock upon its issuance.
</TABLE>
NOTE 10 - STOCK OPTIONS AND WARRANTS
Upon the Distribution, the Company adopted various stock option plans of
the Predecessor Corporation. Options to purchase Predecessor Corporation common
stock have been converted into options to purchase Medicus common stock based
upon the fair market value following the Distribution. The Company applies APB
Opinion 25 and related Interpretations to account for its plans. Accordingly, no
compensation cost is generally recognized for its stock option plans and its
employee stock purchase plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
by SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<PAGE>
Year Ended May 31,
--------------------------------
1997 1996
-------------------------------
Net income (loss) As reported $ (4,220,018) $ (3,725,991)
Pro forma (5,187,253) (4,262,364)
Earnings (loss) per share As reported (0.70) (0.57)
Pro forma (0.86) (0.65)
For purposes of SFAS 123, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and 1996
respectively: no expected dividends, expected volatility of and 76.36% and
72.17%, risk-free interest rates of 6.56% and 6.09% for the stock options; and
lives of 7 years. The weighted-average fair value of options granted in 1997 and
1996 was $4.18 and $5.30 respectively.
The stock exercise price of each option is determined by a committee (the
"Committee") of no fewer than two Directors designated by the Board of
Directors, and shall not be less than the fair market value of the stock subject
to the option at the time the option is granted. Each option shall be for such
term of not more than ten years as shall be determined by the Committee at the
date of grant. The Committee shall have full and final authority, in its
absolute discretion, to determine the time or times when each option becomes
exercisable and the duration of the exercise period. The Committee may at its
discretion accelerate the exercisability of any option at any time before
expiration or termination of an option previously granted, extend the terms of
such option, except that an aggregate option period may never exceed ten years.
As of May 31, 1997, the Company had 358,879 options available for grant
under all plans. A summary of the status of the Company's option plans as of May
31, 1997 and 1996, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Year Ended May 31, Year Ended May 31,
1996 1997
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Weighted- Weighted-
Avg. Exercise Avg. Exercise
Shares Price Shares Price
Outstanding at
beginning of year - - 1,387,350 $ 7.53
Conversion at
Distribution of options
previously held 1,035,850 $ 7.85 - -
Granted 368,000 6.28 615,100 5.49
Exercised (16,500) 0.48 - -
Cancelled/Forfeited - - (320,100) 6.10
Outstanding at End of ---------- ----------
year 1,387,350 7.53 1,682,350 6.79
========== ==========
Options Exercisable at
year-end 332,950 7.78 414,950 7.70
========== ==========
</TABLE>
The following table summarizes information about the stock options
outstanding at May 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable at Average
Exercise Prices at 5/31/97 Life (yrs.) Exercise Price 5/31/97 Exercise Price
---------------- ---------- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.19 to 2.00 19,650 7.8 $ 1.87 19,650 $ 1.87
5.00 to 5.82 529,000 9.5 5.38 7,500 5.25
6.25 to 6.82 644,200 7.9 6.56 169,550 6.69
7.02 to 7.60 182,000 8.6 7.44 47,750 7.29
8.97 to 9.62 273,500 6.9 9.34 153,500 9.34
11.89 to 16.50 34,000 7.4 11.90 17,000 11.90
</TABLE>
The Company realizes an income tax benefit from the exercise of certain
stock options. These income tax benefits result in a decrease in current income
taxes payable and an increase in capital in excess of par value.
A healthcare services organization with which the Company maintains a joint
development agreement holds a warrant to purchase 100,000 shares of the
Company's common stock at a price of $7.80 per share, exercisable any time
before March, 1999. The value of the warrant is being amortized on a
straight-line basis over its six-year life.
The Company's founder, Richard C. Jelinek, holds 400,000 warrants to
purchase common stock at $8.00 per share. The value of the warrant was recorded
as part of the stock repurchase agreement recorded in the quarter ended February
28, 1997.
NOTE 11 - EMPLOYEE BENEFITS
In connection with the Distribution, the Company adopted an employee stock
purchase plan under which the sale of common stock to employees was authorized.
Employees may designate up to the lesser of $10,000 or 10% of their compensation
for the purchase of stock. The purchase price is the lesser of 85% of the fair
market value of the stock on either the date of grant of a one-year purchase
option or the date the purchase option is exercised. During the year ended May
31, 1997 and the period from March 1, 1996 through May 31, 1996, 29,162 and
7,132 shares, respectively, of common stock were issued under the plan for an
aggregate purchase price of $128,423 and $38,352, respectively. Compensation
cost related to the employee stock purchase plan, as determined based on the
fair value method of SFAS 123, would have aggregated $139,000 and $75,000,
respectively, for the years ended May 31, 1997 and 1996 had the Company adopted
this statement. For purposes of SFAS 123, these amounts were estimated using the
Black-Scholes model with the following assumptions for the years ended May 31,
1997 and 1996, respectively: no expected dividends, an expected life of one
year, expected volatility of 130.17% and 158.17% and risk-free interest rates of
5.40% and 5.45%.
The Company has a contributory retirement savings plan ("401(k) Plan")
which covers eligible employees who qualify as to age and length of service.
Participants may contribute 1% - 15% of their salaries, subject to maximum
contribution limitations imposed by the IRS. The expense of the 401(k) Plan,
consisting of discretionary Company contributions, was $134,795, $121,602 and
$101,512 for the years ended May 31, 1997, 1996 and 1995, respectively.
<PAGE>
NOTE 12 - COMMITMENTS
The Company has various lease agreements for real and personal property.
These obligations extend through 2006 and in some cases contain renewal options.
As of May 31, 1997, future minimum lease payments for non-cancelable operating
leases in excess of one year are as follows:
Year Ending May 31,
1998 $ 977,404
1999 1,017,264
2000 847,322
2001 716,538
2002 677,786
Thereafter 2,890,522
---------------
$ 7,126,836
===============
Rental expense on all operating leases totaled $828,221, $682,400, and
$664,844, during fiscal 1997, 1996 and 1995, respectively.
NOTE 13 - RELATED PARTY TRANSACTIONS
As discussed in Note 1, the Company and MCS signed a services agreement.
For the year ended May 31, 1997 and during the fourth quarter of fiscal 1996,
the Company charged MCS $525,000 and $175,000, respectively, for services under
this agreement, reducing general and administrative expense by these amounts.
Due from Managed Care Solutions, Inc. on the Balance Sheet includes this charge
plus amounts owing related to the Distribution. During fiscal 1996 and 1995, the
Company provided MCS cash infusions for operating purposes of $250,000 and
$5,000,000, respectively.
The Company has repurchased Common Stock and Voting Preferred Stock from
its founder, Richard C. Jelinek, and a trust of which he is a beneficiary,
pursuant to a transaction described in Note 5 and Note 8. Mr. Jelinek continues
to serve as a Director.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
The Company's revenues are generated from clients operating in the
healthcare industry, and accordingly, as of May 31, 1997 and 1996, all of the
Company's trade receivables and installment receivables were from entities in
this industry. The Company has no policy requiring collateral for the extension
of trade credit in the ordinary course of business.
NOTE 15 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 128, "Earnings per Share," issued in February 1997, changes the
method of calculating earnings per share and will be effective for the Company's
financial statements for the year ending May 31, 1998. Earlier application is
not permitted. However, the Company is permitted to disclose pro forma earnings
per share amounts computed using this Statement in periods prior to adoption.
Upon adoption, all prior period earnings per share data presented shall be
restated to conform to this Statement. The calculation of earnings per share
under this Statement is simpler than prior methods and more consistent with
international accounting standards. Given the Company's historical losses,
common stock equivalents were excluded from prior pro forma earnings per share
calculations because they were anti-dilutive. Therefore, adoption of this
Statement is not expected to have a material impact on amounts previously
reported as pro forma net loss per common share.
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997,will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. Such changes include, for example, cumulative foreign
currency translation adjustments, certain minimum pension liabilities and
unrealized gains and losses on available-for-sale securities. This Statement is
effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company expects to adopt this Statement beginning with its financial
statements for the year ending May 31, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company expects to adopt this Statement in its
financial statements for the year ending May 31, 1998.
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly financial information for the years ended May 31, 1997
and 1996 is supplementary and is provided in the following summary:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------
May 31, February 28, November 30, August 31,
1997 1997 1996 1996
--------------------- --------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
Total revenues $ 4,845,868 $ 4,064,276 $ 5,162,777 $ 4,196,779
Total operating expenses 2,075,024 5,259,597 2,121,897 1,378,980
Operating income (loss) (1,399,027) (6,347,410) 109,905 280,667
Net income (loss) (793,571) (3,930,237) 211,574 292,216
Earnings (loss) per common share (0.14) (0.60) 0.03 0.05
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------
May 31, February 29, November 30, August 31,
1996 1996 1995 1995
-------------------- --------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Total revenues $ 4,871,723 $ 4,203,719 $ 5,318,504 $ 5,400,233
Total operating expenses 5,664,899 3,278,847 2,612,565 2,559,171
Operating income (loss) (5,946,480) (1,596,314) (104,481) 202,571
Net income (loss) (3,472,218) (781,890) 188,090 340,027
Earnings (loss) per common share (0.54) - - -
Pro forma earnings (loss) per
common share - (0.12) 0.03 0.05
</TABLE>
Results of operations for the quarters ended February 28, 1997, May 31,
1996, and February 29, 1996 include restructuring charges discussed in Note 4
and the stock repurchase discussed in Note 5. Total revenues, total operating
expenses, and operating income for all periods have been restated for the
discontinued operation discussed in Note 3.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers of the Company, their ages and their positions with the
Company are provided in the table below. The other information called for by
Item 10 is incorporated by reference to the Registrant's Proxy Statement being
sent to stockholders in connection with the 1997 Annual Meeting of Stockholders
to be held on November 18, 1997 (the "Proxy Statement").
Name Age Position
Patrick C. Sommers 50 President, Chief Executive Officer
and Chairman
Angus J. Carroll 38 Senior Vice President
Marlon T. Gruen 43 Senior Vice President
Robert C. Steffel 44 Senior Vice President
Daniel P. DiCaro 40 Vice President, Chief Financial
Officer and Asst. Secretary
Susan K. Doctors 56 Vice President
Lynda D. Hernandez 41 Vice President
Timothy K. Rutledge 39 Vice President
William G. Brown 54 Secretary and Director
Officers serve at the pleasure of the Board.
Patrick C. Sommers, President, Chief Executive Officer, and Chairman of the
Board of Directors joined the Company in February 1996. From 1992 to 1996, Mr.
Sommers served as President of Ceridian Employer Services, a $400 million
division of Ceridian Corporation (formerly Control Data Corporation). From 1990
to 1992, Mr. Sommers was President of GTE Information Services, a division of
GTE Corporation, and from 1969 to 1990, he served in successive management
positions with Dun & Bradstreet Corporation, culminating with his position as
President of Dun & Bradstreet Information Resources, Inc.
Angus J. Carroll, Senior Vice President, joined the Company in July 1996
and is responsible for strategic planning and business development. From 1993 to
1996, Mr. Carroll served as Vice President of Business Development at Ceridian
Employer Services. From 1990 to 1993, he was Director of Business Planning at
GTE Corporation. From 1979 to 1990, Mr. Carroll held successive management
positions with Dun & Bradstreet Corporation, culminating with the position of
Assistant Vice President of Computer Development. Mr. Carroll received his
M.B.A. from Fairleigh-Dickinson University.
Marlon T. Gruen, Senior Vice President, joined the company in February 1997
and is responsible for marketing. From 1992 to 1997, Mr. Gruen served as Vice
President of Marketing for Merck-Medco Managed Care, LLC, a division of Merck &
Company. From 1991 to 1992, he was Director of Product Planning at GTE Health
Systems, a division of GTE Corporation. From 1990 to 1991, Mr. Gruen served as
Director of Product Planning at Consumer Health Services, Inc. Prior to that,
from 1977 to 1990, he held successive management positions with Dun & Bradstreet
Corporation, culminating with the position of Assistant Vice President of
Product Planning & Development.
<PAGE>
Robert C. Steffel, Senior Vice President, is responsible for the contract
management and information services businesses. Prior to joining the Company in
December 1991, he was Vice President, Information Systems of Specialty Home
Health Care from 1989 to 1991. He also served as Director of Information Systems
and Management Engineering at Curaflex Home Health Care from 1988 to 1989.
Daniel P. DiCaro, Vice President, Chief Financial Officer and Assistant
Secretary, joined the Company in January 1997. Mr. DiCaro was one of the
founders of Imagination Pilots Entertainment (IPE), a joint venture with Time
Warner in consumer multimedia software. Mr. DiCaro served as the Chief Financial
Officer and Chief Operating Officer of IPE from 1994 to 1997. He is currently a
director of IPE. From 1990 to 1994, Mr. DiCaro served as the Chief Financial
Officer of a group of privately held, venture capital backed, software and
information service companies. Previously, he was the Vice President of Finance
for CCC Information Services Inc. (1987 to 1990) and a member of the
international accounting firm of Arthur Young and Company (1984 to 1987). Mr.
DiCaro received his M.B.A. from DePaul University and is a certified
public accountant.
Susan K. Doctors, Vice President, joined the Company in January 1995 and is
responsible for Human Resources and Administration. From 1993 to 1995, she
worked as an independent consultant. Prior to 1993, Ms. Doctors worked 19 years
at Official Airline Guides, Inc. holding successive management positions
culminating with her position as Vice President of Human Resources. Ms. Doctors
received her Masters in Management from the Kellogg Graduate School at
Northwestern University.
Lynda D. Hernandez, Vice President, is responsible for the operations of
the Clinical Data Systems division. Most recently, Ms. Hernandez served as
Senior Director for operations. From 1990 to 1992, she was manager of Technical
Support, Interfaces and Client Services in the Clinical Data Systems division.
Prior to 1990, Ms. Hernandez served in successive technical and management
positions with the Company.
Timothy K. Rutledge, Vice President, is responsible for the operations of
the Decision Support Systems division. He joined the Company in June 1992
following the acquisition of Innovate Software Solutions, Inc. which he
co-founded in 1989. He held successive management positions with that firm until
its acquisition by Medicus. Previously, he served as a manager for Price
Waterhouse.
William G. Brown is a partner of Bell, Boyd & Lloyd, Chicago, IL, legal
counsel to the Company, and has been Secretary and a Director of the Predecessor
Corporation since its incorporation in December 1984, and of MCS and the Company
since March 1, 1996. Mr. Brown is also a Director of MYR Group, Dovenmuehle
Mortgage and CFC International, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
information under the caption "Compensation" in the Registrant's Proxy Statement
for the 1997 Annual Meeting of Stockholders to be held on November 18, 1997 (the
"Proxy Statement").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
information under the caption "Common Stock Ownership by Management" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Balance Sheets at May 31, 1997 and 1996 F-3
Statements of Operations for the years
ended May 31, 1997, 1996 and 1995 F-4
Statements of Changes in Stockholders' Equity for the years
ended May 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended May 31, 1997,
1996 and 1995 F-7
Notes to Financial Statements F-8
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the Financial
Statements or the Notes to Financial Statements.
<PAGE>
Exhibits:
A list of Exhibits is set forth in the Exhibit Index, which index precedes
such exhibits and which is incorporated herein by this reference thereto.
Included in the exhibits listed therein are the following exhibits which
constitute management contracts or compensatory plans or arrangements:
(i.) 1989 Stock Option Plan, as amended
(ii.) 1991 Stock Option Plan
(iii.) 1993 Stock Option Plan
(iv.) 1993 Performance Stock Option Plan
(v.) Stock Purchase Plan, as amended
(vi.) Form of Indemnification Contract between Registrant and each
officer and director
(vii.) Retirement Savings Plan
(viii.) 1994 Stock Option Plan
(ix.) 1994 Directors' Stock Option Plan
(x.) 1995 RCM Stock Option Plan
(xi.) 1996 C.E.O. Stock Option Plan
(xii.) 1996 C.E.O. Replacement Stock Option Plan
(xiii.) 1996 C.E.O. Special Stock Option Plan
(xiv.) 1997 Employee Stock Option and Restricted Stock Plan
(xv.) Amendment to and Restatement of the 1989, 1991, 1993, 1993
Performance and 1994 Stock Option Plans
(xvi.) Stock Repurchase and Warrant Agreement between the Company
and Richard C. Jelinek
(xvii.) Stock Repurchase and Warrant Agreement between the Company and
the Boston Safe Deposit and Trust Company of California, or
its successors, as trustee of the Richard C. Jelinek
Charitable Remainder Unitrust dated August 3, 1993
Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended May 31, 1997.
<PAGE>
Exhibit Index
Exhibit
Number
2 Distribution Agreement between the Predecessor
Corporation and the Registrant (Incorporated by
Reference to Exhibit 2(b) to the Predecessor
Corporation's Report on Form 8-K (Commission File No.
0-19393) dated March 1, 1996, as amended by Form
8-K/A-1 filed on April 30, 1996).
3 (a) Restated Certificate of Incorporation (incorporated
by reference to Exhibit 4(a) to Registration
Statement number 333-3028).
(b) Bylaws (incorporated by reference to Exhibit 3(b) to
the Registrant's Registration Statement on Form 10
(Commission File No. 0-27614)).
10 (b) Agreement between the Registrant and Comshare, Inc.**
(c) 1989 Stock Option Plan, as amended**
(c)(1) 1991 Stock Option Plan ***
(c)(2) 1993 Stock Option Plan****
(c)(3) 1993 Performance Stock Option Plan****
(c)(4) 1994 Stock Option Plan*****
(c)(5) 1994 Directors' Stock Option Plan #
(c)(6) 1995 RCM Stock Option Plan ##
(c)(7) 1996 C.E.O. Stock Option Plan ##
(c)(8) 1996 C.E.O. Replacement Stock Option Plan ##
(c)(9) 1996 C.E.O. Special Stock Option Plan ##
(c)(10) 1997 Employee Stock Option and Restricted Stock
Plan (Incorporated by Reference to Exhibit D to the
Company's Proxy Statement dated February 17, 1997
(Commission File No. 0-27614))
(c)(11) Amendment to and Restatement of the 1989, 1991, 1993,
1993 Performance and 1994 Stock Option Plans
(Incorporated by Reference to Exhibit C to the
Company's Proxy Statement dated February 17, 1997
(Commission File No. 0-27614))
(e)(1) Stock Repurchase and Warrant Agreement between the
Company and Richard C. Jelinek (Incorporated by
Reference to Exhibit E to the Company's Proxy
Statement dated February 17, 1997
(Commission File No. 0-27614))
(e)(2) Stock Repurchase and Warrant Agreement between the
Company and the Bostons Safe Deposit and Trust
Company of California, or its successors, as trustee
of the Richard C. Jelinek Charitable Remainder
Unitrust dated August 3, 1993 (Incorporated by
Reference to Exhibit E to the Company's Proxy
Statement dated February 17, 1997
(Commission File No. 0-27614))
(f) Stock Purchase Plan, as amended ##
(g) Form of Indemnification Contract between Registrant
and each officer and director**
(h) Retirement Savings Plan****
(i) Lease of Evanston, IL office ##
(j) Lease of Alameda, CA office ##
(k) Lease of Cincinnati, OH office***
(l) Lease of Chesterfield, MO office ##
(m) Loan and Security Agreement with Cole Taylor Bank
23 Consent of Price Waterhouse LLP
<PAGE>
* Indicated only on manually signed original of report.
** Incorporated by reference to the exhibit with the same designation filed
as part of Registration Statement No. 33-41253.
*** Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1992.
**** Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1993.
***** Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1994.
# Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1995.
## Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Registrant for the
fiscal year ended May 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDICUS SYSTEMS CORPORATION
By Patrick C. Sommers
------------------
Patrick C. Sommers Chairman,
Chief Executive Officer
and President
Dated: August 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of registrant
and in the capacities and on the dates indicated.
Signature Title Date
Patrick C. Sommers Chairman of the August 28, 1997
-------------------- Board of Directors,
Patrick C. Sommers Chief Executive Officer
and President
Daniel P. DiCaro Vice President August 28, 1997
-------------------- (principal financial and
Daniel P. DiCaro accounting officer)
William G. Brown Director August 28, 1997
--------------------
William G. Brown
Jon E.M. Jacoby Director August 28, 1997
--------------------
Jon E.M. Jacoby
Richard C. Jelinek Director August 28, 1997
--------------------
Richard C. Jelinek
John P. Kunz Director August 28, 1997
--------------------
John P. Kunz
Risa Lavizzo-Mourey Director August 28, 1997
--------------------
Risa Lavizzo-Mourey
Gail L. Warden Director August 28, 1997
--------------------
Gail L. Warden
LOAN AND SECURITY AGREEMENT
DATED AS OF
__________________, 1997
BY AND BETWEEN
COLE TAYLOR BANK
AND
MEDICUS SYSTEMS CORPORATION
<PAGE>
COLE TAYLOR BANK - MEDICUS SYSTEMS CORPORATION -
LOAN AND SECURITY AGREEMENT
EXHIBIT LIST
Exhibit No.
Collateral Locations 1.1(G)
Patents, Trademarks, Copyrights and Licenses 1.1(K)
Form of Software Agreement 1.1(Z)
Existing Indebtedness 5.1(F)
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of
____________, 1997, by and between COLE TAYLOR BANK (the "Lender") and MEDICUS
SYSTEMS CORPORATION ("Borrower").
THE PARTIES HERETO agree as follows:
ARTICLE ONE. DEFINITIONS
SECTION 1.1. DEFINED TERMS. In addition to terms defined elsewhere in this
Agreement or any Supplement or Exhibit hereto, when used herein, the following
terms shall have the following meanings:
(A) "Account Debtor" shall mean any Person who is or who may become
obligated to Borrower under, with respect to, or on account of an Account
Receivable or other Collateral.
(B) "Accounts Receivable" shall mean any and all accounts (as such term is
defined in the UCC) of Borrower and each and every right of Borrower to (i) the
payment of money or (ii) the receipt or disbursement of products, goods,
services or other valuable consideration, whether such right now exists or
hereafter arises, whether such right arises out of a sale, lease or other
disposition of Inventory, or out of a rendering of services, or any other
transaction or event, whether such right is created, generated or earned by
Borrower or by some other Person who subsequently transfers its interest to
Borrower, whether such right is or is not already earned by performance, and
howsoever such right may be evidenced, together with all other rights and
interests (including all liens and security interests) which Borrower may at any
time have by law or agreement against any Account Debtor or other Person
obligated to make any such payment or against any property of such Account
Debtor or other Person. Without limitation of the foregoing, all amounts due and
owing from time to time pursuant to the Software Agreements shall be deemed to
be Accounts Receivable.
(C) "Affiliate" shall mean any Person which, directly or indirectly, owns
or controls, on an aggregate basis, at least a five percent (5%) interest in any
other Person, or which is controlled by or is under common control with any
other Person.
(D) "Business Day" means any day on which the Lender is open for business
in Chicago, Illinois, other than a Saturday or Sunday.
(E) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(F) "Collateral" shall mean the following property owned by Borrower,
howsoever arising, wherever located and whether now owned or existing or
hereafter existing or acquired:
(i) all Equipment;
(ii) all Accounts Receivable;
(iii) all Inventory;
(iv) any and all monies, reserves, deposits, deposit accounts, securities,
cash, cash equivalents, balances, credits, and interest and dividends on any of
the above, of or in the name of Borrower, now or hereafter with the Lender and
any and all other property of any kind and description of or in the name of
Borrower, now or hereafter, for any reason or purpose
whatsoever, in the possession or control of, or in transit to, the Lender
or any agent or bailee for the Lender;
(v) all chattel paper, contract rights and instruments;
(vi) all General Intangibles;
(vii) all furniture and fixtures;
(viii) all Software Agreements;
(ix) all computer databases, flow diagrams, software, software systems,
programs, research and stored information;
(x) all source codes and object codes relating to the property listed in
clause (ix) above;
(xi) all books, records and computer records in any way relating to the
above property;
(xii) any and all substitutions, renewals, improvements, replacements,
additions and proceeds of (i) through (xi) above, including, without limitation,
proceeds of insurance policies.
(G) "Collateral Locations" shall mean the locations set forth on Exhibit
1.1(G) attached hereto.
(H) "Corporate Real Property" shall mean all of the real estate and the
improvements thereon and thereto leased by Borrower at the premises commonly
known as One Rotary Center, Suite 1111, Evanston, Illinois 60201.
(I) "Documents" shall mean this Agreement, the Revolving Note, the Term
Note and any other instruments or documents required or contemplated hereunder
or thereunder, whether now existing or at any time hereafter arising.
(J) "Equipment" shall mean all machinery and equipment owned by Borrower,
wherever located, whether now owned or hereafter existing or acquired by
Borrower, any additions thereon, accessions thereto or replacements of parts
thereof.
(K) "General Intangibles" shall mean all general intangibles (as such term
is defined in the UCC) owned by Borrower, including, but not limited to
goodwill, trademarks, trade names, licenses, patents, patent applications,
copyrights, inventions, franchises, books and records of Borrower, designs,
trade secrets, registrations, prepaid expenses, all rights to and payments of
refunds, overpayments, rebates and return of monies, including, but not limited
to, sales tax refunds, tax refunds, tax refund claims and rights to and payments
of refunds, overpayments or overfundings under any pension, retirement or profit
sharing plans and any guarantee, security interests or other security held by or
granted to Borrower to secure payment by an Account Debtor of any of the
Accounts Receivable. Without limitation of the foregoing, "General Intangibles"
shall include the patents, trademarks, copyrights and licenses more fully
described on Exhibit 1.1(K) attached hereto.
(L) "Inventory" shall mean any and all goods, finished goods, whole goods,
materials, raw materials, work-in-progress, components or supplies, wheresoever
located and whether now owned or hereinafter acquired and owned by Borrower,
including, without limitation, goods, finished goods, whole goods, materials,
raw materials, work-in-process, components or supplies in transit, wheresoever
located, whether now owned or hereafter acquired by Borrower, which are held for
demonstration, illustration, sale or lease, furnished under any contract of
service or held as raw materials, work-in-process for manufacturing or
processing or supplies for manufacturing or processing, and all materials used
or consumed in the business of Borrower, and shall include such other property,
the sale or disposition of which has given rise to an Accounts Receivable and
which has been returned to or repossessed or stopped in transit by or on behalf
of Borrower, but shall not include property owned by third parties in the
possession of Borrower.
(M) "Interest Period" means any 90 day period as selected by the Borrower
in the notice required to be sent by Borrower as set forth in Section 2.3 of
this Agreement; provided, however, that each Interest Period is subject to the
following:
(i) If any Interest Period would otherwise end on a day which is not a
Business Day, that Interest Period shall be extended to the next succeeding
Business Day;
(ii) No Interest Period may extend beyond the Revolver Termination Date;
and
(iii) The interest rate for each Interest Period shall be applied from and
including the first day of such Interest Period to, but excluding, the last day
of such Interest Period.
(N) "Interest Rate Option Conditions" shall mean all of the following:
(i) no Event of Default shall have occurred; and
(ii) Borrower's Tangible Stockholders Equity as reported in Borrower's
accountant prepared financial statements required to be delivered to Lender
pursuant to Section 5.1(A) of this Agreement is greater than or equal to
$8,500,000.00; and
(iii) no material adverse change has occurred in the business or financial
condition of Borrower; and
(iv) the date is after May 31, 1997.
(O) "Interest Rate Reduction Conditions" shall mean all of the following:
(i) no Event of Default shall have occurred; and
(ii) Borrower's Tangible Stockholders Equity as reported in Borrower's
accountant prepared financial statements required to be delivered to Lender
pursuant to Section 5.1(A) of this Agreement is greater than or equal to
$10,000,000.00; and
(iii) no material adverse change has occurred in the business or financial
condition of Borrower.
(P) "Liabilities" shall mean all liabilities, indebtedness and obligations
of Borrower to the Lender, howsoever created, arising or evidenced, whether now
existing or hereafter arising, whether direct or indirect (including those
acquired by assignment), absolute or contingent, due or to become due, primary
or secondary, joint or several, whether existing or arising through discount,
overdraft, purchase, direct loan, participation, operation of law, or otherwise,
including, but not limited to, all liabilities, indebtedness and obligations of
Borrower to the Lender pursuant to any letter of credit, any standby letter of
credit or any of the Documents and reasonable outside attorneys' and paralegals'
fees or charges relating to the preparation of the Documents and the enforcement
of Lender's rights, remedies, powers and security interests under this
Agreement, including, but not limited to, the drafting of any documents in the
preparation and enforcement of the Loans.
(Q) "Libor" shall mean shall mean for each Interest Period, the rate of
interest per annum as determined by Lender to be the rate (rounded upward, if
necessary, to the nearest 1/16 of 1%) at which deposits of United States dollars
in immediately available and freely transferable funds are offered to Lender in
the London Interbank Eurodollar market at 11:00 a.m. (London time) two Business
Days prior to the commencement of such Interest Period for a period equal to
such Interest Period and in an amount equal to the applicable Libor Portion to
be outstanding from Lender during such Interest Period.
(R) "Libor Portion" and "Libor Portions" shall have the meanings set forth
in Section 2.3(B) of this Agreement.
(S) "Loan" shall mean individually, and "Loans" shall mean collectively,
each of the Revolving Loans.
(T) "Net Worth" shall mean the total amount of issued and outstanding
capital stock, plus paid in capital and retained earnings and less treasury
stock.
(U) "Note" shall mean the Revolving Note.
(V) "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, entity, party or government (whether national, federal, state,
county, city, municipal or otherwise including, without limitation, any
instrumentality, division, agency, body or department thereof).
(W) "Portion" shall have the meaning set forth in Section 2.3(B) of this
Agreement.
(X) "Prime Rate" shall mean, as of the date of any determination, the rate
per annum then most recently announced publicly by the Lender as its prime rate
of interest in Chicago, Illinois. The Prime Rate is the interest rate charged by
the Lender on commercial loans to a substantial number of the Lender's good
business customers, but it is not necessarily the Lender's lowest interest rate
charged to any customer. The Prime Rate is subject to change by the Lender
without notice of any kind, except as set forth in the first sentence of this
clause.
(Y) "Prime Rate Portion" shall have the meaning set forth in Section 2.3(B)
of this Agreement.
(Z) "Software Agreement" shall mean individually, and "Software Agreements"
shall mean collectively, each agreement or license given by Borrower to its
customers or by and between Borrower and any of its customers for the use,
license and/or maintenance of computer programs and software, whether now
existing or hereinafter arising, including, but not limited to, the form of
agreement attached hereto as Exhibit 1.1(Z).
(AA) "Tangible Stockholders Equity" shall mean Borrower's Net Worth minus
the capitalized value of Borrower's software products net of accumulated
amortization.
(BB) "UCC" shall mean the Uniform Commercial Code as enacted and amended in
the State of Illinois.
SECTION 1.2. OTHER TERMS. Accounting terms used in this Agreement which are
not specifically defined shall have the meanings customarily given them in
accordance with generally accepted accounting principles in effect from time to
time. Terms used in this Agreement which are defined in the UCC, shall, unless
the context indicates otherwise or unless otherwise defined in this Agreement,
have the meanings provided for by the UCC.
<PAGE>
ARTICLE TWO. LOANS
SECTION 2.1. LOAN AMOUNT. Subject to the terms and conditions of this
Agreement, on the date upon which all of the terms and conditions of the
Documents have been met or fulfilled to the satisfaction of Lender (the "Closing
Date"), the Lender agrees to make loans in the aggregate to the Borrower on a
revolving basis (such loans being herein called individually a "Revolving Loan"
and collectively the "Revolving Loans") from time to time in such amounts as the
Borrower may from time to time request up to the maximum amount of $2,500,000.00
(the "Line of Credit"); provided, however, that (A) repayments from time to time
of the Line of Credit shall be available to be reborrowed pursuant to the terms
and conditions of this Agreement; and (B) if the Revolving Loans outstanding at
any time or from time to time exceeds the advance limitations described above,
Borrower shall pay on demand to the Lender such amount necessary to eliminate
such excess; and (C) the Lender's commitment to make Revolving Loans shall
remain in effect for a period to and including October 10, 1999 (the "Revolver
Termination Date"); and (5) notwithstanding anything else contained in this
Agreement, (i) upon the occurrence and continuance of any Event of Default, and
in every such event, the Lender may, in its sole discretion, immediately cease
to make Revolving Loans; and (ii) Borrower shall repay to the Lender on the
Revolver Termination Date all Revolving Loans, plus interest accrued to the date
of payment.
SECTION 2.2. USE OF LOAN PROCEEDS. The proceeds of any borrowing by the
Borrower pursuant to the Revolving Loans shall be used by the Borrower solely
for refinancing existing indebtedness of the Borrower, providing working capital
for Borrower and paying for operating expenses of the Borrower and the fees,
costs and expenses of the Lender as provided for in this Agreement.
SECTION 2.3. REVOLVING NOTE.
(A) General. The Revolving Loans shall be evidenced by a promissory note
(herein called the "Revolving Note") in form and manner satisfactory to Lender,
dated the date first above written, payable to the order of the Lender, in the
principal amount of the Maximum Line of Credit Amount. The date and amount of
each Revolving Loan made by the Lender and of each repayment of principal
thereon received by the Lender shall be recorded by the Lender in the records of
the Lender and the aggregate unpaid principal amount shown on such records shall
be rebuttable, presumptive evidence of the principal owing and unpaid on the
Revolving Note. The failure to record any such amount on such records shall not,
however, limit or otherwise affect the obligations of the Borrower hereunder or
under the Revolving Note to repay the principal amount of the Revolving Loans
together with all interest accruing thereon. The unpaid principal amount from
time to time outstanding on the Revolving Loans shall be payable as set forth in
the Revolving Note. Lender is hereby authorized to debit any of the Borrower'
accounts with Lender and/or make a Revolving Loan with the proceeds disbursed
directly to Lender to make the required payments pursuant to this Section.
(B) Interest Rate Options.
(i) Interest Rate Option Conditions Not Met. Unless and until all of the
Interest Rate Option Conditions shall have been met, the unpaid principal amount
of the Revolving Note shall only bear interest at the Prime Rate, as in effect
from time to time; provided, however, that upon the occurrence of any Event of
Default, the unpaid amounts due and owing pursuant to the Revolving Note shall
bear interest, whether before or after judgment, until payment in full thereof
at the rate per annum determined by adding 4% to the interest rate which would
otherwise be applicable thereto from time to time. Any change in the interest
rate on the Revolving Note resulting from a change in the Prime Rate shall be
and become effective as of and on the date of the relevant change in the Prime
Rate. Interest accruing pursuant to this clause (i) shall be due and payable on
the first day of each month.
<PAGE>
(ii) Interest Rate Option Conditions Met. Commencing with the date on which
all of the Interest Rate Option Conditions shall have been met, the unpaid
principal amount of the Revolving Note shall bear interest as described in this
Section 2.3(B)(ii).
(a) Option. Subject to all of the terms and conditions of this Agreement,
commencing with the date on which all of the Interest Rate Option Conditions
shall have been met, portions of the principal indebtedness evidenced by the
Revolving Note (all of the indebtedness evidenced by the Revolving Note bearing
interest at the same rate for the same period of time being hereinafter referred
to as a "Portion") may, at the option of Borrower, bear interest with reference
to the Prime Rate (the "Prime Rate Portion") or with reference to the Libor
(individually, a "Libor Portion" and collectively, the Libor Portions") and
Portions may be converted at the option of Borrower from time to time from one
basis to another. All of the indebtedness evidenced by the Revolving Note which
is not part of a Libor Portion shall constitute a single Prime Rate Portion. All
of the indebtedness evidenced by the Revolving Note which bears interest with
reference to a particular Libor for a particular Interest Period shall
constitute a single Libor Portion.
(b) Prime Rate Portion. The Prime Rate Portion shall bear interest at the
Prime Rate as in effect from time to time, minus (I) 1/4% unless and until all
of the Interest Rate Reduction Conditions shall have been met; and (II) 1/2%
commencing with the date on which all of the Interest Rate Reduction Conditions
shall have been met; provided, however, that upon the occurrence of any Event of
Default, such Portion shall bear interest, whether before or after judgment,
until payment in full thereof at the rate per annum determined by adding 4% to
the interest rate which would otherwise be applicable thereto from time to time.
Any change in the interest rate on the Prime Rate Portion resulting from a
change in the Prime Rate shall be and become effective as of and on the date of
the relevant change in the Prime Rate. Interest on the Prime Rate Portion shall
be due and payable on the first day of each month.
(c) Libor Portions. Each Libor Portion shall bear interest for each
Interest Period selected therefor at a rate per annum determined by adding (I)
2.25% unless and until all of the Interest Rate Reduction Conditions shall have
been met to Libor for such Interest Period; and (II) 2.00% commencing with the
date on which all of the Interest Rate Reduction Conditions shall have been met
to Libor for such Interest Period, provided, however, that upon the occurrence
of any Event of Default such Portion shall bear interest, whether before or
after judgment, until payment in full thereof through the end of the Interest
Period then applicable thereto at the rate per annum determined by adding 4% to
the interest rate which would otherwise be applicable thereto, and effective at
the end of such Interest Period such Libor Portion shall automatically be
converted into and added to the Prime Rate Portion and shall thereafter bear
interest at the interest rate applicable to the Prime Rate Portion after the
occurrence of an Event Default. At any time and from time to time, Borrower may
identify no more than 5 Libor Portions of the outstanding principal balance of
the Line of Credit. Each Libor Portion shall be in a minimum amount of
$250,000.00. Interest on each Libor Portion shall be due and payable on the last
day of each Interest Period applicable thereto and at maturity (whether by lapse
of time, acceleration or otherwise) and, with respect to any Interest Period
applicable to a Libor Portion in excess of three (3) months, then on the date
occurring every three (3) months after the date such Interest Period began and
at the end of such Interest Period, and interest after maturity shall be due and
payable upon demand. Borrower shall notify Lender on or before 9:00 a.m.
(Chicago time) on the third Business Day preceding the end of an Interest Period
applicable to a Libor Portion whether such Libor Portion is to continue as a
Libor Portion, in which event Borrower shall notify Lender of the new Interest
Period selected therefor, and in the event Borrower shall fail to so notify
Lender, such Libor Portion shall automatically be converted into and added to
the Prime Rate Portion as of and on the last day of such Interest Period.
Anything contained herein to the contrary notwithstanding, the obligation of
Lender to create, continue or effect by conversion any Libor Portion shall be
conditioned upon the fact that at the time no Event of Default shall have
occurred and be continuing.
(C) Manner of Option Rate Selection for Revolving Note. Borrower shall
notify Lender (i) by 9:00 a.m. (Chicago time) at least three (3) Business Days
prior to the date upon which it requests that any Libor Portion be created or
that any part of the Prime Rate Portion be converted into a Libor Portion, (each
such notice to specify in each instance the amount thereof and the Interest
Period selected therefor); and (ii) by 1:30 p.m. (Chicago time) on the Business
Day upon which it requests that any Prime Rate Portion be created. If any
request is made to convert a Libor Portion into a Prime Rate Portion available
hereunder, such conversion shall only be made so as to become effective as of
the last day of the Interest Period applicable thereto. All requests for the
creation, continuance or conversion of Portions under this Agreement shall be
irrevocable. Such requests may be written or oral and Lender is hereby
authorized to honor telephonic requests for creations, continuances and
conversions received by it from any person Lender in good faith believes to be a
person authorized to act on behalf of Borrower hereunder, Borrower hereby
indemnifying Lender from any liability or loss ensuing from so acting. Each
determination of Libor made by Lender shall be conclusive and binding absent
manifest error.
(D) Change of Law. Notwithstanding any other provisions of the Documents,
if at any time Lender shall determine in good faith that any change in
applicable laws, treaties or regulations or in the interpretation thereof makes
it unlawful for Lender to create or continue to maintain any Libor Portion, it
shall promptly so notify Borrower and the obligation of Lender to create,
continue or maintain such Libor Portion under this Agreement shall terminate
until it is no longer unlawful for Lender to create, continue or maintain such
Libor Portion. Borrower, on demand, shall, if the continued maintenance of any
Libor Portion is unlawful, at its option, either (i) thereupon prepay the
outstanding principal amount of the affected Libor Portion, together with all
interest accrued thereon and all other amounts payable to Lender with respect
thereto under this Agreement; or (ii) convert the principal amount of the
affected Portion into the Prime Rate Portion available hereunder, subject to the
terms and conditions of this Agreement.
(E) Unavailability of Deposits or Inability to Ascertain Libor.
Notwithstanding any other provision of this Agreement or of the Revolving Note,
if prior to the commencement of any Interest Period, Lender shall determine that
deposits in the amount of any Libor Portion scheduled to be outstanding during
such Interest Period are not readily available to Lender in the relevant market
or by reason of circumstances affecting the relevant market, adequate and
reasonable means do not exist for ascertaining Libor, then Lender shall promptly
give notice thereof to Borrower and the obligations of Lender to create,
continue or effect by conversion any Libor Portion in such amount and for such
Interest Period shall terminate and the interest rate on the Revolving Note
shall be converted into a Prime Rate Portion; provided, however, that when
deposits in such amount and for the Interest Period selected by Borrower shall
again be readily available in the relevant market and adequate and reasonable
means exist for ascertaining Libor, Lender shall so notify Borrower and Borrower
then shall have the option of reconverting the method of computing the interest
rate on the Prime Rate Portion into a Libor Portion.
(F) Taxes and Increased Costs. With respect to any Libor Portion, if Lender
shall determine in good faith that any change in any applicable law, treaty,
regulation or guideline (including, without limitation, Regulation D of the
Board of Governors of the Federal Reserve System) or any new law, treaty,
regulation or guideline, or any interpretation of any of the foregoing by any
governmental authority charged with the administration thereof or any central
bank or other fiscal, monetary or other authority having jurisdiction over
Lender or its lending branch or the Libor Portions contemplated by this
Agreement (whether or not having the force of law) shall:
(i) impose, increase, or deem applicable any reserve, special deposit or
similar requirement against assets held by, or deposits in or for the account
of, or loans by, or any other acquisition of funds or disbursements by, Lender
which is not in any instance already accounted for in computing the interest
rate applicable to such Libor Portion;
(ii) subject Lender, any Libor Portion or the Revolving Note to the extent
it evidences such Portion, to any tax (including, without limitation, any United
Stated interest equalization tax or similar tax however named applicable to the
acquisition or holding of debt obligations and any interest or penalties with
respect thereto), duty, charge, stamp tax, fee, deduction or withholding in
respect of this Agreement, any Libor Portion or the Revolving Note to the extent
it evidences such Portion, except such taxes as may be measured by the overall
net income or gross receipts of Lender or its lending branches and imposed by
the jurisdiction, or any political subdivision or taxing authority thereof, in
which Lender's principal executive office or its lending branch is located;
(iii) change the basis of taxation of payments of principal and interest
due from Borrower to Lender hereunder or under the Revolving Note to the extent
it evidences any Libor Portion (other than by a change in taxation of the
overall net income or gross receipts of Lender); or
(iv) impose on Lender any penalty with respect to the foregoing or any
other condition regarding this Agreement, its disbursement, any Libor Portion or
the Revolving Note to the extent it evidences any Libor Portion; and Lender
shall determine that the result of any of the foregoing is to increase the cost
(whether by incurring a cost or adding to a cost) to Lender of creating or
maintaining any Libor Portion hereunder or to reduce the amount of principal or
interest received or receivable by Lender (without benefit of, or credit for,
any prorations, exemption, credits or other offsets available under any such
laws, treaties, regulations, guidelines or interpretations thereof), then the
interest rate on the Revolving Note shall be converted to the Prime Rate
Portion. If Lender makes such a determination, Lender shall provide to Borrower
a certificate setting forth the computation of the increased cost or reduced
amount as a result of any event mentioned herein in reasonable detail and such
certificate shall be conclusive if reasonably determined.
(G) Funding Indemnity. In the event Lender shall incur any loss of profit,
and any loss, cost or expense (including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired or contracted to be acquired by Lender to fund or maintain
any Libor Portion, or the relending or reinvesting of such deposits or other
funds or amounts paid or prepaid to Lender) as a result of:
(i) any payment of a Libor Portion on a date other than the last day of the
then applicable Interest Period for any reason, whether before or after the
occurrence of any Event of Default, and whether or not such payment is required
by any provisions of this Agreement; or
(ii) any failure by Borrower to create, borrow, continue or effect by
conversion a Libor Portion on the date specified in a notice given pursuant to
this Agreement; then upon the demand of Lender, Borrower shall pay to Lender
such amount as will reimburse Lender for such loss, cost or expense. Without
limitation of the foregoing, any prepayment of a Libor Portion on a date other
than the last day of the then applicable Interest Period shall be accompanied by
a prepayment penalty equal to the loss Lender shall suffer as a result of Libor
as calculated on the date of such prepayment for the period of time equal to the
Interest Period for such Libor Portion being prepaid being less than Libor
applicable to the Libor Portion being prepaid. If Lender requests such a
reimbursement Lender shall provide Borrower with a certificate setting forth the
computation of the loss of profit and any loss, cost or expense giving rise to
the request for reimbursement in reasonable detail and such certificate shall be
conclusive if reasonably determined.
(H) Lending Branch. Lender may, at its option, elect to make, fund or
maintain Portions of the Loans hereunder at such of its branches or offices as
Lender may from time to time elect.
(I) Discretion of Bank as to Manner of Funding. Notwithstanding any
provision of this Agreement to the contrary, Lender shall be entitled to fund
and maintain its funding of all or any part of the Revolving Note in any manner
Lender sees fit; it being understood, however, that for the purposes of this
Agreement all determinations hereunder shall be made as if Lender had actually
funded and maintained each Libor Portion, or its share thereof, during each
Interest Period applicable thereto through the purchase of deposits in the
relevant market in the amount of such Libor Portion, having a maturity
corresponding to such Interest Period and bearing an interest rate equal to the
interest rate applicable to such Libor Portion for such Interest Period.
(J) Prepayments on Libor Portions. Borrower may prepay any Libor Portion of
the Revolving Note only on the last date of the then applicable Interest Period,
in whole or in part (but, if in part, then in an amount not less than
$100,000.00 or such greater amount which is an integral multiple of $100,000.00)
upon three (3) Business Days' prior notice to Lender (which notice shall be
irrevocable once given, must be received by Lender no later than 9:00 a.m.
(Chicago time) on the third Business Day preceding the date of such prepayment
and shall specify the principal amount to be repaid). Any such prepayment shall
be effected by payment of the principal amount to be prepaid and accrued
interest thereon to the end of the applicable Interest Period.
(K) Notations and Requests. All Revolving Loans made against the Revolving
Note, the status of all amounts evidenced by the Revolving Note as constituting
part of the Prime Rate Portion or a Libor Portion and the rates of interest and
Interest Periods applicable to such Portions shall be recorded by Lender on its
books and records or, at its option in any instance, endorsed on schedules to
the Revolving Note and the unpaid principal balance and status, rates and
Interest Periods so recorded or endorsed by Lender shall be prima facie evidence
in any court or other proceeding brought to enforce the Revolving Note of the
principal amount remaining unpaid thereon, the status of the Revolving Loans
evidenced thereby and the interest rates and Interest Periods applicable
thereto; provided, however, that the failure of Lender to record any of the
foregoing shall not limit or otherwise affect the obligation of Borrower to
repay the principal amount of the Revolving Note together with accrued interest
thereon.
SECTION 2.4. REQUESTS FOR REVOLVING LOANS. Subject to the terms and
provisions of this Agreement, each request by the Borrower for any draw under
the Line of Credit shall be made in accordance with Lender's Automatic Loan
Manager Program.
ARTICLE THREE. COLLATERAL
SECTION 3.1. SECURITY INTERESTS. To secure payment of the Liabilities,
Borrower hereby irrevocably pledges, assigns, transfers, conveys and sets over
to the Lender and hereby grants to the Lender a first and paramount security
interest in and to the Collateral, howsoever arising, wherever located and
whether now owned or existing or hereafter existing or acquired.
SECTION 3.2. PERFECTION AND FILING REQUIREMENTS. Borrower shall perform any
and all acts requested by the Lender to establish, maintain and continue the
Lender's security interests and liens in the Collateral, including but not
limited to, executing financing statements and such other instruments and
documents when and as reasonably requested by the Lender.
SECTION 3.3. COLLECTION OF ACCOUNTS RECEIVABLE.
(A) Borrower shall establish a "lock box" account at the Lender (the "Lock
Box"), subject to the control of the Lender, and pursuant to Lender's standard
form lock-box agreement (the "Lock Box Agreement"). Borrower, at its expense,
will notify or cause to be notified all Account Debtors to pay directly any sum
or sums then due or to become due on the Accounts Receivable to the Lock Box.
(B) Unless otherwise provided herein and subject to the provisions of
Section 3.3(A) of this Agreement, Borrower may collect through the Lock Box at
its own expense the Accounts Receivable in the ordinary course of business;
provided, however, that Borrower's authorization to collect through the Lock Box
the Accounts Receivable is subject to the following:
(i) The Lender, at any time after the occurrence of an Event of Default,
may, in its sole discretion, notify any or all of the Account Debtors that (1)
the Accounts Receivable have been assigned to the Lender; and/or (2) that all
further payments on the Accounts Receivable should be paid solely to the Lender.
When requested by the Lender after the occurrence of an Event of Default,
Borrower at its expense will notify or cause to be notified any or all Account
Debtors to pay directly to the Lender any sum or sums then due or to become due
on the Accounts Receivable or any part thereof and all bills and statements
thereafter sent by Borrower to such Account Debtors shall state that the same
have been assigned to the Lender and are payable solely to the Lender;
(ii) In the event an Account Debtor is notified under Subsection 3.3(B)(i)
of this Agreement or one or more Events of Default have occurred under the terms
of this Agreement, the Lender shall have and succeed to all rights, remedies,
securities and liens of Borrower in respect to such Accounts Receivable or other
Collateral, including, but not limited to, the right of stoppage in transit of
any merchandise, guarantees or other contracts or suretyship with respect to any
such merchandise, warranties, unpaid seller's liens, statutory liens, artisans'
liens, or the right to other collateral security held by or to which Borrower is
entitled for the payment of any such merchandise, and shall have the right to
enforce the same in its name or to direct the enforcement thereof by Borrower
for the benefit of the Lender, and Borrower shall, at the request of the Lender,
deliver to the Lender a separate written assignment of any of the same. The
Lender, however, shall not incur any obligation or liability of Borrower to any
Account Debtor, including, but not limited to, obligations or liabilities
pursuant to any con tract, agreement, warranty, guarantee, judicial decree or
jury award. The Lender, in such an event, is also hereby irrevoc ably authorized
to receive, open and dispose of all mail addressed to Borrower, to notify the
Post Office authorities to change the address for delivery of Borrower's mail to
an address designated by the Lender, to endorse Borrower's name on all notes,
checks, drafts, bills of exchange, money orders, commercial paper of any kind
whatsoever, and any other instruments or documents received howsoever in payment
of the Accounts Receivable, or any part thereof, and the Lender or any officer
or employee thereof is hereby irrevocably constituted and appointed agent and
attorney-in-fact for Borrower for the foregoing purpose;
(iii) Borrower shall not collect, compromise or accept any sum in full
payment or satisfaction of any of the Accounts Receivable for materially less
than the amount due without the express written consent of the Lender, except in
the ordinary course of business; and
(iv) The Lender may directly request the Account Debtors for written
confirmations of the Accounts Receivable at any time whether before or after the
occurrence of an Event of Default.
(C) All collections of Accounts Receivable through the Lock Box shall be
deposited into a cash collateral account located at and controlled by Lender and
for bookkeeping purposes be credited against the Line of Credit (1) banking day
after the date of deposit into such cash collateral account with Lender;
provided, however, that (i) all such credits shall be and are conditional
credits which shall only become final upon collection in immediately available
funds; and (ii) any funds that are electronically transferred from another
financial institution to such cash collateral account shall for bookkeeping
purposes be credited against the Line of Credit one (1) banking day after the
date of deposit into such cash collateral account.
SECTION 3.4. USE OF COLLATERAL. Borrower shall at all times keep the
Collateral in good condition and repair and free and clear of all unpaid charges
(including, but not limited to, taxes), liens and encumbrances, and shall pay or
cause to be paid all obligations as they come due, including but not limited to,
mortgage payments, real estate taxes, assessments and rent due on the premises
where the Collateral is or may be located, except for charges, liens,
encumbrances and obligations being contested in good faith by Borrower and for
which adequate reserves have been established. Borrower agrees that (except as
provided in the immediately preceding sentence) in the event Borrower fails to
pay such obligations, the Lender may, at its sole and arbitrary discretion, pay
such obligations for the account of Borrower. The Lender may, in its sole
discretion, discharge taxes, liens or security interests or other encumbrances
at any time levied or placed on the Collateral and may, in its sole and
arbitrary discretion, pay for the maintenance and preservation of the
Collateral. Any payments made by the Lender pursuant to this Section shall be
repayable to the Lender by Borrower immediately upon the Lender's demand
therefor, with interest at a rate equal to the highest interest rate described
in the Note in effect from time to time during the period from and including the
date funds are so expended by the Lender to the date of repayment, and any such
amounts due and owing the Lender shall be an additional obligation of Borrower
to the Lender secured hereunder.
SECTION 3.5. SOFTWARE AGREEMENTS. As additional security for the payment of
the Liabilities, Borrower shall execute and deliver an assignment of all of the
Software Agreements (the "Software Assignment"), in form and manner satisfactory
to Lender.
SECTION 3.6. PATENTS, TRADEMARKS AND LICENSES. As additional security for
the payment of the Liabilities, the Borrower shall execute and deliver to Lender
a patent, trademark and license security agreement (the "Patent and Trademark
Agreement") pursuant to which all of the patents, trademarks and licenses of the
Borrower are pledged to Lender, in form and manner satisfactory to Lender.
SECTION 3.7. COPYRIGHTS AND LICENSES. As additional security for the
payment of the Liabilities, the Borrower shall execute and deliver to Lender a
copyright and license security agreement (the "Copyright Agreement") pursuant to
which all of the copyrights and licenses of the Borrower are pledged to Lender,
in form and manner satisfactory to Lender.
SECTION 3.8. CROSS COLLATERALIZATION. The Borrower acknowledges and agrees
that (A) the Collateral secures all of the Loans and (B) Lender shall not
release any lien on the Collateral unless and until all the Liabilities are paid
in full.
ARTICLE FOUR. REPRESENTATIONS AND WARRANTIES
SECTION 4.1. BORROWER. Borrower represents and warrants to the Lender that:
(A) Organization, Etc. It is duly organized, validly existing and in good
standing under the laws of the State of its incorporation and is duly qualified
and in good standing or has applied for qualification as a foreign corporation
authorized to do business in each jurisdiction where, the failure to be so
qualified will have a material adverse effect on the Borrower's business.
(B) Authorization: No Conflict. The execution and delivery of the Documents
are all within the corporate powers of it, have been duly authorized by all
necessary action, have, or by the time of their execution and delivery shall
have, received all necessary governmental or regulatory approval (if any shall
be required), and do not and will not contravene or conflict with any provision
of (i) law, rule, regulation or ordinance, (ii) the certificate of incorporation
or by-laws of it; or (iii) any agreement binding upon it or any of their
properties, as the case may be.
(C) Validity and Binding Nature. The Documents executed by it are the
legal, valid and binding obligations of it, enforceable against it, in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization and other similar laws of general
application affecting the rights and remedies of creditors and except as the
availability of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be brought.
(D) Title to Assets. Except as set forth in Section 4.1(E) of this
Agreement, it has good and marketable title to all assets owned by it,
including, but not limited to, the Collateral, subject to no (i) liens,
encumbrances, security interests, or mortgages; (ii) zoning, building, fire,
health or environmental code violations of any governmental authority; and (iii)
violations of any covenants, conditions or restrictions of record.
(E) Liens. None of its assets are subject to any lien, encumbrance or
security interest, except (i) for current taxes not delinquent or taxes being
contested in good faith and by appropriate proceedings and for which adequate
reserves have been established; (ii) liens arising in the ordinary course of
business for sums not due or sums being contested in good faith and by
appropriate proceedings and for which adequate reserves have been established,
but not involving any deposits, advances or borrowed money or the deferred
purchase price of property or services; (iii) liens in favor of Lender; and (iv)
liens specifically permitted pursuant to this Agreement.
(F) Financial Statements. Its financial statements which have been
previously delivered to Lender have been prepared on a basis and in conformity
with generally accepted accounting principles consistently applied, are true and
correct and fairly present the consolidated financial condition of it as at the
dates of such financial statements and the results of its operations for the
periods then ended, and since the date of the latest financial statement
delivered to Lender there has been no material adverse change in its financial
condition or operations.
(G) Litigation and Contingent Liabilities. No litigation or arbitration,
administrative or governmental proceedings are pending or to the knowledge of
Borrower threatened against it which would, if adversely determined, materially
and adversely affect its financial condition or continued operations.
(H) No Violations of Laws. It (i) is not in material violation of any law,
ordinance, rule, regulation, judgment, decree or order of any federal, state or
local governmental body or court; and (ii) has obtained all required permits,
certificates, licenses, approvals and other authorizations from governmental
agencies and entities (whether federal, state or local) necessary to carry on
its operation.
(I) Burdensome Obligations. Except for indentures, agreements, leases,
contracts, deeds or other instruments entered into in the ordinary course of
business that are not otherwise precluded or prohibited pursuant to the
Documents, it is not a party to any indenture, agreement, lease, contract, deed
or other instrument, or subject to any partnership restrictions which could
reasonably be expected to materially and adversely affect or impair the
business, assets, operations, properties, or condition, financial or otherwise,
of it.
(J) Taxes. All federal, state and local tax returns required to be filed by
it have been filed with the appropriate governmental agencies and all taxes due
and payable by it have been timely paid.
(K) No Default or Event of Default. No event or condition exists under any
material agreement, instrument or document to which it is a party or may be
subject, or by which it or any of its properties are bound, which constitutes a
default or an event of default thereunder, or will, with the giving of notice,
passage of time, or both, would constitute a default or event of default
thereunder.
(L) Employee Benefit Plans. Each employee benefit plan, if any, (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended from time to time) maintained by it complies in all material respects
with all applicable requirements of law and regulations and all payments and
contributions required to be made with respect to such plans have been timely
made.
(M) Federal Laws and Regulations. It is not (i) an "investment company" or
a company "controlled", whether directly or indirectly, by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended;
(ii) a "holding company", or a "subsidiary company" of a "holding company", or
an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", within the meaning of the Public Utility Holding Company Act of 1935,
as amended; or (iii) engaged principally, or as one of its important activities,
in the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System).
(N) Fiscal Year. The fiscal year of it ends on May 31 of each year.
(O) Officers of It. Each Person listed below holds the respective office or
offices in it set forth next to such Person's name:
Name Office
Patrick Sommers President
(P) Genuineness of Accounts Receivable. All the Accounts Receivable of it
are genuine and were incurred in the ordinary course of business and are not in
default or have been adequately provided for within reserves.
(Q) Collateral Locations. All of the tangible Collateral is located at the
Collateral Locations.
ARTICLE FIVE. COVENANTS
SECTION 5.1. BORROWER. Until all the Liabilities are paid in full, the
Borrower covenants and agrees that:
(A) Financial Statements and Certificates. It will furnish to the Lender
(i) within 90 days after the close of each fiscal year of it, a copy of (a) the
annual audited report of it consisting of at least a balance sheet, statement of
operating results and retained earnings, statement of cash flows and notes to
financial statements, profit and loss statement and statement of changes in
financial position of it prepared on a consolidating and consolidated basis and
in conformity with generally accepted accounting principles, duly prepared by
certified public accountants of recognized standing selected by it and approved
by the Lender, together with a certificate from such accountants to the effect
that, in making the examination necessary for the signing of such annual report
by such accountants, they have not become aware of any Event of Default that has
occurred and is continuing, or if they have become aware of any such event,
describing it and the steps, if any taken or being taken to cure it; and (b)
Borrower's annual Management Letter prepared by Borrower's certified public
accountants; (ii) within 45 days after the end of each fiscal quarter, a copy of
its form 10Q filed with the securities and exchange commission; (iii) within 30
days after the end of each fiscal quarter, (1) a statement showing age and
reconciliation of its Accounts Receivable for the preceding month in such form
and detail as Lender may reasonably request; and (2) a certificate signed by the
President or chief financial officer of it providing that the financial
statements being provided to Lender pursuant to clause (iii)(1) above are true
and correct; (iv) copies of all federal and state tax returns of it, including,
but not limited to, requests for extensions of such tax returns, when and as
filed; (v) copies of any and all reports, examinations, notices, warnings and
citations issued by any governmental or quasi-governmental (whether federal,
state or local), unit, agency, body or entity with respect to it; and (vi) such
other information as the Lender from time to time reasonably requests.
(B) Books, Records and Inspections. It will (i) maintain complete and
accurate books and records; (ii) permit reasonable access by the Lender to the
books and records of it; and (iii) permit the Lender, upon reasonable notice, to
inspect the properties, whether real or personal, and operations of it.
(C) Insurance. It will maintain such insurance as may be required by law
and such other insurance to the extent and against such hazards and liabilities
as is customarily maintained by companies similarly situated. All property
insurance policies with respect to the Collateral shall contain loss payable
clauses in form and substance reasonably satisfactory to the Lender, naming the
Lender as a loss payee as its interest may appear, and providing that such
policies and loss payable clauses may not be canceled, amended or terminated
unless at least thirty (30) days prior written notice thereof has been given to
the Lender. All insurance proceeds received by the Lender may be retained by the
Lender, in its sole discretion, for application to the payment of any of the
principal or interest on the Liabilities then due and owing the Lender by it as
the Lender may determine.
(D) Taxes and Liabilities. It will pay when due all taxes, assessments and
other liabilities except as contested in good faith and by appropriate
proceedings and for which adequate reserves have been established.
(E) Restriction on Dividends. It will not declare or pay, or authorize a
declaration or payment of, any dividend, whether a cash dividend or stock
dividend, or make any distribution in cash, property or securities in respect
of, any class of its capital stock.
(F) Indebtedness. It will not incur or permit to exist any indebtedness or
liability for borrowed money or for the deferred purchase price of any property
or any services, except (i) the Loans; (ii) current accounts payable or other
liabilities arising in the ordinary course of business; and (iii) existing
indebtedness more fully described on Exhibit 5.1(F) attached hereto.
(G) Liens. It will not create or permit to exist any mortgage, pledge,
title retention lien, or other lien, encumbrance or security interest with
respect to any assets now owned or hereafter acquired and owned, except (i)
liens for current taxes not delinquent or for taxes being contested in good
faith and by appropriate proceedings and for which adequate reserves have been
established; (ii) liens arising in the ordinary course of business for sums not
due or sums being contested in good faith and by appropriate proceedings and for
which adequate reserves shall have been established and not involving any
advances or borrowed money or the deferred purchase price of property or
services; (iii) liens in favor of Lender; and (iv) those described in Section
4.1(E) of this Agreement.
(H) Guaranties, Loans or Advances. It will not become or be a guarantor or
surety of, or otherwise become or be responsible in any manner with respect to
any undertaking of any other Person, or make or permit to exist any loans or
advances to any other Person, except for the endorsement, in the ordinary course
of collection, of instruments payable to it or to its order.
(I) Mergers, Consolidations and Sales. It will not be a party to any merger
or consolidation with, or purchase or otherwise acquire all or substantially all
of the assets or stock of any class of, or any partnership or joint venture
interest in, any other Person, or sell, transfer, convey or lease all or any
substantial part of its assets, or sell or assign, with or without recourse, any
Accounts Receivable, except with the prior written consent of the Lender.
(J) Self-Dealing. It shall not purchase, acquire or lease any property
from, or sell, transfer or lease any property to (a) any Affiliate, (b) any
officer, director or shareholder of it or any Affiliate, (c) any member of the
immediate family of any of the foregoing, except on terms comparable to the
terms which would prevail in an arms-length transaction between unaffiliated
third parties.
(K) Violation of Law. It will not materially violate any law, statute,
ordinance, rule, regulation, judgment, decree, order, writ or injunction of any
federal, state or local authority, court, agency, bureau, board, commission,
department or governmental body.
(L) Unconditional Purchase Obligations. It will neither enter into or be a
party to any contract for the purchase of materials, supplies or other property
or services if such contract requires that payment be made by it regardless of
whether or not delivery is ever made of such materials, supplies or other
property or services.
(M) Maintenance of Business. It will preserve its corporate existence in
the jurisdiction of establishment, as that may be from time to time, and it will
not operate in any business other than a business substantially the same as the
business of it as in effect on the date of this Agreement.
(N) Employee Benefit Plans. It will (i) maintain each employee benefit plan
as to which it may have any liability in substantial compliance with all
applicable requirements of law and regulations; (ii) make all payments and
contributions required to be made pursuant to such plans in a timely manner; and
(iii) neither establish any new employee benefit plan, agree or contribute to
any multi-employer plan nor amend any existing employee pension benefit plan in
a manner which would increase its obligation to contribute to such plan.
(O) Use of Proceeds. It will not permit any proceeds of the Loans to be
used either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of "purchasing or carrying any margin stock" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System,
as amended from time to time. (P) Good Title. It shall at all times maintain
good and marketable title to all of its assets.
(Q) Officers of Borrower. One of the following Persons listed below will at
all times hold the respective office or offices in it set forth next to such
Person's name:
Name Office
Patrick Sommers President
Daniel P. DiCaro Vice President and Chief Financial Officer
(R) Collateral Locations; Material Adverse Change. It shall give the Lender
(i) 30 days prior written notice of the location of any Collateral at any place
other than the Collateral Locations; and (ii) prompt written notice of any
event, occurrence or other matter which has resulted or may result in a material
adverse change in its financial condition or business operations.
(S) Fiscal Year. The fiscal year of it shall end on May 31 of each year.
(T) Bank Accounts. It shall maintain with Lender all of its business
checking and money market accounts; provided, however, that Borrower's accounts
related to its 401K Plan shall not be covered by this Section.
(U) Debt to Tangible Stockholders Equity Ratio. It shall not cause, suffer
or permit the ratio of (i) its total consolidated liabilities minus deferred
revenues to (ii) its Tangible Stockholders Equity to be greater than 2.0 to 1.0
at any time.
(V) Tangible Stockholders Equity. It shall not cause, suffer or permit its
Tangible Stockholders Equity to be less than $5,500,000.00 at any time.
(W) Minimum Net Income. It shall have a net income after taxes of at least
$750,000.00 for the fiscal year ending May 31, 1998.
(X) Line of Credit. For a period of 30 consecutive days during each fiscal
year of it, there shall be no Revolving Loans outstanding under the Line of
Credit.
ARTICLE SIX. CONDITIONS PRECEDENT
SECTION 6.1. SPECIAL CONDITIONS PRECEDENT TO THE MAKING OF THE FIRST LOAN.
Lender's obligation to make the first Loan is subject to the fulfillment of each
and every one of the following conditions prior to or contemporaneously with the
making of such first loan:
(A) Delivery of Documents. The Lender shall have received each of the
following, in form and substance satisfactory to the Lender and its counsel, and
where applicable, duly executed and recorded:
(i) Certificates of the Secretary of Borrower certifying as to (a) all
corporate actions taken and consents made by Borrower to authorize the
transactions provided for or contemplated under this Agreement and the
execution, delivery and performance of the Documents; and (b) the names of the
officers or employees of Borrower authorized to sign the Documents, together
with a sample of the true signature of each such Person. (Lender may
conclusively rely on such certificates until formally advised by a like
certificate of any changes therein.);
(ii) Acknowledgment copies from the appropriate
governmental authority of all Uniform Commercial
Code financing statements required to perfect the
Lender's security interests in the Collateral;
(iii) Copies of Uniform Commercial Code, tax lien
and judgment searches made with such governmental
offices as Lender deems necessary;
(iv) Certificates of insurance and loss payable
clauses covering the Collateral and meeting the
requirements of this Agreement;
(v) The Revolving Note;
(vi) The Lock Box Agreement;
(vii) The Software Assignment;
(viii) The Patent and Trademark Agreement;
(ix) The Copyright Agreement;
(x) The executed opinion of counsel of counsel to
Borrower, addressed to the Lender and dated the
date of this Agreement;
(xi) Certified copies of the Certificate of
Incorporation or Charter and By-laws of Borrower,
as restated or amended as to the date of this
Agreement;
(xii) Certificates of good standing for Borrower
in the jurisdiction of its incorporation, in the
principal places in which it conducts business and
in places in which it owns real estate and/or
Collateral;
(xiii) A writing from Borrower's certified public
accountants (selected by Borrower and approved by
Lender) addressed to Lender acknowledging that (a)
all financial statements prepared by such
accountants are also being prepared for the
benefit of Lender and (b) Lender shall rely on
such financial statements;
(xiv) Such other instruments or documents as the
Lender may reasonably request.
SECTION 6.2. GENERAL CONDITIONS PRECEDENT TO EACH LOAN. In addition to all
other requirements of this Agreement, including, but not limited to, those set
forth in Section 6.1 of this Agreement, Lender's obligation to make each Loan is
subject to the fulfillment of each and every of the following conditions prior
to or contemporaneously with the making of each and every such Loan:
(A) No Event of Default. No Event of Default shall have occurred and be
continuing, may occur with the giving of notice, the passage of time or both or
shall result from the making of any Loan.
(B) No Material Adverse Change. There shall have been no material adverse
change in the business of the Borrower or the financial condition of the
Borrower from the most recent financial statements submitted by Borrower to
Lender.
(C) Continuation of Representations and Warranties. The representations and
warranties contained in this Agreement shall be true and correct in all material
respects as of the making of any Loan, with the same effect as though made on
such dates.
ARTICLE SEVEN. EVENTS OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT. Each of the following acts, occurrences or
omissions shall constitute an event of default under this Agreement (herein
referred to as an "Event of Default"), whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment or order of any court or any order,
rule or regulation of any governmental or nongovernmental body or tribunal:
(A) Borrower shall default in the payment when due of any amount due and
owing to the Lender under the Note; or
(B) Except for the Event of Default set forth in Section 7.1(A) of this
Agreement, default, and continuance thereof for 30 days after written notice
thereof to Borrower by the Lender, in the payment of any other amount owing by
Borrower to the Lender pursuant to the Documents or pursuant to any other
agreement, note, instrument or guarantee; or
(C) Any representation or warranty made by Borrower contained in the
Documents shall at any time prove to have been incorrect in any material respect
when made; or
(D) Borrower shall default in the performance or observance of any term,
covenant, condition or agreement on its part to be performed or observed under
the Documents (not constituting an Event of Default under any other clause of
this Section 7.1 of this Agreement) and such default shall continue unremedied
for 30 days after written notice thereof shall have been given by the Lender to
Borrower; or
(E) Either: (i) Borrower shall become insolvent or generally fail to pay,
or admit in writing its inability to pay, such Person's debts as they become
due, or a proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed by or
against Borrower or Borrower makes an assignment for the benefit of creditors;
provided, however, that no Event of Default shall exist pursuant to this
Subsection E, Clause (i) due to an involuntary bankruptcy case, proceeding or
petition filed against Borrower unless such involuntary case, proceeding or
petition shall not have been dismissed or withdrawn within 60 days after the
date of such involuntary filing; or (ii) corporate or other action shall be
taken by Borrower for the purpose of effectuating any of the foregoing; or
(F) If notice is given that the Collateral, or any part of the Collateral,
is subject to levy, attachment, seizure, or confiscation or uninsured loss;
provided, however, that the deductible amount on any insurance policy currently
in effect on the Collateral shall not be considered an uninsured loss pursuant
to this Subsection; or
(G) Borrower shall be dissolved, whether voluntarily or involuntarily and
such Person has not taken all actions required to become reinstated; or
(H) Subject to any applicable cure and/or notice periods, any material
default shall occur under any material agreement, document or instrument binding
upon the Borrower, or the assets of any Borrower, including, but not limited to,
any default in the payment when due of any principal of or interest on any
indebtedness for money borrowed or guaranteed by the Borrower, or any default in
the payment when due, or in the performance or observance of, any material
obligation of, or condition agreed to by, the Borrower with respect to any
purchase or lease of any real or personal property or services;
(I) Lender, in good faith, deems itself reasonably insecure for any reason
due to any material adverse change in the business, assets or liabilities,
financial condition, results of operations or business prospects of the
Borrower.
ARTICLE EIGHT. REMEDIES
SECTION 8.1. REMEDIES UPON DEFAULT. Upon the occurrence and continuance of
any Event of Default, and the expiration of any applicable cure period, and in
every such event:
(A) notwithstanding anything in the Documents, Lender may, in its sole and
arbitrary discretion, declare the principal of and interest on any or all of the
Loans, any or all of the Notes, and all other amounts owed under the Documents,
to be forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived; and
(B) Lender may, in its sole and arbitrary discretion, without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived, exercise all of the remedies of a secured party and mortgage holder
under applicable law, including, but not limited to, the UCC, and all of its
rights and remedies under the Documents; and
(C) Lender may require Borrower to make the Collateral and the records
pertaining to the Collateral available to the Lender at a place designated by
the Lender which is reasonably convenient or may take repossession of the
Collateral and the records pertaining to the Collateral without the use of any
judicial process and without any prior notice thereof to Borrower; and
(D) except as otherwise provided by law, Lender may, at its option, and in
its sole and arbitrary discretion, sell the Collateral at public or private sale
upon such terms and conditions as Lender may reasonably deem proper, and Lender
may purchase the Collateral at any such sale, and apply the net proceeds, after
deducting all costs, expenses and attorneys' fees incurred at any time in the
collection of the indebtedness of Borrower to the Lender and in the protection
and sale of the Collateral, to the payment of said indebtedness, returning the
remaining proceeds, if any, to Borrower, with Borrower remaining liable for any
amount remaining unpaid after such application; and
(E) the Lender may, at its option, and in its reasonable discretion, grant
extensions, compromise claims and settle Accounts Receivable for less than face
value, all without prior notice to Borrower; and
(F) Lender may, at its option, and in its sole and arbitrary discretion,
use, in connection with any assembly or disposition of the Collateral, any
trademark, trade name, trade style, copyright, patent right or technical process
used or utilized by Borrower; and
(G) Borrower shall, upon the request of the Lender, forthwith upon receipt,
transmit and deliver to the Lender in the form received, all cash, checks,
drafts and other instruments for the payment of money (properly endorsed, where
required, so that such items may be collected by Lender) which may be received
by Borrower at any time in full or partial payment of any Collateral. Borrower
shall not commingle any such items which may be so received by Borrower with any
other of its funds or property but shall hold them separate and apart from their
own funds or property and in trust for the Lender until delivery is made to
Lender.
SECTION 8.2. ATTORNEY-IN-FACT. Upon the occurrence and during the
continuation of an Event of Default, Borrower hereby appoints Lender as such
Person's attorney-in-fact, with full authority in such Person's place and stead
and in such Person's name or otherwise, from time to time in Lender's sole and
arbitrary discretion, to take any action and to execute any instrument which
Lender may deem necessary or advisable to accomplish the purpose of this
Agreement.
SECTION 8.3. REMEDIES ARE SEVERABLE AND CUMULATIVE. All provisions
contained herein pertaining to any remedy of the Lender shall be and are
severable and cumulative and in addition to all other rights and remedies
available in the Documents, at law and in equity, and any one or more may be
exercised simultaneously or successively. Any notification required pursuant to
this Article Eight or under applicable law shall be reasonably and properly
given to Borrower at the address and by any of the methods of giving such notice
as set forth in Section 9.3 of this Agreement, at least 10 days before taking
any action.
ARTICLE NINE. MISCELLANEOUS
SECTION 9.1. NO WAIVER; MODIFICATIONS IN WRITING. No failure or delay on
the part of Lender in exercising any right, power or remedy pursuant to the
Documents shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof, or the exercise of any other right, power or remedy. No
amendment, modification, supplement, termination or waiver of any provision of
the Documents, nor any consent by Lender to any departure by Borrower therefrom,
shall be effective unless the same shall be in writing and signed by Lender. Any
waiver of any provision of the Documents and any consent by Lender to any
departure by Borrower from the terms of any provision of the Documents shall be
effective only in the specific instance and for the specific purpose for which
given. No notice to or demand on Borrower in any case shall entitle Borrower to
any other or further notice or demand in similar or other circumstances.
SECTION 9.2. SET-OFF. Lender shall have the right to set-off, appropriate
and apply toward payment of any of the Liabilities, in such order of application
as Lender may from time to time and at any time elect, any cash, credit,
deposits, accounts, securities and any other property of Borrower which is in
transit to or in the possession, custody or control of Lender, or any agent,
bailee, or Affiliate of Lender. Borrower hereby grants to Lender a security
interest in all such property.
SECTION 9.3. NOTICES, ETC. All notices, demands, instructions and other
communications required or permitted to be given to or made upon any party
hereto shall be in writing personally delivered or sent by overnight courier or
by facsimile machine, and shall be deemed to be given for purposes of this
Agreement on the day that such writing is delivered or sent by facsimile machine
or one (1) days after such notice is sent by overnight courier to the intended
recipient thereof in accordance with the provisions of this Section 9.3. Unless
otherwise specified in a notice sent or delivered in accordance with the
foregoing provisions of this Section 9.3 of this Agreement, notices, demands,
instructions and other communications in writing shall be given to or made upon
the respective parties hereto at their respective addresses indicated for such
party below:
If to the Borrower: Medicus Systems Corporation
One Rotary Center
Suite 1111
Evanston, Illinois 60201
Attention: President
Phone: (847) ________________
Fax No.: (847) _______________
With copies to: J. Craig Walker, Esq.
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Suite 3200
Chicago, Illinois 60602
Phone: (312) 372-1121
Fax No.: (312) 372-2098
If to the Lender: Cole Taylor Bank
850 West Jackson Blvd.
Chicago, Illinois 60607
Attn: Robert J. Mathson
Phone: (312) 491-5400
Fax No.: (312) 738-5529
With a copy to: Steven Bright, Esq.
Boehm, Pearlstein & Bright, Ltd.
33 North LaSalle Street
35th Floor
Chicago, Illinois 60602
Phone: (312) 782-7474
Fax No. (312) 782-0380
<PAGE>
SECTION 9.4. COSTS, EXPENSES AND TAXES. Borrower agrees to pay all
out-of-pocket fees and expenses of Lender (including, but not limited to, UCC
Filing and Search Fees and fees and reasonable expenses of outside counsel to
Lender and paralegals) in connection with the making of the Loans and
preparation, administration and enforcement of the Documents and the Loans;
provided, however, that solely with respect to the fees and costs of Lender's
counsel in connection with the preparation and negotiation of the Documents and
making of the Loans on the Closing Date, Borrower shall only be responsible for
all of Lender's counsel's out-of-pocket expenses plus up to $5,000.00 of
Lender's legal fees incurred in connection with the preparation and negotiation
of the Documents and making of the Loans through the Closing Date. In addition,
Borrower shall pay any and all stamp, transfer and other taxes payable or
determined to be payable in connection with the execution and delivery of the
Documents and agrees to hold the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes. If any suit or proceeding arising from any of the foregoing is
brought against Lender, Borrower, to the extent and in the manner directed by
Lender, will resist and defend such suit or proceeding or cause the same to be
resisted and defended by counsel approved by Lender. If Borrower shall fail to
do any act or thing which it has covenanted to do under this Agreement or any
representation or warranty on the part of Borrower contained in this Agreement
shall be breached, Lender may, in its sole and arbitrary discretion, after 10
days written notice is sent to Borrower, do the same or cause it to be done or
remedy any such breach, and may expend its funds for such purpose; and any and
all amounts so expended by the Lender shall be repayable to the Lender by
Borrower immediately upon the Lender's demand therefor, with interest at a rate
equal to the highest interest rate set forth in the Note in effect from time to
time during the period from and including the date funds are so expended by
Lender to the date of repayment, and any such amounts due and owing Lender shall
be deemed to be part of the Liabilities secured hereunder. The obligations of
Borrower under this Section shall survive the termination of this Agreement and
the discharge of the other obligations of Borrower under the Documents.
SECTION 9.5. COMPUTATIONS. Where the character or amount of any asset or
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement, be made
in accordance with generally accepted accounting principles applied on a basis
consistent with those at the time in effect.
SECTION 9.6. FURTHER ASSURANCES. Borrower agrees to do such further acts
and things and to execute and deliver to Lender such additional assignments,
agreements, powers, documents and instruments as Lender may reasonably require
or deem advisable to carry into effect the purposes of the Documents, or to
confirm unto Lender its rights, powers and remedies under the Documents.
SECTION 9.7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which counterparts, once they are executed and delivered,
shall be deemed to be an original and all of which counterparts, taken together,
shall constitute but one and the same agreement.
SECTION 9.8. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding
upon, and inure to the benefit of, Lender, Borrower and their respective
successors, assigns, representatives and heirs. Borrower shall not assign any of
its rights nor delegate any of its obligations under the Documents without the
prior written consent of Lender and no such consent by Lender shall, in any
event, relieve Borrower of any of its obligations under the Documents.
SECTION 9.9. HEADINGS. Captions contained in this Agreement are inserted
only as a matter of convenience and in no way define, limit or extend the scope
or intent of this Agreement or any provision of this Agreement and shall not
affect the construction of this Agreement.
SECTION 9.10. ENTIRE AGREEMENT. This Agreement, together with the
Documents, contains the entire agreement between the parties hereto with respect
to the transactions contemplated herein and supersede all prior representations,
agreements, covenants and understandings, whether oral or written, related to
the subject matter of the Agreement. Except as specifically set forth in this
Agreement, Lender makes no covenants to Borrower, including, but not limited to,
any other commitments to provide any additional financing to Borrower.
SECTION 9.11. GOVERNING LAW. This Agreement shall be deemed to be a
contract made under the laws of the State of Illinois and for all purposes shall
be construed in accordance with the laws of the State of Illinois.
SECTION 9.12. SEVERABILITY OF PROVISIONS. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 9.13. CONFLICT. In the event of any conflict between this Agreement
and any of the other Documents, the terms and provisions of this Agreement shall
govern and control.
SECTION 9.14. JURISDICTION; WAIVER. BORROWER ACKNOWLEDGES THAT THIS
AGREEMENT IS BEING SIGNED BY THE LENDER IN PARTIAL CONSIDERATION OF LENDER'S
RIGHT TO ENFORCE IN THE JURISDICTION STATED BELOW THE TERMS AND PROVISION OF
THIS AGREEMENT AND THE DOCUMENTS. BORROWER CONSENTS TO JURISDICTION IN THE STATE
OF ILLINOIS AND VENUE IN ANY FEDERAL OR STATE COURT IN THE COUNTY OF COOK FOR
SUCH PURPOSES AND THEY WAIVE ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND
VENUE. BORROWER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST LENDER IN ANY
JURISDICTION EXCEPT THE AFORESAID COUNTY AND STATE. LENDER AND BORROWER HEREBY
EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY
WITH RESPECT TO ANY MATTER WHATSOEVER RELATING TO, ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THE LOANS, THE DOCUMENTS AND/OR THE TRANSACTIONS WHICH ARE THE
SUBJECT OF THE DOCUMENTS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered at Chicago, Illinois as of the date first above
written.
BORROWER: MEDICUS SYSTEMS CORPORATION
By:________________________________
Title:_____________________________
LENDER: COLE TAYLOR BANK
By:_________________________________
Title:______________________________
<PAGE>
EXHIBIT 1.1(G) TO MEDICUS SYSTEMS CORPORATION -
LOAN AND SECURITY AGREEMENT
Collateral Locations
1. One Rotary Center
Suite 1111
Evanston, Illinois 60201
2. 1301 Marina Village Parkway
Suite 105
Alameda, California 94501
3. 16120 Chesterfield Parkway South
Suite 120
Chesterfield, Missouri 63017
