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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
MCS, INC.
(Exact name of registrant as specified in its charter)
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PENNSYLVANIA 25-1400911
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 PENN CENTER, PITTSBURGH, PA 15253
(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number, including area code: 412-823-7440
Securities to be registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS TO BE SO REGISTERED
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None
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
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EXPLANATORY NOTE
[ ], 1999
Dear Fellow Stockholders:
In May 1999, the board of directors of Mestek, Inc. decided to merge
Mestek's wholly owned subsidiary MCS, Inc. with and into Simione Central
Holdings, Inc. under a merger agreement dated May 26, 1999. Prior to the closing
of the merger, Simione acquired all of the stock of CareCentric Solutions, Inc.
on August 12, 1999. Thereafter, the Mestek board of directors considered, on a
preliminary basis, the distribution of all of the capital stock of MCS to the
Mestek stockholders. The Mestek board of directors determined that a
distribution of all of the capital stock of MCS to the Mestek stockholders
(i.e., a "spin-off") would benefit Mestek by allowing its management to focus
exclusively on the operation and growth of its HVAC, metals and metal forming
segments. The Mestek board of directors also found that the distribution would
benefit MCS by providing MCS with greater access to the capital markets to
develop its home health information and services business and by allowing MCS to
be better able to attract and retain top quality professionals.
In September 1999, the board of directors of Mestek resolved to distribute
all of the capital stock of MCS to the Mestek stockholders on a pro rata basis
prior to the merger of MCS into Simione. Accordingly, all common stockholders of
record of Mestek on [ ], 1999 will receive one share of the common
stock of MCS for each share of the common stock of Mestek they own on that date.
Mestek intends to distribute the shares of common stock of MCS on
[ ].
The business of MCS is primarily related to the sales and service of
business applications software for the home health services information systems
marketplace. On September 1, 1999, MCS transferred its business relating to its
ProfitWorks software, used primarily by the building supply industry, to Mestek,
and this business will not be included in the spin-off.
You do not have to take any action for the spin-off to occur. You do not
have to pay for the uncertificated shares of MCS common stock that you will
receive in the spin-off, nor do you have to surrender or exchange shares of
common stock of Mestek in order to receive shares of MCS common stock. The
number of shares of Mestek common stock that you own will not change as a result
of the spin-off.
Immediately after the spin-off, you will own a pro-rata portion of MCS and
you will continue to own your shares of Mestek. Mestek will continue to trade on
the NYSE but there are no plans to list the MCS shares on any exchange. The MCS
shares will not be transferable for 125 days beginning [record date], except in
the event of a merger between MCS and another company.
On September 9, 1999, MCS, Mestek and Simione signed an Amended and Restated
Agreement and Plan of Merger and Investment Agreement. The amendment of the May
1999 merger agreement added some additional conditions to closing of the merger,
including the completion of the spin-off and the affirmative vote of the common
stockholders of MCS after the spin-off. The proposed merger, including the risks
involved and the conditions to closing of the merger, is described in the Joint
Proxy Statement/Prospectus of Simione and MCS which is being sent to you
simultaneously with this Registration Statement on Form 10. If the merger is
approved by the stockholders of both companies and proceeds to closing, you will
receive in regular certificate form shares of Simione common stock in exchange
for your uncertificated shares of MCS acquired in the spin-off. The Simione
shares will be subject to transferability restrictions for a period of two
years, as further described in the Joint Proxy Statement/Prospectus. The merger
agreement was amended again on October 25, 1999 to make changes that conform to
the proposed structure of the merger. Simione common stock is listed on the
Nasdaq National Market and is traded under the symbol "SCHI".
For your information, I intend to vote the MCS common stock that I will
acquire in the spin-off, either in my own name or as trustee, in favor of the
merger of Simione and MCS.
You should read this Registration Statement on Form 10 and the accompanying
Joint Proxy Statement/Prospectus carefully.
Sincerely,
John E. Reed
Chairman of the Board of Directors
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MCS, INC.
ITEM 1. BUSINESS
OVERVIEW
MCS is primarily involved in the sales and service of business applications
software for the home health services marketplace. Services to customers
include:
- preparation of computer programs and software to meet customer needs,
- providing computer hardware when required,
- installing the system at the customer's business,
- providing continuing support services, and
- providing classroom and computer-based training on its software.
MCS' primary product is MestaMed(TM), a third-party billing, accounting and
inventory control system for providers of home health services. MCS also
develops and offers for sale computer-based training materials for the MestaMed
system and for other home health issues. In addition, MCS Management Services
division offers management services to home health providers to assist them with
billing and reimbursement and the efficient management and utilization of their
systems.
In addition, MCS developed ProfitWorks, a computer system utilized by
building supply, lumber, electrical, plumbing, and hardware suppliers and
outlets and manufacturer's representatives to manage order entry, inventory,
purchasing, accounts receivable, and reporting. The business of ProfitWorks,
including its assets and liabilities, was transferred to Mestek on September 1,
1999, as further described in "Item 7. Certain Relationships and Related
Transactions" on page 22.
MESTAMED
MestaMed is a third-party billing, accounting and inventory control system
for providers of home health services, including:
- home medical equipment,
- home health care,
- infusion therapy,
- rehabilitation programs and
- hospice services.
MCS' customers are home health care providers who use MestaMed to track the
provision of home medical equipment and services to patients and to meet the
complex requirements necessary to obtain reimbursement from Medicare/Medicaid
and other third-party payors. MCS believes MestaMed is the only system which
integrates information for operational and financial management for all of these
disciplines for providers of home health services.
MestaMed is comprised of approximately 4-6 primary functions, such as
billing, and up to 18 additional functions covering a variety of features that a
customer may choose to include in its particular version of the MestaMed system.
MestaMed is available on a variety of computer systems and operating systems
including Open VMS, UNIX, Windows
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NT, AIX and various Intel, Alpha and RS 6000 computer systems. One of MCS'
customers uses MestaMed Plus, a customized version of MestaMed.
Customers also may sign maintenance agreements which provide them with
access to customer support, updates to respond to changes in reimbursement and
regulatory policies, and product enhancements. These maintenance agreements are
typically for one year. The software in installations which do not have
maintenance agreements rapidly becomes obsolete.
MestaMed originally was designed for providers of home medical equipment
such as hospital beds, wheel chairs and oxygen and respiratory equipment. Over
time, MCS expanded MestaMed to include additional functions to meet the needs of
other home health care service providers. MestaMed has also been expanded and
improved in part by requests from customers. These features have been
incorporated into upgrades of MestaMed.
REGULATION
Many of the services provided by the home health care industry are paid for
by the federal government under the Medicare and Medicaid programs or by third
parties such as traditional health insurance companies or HMOs. While Medicare
is administered by the federal government, each state administers the Medicaid
program in its state using its own regulations. Each of these organizations has
elaborate regulations regarding the provision of and payment for services. In
addition, the rules for different types of services such as skilled nursing,
durable medical equipment and infusion therapy are substantially different.
Changes in regulations on reimbursement plans require reprogramming to
update affected MestaMed functions. The federal Health Care Financing Agency
(commonly referred to in the industry as "HCFA") released its interim payment
system (commonly referred to in the industry as "IPS") rules in 1997, and it
released its proposed prospective payment system (commonly referred to in the
industry as "PPS") in October 1999. The final PPS rules are scheduled to be
released in July 2000. The IPS rules did not require extensive reprogramming of
MestaMed. MCS estimates it spent no more than $50,000 in modifying MestaMed to
incorporate the IPS regulations. The impact of these changes is discussed under
"-- Customers" on page 6.
MCS believes that the PPS rules could require extensive reprogramming of
MestaMed. Management is still assessing how much it will cost to update MestaMed
to incorporate the PPS rules. Modifying MestaMed to incorporate regulatory
mandates often requires MCS to divert development personnel and other resources
from scheduled program enhancements and product improvements, and MCS expects
that incorporation of the new PPS rules will also divert resources.
In late October 1999, HCFA released its proposed regulations for the
prospective payment system for reimbursement of home health providers under
Medicare. These proposed rules are subject to comment and are expected to be
finalized by July 2000 and effective October 2000. The proposed rules will
reimburse home health providers fixed amounts for 60 day episodes of care
determined by case mix groups on the basis of an initial Outcome and Assessment
Information Set (commonly referred to in the industry as "OASIS") assessment
adjusted for regional labor cost differences. The proposed rules state that the
reimbursement will be 50% at the start of the episode and 50% after the final
report for the episode with all adjustments has been transmitted. Adjustments
will be
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allowed for low utilization, partial episodes, significant changes in condition,
delivery of therapy and other outlier or excessive costs situations. Additional
submittals required will include a notice of admission, identification of the
appropriate case mix group and a one-line universal bill submission.
These changes to the Medicare payment system will require extensive changes
to the manner in which home health care providers do business because they will
be required to reduce or manage the costs of care per episode so the costs will
not exceed the allowed reimbursement, while maintaining the quality of medical
outcomes required by the patient, the payor or other governmental regulatory and
self-regulating organizations. Such changes will require extensive changes to
MCS' software products. Plans are underway to understand and address these
changes. There is no assurance that:
- these changes can be made correctly or in a timely enough manner given
the resources of MCS;
- HFCA will not change or delay these requirements;
- other suppliers of home health care software who are competitors will not
supply better versions of such products; or
- MCS' customers will have the resources and skills to make the changes to
their operational processes needed to remain in business or to acquire,
install and use the information technology we intend to sell to address
this major regulatory change.
In the recent round of fiscal year 2000 appropriations bills signed into
law, the portions of the Balanced Budget Act of 1997 that were applicable to the
reimbursement of home health care providers under Medicare were amended to:
- defer the 15% additional funding cut until October 2000;
- provide for three year extended payments of prior Medicare
over-reimbursements with the first year interest-free;
- eliminate the bundling of home medical equipment billings with home
health agency billings; and
- provide other minor relief.
These changes will increase the cash flow of our customers and potential
customers for the next 12 months, but do not provide the permanent relief sought
by the industry. The non-bundling change eliminates an opportunity for MCS which
has a software program that would facilitate such bundling of billing. This
legislation will not require significant changes to MCS' software programs.
PROGRAMMING
MestaMed was developed in what are today regarded as "legacy" environments,
a term used to describe environments that are based on outdated programming
technology. Nevertheless, by utilizing tools developed by others, MCS has been
able to sustain and improve the utility of its legacy products and offer those
products on a variety of current computer systems and operating systems,
including Windows NT.
The chart below sets forth the approximate amounts MCS spent on software
development over the past four years. These costs related primarily to product
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improvements and customer requested enhancements to existing products, as well
as to remediation of the year 2000-related issues in certain of MCS' products,
as more fully described under the heading "Item 2 -- Financial
Data -- Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 11.
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1996........................................ $1.3 million
1997........................................ $1.6 million
1998........................................ $2.0 million
1999(1)..................................... $1.7 million
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(1) Nine months ended September 30, 1999
MCS is limited by its programming resources. As of September 30, 1999, MCS
had 30 employees in its development department. On average MCS' programmers have
been with MCS for 6.5 years. Currently, development and support of MestaMed
requires the use of Synergy, a set of legacy oriented tools based on the DIBOL
computer language. It is increasingly difficult to find programmers who are
skilled in these languages. The MestaMed Plus customer has a full-time
programmer dedicated to supporting and enhancing custom software for that
customer.
MestaMed uses older "green-screen" technology instead of a graphical user
interface now common on many Windows-based consumer and business programs.
"Green-screens" require the operator to use the arrow keys and control keys to
navigate. Operators need more training to efficiently input data in a
"green-screen" environment than in a "point and click" graphical user interface
environment.
In the fourth quarter of 1998, MCS began to update MestaMed to use a
graphical user interface for certain application functions. As of the second
quarter of 1999, all file maintenance functions, such as adding a new doctor or
patient to a client's database, have been converted to use a graphical user
interface. MCS is now limiting its MestaMed graphical user interface conversion
efforts in favor of developing a next generation product. MCS has initiated the
design phase of such a product. In the interim, management expects to continue
to support, enhance and upgrade the existing versions of MestaMed.
The new generation of MestaMed will use modern program architecture and
software languages. MestaMed will also be capable of operating in modern
computer network environments including Internet-based operating environments.
To fully replicate the features and functions of MestaMed and to update its
functions to address the new home health care environment expected and the
forthcoming PPS rules will take many years and resources. MCS is using Winfield
Software, Inc., an outside software development company, to design and develop
the program specifications for the first phase of the new MestaMed product. For
a more detailed description of the product, see "MCS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" on page
12.
Management of MCS based its decision to use an outside software development
company in part on the need for MCS' programmers to continue on-going updating
and customization efforts of the current version of MestaMed and their relative
inexperience with current programming languages and structures. Reliance on an
outside software developer subjects MCS to risks that this supplier may not be
able, for whatever reason, to supply the designs and specifications in a timely
and cost-efficient manner, and/or may not be available to support programming
efforts. MCS believes that it could use alternative vendors for these services
at a similar cost to MCS. Switching vendors could result in substantial delays.
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Currently the outside software developer is developing a full set of
specifications and screen layouts for the first phase of the new version of
MestaMed together with MCS' product management team. Under the terms of MCS'
agreement with the outside software developer, MCS retains all ownership rights
associated with the specifications and screen layouts produced. Upon receipt of
the full specifications and screen layouts, MCS can elect to have the software
code necessary to implement the specifications and layouts developed by the
outside software developer or by other programmers, including possibly
programmers in countries with lower labor costs than the United States. In
August 1999, MCS received the first portion of the specifications and layouts
from the developer. The cost of the development of the specifications for the
new version of MestaMed is expected to be approximately $300,000 of which
$80,000 has been incurred and expensed as of September 30, 1999. The balance is
expected to be incurred and expensed in the fourth quarter of 1999. The cost of
implementing the specifications and the actual software coding for the first
phase of the new version of MestaMed is expected to be approximately $1.2
million.
CUSTOMERS
MCS' customers are typically home health care providers. These providers
include:
- home health agencies, which are typically Medicare-certified
organizations which provide a variety of skilled home care services
from nursing to coordination of a caregiving team to administer
comprehensive home care services,
- hospice care organizations, which provide medical, psychological, and
spiritual care for the terminally ill and support for patients'
families,
- intravenous and infusion therapy companies, which delivery medicinal
and nutritional therapies intravenously or through feeding tubes, and
- home medical equipment and supply dealers, which provide home care
patients with products ranging from breathing equipment to wheelchairs
and walkers.
Almost all of MestaMed users purchase primary functions and additional
functions related to the specific business or businesses of the customer. As of
September 30, 1999, approximately 80% of existing MestaMed customers had
purchased the home medical equipment functions, 25% purchased infusion therapy
functions and 15% purchased home health agency functions of one or more types.
In 1998 and the first nine months of 1999, no single customer accounted for more
than 5% of MCS' total revenues and its five biggest customers represented less
than 10% of its total revenues.
In the last two years, there has been significant reduction in the
aggregate number of home health care providers due to consolidation in the
industry and the departure of many home health care providers as a result of the
adoption of the IPS reimbursement regulations and the resulting overall decrease
in Medicare reimbursement. In 1997, there were approximately 10,000 Medicare
certified home health care providers as reported by the National Association for
Home Care on its Internet web site at www.nahc.org. By 1998, there were only
approximately 9,000. MCS had approximately 800 active customers at December 31,
1997, approximately 750 active customers at December 31, 1998 and approximately
570 active customers at September 30, 1999. An active MCS customer is one which
is current on its payments under its maintenance contract and has logged at
least one telephone call with the MCS telephone support center within the last
six months.
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As of September 30, 1999, MCS' backlog was approximately $1,010,000,
compared to approximately $840,000 as of September 30, 1998.
MCS' inventory consists primarily of computer hardware and related
equipment, which is sold together with applications software as an integrated
package, and a supply of third-party software licenses. MCS attempts to maintain
a thirty-day supply of many hardware items so that delivery of completed systems
can be made on a timely basis.
COMPETITION
The market for computer software to support the home health services
information services industry is intensely and increasingly competitive. Because
of the breadth of its overall product offering, MCS competes with many companies
offering alternative solutions for home health services industry needs. Some of
these firms have greater financial, marketing and technical resources than MCS.
They may be able to adapt more quickly to new or emerging technologies and
standards or changes in customer requirements, and they may be able to devote
greater resources to the promotion and sale of their products than can MCS.
MCS believes that the principal competitive factors affecting the home
health information technology market include technical performance and product
attributes such as:
- features and functionality,
- portability,
- reliability,
- ease of use,
- adaptability and scalability,
- product technology platform,
- product reputation,
- product quality,
- customer service and support,
- price,
- ability to integrate with products produced by other vendors,
- quality and development assurance,
- the effectiveness of sales and marketing efforts, and
- company reputation and financial strength.
Partly as a consequence of the recent consolidation in the home health care
industry, home health care providers tend to offer a wider variety of services.
MCS believes that its integrated MestaMed system offers an advantage in terms of
convenience and lifetime service costs to such providers over competitors'
stand-alone software designed to address single types of services. Unlike
stand-alone systems, MestaMed's integrated system does not require re-keying
patient, insurance and other data if a provider wishes to offer
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additional services to an existing patient. However, the initial cost of
MestaMed for a single use is higher than the cost of many of its stand-alone
competitors.
MCS believes that the home health care services industry is increasingly
being dominated by hospital based "integrated delivery networks". MCS has not
established a relationship at this time with a supplier of information systems
to hospital-based delivery systems. It has, however, recently entered into an
agreement with the Volunteer Hospital Association whereby its products are
recommended to the Association's members as the preferred solution for their
home health services information systems needs. The Volunteer Hospital
Association has 1,500 member hospitals of whom 600 have home health agencies,
150 are home medical equipment providers and 130 are home infusion providers.
There can be no assurance that MCS will be successful in competing in the
future with respect to these or other factors.
SALES AND MARKETING
MCS markets MestaMed through its 19 person sales and marketing department.
MCS' sales force is split geographically into east and west divisions. Sales
people specialize in selling primarily to home medical equipment and infusion
providers or home health care agencies. Sales people from both areas work
together to sell to integrated providers. Sales people work from their homes. A
small headquarters sales staff sells add-on software modules, accessories,
supplies and training to existing customers.
MCS markets its products through advertisements in two national home health
care journals, attendance at 30-40 trade shows per year and direct mail. Word of
mouth from satisfied customers is an important part of MCS' marketing. MCS'
foreign sales are not significant.
TRAINING
MCS offers its customers training at its Pittsburgh location, at its new
training facility in Pleasanton, California and on-site at the customer's
offices. MestaMed addresses the complex needs of the home health care market. As
a result, it is a complex program and requires substantial effort to train
operators. The "green-screen" technology used by current versions of MestaMed
requires substantial training of customers' operators. Initial training is often
included in the purchase price of new systems. On-going training is billed
separately. MCS expects that the next generation of MestaMed will result in
lower training costs because of the "user friendliness" of graphical user
interfaces and integrated help features of modern development tools. As of
September 30, 1999 MCS had approximately 38 support service analysts who are
available to provide training to customers. MCS offers three types of classroom
training:
- Installation and initial training,
- On-site training services, and
- Training seminars.
In 1999, MCS has offered nearly 50 seminars to its customers. These range
from classes on network communications to making home health agency businesses
more efficient.
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In February 1998, MCS acquired Mentor/CBT, a computer-based training tool
and content set. Computer-based training allows customers the opportunity to
lower their training costs, especially for small numbers of employees such as
new hires, by purchasing a reusable CD-ROM. As of the second quarter of 1999,
MCS is refocusing its training division to provide more generic industry-wide
content in addition to its product specific content for Internet and
computer-based training. Computer-based training generated revenues of
approximately $128,000 in 1998 and approximately $76,000 for the first nine
months of 1999.
CUSTOMER SERVICE
Customers who have signed a maintenance agreement have access to MCS'
customer service center at MCS' headquarters in Pittsburgh. The customer service
center provides telephone assistance to customers. As of September 30, 1999, MCS
had 68 support service analysts, including the 38 training analysts described
above. MCS is installing an improved voice mail and telephone communication
system and reorganizing its customer service department to deliver "real-time"
customer support to improve customer service and operating efficiency. MCS
expects to have the reorganization completed in early 2000.
CONSULTING
MCS Management Services division offers customers consulting services
relating to improving accounts receivables, collection and reimbursement
functions and generally improving the efficiency of home medical equipment
businesses. This division has three employees with many years of experience in
validating and collecting accounts receivable generated by home medical
equipment providers. It generated revenues of approximately $808,000 in 1998 and
approximately $634,000 through September 30, 1999.
PROPRIETARY RIGHTS AND LICENSES
MCS depends upon a combination of copyrights and restrictions on access to
its trade secrets to protect its proprietary rights. MCS distributes its
products under software license agreements tied to specific computer units which
grant customers a non-exclusive license to MCS products and contain terms and
conditions prohibiting the unauthorized reproduction or transfer of those
products. Generally, MCS products are furnished to customers in both object and
source code form under an obligation of confidentiality. In addition, MCS
generally enters into confidentiality agreements with its management and
programming staff and limits access to and distribution of its proprietary
information.
While MCS has not federally registered any of its copyrights, it generally
includes copyright notices in its software. Despite these precautions, it may be
possible for unauthorized third parties to copy aspects of MCS products or to
obtain information that MCS regards as proprietary. Unregistered copyrights are
still protected under both federal and state law, although a copyright holder
must first register a copyright to sue another person for infringement of that
copyright under federal law. This may be done immediately prior to bringing a
suit. Obtaining registered copyrights on software often requires disclosure of
at least portions of the underlying software code. In addition, software code
changes so frequently that constant updates would be required to keep a useful
copyright current. Therefore, MCS has elected not to register its copyrights at
this time, although it is free to do so at any time.
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MCS believes that, due to the rapid pace of innovation within the software
industry, factors such as its domain knowledge, the technological and creative
skills of its personnel and ongoing reliable product maintenance and support are
more important in establishing and maintaining a leadership position within the
industry than are the various legal protections of its technology.
All trademarks and registered trademarks used herein are the property of
their respective owners.
EMPLOYEES
Because of the importance of systems development to MCS, programming, sales
and support personnel are a primary resource. As of September 30, 1999, MCS had
a total of 137 employees nationwide, consisting of 19 in sales and marketing, 30
in programming and development, 6 in computer-based training, 3 in the
management services division, 68 in support training and education, and 10 in
executive, finance and administration. These figures do not include 9 employees
who worked on ProfitWorks and who were transferred to Mestek on September 1,
1999.
MCS' success is highly dependent on its ability to attract and retain
qualified employees. Competition for employees is intense in the software
industry, and an inability to attract and retain qualified development and sales
personnel, in particular, could postpone product release schedules and adversely
affect MCS' ability to generate revenue.
None of MCS' employees is represented by a labor union or is the subject of
a collective bargaining agreement with respect to his or her employment with
MCS. MCS has never experienced a work stoppage and believes its relations with
its employees are good.
EXECUTIVE OFFICES
MCS' principal executive offices are located at 400 Penn Center,
Pittsburgh, Pennsylvania 15235 and the telephone number is 412-823-7440.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The selected financial data shown below summarizes MCS' financial
operations only. MCS' ProfitWorks segment was distributed to the parent company,
Mestek, Inc., on September 1, 1999. Accordingly, MCS has accounted for the
operations of the ProfitWorks segment prior to that date as a discontinued
operation in accordance with Accounting Principles Board Opinion No. 30. The
distribution of the assets and liabilities of the ProfitWorks segment has been
accounted for as a disposal of a discontinued segment in accordance with
Accounting Principles Board Opinion No. 30.
The following selected financial data have been derived from and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the MCS Financial Statements and notes
thereto included in this Form 10. For a description of the basis of presentation
of the historical financial data of MCS, see Note 1 to the Financial Statements.
The statement of operations data set forth below for each of the three
years in the period ended December 31, 1998 and the balance sheet data at
December 31, 1998 and 1997 are derived from the MCS Financial Statements and
notes thereto included in this Form 10. The MCS Financial Statements for the
years 1998, 1997 and 1996 have been audited by Grant Thornton LLP. The statement
of operations data set forth for the years ended December 31, 1995 and 1994, and
the nine months ended September 30, 1999 and 1998, and the balance sheet data at
December 31, 1995 and 1994, and at September 30, 1999 and 1998 are unaudited.
Because MCS operated as a wholly owned subsidiary of Mestek during the
periods reflected in the following selected financial data, it may have recorded
different results had it been operated independently of Mestek. Therefore, the
financial information presented below is not necessarily indicative of the
results of operations or financial position that would have resulted if MCS had
been a separate, stand-alone business during the periods shown, or of its future
performance as a separate, stand-alone business.
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NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
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1999 1998 1998 1997 1996 1995 1994
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(UNAUDITED) (IN THOUSANDS (UNAUDITED)
EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenues from Continuing Operations........ $12,579 $10,962 $14,901 $15,433 $14,636 $13,865 $13,319
Income from Continuing Operations.......... 477 691 1,026 1,768 1,708 1,552 1,279
Income from Discontinued Operations........ 151 227 403 241 149 101 74
Net income................................. 628 918 1,429 2,009 1,857 1,653 1,353
BASIC AND DILUTED EARNINGS PER SHARE:
From Continuing Operations............... 477 691 1,026 1,768 1,708 1,552 1,279
From Discontinued Operations............. 151 227 403 241 149 101 74
------- ------- ------- ------- ------- ------- -------
628 918 1,429 2,009 1,857 1,653 1,353
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Cash and cash equivalents.................. 33 38 60 40 34 251 160
Working capital............................ (1,258) (1,499) (1,745) (2,110) (1,754) (1,092) (607)
Total assets............................... 5,316 5,146 5,279 4,895 4,489 4,650 4,865
Total long-term liabilities................ -- -- -- -- -- -- --
Stockholders' equity....................... (434) (723) (981) (1,640) (1,312) (843) (397)
</TABLE>
11
<PAGE> 13
MCS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
This Registration Statement on Form 10 contains forward-looking statements,
which are subject to inherent uncertainties. These uncertainties include, but
are not limited to, changes in the health care regulatory environment, changes
in information technology, the broad economic effect of the year 2000 problem,
customer preferences, general economic conditions and increased competition. All
of these uncertainties are difficult to predict, and are beyond the ability of
MCS to control.
Certain statements contained herein constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are not historical facts but rather reflect MCS' current expectations concerning
future results and events. The words "believes", "expects", "intends", "plans",
"anticipates", "likely", "will", "results", "estimates", "projects" or similar
expressions are intended to identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of MCS or industry results, to differ materially from future
results, performance or achievements expressed or implied by such
forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect management's view and speak only as of the date of this
report.
OVERVIEW
In accordance with the requirements of the MCS/Simione merger agreement,
MCS distributed its ProfitWorks segment to Mestek on September 1, 1999. The
distribution has been accounted for as a disposal of a business segment in
accordance with Accounting Principles Board Opinion No. 30. The assets and
liabilities distributed represent the operating assets and liabilities directly
connected to the operation of the ProfitWorks business. The liabilities
distributed exceeded the accounting basis of the assets distributed and,
accordingly, MCS recorded a contribution to paid in capital at the time of the
distribution.
The business of MCS is related to the sales and service of business
applications software for the home health services information systems
marketplace. Services to customers include:
- preparation of computer programs and software to meet customer needs,
- providing computer hardware when required,
- installing the system at the customer's business,
- providing continuing support services, and
- providing classroom and computer-based training on its software.
MCS' principal product, MestaMed, does not typically require significant
customization or lengthy implementation periods. Accordingly, MCS invoices its
customers for
12
<PAGE> 14
software licenses and related hardware sales after both hardware and software
have been delivered and accepted and related contracts, including software
licenses, have been executed.
MCS invoices its customers for software maintenance and telephone support
(other than first year maintenance and support) on an annual basis. Such
billings are treated as deferred revenues on MCS' balance sheet and are
thereafter amortized off to revenue over twelve months using the straight-line
method.
In addition to software licenses, software maintenance and support, and
related hardware, MCS also provides a number of ancillary services including
training, consulting and after-hours support. Revenues from such services are
recognized monthly as such services are performed and billed.
Unbilled receivables represent revenues earned in the current period but
not billed until future dates, usually within one month.
In June 1999, MCS entered into an agreement with Winfield Software, Inc. to
develop specifications and design layouts for Phase I of a new generation of
MestaMed. Phase I is intended to produce a next-generation version of MestaMed
comprising billing and operational functionality targeted to home medical
equipment providers. Phase I is divided into two stages.
The first stage, incorporating the specifications and design layouts being
produced by Winfield Software, will cost $300,000, of which $80,000 has been
incurred and expensed as of September 30, 1999. The balance of the first stage
expenses are expected to be incurred during the fourth quarter of 1999. The
second stage of Phase I, implementing the specifications and generating the
software code, is expected to cost approximately $1,200,000 and to be completed
prior to December 31, 2000. MCS expects to finance the cost of the second stage
through its own operating cash flows and, to the extent necessary, through the
combined credit facilities of MCS and Simione subsequent to the merger.
MCS expects that upon completion of Phase I, it will have a next-generation
version of MestaMed that it can market to home medical equipment providers.
Phase II, and other subsequent product development phases, will be primarily
aimed at adding product functionality to the next-generation MestaMed software
intended for home health agencies, including integrating the point-of-care and
front office functionality already contained in the existing, next-generation
CareCentric product, as well as specifying and developing the billing and other
back office functionality similar to that contained in the MestaMed and Simione
STAT II legacy products. Future development phases are also expected to include
specifying and developing other historical MestaMed and STAT II functions,
including those targeted to other home health service lines such as infusion
therapy, hospice, and rehabilitation.
13
<PAGE> 15
RESULTS OF OPERATIONS
1998 VS 1997
MCS reported reduced revenues, margins and operating profits in 1998
compared to 1997 as indicated in the following table:
<TABLE>
<CAPTION>
1998 % 1997 %
------- ------ ------- ------
($000) ($000)
<S> <C> <C> <C> <C>
Net sales............................. $14,901 100.00% $15,433 100.00%
Gross profit.......................... 5,676 38.09 6,548 42.43
Operating income...................... 1,665 11.17 2,889 18.72
</TABLE>
Reimbursement restrictions imposed upon Medicare providers, MCS' customer
base, in 1998 by the Balanced Budget Amendment adversely affected the home
health care information systems marketplace and resulted in reduced revenues
both industry-wide and for MCS. In addition, costs incurred by MCS in its
efforts to address year 2000 functionality in certain of its products, and in
other product development initiatives, adversely impacted operating profits in
1998. Profit margins were reduced in 1998 relative to 1997 due in part to the
addition of a number of software support specialists in 1998.
MCS' selling expenses, as a percentage of total revenues, increased from
12.47% in 1997 to 14.92% in 1998 due to reduced sales in 1998, as more fully
discussed above, and increases in sales personnel. MCS added four sales
representatives and a marketing coordinator in 1998. MCS' general and
administrative expenses, as a percentage of total revenues, decreased from
11.24% in 1997 to 10.45% in 1998 due to a reduction in MCS' bonus provision for
1998.
1997 VS 1996
MCS reported improved revenues and operating profits in 1997 compared to
1996 as indicated in the following table:
<TABLE>
<CAPTION>
1997 % 1996 %
------- ------ ------- ------
($000) ($000)
<S> <C> <C> <C> <C>
Net sales................................... $15,433 100.00% $14,636 100.00%
Gross profit................................ 6,548 42.43 6,286 42.95
Operating income............................ 2,889 18.72 2,814 19.23
</TABLE>
Increased revenues in 1997 were principally the result of $230,000 in
increased sales of add-on software, and $340,000 in increased revenues from the
Management Services division that was added in 1996. The Management Services
division provides consulting services to home medical equipment providers
regarding accounts receivable and reimbursement management.
MCS' selling expenses as a percentage of total revenues increased slightly
from 12.26% in 1996 to 12.47% in 1997. The principal factor affecting this
increase was an increase in commission expense. MCS' general and administrative
expenses, as a percentage of total revenues, decreased slightly from 11.46% in
1996 to 11.24% in 1997.
14
<PAGE> 16
RESULTS OF OPERATIONS (UNAUDITED INTERIM DATA)
In the nine-month period ended September 30, 1999, MCS reported increased
revenues and margins, but reduced operating income compared to the nine-month
period ended September 30, 1998, as indicated in the following table:
<TABLE>
<CAPTION>
NINE-MONTHS NINE-MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 % SEPTEMBER 30, 1998 %
------------------ ------ ------------------ ------
($000) ($000)
<S> <C> <C> <C> <C>
Net sales................... $12,579 100.00% $10,962 100.00%
Gross profit................ 4,910 39.03 3,990 36.40
Operating income............ 757 6.02 1,124 10.25
</TABLE>
Sales of MCS' core MestaMed product increased significantly in the first
nine months of 1999, accounting for most of this segment's revenue growth.
Significant product development and product support related costs were also
incurred during this period resulting in decreased operating income for the
segment despite the growth in revenues. MCS is pursuing a number of product
development initiatives designed to assist with the migration of its core
products to more modern operating system environments. MCS is also undertaking a
redesign of its product support infrastructure with a view to improving the
quality and timeliness of the support function.
MCS' selling expenses, as a percentage of total revenues, increased from
14.51% in the first nine months of 1998 to 17.00% in the first nine months of
1999 due to the cost associated with engaging an outside marketing consultant to
conduct market research and create strategic planning initiatives for MCS.
Selling expenses were also affected by a revised compensation program for sales
personnel which increased salaries in 1999. MCS' general and administrative
expenses, as a percentage of total revenues, decreased from 10.14% in the first
nine months of 1998 to 9.40% in the first nine months of 1999 reflecting the
effect of increased revenues.
YEAR 2000 DISCLOSURE
The following information is being provided as a Year 2000 Readiness
Disclosure Statement, and is subject to the provisions of the Year 2000
Information and Readiness Disclosure Act.
MCS released a year 2000 compliant version of its principal product,
MestaMed, in September 1998, known as the MestaMed Version II.8. Version II.8 is
capable of accurately processing calendar date information, including
calculating, comparing and sequencing to or from dates in the twentieth and the
twenty-first centuries.
MestaMed runs on a number of different software operating systems and
hardware platforms. The principal operating environments include Alpha/VMS, from
Compaq (formerly Digital Equipment Corporation), RS6000/AIX from IBM,
Pentium/UNIX from Intel and the Santa Cruz Operation (SCO), and Pentium/Windows
NT from Intel and Microsoft. These hardware and software suppliers have
represented to the public that their respective operating environments are
generally year 2000 compliant.
MCS has worked closely with its customers covered under a current software
maintenance and support agreement, to apply the necessary operating system
patches and to install MestaMed Version II.8. Most of these customers have
completed this process
15
<PAGE> 17
and several have subsequently performed their own independent year 2000 testing.
No year 2000 related problems have been reported as a result of this additional
testing. A small number of eligible customers remain to be upgraded.
A small percentage of MCS' customers are running MestaMed on relatively
older platforms, primarily a discontinued version of SCO UNIX running on old
Intel X86 processors, for which the vendors earlier announced that they would
not be providing the necessary changes to make these environments year 2000
compatible. Since that announcement in the fall of 1998, MCS has worked
diligently to disclose this situation to these customers and to encourage them
to upgrade to similar, year 2000 compatible hardware and software platforms. MCS
further notified these customers that due to this circumstance outside MCS'
control, MCS would not be able to renew their annual software maintenance and
software contracts unless they so upgraded.
MCS does not expect its customer base to experience broad-scale, year
2000-related failures for any reasons within MCS' control or influence. MCS'
worst-case scenario would be limited to a relatively small number of customers
who for unanticipated reasons might experience a year 2000-caused failure. To
cover such a circumstance, MCS has developed a year 2000 contingency plan that
requires special teams to be on-call over the New Year's holiday period. Should
a customer experience what it believes to be a year 2000-caused failure, the MCS
year 2000 contingency team will confirm that any such failures are in fact year
2000-related and, as necessary, will correct any defects in MestaMed and/or work
with the operating system and hardware vendors to provide any corrections that
may be their responsibility. For the reasons mentioned above, MCS does not
believe that its exposure to its customer base in relation to year 2000
functionality in its products is or will be material.
MCS recognizes that both its customers and its suppliers are exposed to
many year 2000 related risks in addition to the risks discussed above regarding
MCS' products. MCS does not have any reliable means to measure the risks faced
in this regard by its customers or suppliers. Should the impact of these
unrelated year 2000 risks be severe for one or more of its key suppliers or one
or more of its key customers, the impact on MCS' operations could be material.
MCS' STATE OF READINESS. For its internal business applications systems
and hardware, MCS believes that from a year 2000 readiness perspective it has
only its financial accounting systems to address. In light of the proposed
merger with Simione, MCS plans to integrate its accounting system with Simione's
accounting system. In the event the merger is delayed or does not occur, MCS
would upgrade its general ledger, accounts payable and payroll to MestaMed
Version II.8 and look to other sources for its order entry and accounts
receivable systems. There is no assurance that it can accomplish this plan
before the end of 1999 due to limited technical resources or other
implementation challenges. Accordingly the risk of MCS' operations being
disrupted after December 31, 1999 cannot be discounted.
COSTS INCURRED RELATIVE TO YEAR 2000 SOLUTIONS. MCS estimates that its
total cost of addressing year 2000 functionality will be approximately $750,000
over the two-year period ending on December 31, 1999 (assuming that the merger
is consummated on schedule). Of this total, MCS had incurred approximately
$598,000 as of December 31, 1998. For the nine-month period ending September 30,
1999 MCS has additionally incurred approximately $102,000.
16
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
MCS is a wholly owned subsidiary of Mestek, Inc., a public company traded
on the New York Stock Exchange. As such, MCS has historically distributed
substantially all of its free cash flow to Mestek in the form of an annual
dividend. Dividends paid were $161,000 in 1999, $770,000 in 1998, $2,337,000 in
1997 and $2,326,000 in 1996. MCS does not expect to pay dividends in the future.
MCS' historical access to capital has been through an unrestricted
intercompany account with Mestek. Access to capital in this manner will remain
in place for normal recurring operating expenditures through the date of closing
of the merger with Simione. MCS has historically generated positive cash flow
for Mestek each year and, as such, MCS owed no intercompany debt to Mestek, or
other long-term debt, as of December 31, 1998 or December 31, 1997. Accordingly,
MCS reported no interest expense in either 1998 or 1997. MCS' net cash flow to
Mestek subsequent to the date of the merger agreement in May 1999 has been
negative resulting in a net payable to Mestek of $637,000 as of September 30,
1999. As more fully described in Note 1 to the MCS financial statements, if such
payable to Mestek remains outstanding at the closing it will become due and
payable at the closing.
A number of factors adversely impacted MCS' cash flow during the nine
months ended September 30, 1999 including (1) a change in commission payment
policy from quarter-end to month-end (2) a net reduction in customer deposits
between December 31, 1998 and September 30, 1999 due to an unusually large
receipt to deposits in December of 1998, (3) deposits paid by MCS in relation to
software development work being undertaken in 1999 (as more fully described in
Note 4 to the MCS financial statements on page F-10), (4) a net reduction in
trade payables since December 31, 1998, (5) the payment of a dividend in
relation to the period January 1, 1999 - March 26, 1999 and (6) capital spending
in the nine months ended September 30, 1999 of $206,000.
After the spin-off, MCS will no longer have unrestricted access to capital
from Mestek. Consequently, MCS' cost of capital will likely be substantially
higher than prior to the spin-off. There can be no assurance that capital will
be available to MCS after the spin-off on terms that are acceptable to MCS.
ITEM 3. PROPERTIES
MCS leases office space in Pittsburgh (Monroeville), Pennsylvania, which
houses its principal offices and computer facility used in the computer software
development and system design business. MCS recently extended the term of this
lease until September 30, 2005, with the consent of Simione. MCS has also
recently leased office space in Pleasanton, California to provide more
convenient training facilities and support for its West Coast customers.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Mestek owns all of the capital stock of MCS prior to the spin-off.
Immediately after the spin-off, the Mestek stockholders as of the record date of
the spin-off will own all of the common stock of MCS pro rata in proportion to
their respective holdings of Mestek common stock. As of September 30, 1999,
there were 8,879,505 shares of Mestek common stock outstanding.
17
<PAGE> 19
Under the proxy rules of the Securities and Exchange Commission, a person
who directly or indirectly has or shares voting power and/or investment power
with respect to a security is considered a beneficial owner of the security.
Shares as to which voting power and/or investment power may be acquired within
60 days are also considered as beneficially owned under these proxy rules. The
table below sets forth information that MCS has received from or on behalf of
the persons named concerning the beneficial ownership of Mestek's common stock
by each person who beneficially owns Mestek common stock, each of the MCS
directors, each of MCS' executive officers and all of MCS' directors and
executive officers as a group. The only persons known by MCS to be the
beneficial owners of more than 5% of Mestek common stock as of September 30,
1999 are John E. Reed and Stewart B. Reed, both of whom are directors of Mestek
and MCS. The address of each of Messrs. J.E. Reed and S.B. Reed is 260 North Elm
Street, Westfield, Massachusetts 01085. The amount and nature of their
beneficial ownership is included in the table below. Assuming that the number of
outstanding shares of Mestek common stock does not change and the holdings of
the persons listed below do not change prior to the spin-off, the persons listed
below will own the same number and percentage of MCS shares of common stock
immediately after the spin-off and, if applicable, immediately prior to the
merger with Simione.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
NAME OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------ -------------------------- ----------------
<S> <C> <C>
5% STOCKHOLDERS:
John E. Reed(1)........................ 3,298,393 37.15%
Stewart B. Reed(2)..................... 2,209,387 24.88
DIRECTORS AND EXECUTIVE OFFICERS:
John E. Reed........................... 3,298,393 37.15
Stewart B. Reed........................ 2,209,387 24.88
Winston R. Hindle, Jr. ................ 9,000 *
Nick Kakavis........................... 9,520 *
William A. Thomasmeyer................. -- *
Michael L. Quinn....................... 3,600 *
Stephen M. Shea........................ 3,000 *
DIRECTORS AND EXECUTIVE OFFICERS
COMBINED:
All combined (7 persons)............... 5,532,900 62.3
</TABLE>
- -------------------------
* less than 1%
(1) Excludes 13,307 shares of common stock held by his wife and 13,307 shares of
common stock held by a family trust for which he is not trustee, to which he
disclaims ownership. Excludes 1,712,691 shares of common stock held by John
E. Reed as trustee for various family trusts, but for which he disclaims
beneficial ownership. 1,325,833 of such common shares are, however, included
in the shares listed as beneficially owned by his son, Stewart B. Reed, per
note (2) below. Includes 524,994 shares of common stock owned by Sterling
Realty Trust, a Massachusetts business trust of which John E. Reed is the
trustee and of which he and a family trust are the beneficiaries.
(2) Includes 1,325,833 shares of common stock owned by the Stewart B. Reed
Trust, of which Stewart B. Reed is the beneficiary and John E. Reed is the
trustee.
18
<PAGE> 20
(3) Excludes 137,500 shares of common stock held by a spousal trust, to which
Mr. Burk disclaims ownership.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Currently, MCS' directors are John E. Reed, Stewart B. Reed, Winston R.
Hindle, Jr., Nick Kakavis, Michael L. Quinn and William A. Thomasmeyer. Mestek
elected all of the directors as MCS' sole stockholder. Immediately after the
spin-off, the MCS board of directors and the executive officers of MCS are not
expected to change.
The following table sets forth the names, ages and positions of the
directors and executive officers of MCS.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John E. Reed........................... 83 Chairman of the Board of Directors
Stewart B. Reed........................ 51 Director
Winston R. Hindle, Jr. ................ 68 Director
Nick Kakavis........................... 63 Director
William A. Thomasmeyer................. 45 Director, President & CEO
Michael L. Quinn....................... 46 Director, Vice President --
Operations
Stephen M. Shea........................ 42 Senior Vice President -- Finance and
Treasurer
</TABLE>
JOHN E. REED has been the Chairman of the Board of Directors of MCS since
1986. Mr. Reed is also a director of Mestek, a position he has held since 1989,
and Mr. Reed has served as the President and Chief Executive Officer of Mestek
since 1989. Prior to the 1986 Merger of Mestek and Reed National Corp., Mr. Reed
served as the President and Chief Executive Officer of Reed National Corp. since
he founded it in 1946. Mr. Reed is also a director of Wainwright Bank & Trust
Company of Boston, Massachusetts.
STEWART B. REED has been a director of MCS since 1987. Mr. Reed is also a
director of Mestek, a position he has held since 1986. Mr. Reed served as
Executive Vice President of Mestek from 1986 to 1996. Prior to the 1986 Merger
of Mestek, Inc. and Reed National Corp., Mr. Reed had been Executive Vice
President of Reed National Corp. in charge of corporate development. Mr. Reed
had been employed by Reed National Corp. since 1970. Mr. Reed is the son of John
E. Reed, Chairman of the Board, President and Chief Executive Officer of Mestek
and the Chairman of the Board of MCS.
WINSTON R. HINDLE, JR. has been a director of MCS since 1994. Mr. Hindle is
also a director of Mestek, a position he has held since 1994, and he has also
served on Mestek's Executive Committee since 1997. Mr. Hindle retired from
Digital Equipment Corporation as a Senior Vice President in July 1994. Mr.
Hindle currently serves as a director of National Northeast Corporation, a
subsidiary of Mestek. He is also a director of Keane, Inc. of Boston,
Massachusetts and CP Claire Corporation of Beverly, Massachusetts.
NICK KAKAVIS has been a director of MCS since its inception in 1981. Mr.
Kakavis served as MCS' President and Chief Executive Officer from 1981 until
January 1, 1999,
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<PAGE> 21
and is currently President Emeritus. Mr. Kakavis worked in various engineering
and controls related functions for Mestek from 1958 until the inception of MCS
in 1981.
WILLIAM A. THOMASMEYER has been a director and President and Chief
Executive Officer of MCS since January 1999. From September 1997 until December
of 1998, Mr. Thomasmeyer was President of Mestek Technology, a Mestek subsidiary
founded to pursue the acquisition of software companies in markets complementary
to MCS. Prior to 1997, Mr. Thomasmeyer served as the President and Chief
Executive Officer of Virtual Microsystems, Inc. and Logicraft Information
Systems.
MICHAEL L. QUINN has served as Vice President -- Operations of MCS since
1985, supervising sales, product development and support, and as a director of
MCS since 1992. From 1977 to 1985, Mr. Quinn worked in various programming and
sales capacities for MCS and its parent company.
STEPHEN M. SHEA has been Senior Vice President-Finance of MCS since 1994
and was Vice President-Finance of MCS prior to 1994. Mr. Shea has been employed
in various financial roles by Mestek since 1985 and served as Chief Financial
Officer of Mestek since 1990, and as Senior Vice President -- Finance since
1994. Mr. Shea was a Certified Public Accountant with the Hartford, Connecticut
accounting firm of Spitz, Sullivan, Wachtel & Falcetta from 1979 to 1985.
ITEM 6. EXECUTIVE COMPENSATION
The non-employee directors of MCS will be entitled to receive cash and
other compensation as described below.
CASH COMPENSATION
Prior to the spin-off, non-employee directors of MCS (excluding directors
who were employed by Mestek, the corporate parent of MCS) were entitled to
receive compensation for service on the Board of Directors of MCS in the amount
of $1,500 for each meeting of the Board of Directors attended by such director.
Employee directors and directors employed by Mestek are not paid any fees or
additional compensation for service as members of MCS in connection with
attending MCS' Board and committee meetings. As of the spin-off, compensation of
MCS directors is not expected to change.
Prior to the spin-off, generally, MCS compensation for executive officers
and other key employees of MCS consisted of annual base salary and annual bonus
awards in amounts calculated in accordance with the MCS Bonus Plans that may be
determined from time to time by the Compensation Committee of Mestek and the
Board of Directors of MCS. As of the spin-off, the compensation for executive
officers and other key employees of MCS is not expected to change. As of the
Merger, the compensation of or executive officers and other key employees of MCS
will be established by the Compensation Committee and Board of Directors of
Simione.
COMPENSATION SUMMARY
The following table summarizes compensation awarded or paid by MCS during
the years ended December 31, 1998, 1997, and 1996 to MCS' current Chief
Executive Officer, MCS' former Chief Executive Officer and the three most highly
compensated other executive officers of MCS. No other executive officers of MCS
received compensation in excess of $100,000. Messrs. Thomasmeyer and Quinn are
expected to be employees of Simione following the closing of the Simione/MCS
merger.
20
<PAGE> 22
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------
NUMBER OF
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL
------------------- OPTIONS OTHER
SALARY BONUS GRANTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)(5) ($)(1)
- --------------------------- ---- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
William Thomasmeyer............ 1998 $125,000 $ -- -- $ 232
Director, Chief Executive 1997 33,653 -- -- 58
Officer and President(2) 1996 -- -- -- --
Nick Kakavis................... 1998 83,004 217,653 -- 5,599
Former President and 1997 83,004 306,872 -- 6,022
Chief Executive Officer(3) 1996 83,004 156,571 -- 6,318
Michael L. Quinn............... 1998 73,200 156,782 -- 3,498
Vice President, Operations 1997 73,200 227,223 -- 3,420
1996 73,200 217,284 -- 3,337
John E. Reed(4)................ 1998 262,000 668,000 -- 7,656
Chairman of the Board 1997 262,000 623,000 -- 7,740
1996 262,000 540,000 -- 7,119
Stephen M. Shea(4)............. 1998 119,890 66,800 -- 17,525
Senior Vice President -- 1997 108,000 77,300 -- 16,494
Finance and Treasurer 1996 104,000 69,000 25,000 8,546
</TABLE>
- -------------------------
(1) Figures include company contributions to 401(k) and target benefit plans,
group life insurance and disability insurance premium payments.
(2) Mr. Thomasmeyer became Chief Executive Officer and President of MCS on
January 1, 1999. The amounts listed for him on this table were paid by his
former employer, Mestek Technology, Inc., an affiliate of MCS. Mr.
Thomasmeyer continued his then current salary level upon becoming Chief
Executive Officer and President of MCS.
(3) Mr. Kakavis resigned as President and Chief Executive Officer of MCS
effective on January 1, 1999. He is currently a director and the President
Emeritus of MCS. Under his current employment contract, Mr. Kakavis is to be
paid a salary of $200,000 in 1999, and $100,000 in each of 2000 and 2001.
(4) These officers are also employees of Mestek and are paid by Mestek. Only a
portion of their time is spent on MCS matters. The figures here represent
all of the compensation paid to such officers by Mestek. After the
consummation of the Simione/MCS merger, these officers will not receive any
compensation from MCS or Simione, except for any director's fees that may be
paid in accordance with the established policies of Simione.
(5) Refers to shares of Mestek common stock.
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<PAGE> 23
MCS BONUS PLAN
The Chairman of the Board of Directors, based on the recommendations of the
President, selects officers and employees eligible to participate in the MCS
Bonus Plan, and establishes their respective participation percentage, as well
as the targets for the specified return on tangible net assets employed. Each of
the officers' or employees' respective participation percentage is established
by reference to his or her level of performance, responsibility and contribution
to the profitability of MCS. The participation by an officer or employee in the
MCS Bonus Plan is based on their participation percentage in the operating
profits of MCS in excess of a specified return on tangible net assets employed
in MCS. The specified return targets for the MCS Bonus Plan varies year by year,
but has generally been a 20% return.
EMPLOYMENT AGREEMENT
Mr. Kakavis entered into a three-year agreement with MCS effective January
1, 1999. Pursuant to such agreement, Mr. Kakavis serves as President Emeritus of
MCS. For the first year of the agreement, Mr. Kakavis receives a salary of
$200,000. For the second and third years of the agreement, Mr. Kakavis will
receive a salary of $100,000 per year. Mr. Kakavis is required under the
agreement to perform services necessary for the orderly transition of the
ProfitWorks product line. The agreement terminates on the death or permanent
disability of Mr. Kakavis upon payment of $50,000 by MCS to Mr. Kakavis or his
heirs. In addition, MCS may terminate the agreement for cause upon payment of
all accrued salary and vacation payable to Mr. Kakavis prior to his termination.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MCS has been and will be a wholly-owned subsidiary of Mestek prior to the
spin-off. As such, MCS has historically distributed substantially all of its
free cash flow to Mestek in the form of an annual dividend. These dividends were
$161,000 in 1999, $770,000 in 1998, $2,337,000 in 1997 and $2,326,000 in 1996.
MCS' historical access to capital has been through an open intercompany account
with Mestek. MCS has historically generated positive cash flow to Mestek each
year, and, as such, has no outstanding intercompany debt to Mestek, or other
long-term debt, as of December 31, 1998, 1997 or 1996 and accordingly, reported
no interest expense in 1998, 1997 or 1996. MCS's cash flow subsequent to the
date of the Simione merger agreement in May 1999 has been negative and as a
result, a net payable to Mestek of $637,000 is reflected on MCS' September 30,
1999 balance sheet. In connection with the merger agreement, Mestek and Simione
agreed that any such debt would be treated as a non-interest bearing loan and
accordingly no interest expense was recorded in relation to such debt in 1999.
MCS' results of operations reflect intercompany management fee charges from
Mestek of $74,000 in 1998, $78,000 in 1997, $84,000 in 1996, and its results of
operations include management fees charged from Mestek of $74,000 for the nine
month period ended September 30, 1999 and $55,000 for the nine month period
ended September 30, 1998.
On September 1, 1999, MCS distributed to Mestek, in the form of a dividend,
the ProfitWorks product line. The dividend included all accounts receivable,
inventory and other assets associated with ProfitWorks. Mestek assumed all
liabilities related to ProfitWorks, including warranty obligations, and agreed
to pay rent for space used by ProfitWorks at MCS' headquarters through the end
of 1999. The distribution has been accounted for as a disposal of a discontinued
segment in accordance with Accounting
22
<PAGE> 24
Principles Board Opinion No. 30 as described more fully in Note 11 to the
Consolidated Financial Statements.
R. Bruce Dewey, a director of MCS until August 1999, is the Chief Executive
Officer of Simione and Senior Vice President and Secretary of Mestek. In
connection with the Simione/MCS merger, Mestek will assign to Mr. Dewey options
to purchase 150,000 shares of Simione common stock to be obtained by Mestek in
the Simione/MCS merger at an exercise price of $2.00 per share. These options
vest in the event outstanding Simione options are exercised.
In late 1999 or early 2000, MCS expects to lease from Mestek or an
affiliated company of Mestek certain equipment to be purchased for MCS' use at
MCS' request. The aggregate purchase price for the equipment is expected to be
approximately $550,000. The terms for the lease of such equipment have not yet
been determined, no definitive commitment has been made and there is no
assurance that the lease arrangement will be consummated.
ITEM 8. LEGAL PROCEEDINGS
MCS is not presently involved in any litigation which it believes will
materially and adversely affect its financial condition or results of
operations.
ITEM 9. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MCS is a wholly owned subsidiary of Mestek, and consequently there is no
public market for the shares of MCS common stock. MCS shares will not be
transferable for a period of 125 days from the record date for the spin-off,
except in the event of a merger between MCS and another company. Dividends are
payable from MCS' surplus if and to the extent authorized by the Board of
Directors. MCS does not anticipate paying any dividends in the foreseeable
future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Prior to the spin-off, MCS will issue a stock dividend on its common stock
to its sole shareholder Mestek in an amount sufficient to effect the spin-off.
The purpose of the stock dividend is to increase the number of outstanding
shares of MCS common stock from 1,000 to the exact number of outstanding Mestek
common shares as of the record date of the spin-off. This ensures that each
Mestek stockholder receives the same number of MCS shares as Mestek shares held
by such stockholder. The shares of MCS common stock received by the Mestek
stockholders pursuant to the spin-off, will automatically be canceled upon
consummation of the merger, and ratably exchanged for shares of Simione common
stock pursuant to the merger.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
COMMON STOCK
MCS is authorized to issue up to 10 million shares of $1.00 par value
common stock. Immediately after the spin-off, MCS will have the same number of
shares of common stock issued and outstanding as Mestek has issued and
outstanding (less Mestek treasury shares), or approximately 8.9 million shares.
The holders of the common stock are entitled
23
<PAGE> 25
to one vote per share on all matters to be voted upon by the stockholders and do
not have preemptive rights to acquire additional shares. In the event of the
dissolution and liquidation of MCS, the available proceeds remaining after the
payment of debts and liquidation expenses are to be distributed pro rata to the
holders of MCS common stock. MCS' transfer agent and registrar is EquiServe.
PENNSYLVANIA BUSINESS COMBINATION STATUTE
Chapter 25 of the Pennsylvania Business Corporation Law ("PBCL") contains
several anti-takeover provisions which apply to "registered" corporations,
including MCS.
TRANSACTIONS WITH INTERESTED STOCKHOLDERS. Section 2538 of the PBCL
provides that if (i) an "interested stockholder" (as such term is defined in the
PBCL) of a "registered" corporation(1) (together with others acting jointly or
in concert therewith and affiliates thereof) is to be a party to a merger or
consolidation, a share exchange or certain sales of assets involving such
corporation or a subsidiary thereof; (ii) such interested stockholder is to
receive a disproportionate amount of any of the securities of any corporation
surviving or resulting from a division of such corporation: (iii) such
interested stockholder is to be treated differently from others holding shares
of the same class in a voluntary dissolution of such corporation; or (iv) such
interested stockholder's percentage of voting or economic share interest in such
corporation is materially increased relative to substantially all other
stockholders in a reclassification; then the transactions being proposed must be
approved by the affirmative vote of the holders of shares representing at least
a majority of the votes that all stockholders (other than the interested
stockholder) are entitled to cast with respect to such transaction, excluding
all such voting shares beneficially owned by such interested stockholder. Such
special voting requirement does not apply if the transaction being proposed has
been approved in a prescribed manner by such corporation's board of directors or
certain other conditions (including the amount of consideration to be paid to
certain stockholders) are satisfied or the transaction involves certain
subsidiaries.
Section 2555 of the PBCL may apply to a transaction between a registered
corporation and an interested stockholder thereof, notwithstanding that Section
2538 is also applicable. Section 2555 prohibits such a corporation from engaging
in a "business combination" (as such term is defined in the PBCL) with an
interested stockholder unless: (i) the board of directors of such corporation
gives prior approval to the proposed transaction or gives prior approval to the
interested stockholder's acquisition of 20% of the shares entitled to vote in an
election of directors of such corporation, (ii) the interested stockholder owns
at least 80% of the stock of such corporation entitled to vote in an election of
directors and, no earlier than three months after such interested stockholder
reaches such 80% level, the majority of the remaining stockholders approve the
proposed transaction and stockholders receive a minimum "fair price" for their
shares in the transaction, and the other conditions of Section 2556 of the PBCL
are met, (iii) holders of all outstanding common stock approve the transaction,
(iv) no earlier than 5 years after the interested stockholder acquired the 20%,
a majority of the remaining shares entitled to vote in an election of directors
approve the transaction, or (v) no earlier than 5 years after the interested
stockholder acquired the 20%, a majority of all the shares approve the
transaction, all stockholders receive a minimum "fair price" for their shares
(as set forth in Section 2556 of the PBCL), and certain other conditions are
met.
- ---------------
(1) Under Pennsylvania law, MCS is a "registered corporation."
24
<PAGE> 26
STOCKHOLDER "PUT" IN CONTROL TRANSACTIONS. Under Sections 2542 through
2554 of the PBCL, when a person or group of persons acting in concert holds 20%
of the shares of a registered corporation entitled to vote in the election of
directors (a "control group"), on the occurrence of the transaction that makes
the group a control group, any other stockholder of the registered corporation
who objects can, under procedures set forth in the statute, require the control
group to purchase his or her shares at "fair value" as defined in the PBCL.
CERTAIN SHARE ACQUISITIONS. The PBCL also contains certain provisions
applicable to a "registered" corporation such as MCS which, under certain
circumstances, permit a corporation to redeem Control Shares (as defined in the
PBCL), remove the voting rights of Control Shares and require the disgorgement
of profits by a Controlling Person (as defined in the PBCL).
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
MCS' certificate of incorporation does not provide for the indemnification
of directors or officers of MCS. MCS' bylaws provide that directors and officers
of MCS shall be indemnified as of right to the fullest extent permitted by
Pennsylvania law in connection with any actual or threatened civil, criminal,
administrative or investigative action, suit or proceeding, whether brought in
the name of MCS or otherwise, arising out of the director's or the officer's
service to MCS or another organization at MCS' request. MCS' bylaws permit MCS
to maintain insurance to protect itself and its directors and officers against
any liability, cost or expense incurred in connection with actual or threatened
civil, criminal, administrative or investigative actions, suits or proceedings
arising out of service to MCS or other organizations at MCS' request. Currently,
MCS' directors and officers have a contractual right to indemnification under an
agreement with Mestek funded by a trust.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the "Index to
Financial Statements" on page F-1 and in the financial statements continuing
thereafter. This Form 10 includes the following financial statements of MCS: (i)
audited balance sheets as of December 31, 1998 and 1997, and the unaudited
balance sheet as of September 30, 1999; (ii) audited statements of income for
the fiscal years ending December 31, 1996, December 31, 1997 and December 31,
1998, and unaudited statements of income for the nine month periods ended
September 30, 1999 and September 30, 1998; (iii) audited statement of
stockholders' equity (deficit) for the fiscal years ending December 31, 1996,
December 31, 1997 and December 31, 1998, and the unaudited statement of
stockholders' equity (deficit) for the nine month period ended September 30,
1999, and (iv) audited statement of cash flows for the fiscal years ending
December 31, 1996, December 31, 1997 and December 31, 1998, and the unaudited
statement of cash flows for the nine months ended September 30, 1999 and
September 30, 1998.
25
<PAGE> 27
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
Index to Financial Statements
Report of Grant Thornton LLP
Audited balance sheet as of December 31, 1998 and December 31, 1997 and the
unaudited balance sheet as of September 30, 1999;
Audited statements of income for the fiscal years ending December 31, 1998,
December 31, 1997 and December 31, 1996 and the unaudited statements of income
for the nine months ended September 30, 1999 and September 30, 1998;
Audited statement of stockholder's equity (deficit) for the fiscal years
ending December 31, 1998, December 31, 1997 and December 31, 1996 and the
unaudited period ended September 30, 1999;
Audited statement of cash flows sheet for the fiscal years ending December
31, 1998, December 31, 1997 and December 31, 1996 and the unaudited cash flows
for the nine months ending September 30, 1999 and September 30, 1998.
NOTES TO THE FINANCIAL STATEMENTS
B. EXHIBITS
<TABLE>
<C> <S> <C>
*2.1 -- Second Amended and Restated Agreement and Plan of Merger and
Investment Agreement, dated as of October 25, 1999 by and
among MCS, Inc., Mestek, Inc., Simione Central Holdings,
Inc., John E. Reed, Stewart B. Reed and E. Herbert Burk.
*3.1 -- Amended and Restated Articles of Incorporation of MCS, Inc.
*3.2 -- By-Laws of MCS, Inc.
*10.1 -- Standard form sales contract
*10.2 -- Form of Employment Agreement, dated at November 1998,
between MCS, Inc. and Nick Kakavis
</TABLE>
* Previously filed.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, there unto duly authorized.
MCS, INC.
By: /s/ WILLIAM A. THOMASMEYER
-----------------------------------
Name: William A. Thomasmeyer
Title: President and Chief
Executive Officer
Date: December 7, 1999
27
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENT PAGE
- ------------------- ----
<S> <C>
Report of Grant Thornton LLP Independent Certified Public
Accountants................................................. F-2
MCS, Inc. Balance Sheets.................................... F-3
MCS, Inc. Statements of Income.............................. F-4
MCS, Inc. Statements of Stockholder's Equity (Deficit)...... F-5
MCS, Inc. Statement of Cash Flows........................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder
of MCS, Inc.:
We have audited the accompanying balance sheets of MCS, Inc. as of December
31, 1998 and 1997, and the related statements of income, stockholder's equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MCS, Inc. as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Boston, Massachusetts
July 9, 1999 (except for Notes 1, 9, 11 and 12
as to which the date
is September 9, 1999)
F-2
<PAGE> 31
MCS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 33 $ 60 $ 40
Accounts receivable -- net................ 3,666 3,837 3,734
Unbilled accounts receivable.............. 247 286 248
Inventories............................... 222 264 393
Other current assets...................... 324 68 10
------ ------- -------
Total current assets................. 4,492 4,515 4,425
Property and equipment -- net............. 599 501 315
Capitalized software -- net............... 187 240 93
Other assets.............................. 38 23 62
------ ------- -------
Total assets......................... $5,316 $ 5,279 $ 4,895
====== ======= =======
LIABILITIES AND STOCKHOLDER
CURRENT LIABILITIES:
Accounts payable.......................... $ 673 $ 856 $ 1,107
Deferred revenue.......................... 2,775 3,150 3,205
Customer deposits......................... 487 689 659
Accrued commissions....................... 444 787 874
Payable to parent company................. 637 -- --
Other accrued liabilities................. 734 778 690
------ ------- -------
Total current liabilities............ 5,750 6,260 6,535
------ ------- -------
STOCKHOLDERS' EQUITY:
Common stock -- par value $1 per share,
1,000 shares issued..................... 1 1 1
Paid in capital........................... 310 230 230
Retained earnings (deficit)............... (745) (1,212) (1,871)
------ ------- -------
Total stockholders' equity
(deficit).......................... (434) (981) (1,640)
------ ------- -------
Total liabilities and stockholders'
equity (deficit)................... $5,316 $ 5,279 $ 4,895
====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 32
MCS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net service revenues................ $12,579 $10,962 $14,901 $15,433 $14,636
Cost of service revenues............ 7,669 6,972 9,225 8,885 8,350
------- ------- ------- ------- -------
Gross profit........................ 4,910 3,990 5,676 6,548 6,286
Selling expense..................... 2,139 1,591 2,223 1,924 1,794
General and administrative
expense........................... 1,183 1,112 1,557 1,735 1,678
New product development............. 831 163 231 -- --
------- ------- ------- ------- -------
Operating profit.................... 757 1,124 1,665 2,889 2,814
Other income (expense), net......... 28 34 47 74 52
------- ------- ------- ------- -------
Income from continuing operations
before taxes...................... 785 1,158 1,712 2,963 2,866
Income taxes........................ 308 467 686 1,195 1,158
------- ------- ------- ------- -------
Income from continuing operations... $ 477 $ 691 $ 1,026 $ 1,768 $ 1,708
Discontinued operations (Note 11):
Income from operations of
discontinued segment before
taxes............................. 251 379 671 401 249
Applicable income tax expense....... 100 152 268 160 100
------- ------- ------- ------- -------
Income from operations of
discontinued segment.............. 151 227 403 241 149
------- ------- ------- ------- -------
Net income........................ $ 628 $ 918 $ 1,429 $ 2,009 $ 1,857
======= ======= ======= ======= =======
Basic and diluted weighted average
shares outstanding................ 1,000 1,000 1,000 1,000 1,000
======= ======= ======= ======= =======
Basic and diluted earnings per
share:
Continuing Operations............. $ 477 $ 691 $ 1,026 $ 1,768 $ 1,708
Discontinued Operations........... 151 227 403 241 149
------- ------- ------- ------- -------
$ 628 $ 918 $ 1,429 $ 2,009 $ 1,857
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 33
MCS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON PAID IN RETAINED CUMULATIVE
STOCK CAPITAL EARNINGS TOTAL
------ ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance (Deficit) December 31, 1995........ $1 $230 $(1,074) $ (843)
Net income............................... 1,857 1,857
Dividends paid........................... (2,326) (2,326)
------- -------
Balance (Deficit) December 31, 1996........ 1 230 (1,543) (1,312)
Net income............................... 2,009 2,009
Dividends paid........................... (2,337) (2,337)
------- -------
Balance (Deficit) December 31, 1997........ 1 230 (1,871) (1,640)
Net income............................... 1,429 1,429
Dividends paid........................... (770) (770)
------- -------
Balance (Deficit) December 31, 1998........ 1 230 (1,212) (981)
Net income............................... 628 628
Distribution of ProfitWorks Division
(Note 11)............................. 80 80
Dividends paid........................... (161) (161)
-- ---- ------- -------
Balance (Deficit) September 30, 1999
(unaudited).............................. $1 $310 $ (745) $ (434)
== ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 34
MCS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS FOR THE YEARS
ENDED ENDED
SEPT. 30, DECEMBER 31,
------------- ------------------------
1999 1998 1998 1997 1996
----- ----- ------ ------ ------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $628 $918 $1,429 $2,009 $1,857
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 151 125 194 119 94
Provision for losses on accounts
receivable, net of write-offs.......... 163 85
CHANGES IN ASSETS AND LIABILITIES NET OF
EFFECTS OF ACQUISITIONS AND DISPOSITIONS:
Accounts receivable......................... 171 70 (266) (455) 9
Unbilled accounts receivable................ 39 (50) (38) (74) (35)
Inventory................................... 42 36 129 37 131
Accounts payable............................ (183) (279) (251) 288 265
Other liabilities........................... 637 38 89 120 10
Deferred revenue............................ (375) (191) (55) 306 (5)
Customer deposits........................... (202) 188 30 (111)
Accrued commissions......................... (343) (371) (87) 76 126
Other....................................... (305) 9 (19) (2) (28)
---- ---- ------ ------ ------
Net cash provided by operating
activities............................. 260 493 1,318 2,509 2,313
---- ---- ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- Continuing
operations................................ (206) (494) (527) (158) (198)
Capital expenditures -- Discontinued
operations................................ -- (1) (1) (8) (6)
---- ---- ------ ------ ------
Net cash (used in) investing activities... (206) (495) (528) (166) (204)
---- ---- ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution to paid in capital (Note 11)... 80 -- -- -- --
Dividends paid.............................. (161) -- (770) (2,337) (2,326)
---- ---- ------ ------ ------
Net cash (used in) financing activities... (81) -- (770) (2,337) (2,326)
---- ---- ------ ------ ------
Net increase (decrease) in cash and cash
equivalents............................ (27) (2) 20 6 (217)
Cash and cash equivalents -- beginning of
period.................................... 60 40 40 34 251
---- ---- ------ ------ ------
Cash and cash equivalents -- end of
period.................................... $ 33 $ 38 $ 60 $ 40 $ 34
==== ==== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 35
MCS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MCS, Inc. (the Company) provides information systems and services to the
home health care industry under the name MestaMed. As more fully described in
Note 11, the Company's former ProfitWorks segment was distributed to the
Company's parent, Mestek, Inc., on September 1, 1999.
The Company is a wholly owned subsidiary of Mestek, Inc., a public company
traded on the New York Stock Exchange. Inter-company transactions between Mestek
and the Company are generally limited to management fees, federal income tax
allocations, cash advances and cash distributions. The net effect of cash flows
between Mestek and the Company, whether net contributions from Mestek or net
distributions to Mestek, are reflected at year-end in the Stockholder's Equity
section of the Company's balance sheet as paid in capital or inter-company
dividends, respectively. At interim periods, the net effect of such cash flows
are generally recorded as an open intercompany account.
In conjunction with the merger agreement, as more fully explained in Note
12, Mestek, Inc. and Simione Central Holdings, Inc. ("Simione") agreed that
Mestek will not initiate or accept dividend distributions from MCS relative to
its earnings, after April 1, 1999. The parties further agreed that if MCS'
intercompany account with Mestek represents a net payable to Mestek at the date
of the closing, the liability will be treated as a non-interest bearing loan and
will be due and payable at the closing unless otherwise agreed in writing by the
parties prior to the closing.
Mestek, Inc. and MCS have maintained a long standing practice relative to
consolidated federal income tax allocations under which a portion of Mestek's
consolidated federal income tax liability, including as appropriate deferred
taxes, is allocated to MCS each year and is recorded by both entities as an
intercompany receivable/payable. Mestek, Inc. and Simione have agreed pursuant
to the Merger Agreement to continue this practice through the date of the
closing. Similarly, an allocation of Mestek, Inc. corporate overhead is recorded
by both parties on a monthly basis through the intercompany account. Pursuant to
the Merger agreement, Mestek, Inc. and Simione agreed that monthly management
fees will continue through the date of the closing.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 36
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
In 1998, the Company adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", which supersedes SOP-91. The adoption of SOP 97-2 did not have a
material impact on the Company's Financial Statements.
The Company typically delivers its principal product, MestaMed, in the form
of bundled, turnkey systems, including hardware, software, and first year
software maintenance and support. The Company typically recognizes revenues for
these systems upon receipt of a signed purchase agreement, payment of a 20%
deposit, and delivery of the system. Total payment for these systems is fixed,
determinable, and probable. These systems do not typically require significant
post-delivery obligations.
Revenues for post-contract customer support are recognized ratably over the
term of the support period, which is typically one year. Post contract customer
support fees typically cover incremental product enhancements, "bug fixes", etc.
Separate fees are charged for new modules, additional users, and migrations to
different operating system platforms.
Subsequent to system shipment, the Company frequently delivers a variety of
add-on software and hardware components. Revenues from these sales are
recognized upon shipment.
In addition to software licenses, software maintenance and support, and
related hardware, the Company also provides a number of ancillary services
including training, consulting and after-hours support. Revenues from such
services are recognized monthly as such services are performed.
Unbilled receivables typically represent revenues from ancillary services
performed and earned in the current period but not billed until subsequent
periods, usually within one month.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in income for the period.
SOFTWARE DEVELOPMENT EXPENSES
SFAS No. 86 requires that software development costs incurred subsequent to
the establishment of technological feasibility for the product be capitalized.
The Company has no capitalized development costs.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income" established standards for the reporting and display of
comprehensive
F-8
<PAGE> 37
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
income. For the years ended December 31, 1998, December 31, 1997 and December
31, 1996, respectively, the components of other comprehensive income were not
material.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 131, which was effective for fiscal years beginning
after December 15, 1997. SFAS 131 requires, in general, a "management approach"
rather than an "industry approach" to the disclosure of segment information. The
Company adopted SFAS 131 in 1998 and prepared its segmental reporting
accordingly as reflected in Note 9 to the Financial Statements.
RECLASSIFICATION
Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
INTERIM FINANCIAL STATEMENTS
The Financial Statements as of, and for the nine months ended, September
30, 1999 and 1998 are unaudited and, in the opinion of management, include all
material adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows. The results for interim periods are not
necessarily indicative of results for the entire year.
2. INVENTORIES
Inventories consist principally of computer equipment held for resale and
related operating system licenses. Inventories are valued at the lower of cost
or market.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DEPRECIATION AND
SEPTEMBER 30, ---------------------------------- AMORTIZATION EST.
1999 1998 1997 1996 USEFUL LIVES
------------- ---------- --------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Furniture and
fixtures........... $ 299,000 $ 180,000 $ 153,000 $ 143,000 10 years
Computer equipment... 1,108,000 1,021,000 734,000 578,000 5 years
---------- ---------- --------- ---------
1,407,000 1,201,000 887,000 721,000
Accumulated
depreciation....... (808,000) (700,000) (572,000) (481,000)
---------- ---------- --------- ---------
$ 599,000 $ 501,000 $ 315,000 $ 240,000
========== ========== ========= =========
</TABLE>
Depreciation expense was $128,000, $100,000 and $76,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-9
<PAGE> 38
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was $116,000 and $73,000 for the nine-month periods
ended September 30, 1999 and 1998, respectively.
4. CAPITALIZED SOFTWARE
In June 1999, the Company entered into an agreement with Winfield Software,
Inc. to develop specifications and design layouts for Phase I of a new
generation of MestaMed. Phase I is intended to produce a next-generation version
of MestaMed comprising billing and operational functionality targeted to home
medical equipment providers. Phase I is divided into two stages.
The first stage, incorporating the specifications and design layout being
produced by Winfield Software, will cost $300,000, of which $80,000 has been
incurred and expensed as of September 30, 1999. The balance of the first stage
expenses are expected to be incurred during the fourth quarter of 1999. At the
conclusion of the first stage, the Company expects that technological
feasibility will have been established and, accordingly, stage two of the
development project, which is expected to cost approximately $1,200,000, will
begin. Stage two will consist of implementing the specifications and generating
the software code. It is expected that stage two will be completed prior to
December 31, 2000. In accordance with SFAS No. 86, the Company expects to
capitalize and amortize the cost of stage two over an appropriate period.
The Company's capitalized software represents Mentor/CBT, a computer-based
training tool and content set acquired from a third party in February 1998 at a
cost of approximately $213,000. Mentor/CBT is being amortized over sixty months
using the straight-line method. Mentor/CBT is used by the Company to develop and
organize training programs and other CBT (computer-based training) content to
assist in the implementation of MestaMed and other software applications.
5. INCOME TAXES
The Company accounts for income taxes using the liability method which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the financial statement
carrying amount and the tax bases of assets and liabilities.
Income Tax Expense consisted of the following:
<TABLE>
<CAPTION>
SEPT. 30 SEPT. 30
1999 1998 1998 1997 1996
-------- -------- ---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current federal income tax............... $240 $365 $534 $ 936 $ 886
Current state income tax................. 68 102 152 259 272
---- ---- ---- ------ ------
$308 $467 $686 $1,195 $1,158
==== ==== ==== ====== ======
</TABLE>
Total Income Tax Expense was essentially equal to "expected" income tax
expense computed by applying the U.S. Federal Income Tax rate of 35 percent, and
related state corporate income tax rates, to earnings before income tax.
F-10
<PAGE> 39
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities were not material at September
30, 1999, December 31, 1998, September 30, 1998, December 31, 1997, or December
31, 1996.
For Federal Income Tax purposes, the Company files a consolidated return
with its parent, Mestek, Inc. The Company's income tax provision,
notwithstanding, is computed on a stand-alone basis.
6. STOCKHOLDER'S EQUITY (DEFICIT)
The Company has authorized common stock of 1,000 shares with a par value of
$1 per share. One thousand shares are issued and outstanding and are held by
Mestek, Inc. as of December 31, 1998, 1997 and 1996, and September 30, 1999 and
1998.
7. LEASES
The Company leases office space in suburban Pittsburgh, Pennsylvania on an
operating lease basis. In addition to a basic annual rental of $349,000, the
Company is obligated to pay property taxes on the premises to the extent they
exceed those in effect in 1990. No such excess occurred in either 1998, 1997 and
1996.
Rent expense under the lease totaled $302,000, $252,000 and $277,000 for
the years ended December 31, 1998, 1997 and 1996 respectively, and $335,000 and
$223,000 for the nine month periods ended September 30, 1999 and 1998. Amounts
prior to 1999 are less than the basic annual rental for 1999 as less space was
in use in these years.
Future minimum lease payments under the lease agreement as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
- ------------------------ ---------
<S> <C>
1999........................................................ $349,000
2000........................................................ 262,000
--------
Total minimum lease payments.............................. $611,000
========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified defined contribution target benefit
pension plan, which covers substantially all of its employees. Pension costs are
accrued annually based on contributions earned by participants under plan
provisions. The total expense related to this plan for the twelve months ended
December 31, 1998, 1997 and 1996 was $88,000, $65,000 and $70,000, respectively.
The total expense related to this plan for the nine months ended September 30,
1999 and 1998 was $59,000 and $59,000, respectively.
The Company maintains bonus plans for its officers and other key employees.
The plans generally allow for annual bonuses for individual employees based upon
the operating results of related profit centers in excess of a percentage of the
Company's investment in the respective profit centers.
The Company maintains a qualified 401(k) Plan for its employees who choose
to participate. Participants may elect to have up to fifteen percent (15%) of
their
F-11
<PAGE> 40
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
compensation withheld, up to the maximum allowed by the Internal Revenue Code.
Participants may also elect to make nondeductible voluntary contributions up to
an additional ten percent (10%) of their gross earnings each year within the
legal limits. The Company contributes $0.25 of each $1.00 deferred by
participants and deposited to the Plan not to exceed one and five tenths percent
(1.5%) of an employee's compensation. The Company does not match any amounts for
withholdings from participants in excess of six percent (6%) of their
compensation or for any nondeductible voluntary contributions. Contributions are
funded on a current basis. Employer contributions to the Plan were $66,704,
$60,004, and $54,490 for the years ended December 1998, 1997, and 1996,
respectively. Employer contributions to the Plan were $61,479 and $52,003 for
the nine month periods ended September 30, 1999 and 1998, respectively.
9. SEGMENT INFORMATION
The Company has only one reportable segment, MestaMed, which develops
computer software for the home health care and durable medical equipment
marketplaces. As more fully described in Note 11, the Company's former
ProfitWorks Segment was distributed to Mestek, Inc. on September 1, 1999. The
results of operations for the ProfitWorks segment prior to that date are
accounted for under Discontinued Operations in accordance with APB 30.
10. RELATED PARTY
The Company is a wholly owned subsidiary of Mestek, Inc. (the Parent) a
public company traded on the New York Stock Exchange. As such, the Company has
historically distributed substantially all of its free cash flow to the Parent
in the form of an annual dividend. The Company's historical access to capital
has been through an open intercompany account with the Parent. The Company has
historically generated positive cash flow to the Parent each year and, as such,
had no outstanding intercompany debt to the Parent, or other long-term debt, as
of December 31, 1998, December 31, 1997 or December 31, 1996 and accordingly,
reported no interest expense in 1998, 1997 or 1996. The Company's results of
operations for the nine months ended September 30, 1999, and 1998, and the years
1998, 1997 and 1996 reflect intercompany management fee charges from the Parent
of $74,000, $55,000, $74,000, $78,000 and $84,000, respectively. As described in
Note 1, at interim dates the Company reports its net cash flow activity to or
from the Parent as an open intercompany payable or receivable as appropriate.
F-12
<PAGE> 41
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. DISCONTINUED OPERATIONS
On September 1, 1999, the Company distributed to its parent, Mestek, Inc.,
substantially all of the operating assets and liabilities, including product
warranty obligations, of its former ProfitWorks segment. The ProfitWorks segment
develops and markets software for the building supplies distribution
marketplace. ProfitWorks modules include order entry, inventory control,
billing, accounts receivable and general ledger. ProfitWorks does not
participate in the health care information systems marketplace. The Company has
accounted for the operations of ProfitWorks prior to that date as a discontinued
operation in accordance with APB 30. The liabilities distributed by the Company
and assumed by Mestek, Inc. exceeded the accounting basis of the assets
distributed to Mestek, Inc. by $80,000. The Company has accounted for this
difference as a contribution to Paid in Capital on September 1, 1999. Corporate
overhead costs originally allocated to the Discontinued Operations of
ProfitWorks have been reallocated to the remaining MestaMed business in the
accompanying financial statements, in accordance with APB 30 and are illustrated
in the following table.
<TABLE>
<CAPTION>
NINE MOS YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- ---------------------
1999 1998 1998 1997 1996
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues from Discontinued Segment........... 942 1,182 1,729 1,596 1,478
Overhead reallocated to MestaMed............. 168 120 166 182 180
</TABLE>
ProfitWorks' assets are included in the Company's historical balance sheets
presented herein as follows:
<TABLE>
<CAPTION>
9/30/99 12/31/98 12/31/97
------- -------- --------
<S> <C> <C> <C>
0 434 350
== === ===
</TABLE>
12. SUBSEQUENT EVENT
On May 26, 1999, Mestek entered into a definitive agreement, (the
Agreement), to merge its wholly owned subsidiary, MCS, Inc. (MCS) into Simione
Central Holdings, Inc. (Simione). Under the terms of the Agreement, for every
share of outstanding Simione common stock, Simione will issue approximately .85
shares of its common stock to Mestek in the exchange. As a result, Mestek would
own approximately 46% of outstanding Simione common stock after the merger is
completed. Under the terms of the Agreement, MCS' ProfitWorks segment will be
distributed to Mestek prior to the merger.
Simione is a provider of information systems and services to the Home
Health Care industry. Simione provides information systems, consulting and
agency support services to customers nationwide. Simione provides freestanding,
hospital based and multi-office Home Health Care Providers (including certified,
private duty, staffing, HME, IV therapy, and hospice) with information solutions
that address all aspects of home care operations. Simione maintains offices
nationwide and is headquartered in Atlanta, Georgia.
Under the terms of the Agreement, if either party terminates the Agreement
in favor of an alternative acquisition proposal the terminating party shall be
obligated to pay the
F-13
<PAGE> 42
MCS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
other party up to $1,700,000 in termination fees. The Agreement is subject to
regulatory and stockholder approvals and is expected by the parties to close
prior to the end of 1999.
On September 9, 1999, Mestek, Inc. ("Mestek") announced that it had entered
into an amendment to the Agreement (the "First Amendment"), whereby the shares
of common stock of MCS shall be distributed to the Mestek common stock
stockholders in a spin-off transaction. Immediately prior to the distribution,
MCS will increase its outstanding shares to equal the number of outstanding
shares of Mestek common stock via a stock dividend. MCS shall then be merged
with and into Simione, and MCS' stockholders will receive approximately .85
shares of Simione common stock for each share of MCS common stock.
In connection with the First Amendment, Mestek loaned to Simione the sum of
$3,000,000 on a short-term basis. Upon the closing of the above-mentioned
merger, the $3,000,000 loan will be canceled, and Mestek shall contribute an
additional $3,000,000 to the capital of Simione in return for newly issued
Series B Preferred Stock of Simione. The Series B Preferred Stock issued to
Mestek will have voting rights equivalent to 11.2 million shares of Simione
common stock. Mestek will also receive as part of its capital contribution to
Simione a warrant for the subsequent purchase of 2 million shares of Simione
common stock.
On October 25, 1999, Mestek announced that it had entered into a second
amendment to the Agreement (the "Second Amendment"), which was entered into at
the request of the respective counsel of Simione and Mestek to clarify
provisions in the merger agreement relating to the appointment of designees of
the MCS stockholders and designees of Simione to Simione's board of directors
during the 18 month period after completion of the merger and the right of a
majority of such MCS designees to remove any MCS designee from the board during
such 18 month period.
The Merger of MCS with and into Simione will be accounted for as a reverse
merger due to the fact that the MCS stockholders will effectively hold more than
50% of the value of all equity securities and more than 50% of the common
shareholder votes of the merged entity through the effect of the Series B
Preferred Stock mentioned above. Accordingly, MCS will be treated as the deemed
acquirer, notwithstanding its technical dissolution, and Simione will be treated
as the acquired entity in accordance with APB 16.
F-14
