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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL REPORT FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12 (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------------------
PRACTICEWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2259090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1765 THE EXCHANGE
SUITE 500
ATLANTA, GEORGIA 30339
(Address of principal executive offices -- zip code)
(770) 850-5006
(Registrant's telephone number, including area code)
-------------------------
Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------------------------------ ------------------------------------------------
Common Stock, $0.01 par value Nasdaq National Market
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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This Registration Statement has been prepared on a prospective basis on the
assumption that, among other things, the distribution (as defined in the
information statement which is a part of this Registration Statement) and the
related transactions contemplated to occur prior to or contemporaneously with
the distribution will be consummated as contemplated by the information
statement. There can be no assurance, however, that any or all of such
transactions will occur or will occur as so contemplated. Any significant
modifications or variations in the transactions contemplated will be reflected
in an amendment or supplement to this Registration Statement.
<PAGE> 3
CROSS REFERENCE
PRACTICEWORKS, INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY
REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
---- ------------ ---------------------------------
<C> <S> <C>
1 Business.................................. "SUMMARY;" "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS;" and "BUSINESS."
2 Financial Information..................... "SUMMARY -- SUMMARY HISTORICAL AND PRO
FORMA FINANCIAL DATA;" "PRACTICEWORKS (A
DIVISION OF INFOCURE CORPORATION)
HISTORICAL CAPITALIZATION;" "PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
SELECTED FINANCIAL DATA;" "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS;"
"PRACTICEWORKS (A DIVISION OF INFOCURE
CORPORATION) HISTORICAL FINANCIAL
STATEMENTS;" and "PRACTICEWORKS (A DIVISION
OF INFOCURE CORPORATION) PRO FORMA
FINANCIAL STATEMENTS."
3 Properties................................ "BUSINESS -- Facilities."
4 Security Ownership of Certain Beneficial
Owners and Management..................... "BENEFICIAL OWNERSHIP OF COMMON STOCK."
5 Directors and Executive Officers.......... "MANAGEMENT."
6 Executive Compensation.................... "MANAGEMENT."
7 Certain Relationships and Related
Transactions.............................. "SUMMARY;" "THE DISTRIBUTION --
Relationship Between InfoCure And
PracticeWorks Following the Distribution."
8 Legal Proceedings......................... "BUSINESS -- Legal Proceedings."
9 Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters....................... "SUMMARY;" "THE DISTRIBUTION --
Listing and Trading of the PracticeWorks
Common Stock" and "DIVIDEND POLICIES."
11 Description of Registrant's Securities to
be Registered............................. "DESCRIPTION OF CAPITAL STOCK."
</TABLE>
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<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
---- ------------ ---------------------------------
<C> <S> <C>
12 Indemnification of Officers and
Directors................................. "LIABILITY AND INDEMNIFICATION OF DIRECTORS
AND OFFICERS."
13 Financial Statements and Supplementary
Data...................................... "SUMMARY;" "PRACTICEWORKS (A DIVISION OF
INFOCURE CORPORATION) SELECTED FINANCIAL
DATA;" "PRACTICEWORKS (A DIVISION OF
INFOCURE CORPORATION) HISTORICAL FINANCIAL
STATEMENTS;" and "PRACTICEWORKS (A DIVISION
OF INFOCURE CORPORATION) PRO FORMA
FINANCIAL STATEMENTS."
</TABLE>
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
Item 10. Recent Sales of Unregistered Securities.
None.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) List of Financial Statements. The following financial statements are
included in the Information Statement:
PRACTICEWORKS (A DIVISION OF INFOCURE CORPORATION) HISTORICAL FINANCIAL
STATEMENTS:
Report of Independent Certified Public Accountants.
Balance sheets as of December 31, 1999 and 1998.
Statements of operations for the years ended December 31, 1999 and 1998
and the eleven months ended December 31, 1997.
Statements of changes in divisional equity for the years ended December
31, 1999 and 1998 and the eleven months ended December 31, 1997.
Statements of cash flows for the years ended December 31, 1999 and 1998
and the eleven months ended December 31, 1997.
Notes to financial statements
Balance sheets as of June 30, 2000 (unaudited) and December 31, 1999.
Statements of operations (unaudited) for the three months and six months
ended June 30, 2000 and 1999.
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Statements of cash flows (unaudited) for the six months ended June 30,
2000 and 1999.
Notes to interim financial statements (unaudited)
PRACTICEWORKS (A DIVISION OF INFOCURE CORPORATION) PRO FORMA FINANCIAL
STATEMENTS:
Introduction to unaudited pro forma condensed combined financial
statements
Unaudited pro forma condensed combined balance sheet as of June 30,
2000.
Unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1999.
Unaudited pro forma condensed combined statement of operations for the
six months ended June 30, 2000.
Notes to unaudited pro forma condensed combined financial statements
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES HISTORICAL FINANCIAL STATEMENTS:
Independent Auditor's Report
Consolidated balance sheet as of September 30, 1999
Consolidated statements of operations for the fiscal years ended
September 30, 1999 and 1998
Consolidated statements of stockholders' equity for the fiscal years
ended September 30, 1999 and 1998
Consolidated statements of cash flows for the fiscal years ended
September 30, 1999 and 1998
Notes to consolidated financial statements
Consolidated balance sheets as of June 30, 2000 (unaudited) and
September 30, 1999
Unaudited consolidated statements of operations for the three and nine
months ended June 30, 2000 and 1999
Unaudited consolidated statements of cash flows for the nine months
ended June 30, 2000 and 1999
Notes to unaudited consolidated financial statements
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<PAGE> 6
(b) Exhibits. The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
2.1* -- Form of Distribution Agreement.
3.1 -- Certificate of Incorporation of PracticeWorks, Inc.
3.2 -- Form of By-Laws of PracticeWorks, Inc.
4.1* -- Form of certificate representing PracticeWorks
common stock.
10.1* -- Form of Tax Disaffiliation Agreement.
10.2* -- Form of Transition Services Agreement.
10.3* -- Form of Distribution Agreement (filed as Exhibit
2.1).
10.4* -- Form of Employee Benefits Compensation and
Allocation Agreement.
10.5* -- Form of Intellectual Property License Agreement.
10.6* -- Form of Stock Incentive Plan.
10.7* -- Form of Indemnification Agreement.
10.8* -- Form of Executive Officer Employment Agreements.
21.1* -- List of Subsidiaries.
23.1 -- Consent of BDO Seidman, LLP.
23.2 -- Consent of Hein + Associates LLP.
27.1 -- Financial Data Schedule for December 31, 1999 (for
SEC purposes only).
27.2 -- Financial Data Schedule for June 30, 2000 (for SEC
purposes only).
</TABLE>
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* To be filed by amendment.
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SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on August 22, 2000.
PRACTICEWORKS, INC.
By: /s/ JAMES K. PRICE
-----------------------------------
James K. Price
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints James K. Price and James A. Cochran and each of
them, his or her true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution, from such person and in each person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to the Registration Statement and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully to all said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities indicated on August 22, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ RICHARD E. PERLMAN Chairman of the Board and Director
--------------------------------------
Richard E. Perlman
/s/ JAMES K. PRICE Chief Executive Officer, President and
-------------------------------------- Director (Principal Executive
James K. Price Officer)
/s/ JAMES A. COCHRAN Senior Vice President and Chief
-------------------------------------- Financial Officer (Principal
James A. Cochran Financial Officer)
</TABLE>
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[INFOCURE LETTERHEAD]
, 2000
Dear Fellow Stockholder:
I am pleased to inform you that the Board of Directors of InfoCure
Corporation has approved a pro rata distribution to InfoCure stockholders of all
of the outstanding shares of common stock of PracticeWorks, Inc., a leading
information management technology provider to dentists, orthodontists and oral
and maxillofacial surgeons. PracticeWorks is currently an indirect, wholly owned
subsidiary of InfoCure.
The distribution will take place on , 2000. Each InfoCure
stockholder as of , 2000 will receive shares of
PracticeWorks common stock for every share of InfoCure common stock held on that
date. No fractional shares of PracticeWorks common stock will be issued. If you
otherwise would be entitled to a fractional share, you will receive a check for
the cash value of the fractional share interest. We will apply to list the
PracticeWorks common stock you are receiving on the Nasdaq Stock Market's
National Market under the symbol "PWKS."
We believe that the distribution will meaningfully enhance value for
InfoCure stockholders and will give PracticeWorks the financial and operational
flexibility to take advantage of significant growth opportunities in the
information management technology business for the dental, orthodontic and oral
and maxillofacial surgery markets. We believe that separating the two companies
will enhance the ability of each of PracticeWorks and InfoCure to focus on
strategic initiatives and new business opportunities and to design equity-based
compensation programs targeted to its own performance. In addition, we expect
that the transition to an independent company will heighten PracticeWorks'
management's focus, provide PracticeWorks with greater access to capital, and
allow PracticeWorks to better pursue strategic relationships and acquisitions.
The enclosed information statement describes the distribution and provides
important financial and other information about PracticeWorks. Please read it
carefully.
You do not have to take any action to receive your shares of PracticeWorks
common stock. You will not be required to pay anything or to surrender your
shares of InfoCure common stock. Account statements reflecting your ownership of
PracticeWorks common stock will be mailed to record holders of InfoCure common
stock shortly after , 2000. If you are not a record holder of InfoCure
common stock, your shares of PracticeWorks common stock should be credited to
your account with your stockbroker or nominee on or about , 2000.
Following the distribution, you may also request physical stock certificates if
you wish. Information for making that request will be furnished with your
account statement.
Sincerely,
Frederick L. Fine
Chief Executive Officer and President
<PAGE> 9
[PRACTICEWORKS LETTERHEAD]
, 2000
Dear Stockholder:
We are very pleased that you will soon be a stockholder of PracticeWorks,
Inc. PracticeWorks is a leading information management technology provider to
dentists, orthodontists and oral and maxillofacial surgeons.
We believe that the separation of our business from the businesses of our
corporate parent, InfoCure Corporation, will enhance our ability to grow our
business aggressively, both internally and through selective acquisitions. For
the first time, we will have the ability to offer our employees incentive
opportunities linked to our performance as a stand-alone company, which we
believe will aid our efforts to enhance employee performance.
As an independent company, we can more effectively focus on our objectives
and support the capital needs of our company, bringing value to you as a
stockholder.
We will apply to list the shares of PracticeWorks common stock you are
receiving on the Nasdaq Stock Market's National Market under the symbol "PWKS."
Our board, management and employees are excited about our future as an
independent company, and we look forward to your support and participation in
our success.
Sincerely,
James K. Price
Chief Executive Officer and President
<PAGE> 10
SUBJECT TO COMPLETION, DATED AUGUST 22, 2000
INFORMATION STATEMENT RELATING TO THE SPIN-OFF OF
PRACTICEWORKS, INC.
FROM INFOCURE CORPORATION
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
InfoCure Corporation is sending you this information statement to describe
the pro rata distribution to InfoCure stockholders of all of the outstanding
shares of common stock of PracticeWorks, Inc. In this distribution, you will
receive shares of PracticeWorks common stock for every share of
InfoCure common stock that you hold at the close of business on ,
2000. Stockholders will receive cash in lieu of fractional shares to which they
would otherwise be entitled. See "The Distribution" beginning on page 30.
PracticeWorks is currently an indirect, wholly owned subsidiary of
InfoCure. Immediately after the distribution is completed, InfoCure will not own
any shares of PracticeWorks common stock, and PracticeWorks will be an
independent public company.
The distribution of the PracticeWorks common stock will be effected at
11:59 p.m., Atlanta, Georgia time, on , 2000. You do not have to take
any action to receive your shares of PracticeWorks common stock. You will not be
required to pay anything or to surrender your InfoCure shares. InfoCure intends
to distribute the PracticeWorks common stock by book entry. The number of shares
of InfoCure common stock that you own will not change as a result of the
distribution.
There is no current public trading market for the PracticeWorks common
stock, although a "when-issued" trading market may develop prior to completion
of the distribution. We will apply to list the PracticeWorks common stock on the
Nasdaq Stock Market's National Market under the symbol "PWKS." See "The
Distribution -- Listing and Trading of the PracticeWorks Common Stock" beginning
on page 32.
-------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY OR
YOUR SHARE CERTIFICATES.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS DESCRIBED IN THIS
INFORMATION STATEMENT BEGINNING ON PAGE 14.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
INFORMATION STATEMENT OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES.
THE DATE OF THIS INFORMATION STATEMENT IS , 2000.
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers About the Distribution................ 1
Summary..................................................... 6
Risk Factors................................................ 14
Introduction................................................ 30
The Distribution............................................ 30
Relationship Between InfoCure and PracticeWorks Following
the Distribution.......................................... 36
PracticeWorks (A Division of InfoCure Corporation)
Historical Capitalization................................. 38
Dividend Policies........................................... 39
PracticeWorks (A Division of InfoCure Corporation) Selected
Financial Data............................................ 40
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 43
Business.................................................... 56
Management.................................................. 75
Beneficial Ownership of Common Stock........................ 82
Description of Capital Stock................................ 83
Anti-Takeover Provisions of PracticeWorks' Certificate of
Incorporation, Bylaws and Delaware Law.................... 84
Liability and Indemnification of Directors and Officers..... 88
Independent Certified Public Accountants.................... 89
Additional Information...................................... 89
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 12
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
The following section answers various questions that you may have with
respect to the pro rata distribution to InfoCure stockholders of all of the
outstanding shares of PracticeWorks common stock. This is referred to in this
information statement as the distribution.
Q: WHY IS INFOCURE EFFECTING THE DISTRIBUTION?
A: InfoCure's board of directors and management believe that the distribution
is in the best interests of InfoCure, PracticeWorks and InfoCure's stockholders.
InfoCure's board of directors and management believe that separating
PracticeWorks from InfoCure's other businesses will allow both PracticeWorks and
InfoCure to focus on their respective businesses and provide them with the
flexibility to pursue different strategies and react quickly to changing market
environments. PracticeWorks' business is a distinct business with significant
differences from InfoCure's other operations with respect to its markets,
products, capital needs and plans for growth. InfoCure's board of directors and
management believe that the distribution will enhance the ability of each of
PracticeWorks and InfoCure to focus on strategic initiatives and new business
opportunities and to design equity-based compensation programs targeted to its
own performance. In addition, InfoCure's board of directors expects that the
transition to an independent company will heighten PracticeWorks' management's
focus, provide PracticeWorks with greater access to capital, and allow
PracticeWorks to better pursue strategic relationships and acquisitions. For a
more detailed discussion of the reasons for the distribution, see "The
Distribution -- Reasons for the Distribution" on page 30.
Q: WHEN WILL THE DISTRIBUTION OCCUR?
A: We currently anticipate completing the distribution on , 2000.
Q: WHAT BUSINESS WILL PRACTICEWORKS CONDUCT FOLLOWING THE DISTRIBUTION?
A: After the distribution, PracticeWorks will operate the information
management technology business for dentists, orthodontists and oral and
maxillofacial surgeons that InfoCure currently operates. See "Summary -- Our
Business" on page 6, "The Distribution -- Results of the Distribution" on page
32 and "Business" beginning on page 56.
Q: WHAT WILL I RECEIVE AS A RESULT OF THE DISTRIBUTION?
A: For every share of InfoCure common stock that you own of record on
, 2000, you will receive shares of PracticeWorks common
stock. For example, if you own 100 shares of InfoCure common stock on ,
2000, you will receive shares of PracticeWorks common stock.
Fractional shares of PracticeWorks common stock will not be distributed.
Fractional shares will be aggregated and sold in the public market by the
distribution agent. The aggregate net cash proceeds of these sales will be
distributed ratably to those stockholders who would otherwise have received
fractional interests.
InfoCure currently intends to distribute the PracticeWorks common stock by
book entry. If you are a record holder of InfoCure common stock, instead of
physical stock
1
<PAGE> 13
certificates, you will receive from PracticeWorks' transfer agent shortly after
, 2000 a statement of your book entry account for the shares of
PracticeWorks common stock distributed to you. Following the distribution, you
may request physical stock certificates if you wish, and instructions for making
that request will be furnished with your account statement. If you are not a
record holder of InfoCure common stock because your shares are held on your
behalf by your stockbroker or other nominee, your shares of PracticeWorks common
stock should be credited to your account with your stockbroker or nominee on or
about , 2000.
Q: WHAT DO I HAVE TO DO TO RECEIVE MY PRACTICEWORKS COMMON STOCK?
A: Nothing. Your shares of PracticeWorks common stock will be either reflected
in an account statement that PracticeWorks' transfer agent will send to you
shortly after , 2000 or credited to your account with your broker or
nominee on or about , 2000.
Q: WHEN WILL I RECEIVE MY PRACTICEWORKS COMMON STOCK?
A: If you hold your shares of InfoCure common stock in your own name, your
account statement will be mailed to you on or about , 2000. You should
allow several days for the mail to reach you.
If you hold your shares of InfoCure common stock through your stockbroker,
bank or other nominee, you are probably not a stockholder of record, and your
receipt of shares of PracticeWorks common stock depends on your arrangements
with the nominee that holds your shares of InfoCure common stock for you.
InfoCure anticipates that stockbrokers and banks generally will credit their
customers' accounts with PracticeWorks shares of common stock on or about
, 2000, but you should check with your stockbroker, bank or other
nominee. See "The Distribution -- Manner of Effecting the Distribution" on page
31.
Q: HOW WILL THE DISTRIBUTION AFFECT THE MARKET PRICE OF MY INFOCURE COMMON
STOCK?
A: Following the distribution, InfoCure common stock will continue to be listed
and traded on the Nasdaq Stock Market's National Market under the symbol "INCX."
As a result of the distribution, the trading price of InfoCure common stock
immediately following the distribution will likely be lower than it was
immediately prior to the distribution. Until the market has fully analyzed the
operations of InfoCure without the operations of PracticeWorks, the price of
InfoCure common stock may fluctuate significantly. See "The Distribution --
Listing and Trading of the PracticeWorks Common Stock" beginning on page 32.
Q: WHERE WILL MY PRACTICEWORKS COMMON STOCK BE TRADED?
A: We will apply to list the PracticeWorks common stock on the Nasdaq Stock
Market's National Market under the symbol "PWKS." Trading of the PracticeWorks
common stock may commence on a when-issued basis after the record date. See "The
Distribution -- Listing and Trading of the PracticeWorks Common Stock" beginning
on page 32.
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<PAGE> 14
Q: WHAT IF I WANT TO SELL MY INFOCURE COMMON STOCK OR MY PRACTICEWORKS COMMON
STOCK?
A: You should consult with your own financial advisors, such as your
stockbroker, bank or tax advisor. InfoCure does not make recommendations on the
purchase, retention or sale of shares of InfoCure common stock or PracticeWorks
common stock.
If you do decide to sell any shares, you should make sure your stockbroker,
bank or other nominee understands whether you want to sell your InfoCure common
stock or your PracticeWorks common stock, or both. The following information may
be helpful in discussions with your stockbroker, bank or other nominee.
Beginning about , 2000 and continuing through , 2000,
the Nasdaq National Market practices should generally allow you to sell your
InfoCure shares either together with the right to receive shares of the
PracticeWorks common stock in the distribution or without the right to receive
the PracticeWorks common stock. If you sell your InfoCure common stock with the
right to receive the PracticeWorks common stock, you or your broker or bank will
be required to deliver to the buyer the PracticeWorks common stock you receive
in the distribution. You should also be able to sell your right to receive the
PracticeWorks common stock without selling your InfoCure shares.
Sales of InfoCure common stock with the right to receive shares of
PracticeWorks common stock should generally settle in the customary three
business day settlement period. Sales of InfoCure common stock without the right
to receive shares of the PracticeWorks common stock and sales of PracticeWorks
common stock without the right to receive InfoCure common stock will settle
according to the terms of the individual contract for the sale of the stock. You
should check with your stockbroker, bank or other nominee for details. Beginning
about , 2000, you may only sell your InfoCure common stock and
PracticeWorks common stock separately. Once again, check with your stockbroker,
bank or other nominee for details. See "The Distribution -- Listing and Trading
of the PracticeWorks Common Stock" beginning on page 32.
Q: HOW WILL THE DISTRIBUTION AFFECT THE DIVIDENDS ON MY INFOCURE COMMON STOCK?
A: InfoCure has not historically paid dividends on its common stock. InfoCure
currently intends to retain all available funds and any future earnings for use
in the operation and expansion of its business and does not anticipate declaring
or paying any cash dividends in the foreseeable future. See "Dividend Policies"
on page 39.
Q: WILL PRACTICEWORKS PAY DIVIDENDS?
A: The declaration and payment of dividends is at the discretion of
PracticeWorks' board of directors and will be subject to PracticeWorks'
financial results and the availability of surplus funds to pay dividends. The
amount of quarterly cash dividends, if any, will depend on a number of factors,
including PracticeWorks' financial condition, capital requirements, results of
operations, future business prospects and other factors PracticeWorks' board of
directors may deem relevant, including restrictions on PracticeWorks' ability to
declare and pay dividends on the PracticeWorks common stock contained in the
credit facility that PracticeWorks expects to enter into in connection with the
distribution. PracticeWorks does not currently intend to pay dividends in the
foreseeable future. See "Summary -- The Distribution -- Credit Facility" on page
9; "Dividend Policies" on page 39 and
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<PAGE> 15
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" beginning on page 53.
Q: WILL I HAVE TO PAY TAXES ON THE PRACTICEWORKS COMMON STOCK THAT I RECEIVE?
A: The distribution is conditioned upon InfoCure's receipt of an opinion of
King & Spalding, counsel to InfoCure, to the effect that the distribution should
be treated as a transaction to which Section 355 of the Internal Revenue Code
applies. If Section 355 of the Internal Revenue Code applies, the distribution
generally will not result in the recognition of income, gain, or loss to
InfoCure stockholders for United States federal income tax purposes except with
respect to cash, if any, received in lieu of fractional shares of PracticeWorks
common stock. If you have any questions, please consult your tax advisor. See
"Risk Factors -- If the distribution is taxable, InfoCure's stockholders could
be required to pay tax on their shares of PracticeWorks common stock, and
InfoCure could incur a corporate tax liability" beginning on page 15 and "The
Distribution -- Federal Income Tax Consequences of the Distribution" beginning
on page 33.
Q: WILL THERE BE ANY CHANGE IN THE UNITED STATES FEDERAL INCOME TAX BASIS OF MY
INFOCURE COMMON STOCK AS A RESULT OF THE DISTRIBUTION?
A: Yes. If the distribution qualifies for tax-free treatment under Section 355
of the Internal Revenue Code, the tax basis in your InfoCure common stock prior
to the distribution will be allocated among your shares of InfoCure common stock
and PracticeWorks common stock in proportion to their relative fair market
values at the time of the distribution. If you are the record holder of your
InfoCure common stock, you will receive information with your account statement
that will help you calculate the adjusted tax basis for your InfoCure common
stock, as well as the tax basis for your PracticeWorks common stock. See "The
Distribution -- Federal Income Tax Consequences of the Distribution" beginning
on page 33.
Q: WHERE CAN I GET MORE INFORMATION?
A: If you have any questions relating to the mechanics of the distribution and
the delivery of account statements or the trading of InfoCure or PracticeWorks
common stock prior to the distribution, you can contact the distribution agent:
[to be named]
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For other questions related to the distribution, InfoCure or PracticeWorks,
please contact:
Georgeson Shareholder Communications, Inc.
17 State Street
New York, New York 10004
(800) 223-2064
4
<PAGE> 16
After the distribution, PracticeWorks stockholders with inquiries relating
to the distribution or their investment in PracticeWorks should contact:
PracticeWorks, Inc.
1765 The Exchange
Suite 500
Atlanta, Georgia 30339
Attention: Corporate Secretary
(770) 850-5006
After the distribution, InfoCure stockholders with inquiries relating to
the distribution or their investment in InfoCure should contact:
InfoCure Corporation
1765 The Exchange
Suite 200
Atlanta, Georgia 30339
Attention: Corporate Secretary
(770) 221-9990
5
<PAGE> 17
SUMMARY
This summary highlights selected information contained elsewhere in this
document. It is not complete and may not contain all of the information that is
important to you. To acquire a better understanding of the distribution and
PracticeWorks, you should read this entire document carefully, including the
risks factors beginning on page 14 and the financial statements and the notes
thereto beginning on page F-1. Throughout this information statement, the terms
"we" and "our" refer solely to PracticeWorks.
WHY INFOCURE SENT THIS DOCUMENT TO YOU
InfoCure Corporation sent you this document because you were an owner of
InfoCure common stock on , 2000. This entitles you to receive a pro
rata distribution of shares of common stock of PracticeWorks, Inc.,
which is currently an indirect, wholly owned subsidiary of InfoCure, for every
InfoCure share you owned on that date. This is referred to as the
"distribution." No action is required on your part to participate in the
distribution and you do not have to pay cash or other consideration to receive
your shares of PracticeWorks common stock.
This document describes our business, the relationship between InfoCure and
PracticeWorks, how this transaction benefits InfoCure and its stockholders, and
provides other information to assist you in evaluating the benefits and risks of
holding or disposing of the PracticeWorks common stock that you will receive in
the distribution. You should be aware of certain risks relating to the
distribution and our business, which are described in this information statement
beginning on page 14.
OUR BUSINESS
PracticeWorks is a leading information management technology provider for
dentists, orthodontists and oral and maxillofacial surgeons. Our offerings
include practice management applications, business-to-business e-commerce
services, electronic data interchange, or EDI, services, ongoing maintenance and
support and training. These applications and services are designed to automate
the provider's practice, resulting in greater efficiency, lower costs and higher
quality care. As of July 31, 2000, we had an installed base of over 38,000
providers, including 30,000 dentists, 4,300 orthodontists and 3,700 oral and
maxillofacial surgeons.
THE DISTRIBUTION
Distributing Company............ InfoCure Corporation, a Delaware
corporation.
Distributed Company............. PracticeWorks, Inc., a Delaware corporation.
Primary Purposes of
Distribution.................... InfoCure's board of directors believes that
separating PracticeWorks from the rest of
InfoCure's businesses will allow both
PracticeWorks and InfoCure to focus on their
respective businesses and provide them with
the flexibility to pursue different
strategies and react quickly to changing
market environments. Our business is a
distinct
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business with significant differences from
InfoCure's other operations with respect to
its markets, products, capital needs and
plans for growth. InfoCure's board of
directors believes that separating the two
companies will enhance the ability of each
of PracticeWorks and InfoCure to focus on
strategic initiatives and new business
opportunities and design equity-based
compensation programs targeted to its own
performance. In addition, InfoCure's board
of directors believes that PracticeWorks
will have greater access to capital as an
independent company and that PracticeWorks
will be better able to pursue strategic
relationships and acquisitions. For a more
detailed discussion of the reasons for the
distribution, see "The
Distribution -- Reasons for the
Distribution" on page 30.
Shares of PracticeWorks Common
Stock to be Distributed....... InfoCure will distribute to its stockholders
approximately shares of
PracticeWorks common stock, based on
approximately shares of InfoCure
common stock outstanding on ,
2000. The shares of PracticeWorks common
stock to be distributed will constitute all
of the PracticeWorks common stock
outstanding after the distribution.
Fractional Shares............... Fractional shares of PracticeWorks common
stock will not be distributed. Fractional
shares will be aggregated and sold in the
public market by the distribution agent. The
aggregate net cash proceeds of these sales
will be distributed ratably to those
stockholders who would otherwise have
received fractional interests.
Trading Market and Symbol....... There is no current trading market for the
PracticeWorks common stock, although a when-
issued market may develop prior to
completion of the distribution. We will
apply to list the PracticeWorks common stock
you are receiving on the Nasdaq Stock
Market's National Market under the symbol
"PWKS."
Record Date..................... If you owned InfoCure shares at the close of
business on , 2000, referred
to as the record date, then you will receive
shares of PracticeWorks common stock in the
distribution.
Distribution Date............... The distribution will occur at 11:59 p.m.,
Atlanta, Georgia time, on ,
2000. This is referred to as the
distribution date. If you are a
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record holder of InfoCure common stock,
instead of physical stock certificates you
will receive from our transfer agent shortly
after , 2000 a statement of
your book entry account for the
PracticeWorks common stock distributed to
you. Following the distribution, you may
request physical stock certificates if you
wish, and instructions for making that
request will be furnished with your account
statement. If you are not a record holder of
InfoCure common stock because your shares
are held on your behalf by your stockbroker
or other nominee, your shares of
PracticeWorks common stock should be
credited to your account with your
stockbroker or other nominee on or about
, 2000.
Distribution Ratio.............. You will receive shares of
PracticeWorks common stock for every share
of InfoCure common stock you held on the
record date.
Distribution Agent.............. [TO BE NAMED]
Transfer Agent and Registrar for
the PracticeWorks Common
Stock......................... [TO BE NAMED]
Tax Consequences................ King & Spalding, counsel to InfoCure, will
render an opinion to InfoCure that the
distribution should be tax-free to you for
United States federal income tax purposes
except with respect to cash received in lieu
of fractional shares of PracticeWorks common
stock. See "Risk Factors -- If the
distribution is taxable, InfoCure's
stockholders could be required to pay tax on
their shares of PracticeWorks common stock,
and InfoCure could incur a corporate tax
liability" beginning on page 15 and "The
Distribution -- Federal Income Tax
Consequences of the Distribution" beginning
on page 34.
Relationship with InfoCure After
The Distribution.............. Immediately prior to the distribution date,
InfoCure and PracticeWorks will enter into
agreements to transfer to PracticeWorks the
assets and liabilities of InfoCure's
information management technology business
for dentists, orthodontists and oral and
maxillofacial surgeons, to arrange for the
continued provision of certain services by
InfoCure and PracticeWorks to one another,
to make arrangements for the distribution
and to define the ongoing relationships
between InfoCure and PracticeWorks. InfoCure
and PracticeWorks will
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<PAGE> 20
also enter into an agreement providing for
the sharing of taxes incurred by them prior
to the distribution and providing
indemnification rights with respect to tax
matters. After the distribution, InfoCure
and PracticeWorks will not have any other
material contracts or other arrangements
between them other than arrangements made on
an arm's length basis. See "Relationship
Between InfoCure and PracticeWorks Following
the Distribution" beginning on page 36.
Board of Directors
of PracticeWorks.............. After the distribution, we expect to have a
board of six directors, divided into three
classes. After their initial term, directors
of each class will serve three-year terms.
See "Management" beginning on page 75.
Management of PracticeWorks..... Our current executive officers will continue
to serve as executive officers of
PracticeWorks after the distribution. See
"Management" beginning on page 75.
Credit Facility................. At the time of the distribution, we expect
to incur approximately $ million of
indebtedness under a credit facility with
FINOVA Capital Corporation to repay
InfoCure's long-term indebtedness relating
to our business. The terms of the credit
facility will include customary affirmative
and negative covenants that, among other
things, require us to satisfy certain
financial tests and maintain certain
financial ratios, and limit our ability to
declare and pay dividends on the
PracticeWorks common stock. We may also
incur additional indebtedness from time to
time for general corporate purposes,
including working capital requirements,
capital expenditures and future
acquisitions. See "Management's Discussion
and Analysis of Financial Condition and
Results of Operations -- Liquidity and
Capital Resources" beginning on page 53.
Post-Distribution Dividend
Policies...................... PracticeWorks. Following the distribution,
our dividend policy will be set by our board
of directors. The declaration and payment of
dividends is at the discretion of our board
of directors and will be subject to our
financial results and the availability of
surplus funds to pay dividends. We do not
anticipate declaring or paying any cash
dividends in the foreseeable future. See
"Dividend Policies" on page 39.
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InfoCure. InfoCure has never declared or
paid any cash dividends on its capital
stock. InfoCure currently intends to retain
all available funds and any future earnings
for use in the operation and expansion of
its business and does not anticipate
declaring or paying any cash dividends in
the foreseeable future. See "Dividend
Policies" on page 39.
Anti-takeover Effects........... Certain provisions of our certificate of
incorporation and bylaws and the Tax
Disaffiliation Agreement may have the effect
of making the acquisition of control of
PracticeWorks more difficult or expensive.
See "Risk Factors -- Provisions of our
certificate of incorporation, bylaws and the
Tax Disaffiliation Agreement may discourage
takeovers" beginning on page 28 and
"Anti-Takeover Provisions of PracticeWorks'
Certificate of Incorporation, Bylaws and
Delaware Law" beginning on page 84.
Risk Factors.................... You should review the risks relating to the
distribution and our business described in
"Risk Factors" beginning on page 14.
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<PAGE> 22
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
SUMMARY HISTORICAL AND
PRO FORMA FINANCIAL DATA
The summary historical financial data of PracticeWorks set forth below is
qualified in its entirety by, and should be read in conjunction with, the
financial statements of PracticeWorks (a division of InfoCure Corporation),
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
information statement. The statement of operations data for each of the fiscal
years ended December 31, 1999 and 1998 and the eleven months ended December 31,
1997 and the balance sheet data as of December 31, 1999 and 1998 are derived
from, and are qualified by reference to, the financial statements included
elsewhere in this information statement that have been audited by BDO Seidman,
LLP, PracticeWorks' independent certified public accountants. Interim results
for the periods ended and as of June 30, 2000 and 1999 are derived from our
unaudited financial statements appearing elsewhere in this information statement
which, in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of that data.
The financial statements for all periods presented give retroactive effect
to pooling of interests treatment for five acquisitions completed during the
year ended December 31, 1999 and include the results of operations for all
purchase acquisitions from the respective acquisition date.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED ELEVEN MONTHS
JUNE 30, DECEMBER 31, ENDED
------------------ ----------------- DECEMBER 31,
2000(2) 1999 1999(3) 1998(4) 1997(5)
-------- ------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)(1)
REVENUE:
Systems and software........ $ 6,562 $17,851 $34,325 $27,825 $13,961
Maintenance, support and
services................. 13,454 8,730 20,266 15,662 7,523
-------- ------- ------- ------- -------
Total revenue.......... 20,016 26,581 54,591 43,487 21,484
-------- ------- ------- ------- -------
OPERATING EXPENSE:
Hardware and other items
purchased for resale..... 2,851 4,864 9,654 9,726 3,722
Selling, general and
administrative (excluding
compensatory stock
awards).................. 18,980 14,574 28,666 21,061 11,703
Research and development.... 1,541 1,341 4,185 3,537 3,267
Depreciation and
amortization............. 7,898 1,010 3,284 2,272 551
Restructuring and other
charges.................. 816 -- 1,814 1,031 6,463
Merger costs................ -- 266 659 69 --
Compensatory stock awards... -- 294 428 6,447 14
</TABLE>
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<PAGE> 23
(continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED ELEVEN MONTHS
JUNE 30, DECEMBER 31, ENDED
------------------ ----------------- DECEMBER 31,
2000(2) 1999 1999(3) 1998(4) 1997(5)
-------- ------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gain on disposal of fixed
assets................... (632) -- -- -- --
-------- ------- ------- ------- -------
Total operating
expense............. 31,454 22,349 48,690 44,143 25,720
-------- ------- ------- ------- -------
Operating (loss) income....... (11,438) 4,232 5,901 (656) (4,236)
-------- ------- ------- ------- -------
Interest expense and other,
net...................... 959 1,044 1,335 966 198
-------- ------- ------- ------- -------
(Loss) income before income
taxes and extraordinary
item........................ (12,397) 3,188 4,566 (1,622) (4,434)
(Benefit) provision for income
taxes....................... (3,731) 1,561 2,186 873 (171)
Extraordinary item, net of
income taxes................ -- 72 72 -- --
-------- ------- ------- ------- -------
Net (loss) income............. $ (8,666) $ 1,555 $ 2,308 $(2,495) $(4,263)
======== ======= ======= ======= =======
OTHER DATA:
EBITDA(6)..................... $ (3,356) $ 5,802 $12,086 $ 9,163 $ 2,792
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ----------------------------
2000 1999 1998 1997
----------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents............... $ 4,915 $ 2,527 $ 1,633 $ 741
Working capital......................... 564 (1,190) (1,034) (3,598)
Total assets............................ 74,480 57,842 37,098 14,434
Long-term debt, less current portion.... 19,681 9,614 14,769 4,405
Net divisional equity................... 41,170 32,419 10,800 983
</TABLE>
-------------------------
(1) The historical capital structure of PracticeWorks is not representative of
our future capital structure. We issued common stock to a wholly owned
subsidiary of InfoCure in August 2000 and we will commence operations as a
separate legal entity upon completion of the distribution. Accordingly, the
historical net (loss) income per share and weighted average number of shares
of common stock outstanding are not shown for any of the periods presented.
(2) During the six months ended June 30, 2000, InfoCure acquired six companies
in transactions accounted for as purchases.
(3) During 1999, InfoCure acquired four companies in transactions accounted for
as purchases.
(4) During 1998, InfoCure acquired one company in a transaction accounted for as
a purchase.
(5) During 1997, InfoCure acquired two companies in transactions accounted for
as purchases.
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<PAGE> 24
(6) EBITDA represents earnings before interest, (benefit) provision for income
taxes, depreciation and amortization, restructuring and other charges,
merger costs, compensatory stock awards and gain on disposal of fixed
assets. EBITDA is not a measurement in accordance with generally accepted
accounting principles, or GAAP, and should not be considered an alternative
to, or more meaningful than, net (loss) income as a measure of our
profitability or cash flows as a measure of our liquidity. All companies do
not calculate EBITDA in the same manner. Accordingly, our EBITDA may not be
comparable with that of other companies. We have included information
concerning EBITDA because management believes EBITDA provides a useful
measure of our performance.
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Under the terms of a merger agreement dated December 21, 1999, as amended,
InfoCure intends to acquire Medical Dynamics, Inc. following approval of the
transaction by Medical Dynamics' stockholders and satisfaction of other closing
conditions. InfoCure plans to transfer the assets and liabilities of Medical
Dynamics' business to PracticeWorks in connection with the distribution. The
following selected unaudited pro forma condensed combined financial information
has been derived from the historical financial statements of PracticeWorks (A
Division of InfoCure Corporation) and Medical Dynamics included elsewhere in
this information statement. The unaudited pro forma condensed combined
statements of operations data for the six months ended June 30, 2000 and the
year ended December 31, 1999 have been presented as if the pending acquisition
of Medical Dynamics had been consummated on January 1, 1999. The unaudited pro
forma condensed combined balance sheet data as of June 30, 2000 has been
presented as if the pending acquisition of Medical Dynamics had been consummated
on that date.
The selected unaudited pro forma condensed combined financial information
gives effect to the acquisition of Medical Dynamics under the purchase method of
accounting for business combinations and is based upon the assumptions and
adjustments described in the notes to the unaudited pro forma condensed combined
financial statements.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................. $ 22,259 $ 65,550
Restructuring and other charges............... 816 2,469
Merger costs.................................. -- 659
Compensatory stock awards..................... -- 478
Operating (loss) income....................... (13,117) 1,072
Net loss before extraordinary item............ (10,109) (1,276)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,857
Working capital............................................. (688)
Total assets................................................ 86,275
Long-term debt, less current portion........................ 19,820
Net divisional equity....................................... 51,600
</TABLE>
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<PAGE> 25
RISK FACTORS
This document contains forward-looking statements that reflect our current
assumptions and estimates of future performance, the development and timing of
our release of new applications and services, the rate of adoption of our new
applications and services by new and existing customers, our success is
establishing strategic relationships, the growth of our business and general
economic conditions. These statements may pertain to periods following the
distribution. You can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "estimates" or similar expressions. Any
forward-looking statements are subject to risks and uncertainties that may cause
actual results and future trends to differ materially from those projected,
stated, or implied by the forward-looking statements. Our results and the
accuracy of the forward-looking statements could be affected by the risk factors
discussed below. We do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
In addition to the information contained elsewhere in this document, you
should carefully read the following risk factors related to the distribution and
to PracticeWorks. All references to "we" or "our" are deemed to refer to
PracticeWorks and its subsidiaries.
RISKS RELATING TO THE DISTRIBUTION
THERE HAS NOT BEEN ANY PRIOR TRADING MARKET FOR OUR COMMON STOCK.
There is no current trading market for our common stock, although a
when-issued trading market may develop prior to completion of the distribution.
We will apply to list our common stock on the Nasdaq Stock Market's National
Market under the symbol "PWKS." There can be no assurance that our common stock
will be actively traded and we cannot predict the prices at which our common
stock will trade. Some of the InfoCure stockholders who receive shares of our
common stock may decide that they do not want shares in an information
management technology company focused exclusively on the dental, orthodontic and
oral and maxillofacial surgery markets, and they may sell their shares of our
common stock following the distribution. These sales may delay the development
of an orderly trading market in our common stock for a period of time following
the distribution. Until the shares of our common stock are fully distributed and
an orderly market develops, the prices at which our common stock trades may
fluctuate significantly and may be lower or higher than the price that would be
expected for a fully distributed issue. Prices for our common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the shares, our results of operations,
investors' impressions of PracticeWorks, changes in economic conditions in the
healthcare information technology industry and general economic and market
conditions. In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse impact on the trading price of our common stock.
THE DISTRIBUTION MAY CAUSE FLUCTUATIONS IN TRADING PRICES OF INFOCURE COMMON
STOCK.
Following the distribution, InfoCure common stock will continue to be
listed and traded on the Nasdaq Stock Market's National Market under the symbol
"INCX." As a result of the distribution, the trading price of InfoCure common
stock immediately
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<PAGE> 26
following the distribution will likely be lower than the trading price of
InfoCure common stock immediately prior to the distribution. The combined
trading prices of InfoCure common stock and PracticeWorks common stock after the
distribution may be less than, equal to or greater than the trading prices of
InfoCure common stock immediately prior to the distribution. Until the market
has fully analyzed the operations of InfoCure without the operations of
PracticeWorks, the prices at which InfoCure common stock trades may fluctuate
significantly. In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse effect on the trading price of InfoCure common stock.
THE POSSIBILITY OF SUBSTANTIAL SALES MAY HAVE AN ADVERSE IMPACT ON THE TRADING
PRICE OF OUR COMMON STOCK.
Based on the number of shares of InfoCure common stock outstanding on
, 2000, InfoCure will distribute to its stockholders a total of
approximately shares of our common stock. Under the United States
federal securities laws, almost all of these shares may be resold immediately in
the public market, except for shares of our common stock held by our affiliates.
We cannot predict whether stockholders will resell large amounts of our common
stock in the public market following the distribution or how quickly they may
resell those shares. The resale of large amounts of our common stock could have
a material adverse effect on the trading price of our common stock.
IF THE DISTRIBUTION IS TAXABLE, INFOCURE'S STOCKHOLDERS COULD BE REQUIRED TO PAY
TAX ON THEIR SHARES OF PRACTICEWORKS COMMON STOCK, AND INFOCURE COULD INCUR A
CORPORATE TAX LIABILITY.
InfoCure and PracticeWorks intend for the distribution generally to qualify
for non-recognition treatment for federal income tax purposes under Section 355
of the Internal Revenue Code. In connection with the distribution, King &
Spalding, counsel to InfoCure, will render an opinion that the distribution
should qualify for non-recognition treatment under Section 355 of the Internal
Revenue Code. Whether a transaction qualifies for nonrecognition treatment under
Section 355 of the Internal Revenue Code depends in part on the business reasons
for the transaction and satisfaction of numerous other fact-based requirements.
The opinion of King & Spalding, therefore, will be subject to certain
assumptions and based on various factual representations made by officers of
InfoCure and PracticeWorks. If any of the assumptions or representations upon
which the opinion of King & Spalding will be based is inaccurate or incomplete
in any material respect, the distribution could become taxable to InfoCure, its
stockholders, or both. Moreover, the opinion of King & Spalding will not be
binding on the Internal Revenue Service and, as a result, we cannot assure you
that the distribution will qualify as a tax-free transaction. Additionally, even
if the distribution is tax-free to InfoCure stockholders, it is possible that
the distribution could be rendered taxable to InfoCure as a result of a
subsequent acquisition of InfoCure or PracticeWorks.
If the distribution fails to qualify for nonrecognition treatment under
Section 355 of the Internal Revenue Code, InfoCure stockholders who receive
shares of PracticeWorks common stock in the distribution would be treated as if
they had received a taxable distribution in an amount equal to the fair market
value of the PracticeWorks common stock received. The amount of the taxable
distribution would be treated as (1) a dividend to the extent paid out of
InfoCure's current or accumulated earnings and profits, if any,
15
<PAGE> 27
including earnings and profits recognized by InfoCure as a result of the
distribution of the PracticeWorks common stock, then (2) a reduction in such
stockholder's basis in his or her InfoCure common stock to the extent that the
amount received exceeds the amount treated as a dividend, and then (3) gain from
the sale or exchange of InfoCure common stock to the extent the amount received
exceeds the amounts described in clauses (1) and (2) above.
If the distribution fails to qualify for tax-free treatment as to
InfoCure's stockholders, then, in general, a corporate income tax also could be
payable by the consolidated group of which InfoCure is the common parent based
upon the difference between (1) the aggregate fair market value of the shares of
our common stock distributed in the distribution and (2) InfoCure's adjusted
basis in the shares of our common stock. Although the corporate level tax would
be payable by InfoCure, we have agreed to indemnify InfoCure under certain
circumstances for all or a portion of this tax liability. This indemnification
obligation, if triggered, could be substantial. In addition, under the
consolidated return regulations, each member of InfoCure's consolidated group,
including PracticeWorks, is jointly and severally liable for any tax liability
incurred by InfoCure.
Even if the distribution qualifies as a tax-free distribution for United
States federal income tax purposes as to the InfoCure stockholders, a corporate
income tax could be payable by InfoCure as described above pursuant to Section
355(e) of the Internal Revenue Code if, during the four-year period beginning
two years before the distribution, one or more persons were to acquire a 50% or
greater interest in InfoCure or PracticeWorks as part of a plan or series of
related transactions that includes the distribution. For example, a transaction
or series of transactions resulting in an acquisition of a 50% or greater
interest in either InfoCure or PracticeWorks, in the aggregate, by one or more
persons within the two-year period following the distribution would trigger a
corporate level tax liability to InfoCure under Section 355(e) unless InfoCure
affirmatively establishes that the acquisition or acquisitions were not part of
a plan or series of related transactions that included the distribution. In
addition, Section 355(e) would apply to acquisitions of "predecessors" of either
InfoCure or PracticeWorks that occurred pursuant to a plan or series of related
transactions that include the distribution. A number of corporations that
InfoCure acquired within the two-year period preceding the distribution may be
treated as predecessors of InfoCure or of PracticeWorks, although the statute is
not clear and no administrative guidance or court decisions to date have
addressed the matter. If corporations acquired by InfoCure within the two-year
period preceding the distribution are treated as predecessors of InfoCure or
PracticeWorks, the distribution would be presumed to occur pursuant to a plan or
series of related transactions that included InfoCure's acquisition of the
predecessor corporations. Nevertheless, InfoCure believes that, if the Internal
Revenue Service were to assert that the distribution is taxable to InfoCure
under Section 355(e) of the Internal Revenue Code because of InfoCure's
acquisition of the predecessor corporations, it would be able to prove that none
of its pre-distribution acquisitions occurred pursuant to a plan or series of
related transactions that includes the distribution. It is possible, however,
that InfoCure would not be successful in rebutting the presumption under Section
355(e) and that the distribution would be taxable to InfoCure.
16
<PAGE> 28
RISKS RELATED TO OUR BUSINESS
WE HAVE NO OPERATING HISTORY AS AN INDEPENDENT COMPANY AND WE MAY BE UNABLE TO
MAKE THE CHANGES NECESSARY TO OPERATE AS A STAND-ALONE COMPANY.
We do not have an operating history as an independent public company. We
have relied on InfoCure for various financial, administrative and managerial
expertise in conducting our operations. Following the distribution, InfoCure
will have no obligation to provide assistance to us other than the interim
services which will be provided by InfoCure under the Transition Services
Agreement and which are described in "Relationship Between InfoCure and
PracticeWorks Following the Distribution," beginning on page 36. Because our
business has never been operated as an independent company, we cannot assure you
that we will be able to successfully put in place the financial, administrative
and managerial structure necessary to operate as an independent company, or that
the development of such a structure will not require a significant amount of
management's time or result in significant additional operating costs, either of
which could cause our results of operations to suffer.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY AND, THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF OUR
HISTORICAL OR FUTURE RESULTS.
The historical financial information included in this information statement
may not reflect our results of operations, financial position and cash flows as
a stand-alone company or our results of operations, financial position and cash
flows in the future. The historical financial information included in this
information statement does not reflect any changes that may occur in our funding
and operations as a result of the distribution. As a result, this financial
information may not be reliable as an indicator of our historical or future
results of operations.
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT THE PRICING MODEL AND MANY
OF THE APPLICATION AND SERVICE OFFERINGS THAT WE EXPECT TO BE THE FOCUS OF OUR
BUSINESS IN THE FUTURE, WHICH MAKES IT DIFFICULT TO EVALUATE OUR HISTORICAL AND
FUTURE FINANCIAL PERFORMANCE.
Historically, we charged our customers a license fee plus maintenance and
service fees for our practice management applications and services. We currently
derive substantially all of our revenue from maintenance and service fees and
transaction fees relating to electronic data interchange, or EDI, services. Our
new pricing strategy is to migrate substantially all of our customers to
subscription pricing over the next five years. In addition, our business
strategy is to promote the most technologically advanced of our existing
applications, our application service provider, or ASP, applications and the
other new applications and services we are currently developing. Accordingly,
our historical financial information reflects our results from a pricing model
that differs from the pricing model to which we are transitioning our customer
base and application and service offerings that represent only a portion of the
applications and services that we expect to offer in the future. We expect the
revenue and operating expenses from subscription pricing and our new application
and service offerings to differ from our historical results. As a result, our
historical financial information does not reflect the current and future focus
of our business and cannot be used to predict our future revenue or results of
operations.
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<PAGE> 29
WE HAVE A RECENT HISTORY OF LOSSES AND WE MAY NEVER ACHIEVE OR MAINTAIN
PROFITABILITY.
We had net losses of approximately $8.7 million for the six months ended
June 30, 2000. Our accumulated deficit as of June 30, 2000 was approximately
$12.2 million. We expect to continue to recognize reduced revenues due to our
introduction in the second quarter of 2000 of subscription pricing. As a result,
we expect our operating and net losses to continue for the foreseeable future.
We cannot assure you we will increase revenue or control expenses sufficiently
to achieve or maintain profitability in the future.
WE MUST SUCCESSFULLY COMPLETE THE DEVELOPMENT OF OUR NEW APPLICATIONS AND
SERVICES TO IMPLEMENT OUR GROWTH STRATEGY.
Our strategy for growing our business and achieving profitability depends
upon our ability to offer a number of additional applications and services in
the near future. We are continuing to develop our ASP applications and our
Internet portal, or website, and the services it will enable. However, because
the development of our applications and services entails significant technical
and business risks and requires substantial expenditures and lead time, we may
be unable to offer these applications and services on our projected schedule, in
a cost-effective manner or at all. If the offering of any or all of these
applications and services is delayed or cancelled, our ability to grow our
business and achieve profitability will be substantially impaired. In addition,
announcement of delays or cancellation of these anticipated product offerings
may cause our stock price to decline.
WE MAY NOT BE ABLE TO ESTABLISH THE STRATEGIC RELATIONSHIPS NECESSARY TO
IMPLEMENT OUR GROWTH STRATEGY.
We expect to develop additional strategic relationships with providers of
dental and other supplies. This will allow us to begin offering our e-commerce
application, which we call InfoLincx, in the dental and oral and maxillofacial
surgery markets. Establishing these strategic relationships will involve
negotiation with various suppliers and we may be unable to reach acceptable
agreements. If we are unable to develop these strategic relationships, our
ability to offer InfoLincx will be limited and our ability to grow our business
and achieve profitability will be substantially impaired.
OUR FUTURE REVENUE GROWTH DEPENDS ON CUSTOMERS RESPONDING FAVORABLY TO OUR NEW
APPLICATIONS AND SERVICES.
Our growth strategy depends on our ability to generate usage of our ASP
applications, Internet portal, InfoLincx and other new applications and services
by a large number of dentists, orthodontists and oral and maxillofacial
surgeons. We cannot be certain that these new applications and services will
achieve market acceptance. In order to successfully sell our new applications
and services, we will need to convince new and existing customers that the
features and functionality of our applications justify their cost, as well as
the time and administrative expense required for conversion. They may be
unwilling to adopt new practice management systems if they have made an
extensive investment in hardware, software and training for existing systems. In
addition, potential customers are likely to be unfamiliar with the ASP delivery
model and may be unwilling to utilize a practice management system in which the
application and patient data is stored on an off-site server and delivered to
their offices through the Internet. If we are unsuccessful in attracting
customers to our new applications and services or if the market for our
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applications and services does not grow or grows slowly, achieving profitability
could take longer than expected or we may never achieve profitability.
WE EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH COULD CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, some of which are outside of our control. As
a result, you should not rely on period-to-period comparisons of revenue and
operating results as an indication of our future performance. Some of the
factors that may affect our revenue and operating results include:
- our success in appropriately setting subscription fees and the rate at
which new and existing customers adopt subscription pricing;
- the timing of the release of our ASP applications and Internet portal and
the introduction of InfoLincx to the dental and oral and maxillofacial
surgery markets;
- our success in establishing additional strategic relationships, including
those necessary to enable the introduction of InfoLincx in the dental and
oral and maxillofacial surgery markets;
- the rate of adoption of our new applications and services by new and
existing customers;
- costs of developing new applications and services;
- changes in the adoption of Internet usage and acceptance by healthcare
providers of electronic commerce;
- the timing and amount of sales and marketing expenditures;
- changes in customer purchasing patterns;
- costs related to acquisitions of technologies or businesses; and
- general economic conditions, as well as those specific to the healthcare
information technology market and related industries.
Any change in one or more of these or other factors could cause our annual
or quarterly operating results to fluctuate. If our operating results do not
meet the expectations of securities analysts and investors, our stock price will
likely decline.
OUR SUBSCRIPTION PRICING MODEL IS UNPROVEN AND OUR SUCCESS DEPENDS ON OUR
ABILITY TO SET SUBSCRIPTION FEES AT APPROPRIATE LEVELS.
The success of our subscription pricing model depends on our ability to set
subscription fees for our applications and services at rates that will allow us
to achieve profitability. We have limited experience with subscription pricing
as we first introduced it to our customers during the second quarter of 2000.
Furthermore, the markets for practice management applications and services
delivered on a subscription basis is new and evolving. There are relatively few
similar products whose subscription fees we can evaluate in setting our fees and
the providers of those products have also had to set their fees in the context
of an undeveloped market. As a result, we have limited information from which to
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evaluate the appropriate level for our subscription fees and we may fail to set
our subscription fees at levels that enable us to become profitable. In
addition, we expect to enter into multi-year agreements with subscribers
pursuant to which subscription fees or increases in fees will be locked-in
typically for three to five years, limiting our ability to increase our
subscription fees for those subscribers. If we fail to appropriately price our
subscription fees, achieving profitability could take longer than expected or we
may never achieve profitability.
IF WE CANNOT EFFICIENTLY CONVERT THE DATA STORED IN EXISTING PRACTICE MANAGEMENT
APPLICATIONS TO OUR ASP APPLICATIONS, OUR GROWTH AND RESULTS MAY BE HARMED.
When customers elect to use our ASP applications, they may need us to
convert the data stored in their existing practice management applications to
our ASP applications. If we cannot rapidly and accurately convert the data
stored in customers' existing practice management systems to our ASP
applications, whether they are existing customers using our applications or new
customers, our business will suffer. If we experience difficulties or delays in
converting this data, we will be forced to incur additional costs necessary to
correctly convert the data and we may be unable to attract additional customers.
OUR NEW PRODUCT STRATEGY AND SUBSCRIPTION PRICING MODEL WILL REQUIRE ADDITIONAL
FINANCING WHICH MAY NOT BE AVAILABLE.
We expect our transition to the subscription pricing model to continue to
adversely impact our cash flow until subscription fees replace the decline in
one-time revenue from license fees and hardware sales. In addition, we expect to
incur operating costs associated with the development of our ASP applications,
Internet portal and other new applications and services, the establishment of
additional strategic relationships and marketing and sales expenses in
connection with the introduction of new applications and services. We may also
need to raise funds in the future to meet our working capital needs. Additional
financing may not be available when and if we need it, and if available, it may
not be available on terms favorable to us. Recently, some Internet companies
with a history of operating losses have been unable to raise additional
financing. If adequate funds are not available on acceptable terms, we may not
be able to effectively develop and enhance our application and service
offerings, market our applications and services, respond to competitive
pressures or fund acquisitions. If we raise additional funds by issuing equity
or convertible debt securities, your ownership will be diluted and our stock
price may decline. Any new securities could also have rights, preferences and
privileges senior to those of our common stock.
WE PLAN TO EXPAND RAPIDLY AND IT MAY BE DIFFICULT TO MANAGE OUR GROWTH.
We intend to rapidly grow our business. However, we cannot be sure that we
will successfully manage our growth. In order to successfully manage our growth,
we must:
- expand and enhance our administrative infrastructure;
- improve our management, financial and information systems and controls;
- expand, train and manage our employees effectively; and
- successfully retain and recruit additional employees.
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Continued growth could place a further strain on our management, operations
and financial resources. There will also be additional demands on our sales,
marketing, information systems and administrative resources as we increase our
application and service offerings and expand our target markets and customers.
We cannot assure you that our operating and financial control systems,
administrative infrastructure, facilities and personnel will be adequate to
support our future operations or to effectively adapt to future growth. If we
cannot manage our growth effectively, our business may be harmed.
WE MAY NOT BE ABLE TO ACHIEVE A RECOGNIZED BRAND NAME FOR PRACTICEWORKS.
Achieving market acceptance for our new applications and services will
require substantial sales and marketing efforts and the expenditure of
significant funds to increase awareness and demand by our target customers. To
cultivate new customers within the dental, orthodontic and oral and
maxillofacial surgery markets, we plan to implement a program designed to create
a strong brand identity for PracticeWorks. We also need to ensure that our
current customers, especially those obtained through acquisitions, are familiar
with the PracticeWorks brand name. If we fail to successfully create a
recognized brand name for PracticeWorks, our ability to obtain new customers and
retain current customers could suffer.
WE MAY BE UNABLE TO CONTINUE TO ATTRACT QUALIFIED PERSONNEL TO SUPPORT THE
EXPANSION OF OUR BUSINESS.
We believe our success also depends largely on our ability to attract and
retain highly skilled technical, managerial and marketing personnel to develop
and market our new applications and services. Individuals with the information
technology skills we need to further develop our applications and services are
in short supply and competition for qualified personnel is particularly intense.
Further, it can be difficult to hire experienced sales professionals. We may not
be able to hire the necessary personnel to implement our business strategy, or
we may need to pay higher compensation for employees than we currently expect.
If we are unable to hire and retain qualified employees, our business and
expansion plans will suffer.
WE ARE DEPENDENT UPON OUR EXECUTIVE OFFICERS, AND THE LOSS OF THESE PERSONNEL
COULD DISRUPT OUR GROWTH.
Our success depends on the continued services and performance of our
executive officers and we cannot guarantee that we will be able to retain those
individuals. The loss of the services of one or more of our executive officers
could seriously impair our ability to implement the changes in our application
and service offerings and pricing model that we are currently undertaking and
our ability to manage and expand our business. We do not maintain key person
life insurance.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE, AND MANY OF OUR COMPETITORS HAVE
MUCH GREATER RESOURCES THAN WE DO.
The market for providing information management technology to dentists,
orthodontists and oral and maxillofacial surgeons is extremely competitive. In
addition, the market for Internet-based application service providers in the
healthcare industry is relatively new and evolving. We anticipate that
competition will continue to intensify as the use of the Internet grows. Our
competitive position is difficult to evaluate due to the variety of
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current and potential competitors and the evolving nature of the healthcare
information technology market.
Our primary competitors include national and regional providers of
traditional practice management systems, application service providers,
healthcare e-commerce and Internet connectivity companies. Each of these types
of companies currently competes with us or can be expected to compete with us in
the future in delivering information management technology to dentists,
orthodontists and oral and maxillofacial surgeons, including the delivery of
practice management applications and services through the ASP delivery model.
Furthermore, major software companies and other entities, including those
specializing in the healthcare industry that are not currently offering
applications or services that compete with our applications, may enter our
markets. We also expect to compete with traditional and online retailers of
dental, medical and office supplies, health content providers and website
developers. In addition, our existing and future strategic partners may compete
with us from time to time by selling, consulting on or hosting other
applications that compete with our applications and services.
Many of our competitors have substantially greater financial, technical and
marketing resources, longer operating histories, greater name recognition and
more established relationships in the healthcare information technology market
than we have. In addition, the lack of barriers to entry in our market exposes
us to a potentially increasing number of competitors. We cannot assure you that
we will have the resources or expertise to compete successfully in the future.
If we are unable to develop and expand our applications and services or adapt to
changing customer needs as well as our current or future competitors are able to
do, we may experience reduced profitability and a loss of market share.
WE MAY HAVE DIFFICULTY INTEGRATING CURRENT AND FUTURE ACQUISITIONS INTO OUR
BUSINESS.
Since December 1, 1999, we have acquired 12 companies, and we may from time
to time acquire other companies. As a result, we are exposed to increased risks
relating to integrating these companies into our business, including:
- integration of new operations, products, services and personnel;
- diversion of resources from our existing business;
- client communication and branding awareness;
- inability to generate revenues from new products and services sufficient
to offset associated acquisition costs;
- maintenance of uniform standards, controls and policies;
- accounting issues that adversely affect our financial results;
- impairment of employee and customer relations as a result of any
integration of new management personnel; and
- dilution to existing stockholders from the issuance of equity securities.
In addition, liabilities or other problems associated with an acquired
business may adversely affect our business or operating results.
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MARKET ACCEPTANCE OF OUR INTERNET-BASED APPLICATIONS AND SERVICES WILL BE
DEPENDENT ON INCREASED USE OF THE INTERNET BY OUR CUSTOMERS AND THEIR SUPPLIERS,
AND A LACK OF GROWTH OR DECLINE IN THEIR INTERNET USE MAY ADVERSELY AFFECT OUR
BUSINESS MODEL.
We intend to grow, in part, by encouraging dentists, orthodontists and oral
and maxillofacial surgeons to use our ASP applications, which are accessed
through the Internet, to place orders with suppliers over the Internet using our
InfoLincx application and to access other services on our Internet portal. If
use of the Internet for commerce and communication in the healthcare industry
does not increase, our customers and healthcare suppliers may not utilize the
Internet as we anticipate and our growth could be substantially limited. Rapid
growth in the use of the Internet is a recent phenomenon. As a result,
acceptance and use may not continue to develop at historical rates. A number of
factors may inhibit the continued growth and development of the Internet,
including:
- inadequate network infrastructure;
- lack of availability of cost-effective high-speed service;
- security and privacy concerns; or
- inconsistent quality of services.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth and its performance and
reliability may decline. In addition, websites have experienced interruptions in
their service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays frequently occur in
the future, Internet usage could grow more slowly or decline. Even if Internet
usage grows generally, our business will suffer if our existing and potential
customers, many of whom have not traditionally utilized the Internet for
business purposes, do not accept Internet solutions.
WE WOULD NOT BE ABLE TO DELIVER OUR ASP APPLICATIONS OR OUR INTERNET PORTAL IF
THIRD PARTIES DO NOT PROVIDE INFRASTRUCTURE AND APPLICATION HOSTING.
We do not intend to develop or maintain Internet infrastructure or
application hosting capabilities to support our ASP applications, our Internet
portal or the services it enables. Therefore, we are dependent on obtaining
those capabilities from a third party hosting partner. The ability to remotely
host our ASP applications and our Internet portal is central to our business
strategy and depends on the efficient and uninterrupted operation of the
computer and network systems of the hosting partner we select. If we fail to
establish a relationship with a hosting partner on acceptable terms, or if our
hosting partner fails to host our ASP or our Internet portal applications due to
a breach of our agreement with the hosting partner, technical difficulties or
for any other reason, we may be unable to provide our ASP applications and other
services to our customers, which would harm our business.
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SYSTEM FAILURES MAY CAUSE INTERRUPTIONS OF OUR INTERNET-BASED APPLICATIONS AND
SERVICES.
The performance of our hosting partner's servers, networking hardware and
software infrastructure will be critical to our ability to provide our ASP
applications and our Internet portal and the services it will enable. Any
systems failure or interruption could result in disruption of service or loss or
compromise of customer data. These failures, especially if they are prolonged or
repeated, would make our services less attractive to customers and damage our
reputation. Our hosting partner's systems may fail because:
- its systems and operations will be vulnerable to damage or interruption
from human error, natural disaster, power loss, telecommunications
failures, break-ins, sabotage, computer viruses and similar events;
- its hardware and application software may experience system failures;
- performance may suffer due to firewall security;
- there may be errors in architectural design; and
- it may be unable to manage its growth and to attract and retain
employees.
Any system failure that causes an interruption in service or a decrease in
responsiveness of our Internet-based services, if sustained or repeated, may
adversely affect our business and operating results.
INTERNET SECURITY CONCERNS COULD ADVERSELY AFFECT OUR BUSINESS.
The secure transmission of confidential information over public networks is
a fundamental requirement for the applications and services we plan to offer
over the Internet. Concerns over the security of transactions and information
and other privacy issues may inhibit the growth of the Internet and delivery of
applications and services such as ours over the Internet. We plan to use
encryption and authentication technology for the transmission of confidential
information over the Internet. However, technological advances, including new
discoveries in the field of cryptography, could result in a compromise or breach
of our security systems. Therefore, we cannot be certain that our security
measures will prevent breaches. An intruder who breaches our security measures
could misappropriate proprietary information or cause interruptions in our
operations. In addition, we could be required to spend a significant amount of
time and money to protect against security breaches or to alleviate problems
caused by such breaches. Security breaches could also expose us to a risk of
loss or litigation and possible liability. As a result, security breaches could
adversely affect our reputation, our business or our operating results.
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TECHNOLOGY SOLUTIONS MAY CHANGE FASTER THAN WE ARE ABLE TO UPDATE OUR
TECHNOLOGY.
Although the healthcare industry, including dental, orthodontic and oral
and maxillofacial surgery practices, has been slow to respond to technological
advances, many companies are introducing technologically advanced products in
anticipation of growing demand in this market. As a result, the healthcare
industry is likely to experience rapidly changing technology, evolving industry
standards, emerging competition and the frequent introduction of new
applications and services. Our success could depend partly on our ability to:
- develop new or enhance existing applications and services to meet our
customers' changing needs in a timely and cost-effective manner;
- respond effectively to technological changes and new application and
service offerings of our competitors; and
- maintain and continue to develop relationships with providers of Internet
infrastructure and application hosting capabilities.
We cannot assure you that we will be able to accomplish any or all of these
goals. Many of our competitors may develop products or technologies that are
better or more attractive than ours or that may render our applications and
services obsolete. If we do not succeed in adapting our applications and
services, our business could be harmed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET AND COULD LIMIT OUR CUSTOMERS' USE OF THE
INTERNET.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. Laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content, copyrights, distribution and characteristics,
and quality of products and services. The adoption of any additional laws or
regulations may impede the growth of the Internet, which could, in turn,
decrease the demand for our Internet-based applications and services and
increase our cost of doing business, or otherwise harm our business. Moreover,
the applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet and other online
services could harm our business.
WE ARE SUBJECT TO GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY.
As a participant in the healthcare industry, our operations and
relationships are subject to regulation by federal and state laws and
regulations and enforcement by federal and state governmental agencies.
Sanctions may be imposed for violation of these laws. Any failure or alleged
failure to comply with applicable laws and regulations could subject us to
investigations, significant fines or other sanctions.
State and federal laws that protect individually identifiable health
information may impact the manner in which we conduct our business. Failure to
comply with applicable federal or state laws regarding transmittal, use and
confidentiality of patient information of
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the dentists, orthodontists and oral and maxillofacial surgeons with whom we
have direct relationships could adversely affect our business.
Numerous state laws govern the confidentiality of health information and
federal regulations have been proposed which would govern the receipt, use, and
delivery of individually identifiable health information. Under the Health
Insurance Portability and Accountability Act of 1996, known as HIPAA, the
Department of Health and Human Services has passed national standards to
facilitate the electronic exchange of health information and has proposed
national standards to ensure the confidentiality and security of such
information. The proposed rule establishes a complex regulatory framework on a
variety of subjects, including (1) disclosure and use of health information that
require patient consent, (2) individuals' rights to access and amend their
health information, (3) individuals' rights to an accounting of disclosures, and
(4) administrative, technical and physical safeguards required of entities which
use protected health information. In addition, we are also subject to state
patient confidentiality laws. Further, as we transact business with healthcare
providers in other countries, the laws of those countries govern our use and
disclosure of health information.
In addition to the proposed federal health information privacy rule, the
Department of Health and Human Services has issued proposed regulations
addressing security standards regarding transmission of health information data
under HIPAA. The security standards address various areas, including,
administrative procedures, physical safeguards, technical security services and
technical security mechanisms. Security standards may require us to enter into
agreements with some of our customers restricting the dissemination of health
information and requiring implementation of specified security measures.
Federal law prohibits, among other things, the payment or receipt, subject
to certain exceptions and "safe harbors," of any remuneration to induce the
referral of patients or the purchase, arranging for or recommending of the
purchase of items or services for which payment may be made under Medicare,
Medicaid, and other federally-funded healthcare programs. Several states have
similar anti-remuneration laws. Compliance with these laws could require us to
structure our agreements and business arrangements and develop our applications
differently than we originally planned.
WE MAY BE SUBJECT TO REGULATION BY THE FOOD AND DRUG ADMINISTRATION.
The Food and Drug Administration, or FDA, generally has the authority to
regulate medical devices, including computer applications, when devices are
indicated, labeled or intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. Although we do not
believe that any of our current applications or services are subject to FDA
regulation as medical devices, expansion of our application and service
offerings could subject us to FDA regulation. Further, there can be no assurance
that the FDA will not assert jurisdiction over certain aspects of our business.
FDA jurisdiction over our business, including our applications or services,
could materially impact our ability to introduce new applications or services in
a timely manner because of the FDA approval process. In addition, compliance
with FDA regulations could be expensive.
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CHANGES IN THE REGULATORY AND ECONOMIC ENVIRONMENT IN THE HEALTHCARE INDUSTRY
COULD ADVERSELY AFFECT OUR BUSINESS.
As a result of the continued escalation of healthcare costs and concern
regarding privacy and security of Internet commerce, numerous proposals have
been or may be introduced in the United States Congress, governmental agencies
and state legislatures regarding healthcare reform and the regulation of
healthcare information. These governmental proposals may increase government
involvement in healthcare and lower reimbursement rates in certain
circumstances. Economic and political influences, including the increasing role
of managed care in the dental, orthodontic and oral and maxillofacial surgery
markets, may change the environment in which those providers practice. There can
be no assurance that dentists, orthodontists and oral and maxillofacial surgeons
will not react negatively to these proposals and uncertainty by reducing or
deferring the use of our applications and services. Although we exercise care in
structuring our operations to comply in all material respects with the
applicable laws and regulations, it is possible that future legislation,
regulations and the interpretation of such laws could require us to modify our
agreements, applications, services, business and marketing from time to time in
response to changes in the regulatory environment. Such required changes may
adversely affect our business.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS FROM THIRD PARTY
CHALLENGES, IT MAY SIGNIFICANTLY IMPAIR OUR COMPETITIVE POSITION.
Our success and ability to compete depend in part on our ability to protect
our proprietary intellectual property rights. Any failure to adequately protect
our proprietary rights could result in our competitors offering similar
services, which could impair our competitive advantage and decrease our revenue.
To protect our proprietary rights, we rely primarily on a combination of
copyright, trade secret and trademark laws, confidentiality agreements with
third parties, and protective contractual provisions such as those contained in
license agreements with strategic partners, vendors and customers. In addition,
our employees are expected to sign an agreement to comply with our corporate
policies and procedures, including our policy regarding non-disclosure of
confidential information. We have not entered into these agreements in every
case, and there remains a risk that existing copyright, trademark and trade
secret laws afford only limited protection.
We cannot assure you that our means of protecting our proprietary rights
are adequate, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. Despite our efforts,
unauthorized parties may copy aspects of our applications or services and obtain
and use information that we regard as proprietary. Our competitors could also
independently develop similar technology. Other parties may breach
confidentiality agreements and other protective contracts into which we have
entered. We may not become aware of, or have adequate remedies in the event of,
breaches.
ASSERTING, DEFENDING AND MAINTAINING OUR INTELLECTUAL PROPERTY RIGHTS COULD BE
DIFFICULT AND COSTLY AND FAILURE TO DO SO MAY DIMINISH OUR ABILITY TO COMPETE
EFFECTIVELY AND MAY HARM OUR OPERATING RESULTS.
We may need to pursue lawsuits or legal action in the future to enforce our
intellectual property rights, to protect our trade secrets and domain names and
to determine the validity and scope of the proprietary rights of others. If
third parties prepare
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and file applications for trademarks used or registered by us, we may oppose
those applications and be required to participate in proceedings to determine
priority of rights to the trademark. Similarly, competitors may have filed
applications for patents, may have received patents and may obtain additional
patents and proprietary rights relating to applications or services that block
or compete with ours. We may have to participate in interference proceedings to
determine the priority of invention and the right to a patent for the
application. Litigation and interference proceedings, even if they are
successful, are expensive to pursue and time consuming, and we could use a
substantial amount of our financial resources in either case.
WE MAY FACE THIRD-PARTY CLAIMS ALLEGING INFRINGEMENT OF THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD RESULT IN SIGNIFICANT EXPENSE TO US AND LOSS OF
SIGNIFICANT RIGHTS.
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights to technologies that are important to our
business. This risk may increase as the number of entrants to our market
increases and we improve the functionality of our applications and services,
potentially causing an overlap with the applications and services of other
companies. Any claims against us, or our strategic partners, asserting that our
applications or services infringe or may infringe proprietary rights of third
parties, whether with or without merit, could be time consuming, result in
costly litigation, divert the efforts of our technical and management personnel,
disrupt our relationships with our customers or require us to enter into royalty
or licensing agreements, any of which could have a negative impact upon our
operating results. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. If a claim against us is
successful and we cannot obtain a license to the relevant technology on
acceptable terms, license a substitute technology, or redesign our applications
or services to avoid infringement, our business and financial results could be
harmed.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND THE TAX
DISAFFILIATION AGREEMENT MAY DISCOURAGE TAKEOVERS.
Our certificate of incorporation and bylaws contain provisions that may
make more difficult or expensive or that may discourage a tender offer, change
in control or takeover attempt that is opposed by our board of directors. In
particular, our certificate of incorporation and bylaws:
(1) classify our board of directors into three groups, so that
stockholders elect only one-third of the board each year;
(2) permit stockholders to remove directors only for cause;
(3) permit a special stockholders' meeting to be called only by the
chairman of the board of directors, the chief executive officer or
a majority of the board of directors;
(4) require stockholders to give us advance notice to nominate
candidates for election to our board of directors or to make
stockholder proposals at a stockholders' meeting;
(5) permit our board of directors to issue, without stockholder
approval, preferred stock with such terms as the board may
determine; and
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(6) require the vote of the holders of at least 66 2/3% of our voting
shares for stockholder amendments to our bylaws.
In addition, Section 203 of the Delaware General Corporation Law, which
will be applicable to us after the distribution, provides certain restrictions
on business combinations between us and any party acquiring a 15% or greater
interest in our voting stock other than in a transaction approved by our board
of directors and in certain cases by our stockholders. These provisions of our
certificate of incorporation and bylaws and Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
of PracticeWorks, even if our stockholders support such proposals. These
provisions could also make it more difficult for third parties to remove and
replace the members of our board of directors. Moreover, these provisions could
diminish the opportunities for stockholders to participate in certain tender
offers, including tender offers at prices above the then-current market value of
our common stock, and may also inhibit increases in the trading price of our
common stock that could result from takeover attempts or speculation.
In connection with the distribution, we have agreed to indemnify InfoCure
for all taxes and liabilities incurred solely because (1) we breach a
representation or covenant given to King & Spalding in connection with rendering
its tax opinion, which contributes to an Internal Revenue Service determination
that the distribution was not tax-free or (2) a post-distribution action or
omission by us or one or more of our affiliates contributes to an Internal
Revenue Service determination that the distribution was not tax-free. Unless
InfoCure effectively rebuts the presumption that a change in control transaction
involving PracticeWorks or disposition of PracticeWorks occurring prior to the
second anniversary of the distribution date is pursuant to the same plan or
series of related transactions as the distribution, the Internal Revenue Service
might determine that the distribution was not tax-free, giving rise to our
indemnification obligation. These provisions of the Tax Disaffiliation Agreement
may have the effect of discouraging or preventing an acquisition of
PracticeWorks or a disposition of our businesses, which may in turn depress the
market price for PracticeWorks common stock.
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INTRODUCTION
On , 2000, InfoCure's board of directors declared a pro rata
distribution payable to the holders of record of InfoCure common stock at the
close of business on , 2000, referred to as the record date, of
shares of PracticeWorks common stock for every share of InfoCure
common stock outstanding on the record date. The distribution will be effected
at 11:59 p.m., Atlanta, Georgia, time, on , 2000. This is referred to
as the distribution date. As a result of the distribution, all of the
outstanding PracticeWorks common stock will be distributed to InfoCure
stockholders.
InfoCure intends to distribute the PracticeWorks common stock by book
entry. Instead of stock certificates, each InfoCure stockholder that is a record
holder of InfoCure shares will receive a statement of such stockholder's book
entry account for the PracticeWorks common stock distributed to such
stockholder. Account statements reflecting ownership of the PracticeWorks common
stock will be mailed shortly after the distribution date. PracticeWorks common
stock should be credited to accounts with stockbrokers, banks or nominees of
InfoCure stockholders that are not record holders on or about , 2000.
PracticeWorks was incorporated in August 2000 and, following the
distribution, will operate the information management technology business for
dentists, orthodontists and oral and maxillofacial surgeons currently conducted
by InfoCure. Our principal executive offices are located at 1765 The Exchange,
Suite 500, Atlanta, Georgia 30339, and our telephone number is (770) 850-5006.
The business of PracticeWorks constitutes a significant part of the
business of InfoCure. Following the distribution, InfoCure will be focused
exclusively on information management technology for medical practices.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The board of directors and management of InfoCure believe that the
distribution is in the best interests of InfoCure, PracticeWorks and InfoCure's
stockholders. InfoCure believes that the distribution will meaningfully enhance
value for InfoCure stockholders and give PracticeWorks the financial and
operational flexibility to take advantage of significant growth opportunities in
the information management technology business for dentists, orthodontists and
oral and maxillofacial surgeons. Our business is a distinct business with
significant differences from InfoCure's other operations with respect to its
markets, products, capital needs and plans for growth. InfoCure's board of
directors and management believe that the distribution will enhance the ability
of each of PracticeWorks and InfoCure to focus on strategic initiatives and new
business opportunities and to design equity-based compensation programs targeted
to its own performance. In addition, InfoCure's board of directors expects that
the transition to an independent company will heighten our management's focus,
provide us with greater access to capital, and allow us to better pursue
strategic relationships and acquisitions.
The separation will also enable InfoCure management to concentrate its
attention on the remaining InfoCure businesses. InfoCure management believes
that these businesses may be expanded more effectively if PracticeWorks is no
longer controlled by InfoCure.
30
<PAGE> 42
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the distribution will be set
forth in an Agreement and Plan of Distribution, referred to as the Distribution
Agreement, between InfoCure and PracticeWorks. See "Relationship between
InfoCure and PracticeWorks Following the Distribution -- Distribution Agreement"
beginning on page 36.
The distribution will be made on the basis of shares of
PracticeWorks common stock for every share of InfoCure common stock outstanding
on the record date. As further discussed below, fractional shares will not be
distributed. The actual total number of shares of PracticeWorks common stock to
be distributed will depend on the number of InfoCure shares outstanding on the
record date. Based upon the number of InfoCure shares outstanding on ,
2000, approximately shares of PracticeWorks common stock will be
distributed to InfoCure stockholders. The PracticeWorks common stock to be
distributed will constitute all of the outstanding PracticeWorks common stock.
Options to purchase InfoCure common stock held by InfoCure employees who will
become our employees will be replaced by options to purchase PracticeWorks
common stock. The option price and number of shares subject to each option will
be adjusted so that the aggregate percentage difference between the market price
and the option price will be equal for the InfoCure options and the
PracticeWorks options. See "Relationship Between InfoCure and PracticeWorks
Following the Distribution -- Employee Benefits and Compensation Allocation
Agreement" beginning on page 37.
InfoCure intends to use a book entry system to distribute the PracticeWorks
common stock in the distribution unless the stockholder requests a physical
stock certificate. Following the distribution, each record holder of InfoCure
common stock on the record date will receive from , the
distribution agent, a statement of the PracticeWorks common stock credited to
the stockholder's account. After the distribution, stockholders may request
physical stock certificates from our transfer agent instead of participating in
the book entry system.
Fractional shares of PracticeWorks common stock will neither be issued as
part of the distribution nor credited to book entry accounts. In lieu of
receiving fractional shares, each holder of InfoCure common stock who would
otherwise be entitled to receive a fractional share of PracticeWorks common
stock will receive cash for the fractional interest. The distribution agent
will, as soon as practicable after the distribution date, aggregate fractional
shares into whole shares and sell them in the open market at the prevailing
market prices and distribute the aggregate proceeds, net of brokerage fees,
ratably to InfoCure stockholders who would otherwise have been entitled to
fractional interests. The amount of this payment will depend on the prices at
which the aggregated fractional shares are sold by the distribution agent in the
open market shortly after the distribution date.
No InfoCure stockholder will be required to pay any cash or other
consideration for the PracticeWorks common stock received in the distribution,
or to surrender or exchange InfoCure common stock in order to receive
PracticeWorks common stock. No vote of InfoCure stockholders is required or
sought in connection with the distribution, and InfoCure stockholders will have
no appraisal rights in connection with the distribution.
In order to receive PracticeWorks common stock in the distribution,
InfoCure stockholders must be stockholders at the close of business on the
record date.
31
<PAGE> 43
RESULTS OF THE DISTRIBUTION
After the distribution, PracticeWorks will be a separate public company
operating the information management technology business for dentists,
orthodontists and oral and maxillofacial surgeons currently operated by
InfoCure. Immediately after the distribution, we expect to have approximately
holders of record of PracticeWorks common stock and approximately
shares of PracticeWorks common stock outstanding, based on the number
of stockholders of record and outstanding InfoCure common stock on ,
2000 and after giving effect to the delivery to stockholders of cash in lieu of
fractional shares of PracticeWorks common stock. The actual number of shares to
be distributed will be determined on the record date. The distribution will not
affect the number of outstanding shares of InfoCure common stock or any rights
of InfoCure stockholders. InfoCure options held by InfoCure employees who will
become our employees will be replaced by PracticeWorks options. See
"Relationship Between InfoCure and PracticeWorks Following the
Distribution -- Employee Benefits and Compensation Allocation Agreement"
beginning on page 37.
LISTING AND TRADING OF THE PRACTICEWORKS COMMON STOCK
We will apply to list the PracticeWorks common stock on the Nasdaq Stock
Market's National Market under the symbol "PWKS." A stockholder who decides to
sell any PracticeWorks common stock or InfoCure common stock should make sure
that the stockholder's stockbroker, bank or other nominee understands whether
the stockholder wants to sell shares of InfoCure common stock, shares of
PracticeWorks common stock, or both. Beginning on or about , 2000 and
continuing through , 2000, Nasdaq National Market practices should
generally allow sales of InfoCure common stock either together with the right to
receive the PracticeWorks common stock in the distribution or without the right
to receive the PracticeWorks common stock. A stockholder that sells InfoCure
common stock with the right to receive the PracticeWorks common stock will be
required to deliver to the buyer the PracticeWorks common stock received in
respect of such InfoCure common stock in the distribution. Stockholders should
also be able to sell their rights to receive PracticeWorks common stock without
selling InfoCure common stock.
Sales of InfoCure common stock with the right to receive the PracticeWorks
common stock should generally settle in the customary three business day
settlement period. Sales of InfoCure common stock without the right to receive
PracticeWorks common stock and sales of PracticeWorks common stock without the
right to receive InfoCure common stock will settle according to the terms of the
individual contract for the sale of the stock. Beginning about , 2000,
stockholders should only be able to sell InfoCure common stock and PracticeWorks
common stock separately. Stockholders should consult their brokers for details.
The shares of PracticeWorks common stock distributed to InfoCure
stockholders will be freely transferable, except for PracticeWorks common stock
received by persons who may be deemed to be our "affiliates" under the
Securities Act of 1933, as amended. Persons who may be deemed to be our
affiliates after the distribution generally include individuals or entities that
control, are controlled by, or are under common control with us, including our
directors, officers and holders of 10% or more of our outstanding common stock.
Persons who are our affiliates will be permitted to sell their shares of
PracticeWorks common stock only pursuant to an effective registration statement
under the Securities Act
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<PAGE> 44
or an exemption from the registration requirements of the Securities Act, such
as the exemptions afforded by Section 4(1) of the Securities Act and Rule 144
promulgated under the Securities Act. It is believed that persons who may be
deemed to be our affiliates after the distribution will beneficially own
approximately PracticeWorks common stock, or less than % of the
outstanding shares of PracticeWorks common stock, upon completion of the
distribution.
There can be no assurance that PracticeWorks common stock will be actively
traded and we cannot predict the prices at which PracticeWorks common stock will
trade. Some of the InfoCure stockholders who receive shares of PracticeWorks
common stock may decide that they do not want shares in an information
management technology focused exclusively on the dental, orthodontic and oral
and maxillofacial surgery markets, and they may sell their PracticeWorks common
stock following the distribution. These sales may delay the development of an
orderly trading market in the PracticeWorks common stock for a period of time
following the distribution. Until the shares of PracticeWorks common stock are
fully distributed and an orderly market develops, the prices at which the
PracticeWorks common stock trades may fluctuate significantly and may be lower
or higher than the price that would be expected for a fully distributed issue.
Prices for PracticeWorks common stock will be determined in the marketplace and
may be influenced by many factors, including the depth and liquidity of the
market for the shares, our operating results, investors' impressions of
PracticeWorks, changes in economic conditions in the healthcare information
technology industry and general economic and market conditions.
Following the distribution, InfoCure common stock will continue to be
listed and traded on the Nasdaq National Market under the symbol "INCX." As a
result of the distribution, the trading price of InfoCure common stock
immediately following the distribution will likely be lower than the trading
price of InfoCure common stock immediately prior to the distribution. Until the
market has fully analyzed the operations of InfoCure without the operations of
PracticeWorks, the prices at which InfoCure common stock trades may fluctuate
significantly.
In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse impact on the trading price of PracticeWorks common stock and/or
InfoCure common stock.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following summary of the material federal income tax consequences of
the distribution is not a complete description of those consequences and, in
particular, may not address federal income tax considerations that affect the
treatment of stockholders subject to special tax rules, including stockholders
who acquired InfoCure common stock by exercising employee stock options or
otherwise as compensation. Each stockholder's individual circumstances may
affect the tax consequences of the distribution to such stockholder. In
addition, no information is provided in this information statement with respect
to tax consequences under applicable foreign, state or local laws. Consequently,
each InfoCure stockholder is advised to consult his or her own tax advisor as to
the specific tax consequences of the distribution.
The following discussion is based on currently existing provisions of the
Internal Revenue Code, existing, proposed and temporary Treasury regulations
promulgated under
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<PAGE> 45
the Internal Revenue Code, and current administrative rulings and court
decisions. All of the foregoing are subject to change, possibly on a retroactive
basis, and any of these changes could affect the validity of the following
discussion.
Neither InfoCure nor PracticeWorks has requested an advance ruling from the
Internal Revenue Service as to the tax consequences of the distribution.
GENERAL
King & Spalding, counsel to InfoCure, will render an opinion to InfoCure
and PracticeWorks that the distribution should qualify as a distribution
described in Section 355 of the Internal Revenue Code. If the distribution so
qualifies, the following United States federal income tax consequences generally
will apply to InfoCure stockholders who hold their shares of InfoCure common
stock as a capital asset:
- Except for any cash received in lieu of a fractional share of
PracticeWorks common stock, an InfoCure stockholder will not recognize
any income, gain or loss as a result of the receipt of shares of
PracticeWorks common stock in the distribution.
- An InfoCure stockholder's holding period for shares of PracticeWorks
common stock received in the distribution will include the period for
which that stockholder's shares of InfoCure common stock were held.
- An InfoCure stockholder's tax basis for shares of PracticeWorks common
stock received in the distribution will be determined by allocating to
shares of PracticeWorks common stock, on the basis of the relative fair
market values of InfoCure common stock and PracticeWorks common stock at
the time of the distribution, a portion of the stockholder's basis in his
or her shares of InfoCure common stock. The InfoCure stockholder's basis
in his or her shares of InfoCure common stock will be decreased by the
portion allocated to the shares of PracticeWorks common stock.
- The receipt of cash in lieu of a fractional share of PracticeWorks common
stock will be treated as a sale of the fractional share, and a
stockholder will recognize gain or loss equal to the difference between
the amount of cash received and the stockholder's basis in the fractional
share, as determined above. The gain or loss will be long-term capital
gain or loss if the stockholder's holding period for the fractional
share, as determined above, is more than one year.
- Neither InfoCure nor PracticeWorks will recognize any gain or loss in the
distribution other than deferred intercompany gains and excess loss
accounts, if any, that may be triggered as a result of the distribution.
In rendering its opinion, King & Spalding will rely upon analysis,
assumptions, representations and future undertakings from PracticeWorks and
InfoCure and certain other data, documentation and other materials that King &
Spalding deems necessary for purposes of its opinion. The opinion of counsel
will not be binding on the Internal Revenue Service or the courts; accordingly,
there can be no assurance that the distribution will qualify as a tax-free
transaction to InfoCure and its stockholders. In addition, under Section 355(e)
of the Internal Revenue Code, the distribution may become taxable to InfoCure,
but not InfoCure stockholders, if during the four-year period beginning two
years before the distribution, one or more persons were to acquire a 50% or
greater interest in InfoCure or PracticeWorks as part of a plan or a series of
related transactions that
34
<PAGE> 46
includes the distribution. Similarly, Section 355(e) of the Internal Revenue
Code would cause the distribution to be taxable to InfoCure, but not to
InfoCure's stockholders, if InfoCure failed to prove that any of the
corporations acquired by InfoCure within the two-year period preceding the
distribution and that are treated as "predecessors" of either InfoCure or
PracticeWorks under Section 355(e) were not acquired pursuant to a plan or
series of related transactions including the distribution.
INDEMNIFICATION
We would be obligated to indemnify InfoCure under the Tax Disaffiliation
Agreement for the full amount of any liability of InfoCure incurred solely
because (1) we breach a representation or covenant given to King & Spalding in
connection with rendering its tax opinion, which breach contributes to an
Internal Revenue Service determination that the distribution was not tax-free,
or (2) a post-distribution action or omission by us or any affiliate of ours
contributes to an Internal Revenue Service determination that the distribution
was not tax-free. InfoCure will indemnify us for all taxes and liabilities
incurred solely because (1) InfoCure breaches a representation or covenant given
to King & Spalding in connection with rendering its tax opinion, which breach
contributes to an Internal Revenue Service determination that the distribution
was not tax-free, or (2) a post-distribution action or omission by InfoCure or
any affiliate contributes to an Internal Revenue Service determination that the
distribution was not tax-free. If the Internal Revenue Service determines that
the distribution was not tax-free for any other reason, InfoCure and
PracticeWorks will indemnify each other against 50% of all taxes and
liabilities. If triggered, PracticeWorks' indemnification obligation would be
substantial.
We will also indemnify InfoCure for any taxes resulting from any internal
realignment undertaken to facilitate the distribution on or before the
distribution date. Any such taxes are not expected to be material.
For a description of the agreement pursuant to which InfoCure and
PracticeWorks have provided for certain tax disaffiliation and other tax-related
matters, see "Relationship Between InfoCure and PracticeWorks Following the
Distribution -- Tax Disaffiliation Agreement" on page 37.
INFORMATION REPORTING
Current United States Treasury regulations require each InfoCure
stockholder who receives shares of PracticeWorks common stock pursuant to the
distribution to attach to his or her federal income tax return for the year in
which the distribution occurs a detailed statement setting forth such data as
may be appropriate in order to show the applicability of Section 355 of the
Internal Revenue Code to the distribution. InfoCure will provide appropriate
information to each holder of record of InfoCure common stock as of the record
date.
REASONS FOR FURNISHING THIS DOCUMENT
This document is being furnished solely to provide information to InfoCure
stockholders who will receive shares PracticeWorks common stock in the
distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of InfoCure or PracticeWorks.
Neither InfoCure nor PracticeWorks will update the information contained in this
document except in the normal course of their respective public disclosure
practices. However, we will amend this document if there is any material change
in the terms of the distribution or if King & Spalding will not render the
opinion described above under "-- Federal Income Tax Consequences of the
Distribution."
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<PAGE> 47
RELATIONSHIP BETWEEN INFOCURE AND PRACTICEWORKS
FOLLOWING THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between
InfoCure and PracticeWorks after the distribution and to provide for an orderly
transition to the status of two independent companies, InfoCure and
PracticeWorks have entered or will enter into the agreements described in this
section. The forms of agreements summarized in this section are included as
exhibits to the registration statement on Form 10 that we have filed with the
Securities and Exchange Commission, and the following summaries are qualified in
their entirety by reference to the agreements as so filed. See "Additional
Information" beginning on page 89.
DISTRIBUTION AGREEMENT
Prior to the distribution date, InfoCure and PracticeWorks will enter into
a Distribution Agreement, which will provide for, among other things, the
principal corporate transactions required to effect the distribution and other
agreements relating to the continuing relationship between PracticeWorks and
InfoCure after the distribution. Pursuant to the Distribution Agreement,
InfoCure will transfer to its wholly owned subsidiary, InfoCure Systems, Inc.,
or ISI, the stock of all of InfoCure's direct subsidiaries, other than ISI. ISI
will then contribute to PracticeWorks the assets and liabilities relating to
InfoCure's information management technology business for dentists,
orthodontists and oral and maxillofacial surgeons. In exchange for that
contribution, we will issue to ISI shares of PracticeWorks common stock.
Immediately before the distribution to the InfoCure stockholders, ISI will
distribute all of our issued and outstanding stock to InfoCure. Finally,
InfoCure will effect the distribution by delivering a certificate or
certificates representing all of the shares of PracticeWorks common stock to be
distributed to InfoCure's stockholders to the distribution agent.
Under the Distribution Agreement and effective as of the distribution date,
we will assume, and will agree to indemnify InfoCure against, all liabilities,
litigation and claims, including related insurance costs, arising out of our
business, and InfoCure will retain, and will agree to indemnify us against, all
liabilities, litigation and claims, including related insurance costs, arising
out of InfoCure's businesses. The foregoing obligations will not entitle an
indemnified party to recovery to the extent any such liability is covered by
proceeds received by such party from any third party insurance policy.
The Distribution Agreement will provide that each of InfoCure and
PracticeWorks will be granted access to certain records and information in the
possession of the other, and will require the retention by each of InfoCure and
PracticeWorks for a period of eight years following the distribution date of all
of this information in its possession.
TRANSITION SERVICES AGREEMENT
InfoCure and PracticeWorks will enter into a Transition Services Agreement
prior to the distribution date under which, in exchange for the fees specified
in that agreement, InfoCure and PracticeWorks will agree to continue to provide
specified administrative services to one another, including accounting, payroll
and information management services. The Transition Services Agreement will
provide that each of InfoCure and PracticeWorks will undertake to provide the
same degree of care and diligence as it uses in providing these services to
itself and its subsidiaries. Provision of services under the
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<PAGE> 48
Transition Services Agreement will terminate upon 120 days prior written notice
by either company, but in no event prior to December 31, 2000. We believe that
the terms and conditions on which services will be provided to us under the
Transition Services Agreement are as favorable to us as those available from
unrelated parties for a comparable arrangement.
TAX DISAFFILIATION AGREEMENT
InfoCure and PracticeWorks will enter into a Tax Disaffiliation Agreement
which will identify each party's rights and obligations with respect to
deficiencies and refunds, if any, of federal, state, local or foreign taxes for
periods before and after the distribution and related matters such as the filing
of tax returns and the conduct of Internal Revenue Service and other audits.
Under the Tax Disaffiliation Agreement, we will indemnify InfoCure for any tax
liability of us or our affiliates for any period. We will also indemnify
InfoCure for all taxes and liabilities incurred solely because (1) we breach a
representation or covenant given to King & Spalding in connection with rendering
its tax opinion, which breach contributes to an Internal Revenue Service
determination that the distribution was not tax-free or (2) a post-distribution
action or omission by us or an affiliate of ours contributes to an Internal
Revenue Service determination that the distribution was not tax-free. InfoCure
will indemnify PracticeWorks for all taxes and liabilities incurred solely
because (1) InfoCure breaches a representation or covenant given to King &
Spalding in connection with rendering its tax opinion, which breach contributes
to an Internal Revenue Service determination that the distribution was not
tax-free, or (2) a post-distribution action or omission by InfoCure or an
affiliate contributes to an Internal Revenue Service determination that the
distribution was not tax-free. If the Internal Revenue Service determines that
the distribution was not tax-free for any other reason, InfoCure and
PracticeWorks will indemnify each other against 50% of all taxes and
liabilities.
We will also indemnify InfoCure for any taxes resulting from any internal
realignment undertaken to facilitate the distribution on or before the
distribution date. Any such taxes are not expected to be material.
EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT
Prior to the distribution, InfoCure and PracticeWorks will enter into an
Employee Benefits and Compensation Allocation Agreement, which will contain
provisions relating to employee compensation, benefits and labor matters and the
treatment of options to purchase InfoCure common stock held by InfoCure
employees who will become our employees. This agreement will provide that
InfoCure options held by InfoCure employees who will become our employees will
be replaced by PracticeWorks options. The option price for the number for the
shares of PracticeWorks common stock subject to each option will be determined
by dividing the option price for the related InfoCure option by the
PracticeWorks conversion factor, and the number of shares of PracticeWorks
common stock subject to each PracticeWorks option will be determined by
multiplying the number of shares subject to the related InfoCure option by the
PracticeWorks conversion factor. The PracticeWorks conversion factor is a number
equal to (1) the closing price of InfoCure common stock on the Nasdaq National
Market on the record date, divided by (2) the opening price of the PracticeWorks
common stock on the Nasdaq National Market on the day following the distribution
date.
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<PAGE> 49
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
HISTORICAL CAPITALIZATION
The following table sets forth our historical debt and capitalization as of
June 30, 2000. This data should be read in conjunction with our historical
balance sheet.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 4,915
========
Long-term debt (1).......................................... 19,686
--------
Divisional equity:
Net advances from InfoCure................................ 53,326
Accumulated deficit....................................... (12,156)
--------
Total divisional equity........................... 41,170
--------
Total capitalization........................................ $ 60,856
========
</TABLE>
-------------------------
(1) The amount recorded as long-term debt represents borrowings under InfoCure's
credit facility and other note agreements which were used primarily to
acquire the businesses whose assets and liabilities will be contributed to
us by InfoCure immediately prior to the distribution.
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<PAGE> 50
DIVIDEND POLICIES
Following the distribution, our dividend policy will be set by our board of
directors. We currently intend to retain all available funds and any future
earnings for use in the operation and expansion of our business and do not
anticipate declaring or paying any cash dividends in the foreseeable future. Any
future determination as to the declaration and payment of dividends will be at
the discretion of our board of directors and will depend on then existing
conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other
factors that our board of directors considers relevant.
InfoCure has never declared or paid any cash dividends on its capital
stock. InfoCure currently intends to retain all available funds and any future
earnings for use in the operation and expansion of its business and does not
anticipate declaring or paying any cash dividends in the foreseeable future. Any
future determination as to the declaration and payment of dividends will be at
the discretion of InfoCure's board of directors and will depend on then existing
conditions, including its financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other
factors that its board of directors considers relevant.
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<PAGE> 51
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements as of and for the years ended
December 31, 1999 and 1998 and the eleven months ended December 31, 1997, our
unaudited financial statements as of and for the six months ended June 30, 2000
and the related notes appearing elsewhere in this information statement. The
information as of and for the years ended January 31, 1997 and 1996 is
unaudited. We believe that the assumptions underlying the preparation of our
financial statements are reasonable. However, our subscription based revenue
model is different than the one we have used historically and we are currently
developing new applications and services we have not historically offered.
Therefore, the financial information included in this information statement may
not be indicative of our future results of operations, financial position and
cash flows. In addition, this financial information may not reflect the
financial results we would have achieved if we had been a separate stand-alone
entity during these periods. The financial statements for all periods presented
give retroactive effect to poolings of interests treatment for five acquisitions
completed during 1999 and include the results of operations for all purchase
acquisitions from the respective acquisition date.
<TABLE>
<CAPTION>
ELEVEN
SIX MONTHS ENDED YEAR ENDED MONTHS YEAR ENDED
JUNE 30, DECEMBER 31, ENDED JANUARY 31,
------------------ ----------------- DECEMBER 31, -----------------
2000(2) 1999 1999(3) 1998(4) 1997(5) 1997 1996
-------- ------- ------- ------- ------------ ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (IN THOUSANDS)(1):
REVENUE:
Systems and software..... $ 6,562 $17,851 $34,325 $27,825 $13,961 $ 7,726 $ 7,623
Maintenance, support and
services............... 13,454 8,730 20,266 15,662 7,523 11,919 10,523
-------- ------- ------- ------- ------- ------- -------
Total revenue.......... 20,016 26,581 54,591 43,487 21,484 19,645 18,146
-------- ------- ------- ------- ------- ------- -------
OPERATING EXPENSE:
Hardware and other items
purchased for resale... 2,851 4,864 9,654 9,726 3,722 6,334 6,278
Selling, general and
administrative
(excluding compensatory
stock awards).......... 18,980 14,574 28,666 21,061 11,703 9,394 9,360
Research and
development............ 1,541 1,341 4,185 3,537 3,267 1,924 1,917
Depreciation and
amortization........... 7,898 1,010 3,284 2,272 551 283 282
Restructuring and other
charges................ 816 -- 1,814 1,031 6,463 -- --
Merger costs............. -- 266 659 69 -- -- --
Compensatory stock
awards................. -- 294 428 6,447 14 -- --
Gain on disposal of fixed
assets................. (632) -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total operating
expense.............. 31,454 22,349 48,690 44,143 25,720 17,935 17,837
-------- ------- ------- ------- ------- ------- -------
Operating (loss) income.... (11,438) 4,232 5,901 (656) (4,236) 1,710 309
-------- ------- ------- ------- ------- ------- -------
Interest expense and other,
net...................... 959 1,044 1,335 966 198 182 183
-------- ------- ------- ------- ------- ------- -------
</TABLE>
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<PAGE> 52
(continued from previous page)
<TABLE>
<CAPTION>
ELEVEN
SIX MONTHS ENDED YEAR ENDED MONTHS YEAR ENDED
JUNE 30, DECEMBER 31, ENDED JANUARY 31,
------------------ ----------------- DECEMBER 31, -----------------
2000(2) 1999 1999(3) 1998(4) 1997(5) 1997 1996
-------- ------- ------- ------- ------------ ------- -------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(Loss) income before income
taxes and extraordinary
item..................... (12,397) 3,188 4,566 (1,622) (4,434) 1,528 126
(Benefit) provision for
income taxes............. (3,731) 1,561 2,186 873 (171) (26) (191)
Extraordinary item, net of
income taxes............. -- 72 72 -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Net (loss) income.......... $ (8,666) $ 1,555 $ 2,308 $(2,495) $(4,263) $ 1,554 $ 317
======== ======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(6).................. $ (3,356) $ 5,802 $12,086 $ 9,163 $ 2,792 $ 1,993 $ 591
======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
AS OF DECEMBER 31, JANUARY 31,
JUNE 30, ---------------------------- ---------------
2000 1999 1998 1997 1997 1996
----------- ------- ------- -------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (IN
THOUSANDS):
Cash and cash equivalents............. $ 4,915 $ 2,527 $ 1,633 $ 741 $ 638 $ 390
Working capital....................... 564 (1,190) (1,034) (3,598) 1,337 804
Total assets.......................... 74,480 57,842 37,098 14,434 3,659 5,142
Long-term debt, less current
portion............................. 19,681 9,614 14,769 4,405 351 1,631
Net divisional equity................. 41,170 32,419 10,800 983 1,229 721
</TABLE>
-------------------------
(1) Our historical capital structure is not representative of our future capital
structure. We issued common stock to a wholly owned subsidiary of InfoCure
in August 2000 and will commence operations as a separate legal entity upon
completion of the distribution. Accordingly, the historical net (loss)
income per share and weighted average number of shares of common stock
outstanding are not shown for any of periods presented.
(2) During the six months ended June 30, 2000, InfoCure acquired six companies
in transactions accounted for as purchases.
(3) During 1999, InfoCure acquired four companies in transactions accounted for
as purchases.
(4) During 1998, InfoCure acquired one company in a transaction accounted for as
a purchase.
(5) During 1997, InfoCure acquired two companies in transactions accounted for
as purchases.
(6) EBITDA represents earnings before interest, (benefit) provision for income
taxes, depreciation and amortization, restructuring and other charges,
merger costs, compensatory stock awards and gain on disposal of fixed
assets. EBITDA is not a measurement in accordance with generally accepted
accounting principles, or GAAP, and should not be considered an alternative
to, or more meaningful than, net (loss) income as a measure of our
profitability or cash flows as a measure of our liquidity. All companies do
not calculate EBITDA in the same manner. Accordingly, our
41
<PAGE> 53
EBITDA may not be comparable with that of other companies. We have included
information concerning EBITDA because management believes EBITDA provides a
useful measure of our performance.
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Under the terms of a merger agreement dated December 21, 1999, as amended,
InfoCure intends to acquire Medical Dynamics, Inc. following approval of the
transaction by Medical Dynamics' stockholders and satisfaction of other closing
conditions. InfoCure plans to transfer the assets and liabilities of Medical
Dynamics' business to PracticeWorks in connection with the distribution. The
following selected unaudited pro forma condensed combined financial information
has been derived from the historical financial statements of PracticeWorks (A
Division of InfoCure Corporation) and Medical Dynamics included elsewhere in
this information statement. The unaudited pro forma condensed combined
statements of operations data for the six months ended June 30, 2000 and the
year ended December 31, 1999 have been presented as if the pending acquisition
of Medical Dynamics had been consummated on January 1, 1999. The unaudited pro
forma condensed combined balance sheet data as of June 30, 2000 has been
presented as if the pending acquisition of Medical Dynamics had been consummated
on that date.
The selected unaudited pro forma condensed combined financial information
gives effect to the acquisition of Medical Dynamics under the purchase method of
accounting for business combinations and is based upon the assumptions and
adjustments described in the notes to the unaudited pro forma condensed combined
financial statements.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $ 22,259 $ 65,550
Restructuring and other charges.............. 816 2,469
Merger costs................................. -- 659
Compensatory stock awards.................... -- 478
Operating loss............................... (13,117) 1,072
Net loss..................................... (10,109) (1,276)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
--------------
(IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,857
Working capital............................................. (688)
Total assets................................................ 86,275
Long-term debt, less current portion........................ 19,820
Divisional equity........................................... 51,600
</TABLE>
42
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Financial Data" and the accompanying financial statements and
related notes included elsewhere in this information statement. The following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this information statement, particularly in "Risk Factors."
OVERVIEW
We are a leading information management technology provider for dentists,
orthodontists and oral and maxillofacial surgeons. Our offerings include
practice management applications, business-to-business e-commerce services,
electronic data interchange, or EDI, services, ongoing maintenance and support
and training. These applications and services are designed to automate the
provider's practice, resulting in greater efficiency, lower costs and higher
quality care. As of July 31, 2000, we had an installed base of over 38,000
providers, including 30,000 dentists, 4,300 orthodontists and 3,700 oral and
maxillofacial surgeons.
For all of the periods presented in this information statement, we operated
as part of InfoCure Corporation. InfoCure's board of directors has approved a
pro rata distribution to its stockholders of all of the outstanding shares of
the common stock of PracticeWorks, which is currently an indirect, wholly owned
subsidiary of InfoCure. Immediately prior to completion of the distribution,
InfoCure will transfer the assets and liabilities of its information management
technology business for dentists, orthodontists, oral and maxillofacial surgeons
to PracticeWorks. After the completion of the distribution, InfoCure will not
own any of our outstanding stock. Upon completion of the distribution, we will
enter into various agreements related to our interim and ongoing relationships
with InfoCure.
A substantial part of our growth has been achieved through acquisitions.
From July 10, 1997 through July 31, 2000, we completed 18 acquisitions. Given
the significant number of acquisitions in each of the periods presented, the
results of operations from period to period may not necessarily be comparable.
Of the 18 acquisitions, we acquired the five companies listed below (the "1999
Pooled Companies") in transactions accounted for as poolings of interests during
the year ended December 31, 1999. These mergers provided for the exchange of
substantially all of the outstanding equity interests of such companies for
shares of InfoCure's common stock.
<TABLE>
<CAPTION>
SHARES OF INFOCURE
COMMON STOCK
COMPANY ISSUED
------- ------------------
<S> <C>
OMSystems, Inc.............................................. 2,287,998
Ardsley, M.I.S., Inc........................................ 209,016
Kevin Kozlowski, Inc., d/b/a Human Touch Software........... 255,247
Unident Corporation......................................... 357,796
InfoLogic, Inc.............................................. 102,096
</TABLE>
43
<PAGE> 55
Because these acquisitions were accounted for as poolings of interests, the
financial statements included in this information statement have been
retroactively restated to reflect them. As a result, the financial position,
results of operations and cash flows are presented as if the 1999 Pooled
Companies had been included for all periods presented. See notes to financial
statements.
We have historically derived revenue primarily from licensing new software
products and software upgrades, reselling hardware components in connection with
a portion of our software sales and providing customer support and services.
Customer support and services typically have been provided pursuant to renewable
annual contracts or on a fee basis. We have derived additional revenue from
customers and third-party clearinghouses by providing EDI services through
contractual arrangements with such parties. Approximately 37% of our total 1999
revenue was recurring in nature.
We base our revenue recognition policies for sales of software on the
provisions of the American Institute of Certified Public Accountants' Statement
of Position ("SOP") No. 97-2, "Software Revenue Recognition." Revenue from
software sales is recognized upon shipment in instances where we have evidence
of a contract, the fee charged is fixed and determinable and collection is
probable. Revenue from hardware sales is recognized upon product shipment.
Revenue from support and maintenance contracts, which are typically one year in
length, are recognized ratably over the life of the contract. Revenue from other
services is recognized as the services are provided.
Depreciation and amortization expense results primarily from the
amortization of goodwill, which represents the excess of the consideration we
paid over the fair value of the net assets acquired in acquisitions accounted
for under the purchase method of accounting. As of December 31, 1999, our
balance sheet included goodwill, net of accumulated amortization, of $32.8
million. Goodwill is amortized over its estimated useful life, which had
previously been 15 years. In the fourth quarter of 1999, management determined
that the estimated useful life of goodwill should be shortened substantially to
be more reflective of the current rate of technological change and competitive
conditions within the marketplace. Accordingly, management changed the estimated
useful life of goodwill from 15 years to three years. This change in accounting
estimate is applied prospectively from the fourth quarter of 1999 and increased
1999 amortization expense by approximately $600,000. As of June 30, 2000, future
amortization expense related to goodwill is estimated to total approximately
$15.9 million per year.
Depreciation and amortization expense also includes depreciation of
property and equipment and amortization of software development costs. Property
and equipment are assigned depreciable lives ranging from three to 40 years.
Software development costs are expensed until technological feasibility is
achieved. Costs incurred after achievement of technological feasibility and
before general release are capitalized and amortized, generally over a four-year
life. Costs incurred after general release are expensed as incurred. As
discussed below, during the fourth quarter of 1999, we adopted a new product
strategy involving the development of ASP applications and other Internet-based
applications and services. Additionally, in connection with restructuring the
businesses of recently acquired companies, we decided to modify future product
offerings. As a result of these decisions, we recorded a charge of approximately
$874,000 million in the fourth quarter of 1999 representing the write-off of the
carrying value of software development costs.
44
<PAGE> 56
CHANGE IN PRODUCT STRATEGY AND BUSINESS MODEL
In the fourth quarter of 1999, we decided to transition to a subscription
pricing model and commenced development of practice management applications that
may be delivered through an ASP delivery model and other Internet-based
applications and services.
Following these decisions, in the second quarter of 2000 we began offering
substantially all of our products and services on a subscription basis. Under
this subscription pricing model, customers pay a fixed, monthly fee for use of
our practice management applications and maintenance and support services. This
represents a change in our historical pricing model in which customers were
charged an initial licensing fee for use of practice management products and
continuing maintenance and support. As a result of the transition to
subscription pricing model, we have experienced a decline in one-time revenue
from software license fees and hardware sales, which we expect to be replaced
over time by monthly subscription fees. In addition, as we convert existing
customers to our new subscription contracts, the recurring support revenue from
our installed customer base will gradually decline and will be replaced by
increasing monthly subscription fee revenue. We expect the percentage of our
revenue that is recurring in nature to increase substantially as a result of
this change. Under our subscription pricing model, as with our historical
pricing model, we will charge our customers transaction fees for use of our EDI
services.
Our existing practice management applications are installed either on
servers or personal computers located in the provider's office. We are
developing ASP applications whereby the application will be remotely hosted on a
central server which our customers will access through a standard Internal
browser. We expect to release an ASP application for use by dentists in the
United States during the fourth quarter of 2000 and to release ASP applications
for orthodontists and oral and maxillofacial surgeons during 2001. Following the
release of these applications, we will offer customers a choice between our most
advanced existing applications and our ASP applications. In addition, we have
developed InfoLincx, an e-commerce application that enables convenient, online
purchasing of dental and office supplies and promotional materials offered by
our strategic partners. Through our existing strategic relationships,
orthodontists currently use InfoLincx to order orthodontic supplies, office
supplies and promotional materials. We are developing additional strategic
relationships to facilitate online ordering of dental supplies, which will allow
us to begin offering InfoLincx in the dental and oral and maxillofacial surgery
markets. We expect to derive increasing revenue from e-commerce transactions
utilizing InfoLincx. This revenue will typically be in the form of a commission
or royalty based on the value of products and services provided by our strategic
partners to our customers and will be recognized as it is earned. We are also
developing an Internet portal which will provide access to our ASP applications,
enable secure communication between patients and providers, feature healthcare
content relevant to the markets we serve and provide access to additional online
services. Further, we intend to develop strategic relationships to enable us to
design custom websites for our customers, enabling them to utilize the Internet
to provide information about their practices and market their services.
We began the implementation of these changes in our pricing model and
product strategy during the six months ended June 30, 2000. During the three
months ended March 31, 2000, we formalized our sales approach relating to our
new pricing model and ASP applications and developed new marketing materials. In
addition, during the six months ended June 30, 2000, we substantially completed
company-wide training and education related to our subscription pricing model
for our sales and support staffs.
45
<PAGE> 57
Because these training initiatives were ongoing throughout the six months ended
June 30, 2000, we had a reduced sales effort from that of comparable periods. As
a result of our announcement to deliver ASP applications, we believe that some
potential customers may have delayed purchases of practice management
applications.
We also believe that the overall reduction in our sales was partially due
to purchases customers made in 1999 to prepare for Year 2000 computer issues.
These factors impacted our results for the six months ended June 30, 2000
compared to the corresponding period in 1999. In addition, because of these
changes in our pricing model and product offerings, we do not believe our
historical financial results are representative of future results.
RESTRUCTURING CHARGES
THE 2000 PLAN. In July 2000, we completed a comprehensive assessment of
infrastructure requirements including personnel, facilities and other resources
for PracticeWorks. As a result of the integration efforts required for the
recent acquisitions and the assessment of infrastructure requirements to execute
our new product strategy and subscription pricing model, management has adopted
a significant initiative to restructure PracticeWorks. The restructuring
includes the consolidation and closing of approximately 10 facilities and the
reduction of approximately 145 employees. We expect to record non-recurring
charges of approximately $4.0 million related to the restructuring, of which the
majority are expected during the third quarter of 2000. The restructuring is
expected to be completed during the fourth quarter of 2000. Once completed, the
restructuring is expected to reduce operating expenses by approximately $9.0
million on an annualized basis.
THE 1999 PLAN. In the fourth quarter of 1999, InfoCure decided to
restructure its business into a medical division and a dental division. The
dental division formed in this restructuring constitutes the business that will
be transferred to PracticeWorks immediately prior to the distribution. At the
time of the restructuring, we decided to transition to subscription pricing and
to commence development of ASP applications and other Internet-based
applications and services. Management committed to a plan of restructuring and
reorganization in connection with the establishment of the dental division and
these changes in our pricing model and product strategy. This restructuring
plan, which was substantially completed in the second quarter of 2000, included
consolidating facilities, eliminating staffing redundancies and repositioning
PracticeWorks to capitalize on the change in our pricing model and product
strategy. In the fourth quarter of 1999, we recorded $1.8 million in
restructuring and other charges in connection with this plan. The components of
these charges are:
- $874,000 representing carrying value of software development costs, the
estimated useful life of which is now considered minimal based on changes
to our product strategy;
- $700,000 reflecting contingent consideration deemed payable to former
stockholders of entities affected by the restructuring;
- $97,000 representing other asset write-downs and costs;
- $95,000 representing facility closure and consolidation costs, including
cancellation of leases and other contracts; and
- $48,000 representing incremental costs associated with completion of
discontinued customer contracts.
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<PAGE> 58
Additional charges were recorded in the first quarter of 2000 primarily to
provide for costs associated with staffing reductions and other asset
write-downs. These personnel changes were finalized and communicated in the
first quarter of 2000. Accordingly, compensation costs, including severance and
other termination benefits, and asset write-downs aggregating $770,000 were
recorded in the first quarter of 2000.
THE 1997 PLAN. In 1997, we adopted a plan to restructure our operations by
consolidating existing facilities and acquired operations. In connection with
the restructuring plan, which was substantially completed in the second quarter
of 1998, we recorded restructuring and other charges totaling $6.5 million in
the fourth quarter of 1997 and $1.0 million in the first six months of 1998.
CHANGE IN FISCAL YEAR
In the first quarter of 1998, we changed our fiscal year end from January
31 to December 31. As a result, our fiscal year beginning February 1, 1997 and
ending on December 31, 1997 reflects eleven months of operations.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
ELEVEN
MONTHS
SIX MONTHS ENDED YEAR ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
---------------- --------------------------- ------------
2000 1999 1999 1998 1997
----- ----- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Systems and software...... 32.8% 67.2% 62.9% 64.0% 65.0%
Maintenance, support and
services................ 67.2 32.8 37.1 36.0 35.0
----- ----- ----- ----- -----
Total revenue... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
OPERATING EXPENSE:
Hardware and other items
purchased for resale.... 14.2 18.3 17.7 22.4 17.3
Selling, general and
administrative
(excluding compensatory
stock awards)........... 94.8 54.9 52.5 48.4 54.5
Research and
development............. 7.7 5.0 7.7 8.1 15.2
Depreciation and
amortization............ 39.5 3.8 6.0 5.2 2.6
Restructuring and other
charges................. 4.1 -- 3.3 2.4 30.1
Merger costs.............. -- 1.0 1.2 .2 --
Compensatory stock
awards.................. -- 1.1 .8 14.8 --
Gain on disposal of fixed
assets.................. (3.2) -- -- -- --
----- ----- ----- ----- -----
Total operating
expense...... 157.1 84.1 89.2 101.5 119.7
----- ----- ----- ----- -----
</TABLE>
47
<PAGE> 59
(continued from previous page)
<TABLE>
<CAPTION>
ELEVEN
MONTHS
SIX MONTHS ENDED YEAR ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
---------------- --------------------------- ------------
2000 1999 1999 1998 1997
----- ----- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating (loss) income... (57.1) 15.9 10.8 (1.5) (19.7)
Interest expense and
other, net.............. 4.8 3.9 2.4 2.2 0.9
----- ----- ----- ----- -----
(Loss) income before
income taxes and
extraordinary item...... (61.9) 12.0 8.4 (3.7) (20.6)
(Benefit) provision for
income taxes............ (18.6) 5.9 4.0 2.0 (0.8)
Extraordinary item, net of
tax..................... -- -- -- -- --
----- ----- ----- ----- -----
Net (loss) income....... (43.3)% 6.1% 4.4% (5.7)% (20.6)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
TOTAL REVENUE. Revenue includes (1) systems and software revenue which
consists of new nonrecurring sales of licenses or upgrades and reselling
hardware components and (2) maintenance, support and services revenue which
consists of recurring fees for software and hardware maintenance and support,
EDI, e-commerce and subscription fees and non-recurring fees for training,
installation and other services. Total revenue for the six months ended June 30,
2000 decreased $6.6 million, or 24.8%, to $20.0 million from $26.6 million for
the six months ended June 30, 1999. For the six months ended June 30, 2000,
systems and software revenue decreased $11.3 million, or 63.1%, to $6.6 million
from $17.9 million in the six months ended June 30, 1999. This decrease is due
to lower unit sales in the current period due to our transition to a
subscription pricing model, some customers delaying new system purchases until
the release of our ASP applications and some customers accelerating purchases
during 1999 to prepare for Year 2000 computer issues. Maintenance, support and
service revenue for the six months ended June 30, 2000 increased $4.8 million,
or 55.2%, to $13.5 million from $8.7 million for the six months ended June 30,
1999. This increase is primarily due to additional revenue generated by
acquisitions made in December 1999 and March and April 2000, an increase in EDI
revenue resulting from an increase in the number of practices using this service
and revenue related to new subscription-priced contracts.
HARDWARE AND OTHER ITEMS PURCHASED FOR RESALE. Hardware and other items
purchased for resale consist of costs incurred to purchase hardware, and include
costs of forms and postage, outsourced hardware maintenance, third-party
software and other items for resale in connection with sales of new systems and
software. The costs required to install such systems and to perform maintenance
and support services are reported in selling, general and administrative
expenses. Hardware and other items purchased for resale for the six months ended
June 30, 2000, decreased $2.0 million, or 40.8%, to $2.9 million from $4.9
million for the six months ended June 30, 1999. For the six months ended June
30, 2000, gross margin, which represents total revenue less hardware and other
items purchased for resale divided by total revenue, was 85.8% compared to 81.7%
for the
48
<PAGE> 60
six months ended June 30, 1999. This increase in gross margin reflects the
increase in higher margin EDI transactions and software maintenance contracts
and a decrease in lower margin hardware sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense includes salaries and
benefits (excluding compensatory stock awards), product development, product
maintenance and support, variable commissions and bonuses, marketing, travel,
communications, facilities, insurance and other administrative expense. SG&A
expense increased $4.4 million, or 30.1%, to $19.0 million for the six months
ended June 30, 2000, from $14.6 million for the six months ended June 30, 1999.
This increase was due primarily to the effects of acquisitions in the year ended
December 31, 1999 and the six months ended June 30, 2000. SG&A as a percentage
of revenue increased to 94.8% for the six months ended June 30, 2000 from 54.9%
for the six months ended June 30, 1999 due to the decrease in revenue.
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of salaries and benefits, supplies, facilities and other
administrative expense associated with making enhancements to existing products
and the development of new products. Research and development expense increased
$200,000, or 15.4%, to $1.5 million for the six months ended June 30, 2000, from
$1.3 million for the six months ended June 30, 1999. This increase is primarily
due to a reduction in software development costs qualifying for capitalization
and also due to an increase in the number of products we offer, primarily from
our acquisitions. Research and development expense as a percentage of revenue
increased to 7.7% for the six months ended June 30, 2000 from 5.0% for the six
months ended June 30, 1999 due to the decrease in revenue.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $6.9 million to $7.9 million for the six months ended June 30, 2000,
from $1.0 million for the six months ended June 30, 1999. This increase was
primarily due to the change in the estimated useful life of goodwill from 15
years to three years during the fourth quarter of 1999.
RESTRUCTURING AND OTHER CHARGES. In the six months ended June 30, 2000, we
incurred costs of $816,000, primarily associated with employee severance and
other termination costs and facility closure costs that were part of our 1999
restructuring plan.
MERGER COSTS. In the six months ended June 30, 1999, we incurred $266,000
in merger costs related to a merger completed during this period.
COMPENSATORY STOCK AWARDS. Compensatory stock awards for the six months
ended June 30, 1999 were $294,000 relating to the vesting of restricted awards
to executive officers of InfoCure.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net for the
six months ended June 30, 2000 decreased $85,000, or 8.1%, from the six months
ended June 30, 1999 due to minor decreases in outstanding debt balances and
increases in the applicable interest rates.
(BENEFIT) PROVISION FOR INCOME TAXES. For the six months ended June 30,
2000 we recorded an income tax benefit of $3.7 million compared to a net expense
of $1.6 million for the six months ended June 30, 1999. The change from net
income tax expense to net income tax benefit is due to our generation of net
operating losses in the six months ended June 30, 2000, compared to net
operating income in the six months ended June 30, 1999.
49
<PAGE> 61
The effective tax rate in both periods differs from statutory rates primarily as
a result of the effect of non-deductible goodwill amortization expense. As of
June 30, 2000, a significant portion of our long-term deferred tax assets
related primarily to net operating loss carryforwards, which expire in 2020.
Management has assessed the realizability of its deferred tax assets in light of
our change in pricing model and product strategy and has concluded that it is
more likely than not that such deferred tax assets will be fully utilized.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL REVENUE. Total revenue for the year ended December 31, 1999
increased $11.1 million, or 25.5%, to $54.6 million from $43.5 million for the
year ended December 31, 1998. The acquisition of the 1999 Pooled Companies,
which are accounted for as pooling of interests, are reflected retroactively for
all periods presented. Systems and software revenue increased $6.5 million, or
23.4%, to $34.3 million for the year ended December 31, 1999, from $27.8 million
for the year ended December 31, 1998. Maintenance, support, and service revenue
increased $4.6 million, or 29.3%, to $20.3 million for the year ended December
31, 1999, from $15.7 million for the year ended December 31, 1998. These
increases primarily reflect overall growth in the business, acquisitions made
during the fourth quarter of 1999 and purchases made in preparation for Year
2000 computer issues.
HARDWARE AND OTHER ITEMS PURCHASED FOR RESALE. Hardware and other items
purchased for resale was $9.7 million for both the years ended December 31, 1999
and 1998. For the year ended December 31, 1999, gross margin was 82.3%, compared
to 77.6%, for the year ended December 31, 1998. This increase in gross margin is
attributable primarily to a change in the mix of revenues resulting from the
growth in service revenues related to EDI which generally carries higher
margins.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense increased $7.6 million,
or 36.0%, to $28.7 million for the year ended December 31, 1999 compared to
$21.1 million for the year ended December 31, 1998. This increase reflects
primarily additional marketing and administrative personnel and other selling
and administrative costs necessary to support the consolidated businesses of the
acquired companies. As a percentage of revenue, SG&A expense increased to 52.5%
for the year ended December 31, 1999 from 48.4% for the year ended December 31,
1998 primarily due to the fact that the SG&A expense for the acquisition of the
1999 Pooled Companies were substantially higher in relation to their revenues
than ours. Because all of these companies were acquired in December 1999, cost
savings measures resulting from their integration had not yet been reflected.
Further, during the fourth quarter of 1999, the allowance for doubtful accounts
increased by $700,000 to more closely align the allowance with our collection
experience and to provide additional coverage as part of the announced change to
a subscription pricing model.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$648,000, or 18.5%, to $4.2 million for the year ended December 31, 1999 from
$3.5 million for the year ended December 31, 1998. This increase was due
primarily to acquisitions and the number of products that we support. We
capitalize development costs incurred from the time a new product reaches
technological feasibility until it is available for general release. The higher
level of capitalized costs in 1999 is reflective of the state of development of
a variety of projects, including new e-commerce applications. As a percentage of
total revenue, research and development expense decreased to 7.7% of total
revenue for the year
50
<PAGE> 62
ended December 31, 1999 from 8.1% of total revenue for the year ended December
31, 1998 due to the significant increase in revenues from acquisitions and
business growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.0 million, or 43.5%, to $3.3 million for the year ended December
31, 1999 from $2.3 million for the year ended December 31, 1998. This increase
was primarily due to increased expense for amortization of goodwill resulting
from the addition of approximately $10.5 million of goodwill related to the 1999
acquisitions and a change in accounting estimate, which was effected in the
fourth quarter of 1999, to reduce the estimated useful life of goodwill from 15
years to three years. This change in accounting estimate resulted in additional
goodwill amortization of approximately $600,000 for 1999.
RESTRUCTURING AND OTHER CHARGES. In the year ended December 31, 1999, we
incurred costs of $1.8 million associated with a restructuring plan announced in
the fourth quarter of 1999. In the year ended December 31, 1998 we incurred $1.0
million of charges associated with the 1997 restructuring plan that was
completed in 1998.
MERGER COSTS. We incurred $659,000 in merger costs in 1999 related to the
acquisitions of the 1999 Pooled Companies.
COMPENSATORY STOCK AWARDS. Compensatory stock awards expense decreased
$6.0 million, or 93.8%, to $428,000 for the year ended December 31, 1999 from
$6.4 million for the year ended December 31, 1998. Compensatory stock award
expense for the year ended December 31, 1999 related to the vesting of
restricted awards to executive officers of InfoCure. The $6.4 million expense in
1998 related to contingently exercisable stock options of an acquired company.
Under the terms of the purchase agreement, the value of the options became
determinable in the fourth quarter of 1998, resulting in recognition of
compensation expense. As a percentage of total revenue, compensatory stock
awards expense decreased to 0.8% for the year ended December 31, 1999 from 14.8%
for the year ended December 31, 1998.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net increased
$369,000, or 38.2%, to $1.3 million for the year ended December 31, 1999 from
$966,000 for the year ended December 31, 1998. The increase relates primarily to
higher average outstanding debt balances during 1999 and a higher effective
interest rate resulting from the amortization of loan costs. As a percentage of
total revenue, interest expense and other, net increased to 2.4% for the year
ended December 31, 1999 from 2.2% for the year ended December 31, 1998.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes was
$2.2 million for the year ended December 31, 1999, compared to $873,000 for the
year ended December 31, 1998. The effective income tax rate of 47.9% for the
year ended December 31, 1999 is higher than statutory rates due to state income
taxes and permanent differences resulting primarily from the amortization of
nondeductible goodwill. In addition, the effective tax rate for 1998 differs
from the statutory tax rate due to the more significant impact of pooling of
interests accounting with certain S-corporation entities that incurred no
federal income taxes prior to their acquisition by us.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO ELEVEN MONTHS ENDED DECEMBER 31, 1997
TOTAL REVENUE. Total revenue for the year ended December 31, 1998
increased $22.0 million, or 102.3%, to $43.5 million from $21.5 million for the
eleven months ended
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December 31, 1997. Systems and software revenue increased $13.8 million, or
98.6% to $27.8 million for the year ended December 31, 1998 from $14.0 million
for the eleven months ended December 31, 1997. Maintenance, support and services
revenue increased $8.2 million, or 109.3%, to $15.7 million for the year ended
December 31, 1998 from $7.5 million for the eleven months ended December 31,
1997. These increases are primarily related to the revenue from acquisitions as
of their respective effective dates, except for the 1999 Pooled Companies, which
were accounted for as poolings of interests and are reflected retroactively for
all periods presented.
HARDWARE AND OTHER ITEMS PURCHASED FOR RESALE. Cost of hardware and other
items purchased for resale increased $6.0 million, or 162.2%, for the year ended
December 31, 1998, to $9.7 million compared to $3.7 million for the eleven
months ended December 31, 1997. The increase is primarily related to the
acquisitions made in 1998 and 1997. Gross margin as a percentage of revenue was
77.6% for the year ended December 31, 1998 and 82.7% for the eleven months ended
December 31, 1997. The decrease in gross margin is due primarily to an increase
in the sales of lower margin hardware during 1998.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense increased $9.4 million,
or 80.3%, to $21.1 million for the year ended December 31, 1998 compared to
$11.7 million for the eleven months ended December 31, 1997. This increase
reflects primarily an increase in marketing and administrative personnel and
other selling and administrative costs necessary to support the businesses of
acquired companies. SG&A expense as a percentage of revenue decreased to 48.4%
for the year ended December 31, 1998 from 54.5% for the eleven months ended
December 31, 1997. This decrease reflects our ability to leverage economies of
scale resulting from the larger installed customer base and higher base of
revenue realized from acquisitions.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$270,000, or 8.2%, to $3.5 million for the year ended December 31, 1998 compared
to $3.3 million for the eleven months ended December 31, 1997. The overall
increase in research and development expense is primarily due to additional
development staff from acquisitions and expenditures to integrate the acquired
products. Research and development expense for the year ended December 31, 1998
as a percentage of total revenue increased to 15.2% from 8.1% for the eleven
months ended December 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.7 million to $2.3 million for the year ended December 31, 1998
compared to $551,000 for the eleven months ended December 31, 1997. This
increase represents primarily the significant increase in goodwill arising from
acquisitions.
RESTRUCTURING AND OTHER CHARGES. Restructuring and other charges were $1.0
million for the year ended December 31, 1998, related primarily to additional
contingent consideration that was deemed earned due to the effect of the
restructuring of the acquired companies. For the eleven months ended December
31, 1997, restructuring and other charges were $6.5 million due to a
restructuring plan that included a $3.5 million write-down of goodwill related
to a July 1997 acquisition and $2.2 million of contingent consideration earned
or deemed payable under terms of acquisition agreements for acquired companies
affected by the restructuring.
COMPENSATORY STOCK AWARDS. During the year ended December 31, 1998, we
recorded approximately $6.4 million related to contingently exercisable stock
options of an acquisition.
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INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net increased
$768,000 to $966,000 for the year ended December 31, 1998 compared to $198,000
for the eleven months ended December 31, 1997. This increase reflects primarily
increases in interest expense associated with indebtedness incurred to complete
acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes was
$873,000 for the year ended December 31, 1998, compared to a net benefit of
$171,000 for the eleven months ended December 31, 1997. This is due to net
taxable income being generated in 1998 versus a net taxable loss being generated
in 1997. The effective income tax rate for the year ended December 31, 1998 is
higher than statutory rates due to permanent differences resulting primarily
from the amortization of nondeductible goodwill and the impact of pooling of
interests accounting with certain S-corporation entities that incurred no
federal income taxes prior to their acquisition by us.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund:
- acquisitions;
- working capital;
- capital expenditures for buildings, furniture, fixtures and equipment;
and
- capitalized software development costs.
Historically, InfoCure has managed cash on a centralized basis. Cash
receipts associated with our business have largely been retained by InfoCure and
InfoCure has provided funds to cover our disbursements for operating activities,
capital expenditures and acquisitions. The cash balances reported by us at
December 31, 1999 and 1998 are based on the results of our operations and the
net cash resulting from intercompany transfers between us and InfoCure. The
investing and financing activities discussed below were funded as a result of
activities entered into by InfoCure and relating to our operations. The
long-term debt amounts reported by us are based on long-term debt that InfoCure
incurred to acquire businesses and other assets that will be transferred to us
immediately prior to the distribution.
During the six months ended June 30, 2000, we used $6.3 million of cash in
operating activities primarily relating to (1) a net loss of $8.7 million,
offset by the net effect of non-cash charges of $7.9 million in depreciation and
amortization and the non-cash benefit of $5.3 million associated with deferred
taxes and (2) payments of accounts payable and accrued liabilities of
approximately $4.6 million, offset by a reduction of approximately $3.1 million
in accounts receivable. The net use of cash flow from operations is due
primarily to the impact of ongoing transition to subscription-based pricing, the
pending release of our ASP applications and some customers making purchases in
1999 to prepare for Year 2000 issues.
During the year ended December 31, 1999, we generated $5.8 million of cash
from operating activities primarily relating to net income of $2.3 million,
which includes non-cash charges for depreciation and amortization and
non-operating restructuring and other charges, offset by an increase in accounts
receivable.
During the six months ended June 30, 2000, cash used in investing
activities was $17.4 million, primarily representing cash used for acquisitions
and related expenditures of $13.4 million. During the year ended December 31,
1999, cash used in investing activities was $10.3 million, consisting primarily
of cash used for acquisitions of $8.3 million.
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During the six months ended June 30, 2000, we generated $26.1 million of
cash from financing activities consisting primarily of borrowings attributed to
us of $11.0 million from InfoCure's line of credit and $15.1 million in cash
advances from InfoCure. During the year ended December 31, 1999, we generated
net cash from financing activities of $5.4 million, including $8.7 million in
proceeds from InfoCure's line of credit and $13.3 million in cash advances from
InfoCure. These proceeds were principally used to retire outstanding debt
previously attributed to us of $16.7 million and to fund the acquisition of the
1999 Purchased Companies.
InfoCure maintains a credit facility with FINOVA Capital Corporation in the
amount of $100.0 million that has a five-year term, bears interest at a floating
rate (9.5% at June 30, 2000) and is secured by substantially all of InfoCure's
assets. InfoCure was not in compliance with certain financial covenants
contained in the credit facility as of June 30, 2000 and received a waiver for
such non-compliance. During July 2000, InfoCure entered into an amendment to the
credit facility to eliminate certain previous financial covenants and establish
new financial covenants. At the time of the distribution, we expect to enter
into a credit facility with FINOVA under which we will incur approximately
$ million of indebtedness to repay InfoCure's long-term indebtedness
relating to our business.
At June 30, 2000, we had total cash and cash equivalents of $4.9 million
and working capital of $564,000. We expect the transition to a subscription
pricing model will continue to adversely impact our cash flow until revenue from
subscription fees replaces revenue from software license fees and hardware
sales. We also expect to incur increased operating costs associated with the
development of our ASP applications and other new applications and services, the
establishment of additional strategic relationships and marketing and sales
expenses in connection with the introduction of new applications and services.
We expect to finance these activities and future acquisitions, if any, through
one or more of the following sources: our credit facility, other indebtedness
and the issuance of debt or equity securities. The sale of equity securities,
including investments convertible into equity securities, may result in further
dilution to existing stockholders. There can be no assurance that additional
sources of capital will be available on terms acceptable to us. We believe that
our existing cash and anticipated future operating cash flow, combined with
availability of funds from other sources of financing, will be sufficient to
fund our working capital requirements through at least the next twelve months.
However, if insufficient funds are available, we may not be able to increase our
marketing and sales expenses and grow our businesses or effectively compete in
any of our markets, which could materially harm our business, financial
condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 was effective for financial statements for
years beginning after December 15, 1998. SOP 98-1 provides guidance over
accounting for computer software developed or obtained for internal use,
including the requirement to capitalize specified costs and amortization of such
costs. Adoption of this standard did not have a material effect on our
capitalization policy.
Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities",
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives),
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and for hedging activities. Historically, we have not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, we do not expect adoption of this new standard on January 1, 2001
to affect our financial statements.
The Financial Accounting Standards Board issued Interpretation
("Interpretation") No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25" which is effective July
1, 2000. Interpretation No. 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
stock compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Adoption of the provisions of the
Interpretation are not expected to have a significant impact on our financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, -- Revenue Recognition, which outlines the basic criteria that must be met
to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the Securities and Exchange Commission. We believe that adopting SAB No.
101 will not have a material impact on our financial position or results of
operations.
COSTS RELATED TO YEAR 2000 COMPLIANCE
We recognized the material nature of the business issues surrounding
computer processing of dates into and beyond the Year 2000 and took corrective
action prior to December 31, 1999. Our total Year 2000 compliance costs were
approximately $1.4 million all of which was incurred prior to December 31, 1999.
We do not currently expect to apply additional material funds to address Year
2000 issues.
As of July 31, 2000, we were not aware of any material disruption in the
operation of our products by our customers as a result of Year 2000 issues. In
addition, as of July 31, 2000, we have not experienced any material disruptions
of our internal computer systems or software applications, and have not
experienced any material problems with the computer systems or software
applications of the third parties with whom we regularly do business as a result
of Year 2000 issues.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risks include fluctuations in interest rates and
variability in interest rate spread relationships, such as prime to LIBOR
spreads. Approximately $18.9 million of our outstanding debt at June 30, 2000
related to long-term indebtedness under InfoCure's credit facility with FINOVA
Capital Corporation that will be allocated to PracticeWorks at the time of the
distribution. We expect interest on the outstanding balance of our credit
facility to be charged based on a variable rate related to prime rate or, at our
option, the LIBOR rate. Both rate bases are incremented for margins specified in
the agreement. Thus, our interest rate is subject to market risk in the form of
fluctuations in interest rates. The effect of a hypothetical one percentage
point increase across all maturities of variable rate debt would result in an
increase of approximately $189,000 in pre-tax net loss assuming no further
changes in the amount of borrowings subject to variable rate interest from
amounts outstanding at June 30, 2000. We do not trade in derivative financial
instruments.
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BUSINESS
OVERVIEW
We are a leading information management technology provider for dentists,
orthodontists and oral and maxillofacial surgeons. Our offerings include
practice management applications, business-to-business e-commerce services,
electronic data interchange, or EDI, services, ongoing maintenance and support
and training. These applications and services are designed to automate the
provider's practice, resulting in greater efficiency, lower costs and higher
quality care. As of July 31, 2000, we had an installed base of over 38,000
providers, including approximately 30,000 dentists, 4,300 orthodontists and
3,700 oral and maxillofacial surgeons.
We believe that the direct and frequent use of our practice management
applications by providers and office staff throughout the business day combined
with our substantial installed customer base strongly positions us to facilitate
business-to-business e-commerce between our customers and dental, medical and
orthodontic product manufacturers and distributors as well as other suppliers.
Through strategic relationships we have established to date, orthodontists using
our e-commerce application can make convenient, cost-effective online purchases
of orthodontic supplies, office supplies and promotional materials. We are
developing additional strategic relationships to enable online purchasing of
dental supplies using our e-commerce application. This will allow us to expand
our e-commerce services to the dental and oral and maxillofacial surgery markets
and further develop this revenue stream.
Our existing practice management applications are installed either on
servers or personal computers located in the provider's office. We are
developing practice management applications that we will deliver through an
applications services provider delivery model whereby the applications will be
remotely hosted on a central server which our customers will access through a
standard Internet browser. Our applications services provider, or ASP,
applications will benefit our customers primarily by:
- decreasing their total cost of ownership by reducing hardware
requirements and allowing them to outsource maintenance and support
functions;
- automatically providing immediate access to future updates and
improvements to our applications;
- enabling secure, online communication with patients; and
- enabling remote access to their practice management applications.
We expect to release our ASP application for use by dentists in the United
States during the fourth quarter of 2000 and to release our ASP applications for
orthodontists and oral and maxillofacial surgeons in 2001.
THE INDUSTRY
CURRENT STATE OF THE DENTAL INDUSTRY
According to the Health Care Financing Administration, healthcare
expenditures were approximately $1.15 trillion, or 13.7% of the U.S. gross
domestic product in 1998. Spending on dental services in the United States
reached approximately $53.7 billion in 1998 and was expected to increase 6.3% in
1999. Dental services are expected to grow at a
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compound rate of 6.6% annually through the year 2007, when total dental care
would account for $95.2 billion of U.S. healthcare expenditures. Expenditures on
dental services are growing at a slightly faster pace than total U.S. healthcare
expenditures, growing from 4.7% of the total in 1997 to over 4.8% in 1999. The
primary drivers of growth in dental services include the aging U.S. population,
natural teeth being retained longer, changing dental practices, general
population growth and an increase in private dental insurance. According to
Dorland Healthcare Information, a healthcare industry research firm, orthodontic
services were estimated to have represented an additional $4.1 billion of
expenditures in 1999, an increase of 7.0% annually since 1997.
The market for professional dental products is estimated to have been
approximately $3.1 billion in 1999, growing at annual rate of 6.7% to more than
$3.5 billion by 2001, according to the Detwiler Group, a healthcare industry
research firm. This market is comprised of a wide range of products including
supplies, such as hand instruments, polishing materials and consumables used in
patient therapy, and equipment, such as sterilizers, powered hand pieces and
ultrasonic cleaners. In addition, orthodontists and oral and maxillofacial
surgeons use other specialty equipment and supplies including bonding and wiring
material, anesthesia and surgical supplies.
The traditional supply chain for professional dental and related products
is highly fragmented and inefficient, with more than 300 distributors serving
dental practices, of which fewer than 20 have more than $20.0 million in annual
sales, according to the Detwiler Group. Even though, according to Strategic
Dental Marketing, an industry market research firm, the six largest
manufacturers of dental supplies control approximately 45% of the market, very
few sales are made directly to dental practices. However, the cost effective
procurement of supplies and equipment is highly important to managing dental
practice expenses.
According to Dorland Health Information, "the spread of managed care in
dental care is likely to increase in the future as HMOs and other managed care
plans contract with dentists to provide services on a capitated basis in an
effort to control costs. The key to prosperity in the capitated environment will
be cost control." The managed care, fixed-fee and capitated models are replacing
the fee-for-service reimbursement model that has been the traditional basis for
payment for healthcare services. We believe this shift will increase the demand
for dental practice management applications and services.
CURRENT INFORMATION MANAGEMENT TECHNOLOGY SOLUTIONS
To more efficiently manage their practices in connection with cost
containment pressures, dental practitioners are increasingly utilizing
information management technology, including practice management applications,
in the day-to-day operation of their practices. Practice management applications
include a range of mission-critical software products for dentists, physicians
and other healthcare providers that are used throughout the business day. Most
practice management applications provide several common functions, including:
- administrative functions, such as patient scheduling;
- financial functions, such as patient billing and receivables management;
and
- clinical functions, such as preventative care notification.
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However, most existing healthcare practice management systems are largely
inadequate because those systems:
- were not designed to handle the complexity of the pricing pressures
created by managed care;
- cannot be automatically upgraded to reflect rapid technological
advancements;
- are not designed to not take advantage of the efficiencies available
through the Internet;
- require substantial up-front investments; and
- require practices to utilize technology experts to efficiently manage
their information technology systems, which is cost prohibitive for all
but the largest practices.
THE EMERGENCE OF THE APPLICATIONS SERVICE PROVIDER MODEL
The ASP model of application delivery offers the end user local access to
an application hosted centrally on remote servers, and all ASP maintenance is
performed centrally once for the benefit of the user community. Customers
typically pay a monthly subscription fee. The advantages of this form of
technology outsourcing include:
- the significant reduction or avoidance of up-front costs to purchase
software, application maintenance and upgrades;
- faster implementation;
- a reduced need for in-house information technology maintenance resources;
- better data storage at a central site;
- remote access to applications; and
- higher level of server security.
These various benefits combine to create a lower total cost of ownership
that can be significant. Gartner Group, an independent research firm, estimates
that companies that choose an ASP solution can reduce related information
technology costs by 35% to 55% over the life of an application. Because of these
many advantages, Gartner Group further estimates that the overall ASP market
will grow from $900 million in 1998 to approximately $23 billion by 2003. The
ASP model is especially beneficial for small to medium sized businesses,
including dental and related practices, due to the impracticality of retaining
in-house information technology resources.
GROWTH OF THE INTERNET AND BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
Many companies in a variety of industries have increasingly begun to use
the Internet to utilize business-to-business electronic communication to
streamline complex processes, purchase and sell goods and exchange information
among fragmented groups of customers, manufacturers and distributors. Forrester
Research, an independent research firm, has estimated that U.S.
business-to-business e-commerce, defined as the total volume of inter-company
trade of goods and services in which the final order is placed over the
Internet, will increase from $109 billion in 1999 to $1.3 trillion in 2003.
Business-to-business e-commerce enables purchasers and sellers in fragmented
markets to reduce supply chain
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inefficiencies. Sellers are able to cost-effectively access additional markets,
streamline their sales, marketing and distribution operations, reduce their
time-to-market and efficiently distribute updated product information. Buyers
can improve their purchasing process and easily access current product
information and a broad range of products and services.
OPPORTUNITY FOR NEW INFORMATION MANAGEMENT TECHNOLOGY SOLUTIONS FOR PHYSICIANS
Information management technology and the Internet are becoming
increasingly important and commercially viable solutions in reducing the current
cost burden in many industries. Because of its size, fragmentation, and
dependence on information exchange, the healthcare sector, including the dental,
orthodontic and oral and maxillofacial surgery industries, is ideally suited to
benefit from increased use of technology solutions to control costs and manage
complex data requirements. However, we believe there are unmet needs between the
older legacy vendors and the new technology vendors. Legacy vendors can provide
systems with advanced features but typically lack solutions that are
user-friendly and enable electronic communications. On the other hand, new
technology vendors can provide this Internet connectivity but often lack the
experience, customer base and feature functionality to promote widespread
adoption. We believe a significant opportunity exists for companies that have
experience in delivering information management technology solutions to dental
providers, advanced feature functionality and new technology solutions that
enhance connectivity through the Internet.
THE PRACTICEWORKS SOLUTION
We offer dentists, orthodontists and oral and maxillofacial surgeons
information management technology solutions that include:
- PRACTICE MANAGEMENT APPLICATIONS. Our feature-rich practice management
applications are designed to automate dental, orthodontic and oral and
maxillofacial surgery practices. We also provide our customers with the
necessary training, maintenance and support.
- E-COMMERCE SERVICES. InfoLincx, our e-commerce application, enables
convenient, online purchasing of dental and office supplies and
promotional materials offered by our strategic partners. Through our
existing strategic relationships, orthodontists currently use InfoLincx
to order orthodontic supplies, office supplies and promotional materials.
We are developing strategic relationships to facilitate online ordering
of dental supplies, which will allow us to begin offering InfoLincx in
the dental and oral and maxillofacial surgery markets.
- ELECTRONIC DATA INTERCHANGE SERVICES. Through the EDI component of our
practice management applications, customers can electronically submit
insurance claims and patient billing information for processing at
national clearinghouses.
- ASP APPLICATIONS. We expect to release our ASP application for use by
dentists in the United States during the fourth quarter of 2000 and our
orthodontic and oral and maxillofacial surgery ASP applications in 2001.
These applications will be remotely hosted on a central server which our
customers will access with a standard Internet browser.
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- INTERNET PORTAL. We are developing an Internet portal, or website, that
will provide access to our ASP applications and an Internet-based version
of InfoLincx, enable secure communication between patients and providers
and feature healthcare content for patients and providers about
dentistry, orthodontics and oral and maxillofacial surgery. We also
expect to enter into strategic relationships which will enable us to
provide additional services to our customers through our Internet portal.
These services may include credentialing, continuing medical education or
CME, banking, insurance and travel services.
- PRACTICE WEBSITES. We plan to offer custom website development services
for our customers, either directly or through a strategic relationship we
will form, enabling them to use the Internet to provide information about
their practices and market their services. We are also plan to pursue
relationships with strategic partners that will offer tools for our
customers to develop their own websites and provide hosting for our
customers' websites.
Our existing applications and services, together with the additional
products we are developing, will provide our customers with the following
significant benefits:
- ROBUST AND SPECIALTY-SPECIFIC FUNCTIONALITY. Our practice management
applications include features that automate the administrative, financial
and clinical information management functions of our customers'
practices. In addition to these standard features, many of our
applications offer specialized features that serve the practice-specific
needs of dental, orthodontic and oral and maxillofacial surgery
customers. Our technologically advanced applications are also scalable,
providing the flexibility to serve practices of all sizes and with
multiple locations.
- CONVENIENT AND COST-EFFECTIVE E-PROCUREMENT. InfoLincx is designed to
reduce the administrative effort and increase the efficiency of a
practice by enabling convenient, online purchasing of dental, medical and
office supplies at competitive prices from a single application.
- LOWER START-UP AND TOTAL COSTS. We expect use of our ASP applications to
result in a lower total cost of ownership for our customers by reducing
hardware requirements and the need for in-house maintenance and support.
We offer our practice management applications and maintenance and support
services for a fixed, monthly subscription fee, which reduces start-up
costs by eliminating one-time application licensing, maintenance and
support fees. Subscription pricing also provides our customers with
protection against application obsolescence, because we provide customers
with upgrades for no additional charge as we expand the functionality of
our applications. Furthermore, our customers will be able to purchase
hardware directly from Dell Computer Corporation at a discount from its
suggested retail prices and pay on an installment basis, further reducing
start-up and overall costs.
- CONVENIENCE OF OUR ASP APPLICATIONS AND INTERNET PORTAL. Our ASP
applications will provide additional benefits, including rapid
implementation and immediate access to upgrades and improvements to our
applications as they become available. Our Internet portal will enable
remote access to our ASP applications, feature Internet-based training
and support services and facilitate secure communication between our
customers and their patients through our ASP applications. We also plan
to offer Internet-based customer support applications that will enable
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customers to view the current status of support requests sent using these
applications and provide access to a customer knowledge base of
frequently-asked questions.
OUR STRATEGY
Our objective is to enhance our position as a leading provider of
information management technology for dentists, orthodontists and oral and
maxillofacial surgeons. Our principal strategies include:
PROMOTE OUR PRACTICE MANAGEMENT APPLICATIONS
We plan to offer customers a choice between the most technologically
advanced of our applications that are installed in the provider's office, which
we call our core applications, and our ASP applications. In addition to
marketing our applications to new customers, we intend to actively encourage
existing customers to upgrade to our ASP applications or our core applications.
We believe providers traditionally upgrade to new practice management systems
approximately every five years. We expect this relatively short upgrade cycle,
combined with our strong customer relationships and our establishment of a
centralized data conversion center to facilitate our efforts to upgrade our
existing customers. As our existing customers upgrade to our ASP or core
applications, we believe we can reduce our operating costs by retiring some of
our existing applications and reducing the overall number of applications we
support.
PROMOTE E-COMMERCE BETWEEN OUR CUSTOMERS AND STRATEGIC PARTNERS
We believe we can capitalize on the direct and frequent use of our practice
management applications by providers and office staff throughout the business
day and our significant market penetration to facilitate e-commerce transactions
between our customers and dental, medical and orthodontic product manufacturers
and distributors as well as other suppliers. We have established strategic
partnerships with Ormco Corporation, a leading supplier of orthodontic supplies,
a division of United Stationers Supply Co., a leading wholesale provider of
office supplies, and Summit Marketing Group, Inc., a leading supplier of
promotional materials. Through these strategic partnerships, orthodontists
currently utilize InfoLincx to place orders directly with Ormco and Summit
Marketing Group. Our customers can place orders for office supplies directly
with us, a service we market under the brand name PracticeDepot, and the orders
are fulfilled by e-NITED, a division of United Stationers. We recently began
marketing InfoLincx in the orthodontic market, and we are continuing to promote
the product to that market. In addition, we are developing strategic
relationships to facilitate online ordering of dental supplies, which will allow
us to begin offering InfoLincx to the dental and oral and maxillofacial surgery
markets.
ESTABLISH A NATIONAL MARKETING IDENTITY AND TARGET NEW CUSTOMERS
We plan to implement a program designed to create a strong brand identity
for PracticeWorks and to gain new customers within the dental, orthodontic and
oral and maxillofacial surgery markets. Our marketing program will include
direct mailings, advertising, participation in trade shows, promotions at user
group meetings and an annual seminar program which will enable us to meet
face-to-face with existing and potential customers in major U.S. cities.
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FURTHER LEVERAGE OUR EXISTING CUSTOMER BASE
In addition to our efforts to promote our core and ASP applications and
e-commerce transactions using InfoLincx, we believe there are other efforts we
can take with existing customers to increase revenue and reduce operating costs.
A significant number of our existing customers do not currently utilize our EDI
services. We plan to encourage customers to begin using our EDI services through
a direct marketing campaign. We also recently established a direct sales group
to focus on marketing our maintenance and support services to our existing
customers that do not currently use those services. We expect to convert
substantially all of our customer base to subscription pricing over the next
five years, which will provide our customers with lower start-up and total costs
and will provide us with a substantial source of recurring revenue. We will
market subscription pricing to existing customers primarily in conjunction with
our efforts to upgrade those customers to our ASP or core applications or as
their existing maintenance and support contracts expire.
SELECTIVELY ACQUIRE COMPLEMENTARY BUSINESSES AND TECHNOLOGY
Since July 1997, we have acquired 18 practice management application
companies. These acquisitions have enabled us to build a substantial customer
base, expand into new markets and obtain the technology utilized by those
businesses. We intend to pursue additional acquisitions as we identify
appropriate opportunities to further increase our customer base, expand into
additional markets and enhance our product offerings.
OUR APPLICATIONS AND SERVICES
PRACTICE MANAGEMENT APPLICATIONS
APPLICATION FEATURES. Our practice management applications are designed to
automate the administrative, financial and clinical information management
functions for dental, orthodontic and oral and maxillofacial surgery practices.
Our applications include features and functions most essential to our customers'
practices, primarily in the following areas:
- ADMINISTRATIVE MANAGEMENT -- appointment scheduling, patient
registration, resource management, patient correspondence, referral
management and management reporting;
- FINANCIAL MANAGEMENT -- payor billing, patient billing and accounts
receivable management; and
- CLINICAL INFORMATION MANAGEMENT -- complete documentation of patient
visits, patient dental history and treatment planning.
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In addition to providing standard practice management features, our
applications offer advanced features that serve many of the specialty-specific
needs of orthodontic and oral and maxillofacial surgery practices. Some of these
advanced features are summarized in the following chart:
<TABLE>
<CAPTION>
SPECIALTY AREA SPECIALTY SPECIFIC FEATURES
-------------- ---------------------------
<S> <C>
Orthodontics - Contract billing via payment coupons
- Time scheduling by units of doctor and
assistant time per procedure
- Treatment charting
- Diagnostic and treatment planning
- Automatic patient treatment milestone tracking
- Imaging
Oral and Maxillofacial - Medical and dental claim processing and cross-
Surgery coding
- Surgery narrative reporting
- Surgery stage tracking
- Implant tracking
- Pretreatment estimating and treatment planning
- Image integration into patient records
</TABLE>
CURRENT APPLICATIONS. We classify our existing practice management
applications as either "core" or "classic." Core applications are the
applications we currently market to new and existing customers and, together
with our ASP applications, are the focus of our ongoing product development
efforts. Core applications offer advanced functionality and operate with the
latest generation of operating systems and hardware platforms. Classic
applications, while continuing to offer adequate functionality, may lack the
most advanced practice management features and may not be designed for the
latest generation of operating systems. We have designated some of our
applications that offer advanced functionality and operate on the latest
generation of operating systems as classic applications because we have a core
application that we believe better serves the same market. Therefore, the
classic application will not be further marketed or developed as part of our
strategy to reduce the number of applications we support.
As of July 31, 2000, approximately 34% of our practice sites used core
applications, while approximately 66% used classic applications. We believe
there is a significant opportunity to upgrade those customers utilizing classic
applications to our core applications or, when available, to our ASP
applications. While we no longer actively market our classic applications, we
will continue to provide support for those applications until we determine that
it is no longer cost effective to do so.
ASP APPLICATIONS. We expect to release our ASP application for use by
dentists in the United States during the fourth quarter of 2000 and our
orthodontic and oral and maxillofacial surgery ASP applications during 2001. Our
ASP applications will be remotely hosted on a central server that our customers
may access using a standard Internet browser. We believe this architectural
design will result in lower support costs because maintenance and updating of
the application will be performed once on the central server rather than having
to be performed at each site. For instance, we will only need to update
standardized diagnosis and procedure codes used for reimbursement once on the
central
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server for the benefit of all of our customers. In addition, a customer will
require only Internet access and a standard browser to access and utilize our
ASP applications, minimizing hardware requirements. We are also developing
Internet-based training and support services for our ASP applications which will
improve accessibility of these services by our customers while reducing our cost
of providing these services.
The advantages to our customers of our ASP applications over traditional
software applications include:
- decreasing their total cost of ownership by reducing hardware
requirements and allowing them to outsource maintenance and support
functions;
- automatically providing immediate access to future updates and
improvements to our applications;
- enabling secure, online communication with patients;
- enabling remote access to their practice management applications;
- better data storage through automatic back ups and storage at secure data
centers;
- access to Internet-based support and training; and
- faster implementation for new customers.
Our dental ASP application will initially feature the functionality
required by most dental practices, plus the efficiency of the ASP delivery
model. We will continue to develop our dental ASP application to offer the full
functionality of our core products. In addition, we expect that our ASP
applications for the orthodontic and oral and maxillofacial surgery markets will
not initially include all of the functionality of our core applications for
those markets, although we will also continue to develop those applications to
offer the full functionality of our core applications.
INTERNET PORTAL
We plan to launch our Internet portal, or website, in the fourth quarter of
2000 in connection with the release of our dental ASP application. Customers
will access the portal through a standard Internet browser and then log in by
entering a unique personal identification number and password. After logging in,
customers will be able to utilize our ASP applications, Internet-based version
of InfoLincx and our website development services and will have access to an
Internet-based customer service application. In addition, our customers will be
able to offer their patients access to selected features of our ASP applications
through the portal, including a feature that will enable secure, online
communication between patient and provider. Practices will also have the option
to allow their patients to view their provider's schedule, request an
appointment and receive confirmation of the appointment, view their clinical
records, obtain account information and view the status of insurance claims.
Access to our ASP applications will be user-specific, so that customers and
patients will have different levels of access and distinct user groups within a
provider's office staff may be given varying levels of access. We also expect to
enter into strategic relationships which will enable us to provide additional
services to our customers through our Internet portal. These services may
include credentialing, continuing medical education, Internet-based banking,
insurance and travel services. Our Internet portal will feature relevant content
regarding the dental, orthodontic and oral and maxillofacial surgery markets.
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INFOLINCX
InfoLincx, our e-commerce application, is designed to reduce administrative
effort and increase the efficiency of the procurement function of a practice by
enabling online purchasing of dental and office supplies. InfoLincx features an
electronic catalogue of the supplies offered by our strategic partners.
Customers create orders by selecting products from this catalogue, and InfoLincx
utilizes the practice's Internet connection to send the order to be fulfilled by
one of our strategic partners. InfoLincx also offers an inventory management
function which can automatically generate practice-specific supply orders for
orthodontic supplies based on the pre-determined needs of the practice.
We introduced InfoLincx in the orthodontic market in the second quarter of
2000. Through our strategic relationships, orthodontists use InfoLincx to order
orthodontic supplies directly from Ormco and promotional supplies directly from
Summit Marketing Group. Customers place orders for office supplies directly with
us, a service we offer under the brand name PracticeDepot. Through a strategic
partnership with us, e-NITED fulfills those office supply orders for our
customers. We are continuing to develop additional strategic relationships with
providers of dental supplies, which will allow us to expand our marketing of
InfoLincx and PracticeDepot to the dental and oral and maxillofacial surgery
markets. We plan to include InfoLincx as an additional component of our core
practice management applications for no additional charge when we provide those
applications to new customers or to existing customers who upgrade to our core
applications.
We plan to release an Internet-enabled version of InfoLincx during the
third quarter of 2000. Customers will be able to access this version of
InfoLincx either directly through an Internet browser or, following the release
of our Internet portal, through the portal. The Internet-enabled version of
InfoLincx will provide real time access to product information and special
promotional offerings by us or our strategic partners, in addition to providing
customers the other advantages of an application delivered through the ASP
model. Initially, the Internet-enabled version of InfoLincx will not include
inventory management functionality.
ELECTRONIC DATA INTERCHANGE
Using the EDI component of our practice management applications, customers
are able to (1) electronically submit insurance claims to independent national
clearinghouses that then submit the claims to payers and (2) submit patient
billing information to clearinghouses that process, print and mail patient
statements and provide billing reports to the customer. The use of our EDI
services can improve a practice's cash flow by enabling more accurate and rapid
submission of claims to third-party payers and statements to patients.
Furthermore, our EDI application is an integrated component of most of our
practice management applications, enabling customers to submit information to
clearinghouses without the need to access a separate system or re-enter data. We
expect to expand our EDI services to enable customers to determine patient
insurance eligibility.
WEBSITE DEVELOPMENT SERVICES
Healthcare practices are increasingly establishing their own websites to
market their services and provide information about their practices over the
Internet. To serve this growing demand, we plan to offer custom website
development services either directly or through a strategic relationship we plan
to form with an independent website developer. We also plan to develop a
strategic relationship with a website developer to provide tools
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for practices to develop their own websites. Customers will access these website
development services through our Internet portal. Through a separate strategic
partnership we are developing, we plan to offer hosting for our customer's
websites. We expect to begin offering these website development and hosting
services in connection with launching our Internet portal during the fourth
quarter of 2000.
SUBSCRIPTION PRICING MODEL
Under our subscription pricing model, our customers pay a fixed, monthly
subscription fee for our practice management applications, maintenance and
support. The subscription fee is based on the practice specialty and number of
system users and is set by a contract that is typically three to five years in
length, but may be terminated following the first year if the customer provides
notice at least 90 days prior to the end of the first year. Subscription fees
also include access to InfoLincx and our EDI application, although customers pay
us or a strategic partner for supplies ordered through InfoLincx and pay us a
fee per EDI transaction. Subscription fees for users of our ASP applications
will also include access to the applications offered through our Internet
portal. In some cases, subscription fees will also include connection to an
Internet service provider, or ISP. We plan to offer this service by establishing
a strategic relationship with an ISP. We will also provide subscribers with
updates to our practice management applications as they become available for no
additional charge. We currently do not offer subscription pricing in the oral
and maxillofacial surgery market, but plan to begin offering this pricing model
in that market during the third quarter of 2000.
STRATEGIC RELATIONSHIPS
We believe the direct and frequent use of our practice management
applications by providers and their office staff throughout the business day
combined with our substantial installed customer base strongly positions us to
facilitate e-commerce between providers and dental, medical and orthodontic
product manufacturers and distributors as well as other suppliers. To pursue
these opportunities, we intend to form relationships with strategic partners
that can provide fulfillment of supply orders placed through InfoLincx. In
addition, we intend to enter into strategic relationships with (1) a hosting
partner for our Internet-based applications, Internet portal and customer
websites, (2) a website developer to offer website development services and
tools to our customers and (3) vendors that will provide healthcare content that
we will offer our customers and their patients through our Internet portal. To
date, we have entered into strategic relationships with the following companies:
ORMCO CORPORATION. Ormco Corporation, a subsidiary of Sybron Corporation,
is a leading provider of orthodontic supplies and other industry-related goods.
We have entered into an agreement with Ormco under which Ormco will be our
exclusive supplier of orthodontic supplies ordered by our customers through
InfoLincx. The two year agreement provides that Ormco will rebate to us a
percentage of each sale generated through InfoLincx, a portion of which we will
rebate to the customer. The agreement will renew automatically for subsequent
one year terms unless terminated earlier by either party.
E-NITED. e-NITED is a division of United Stationers Supply Co., the
leading wholesale distributor of business products and office supplies. We have
entered into an agreement with e-NITED under which e-NITED fulfills orders for
office supplies placed by our customers using InfoLincx. Customers place orders
with PracticeDepot, the trade
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name under which we offer office supplies, and we then send the orders to
e-NITED for fulfillment. e-NITED has order processing facilities nationwide and
will ship orders from the closest facility to the PracticeWorks customer,
shipping on the same day if the order is received by 2 p.m. e-NITED bills us the
for cost of the orders processed and we are responsible for billing our
customers and providing payment to e-NITED.
SUMMIT MARKETING GROUP, INC. Summit Marketing Group, Inc. is a leading
supplier of marketing and promotional materials. We have entered into an
agreement with Summit under which Summit will be our exclusive supplier of
promotional materials for orthodontists ordered by our customers through
InfoLincx. The two year agreement provides that Summit will pay us a royalty
based on the amount of sales generated through InfoLincx. The agreement will
renew automatically for subsequent one year terms unless terminated earlier by
either party.
DELL COMPUTER CORPORATION. Dell Computer Corporation is a leading
designer, developer and manufacturer of personal computers and also provides
personal computer hardware, software and service and support programs to its
customers. We have entered into an agreement with Dell under which Dell will be
the exclusive supplier of computer hardware and related products to our
customers. Under the agreement, our customers purchase their computer hardware
directly from Dell. In addition, Dell will provide general service and support
for its products. In connection with its hardware products, Dell also licenses
some of its software to us for use by our customers. Dell grants our customers a
discount from its suggested retail prices. The one year agreement renews
automatically for successive one year terms unless terminated earlier by either
party.
SALES AND MARKETING
SALES
We generate sales primarily through a direct sales force that is organized
by practice area and consisted of 50 sales representatives as of July 31, 2000.
Our sales force generates sales to new customers and promotes and sells new
applications and services to existing customers. We recently established an
additional dedicated sales force to focus on promoting our maintenance and
support services to our existing customers who do not utilize those services. We
plan to introduce a new application for use by our sales force which will
provide tools for remote generation of proposals, quotes and licenses, lead
tracking, sales forecasting and customer base forecasting.
We plan to focus our sales efforts on the following initiatives:
- aggressively promote our ASP and core applications to new customers or as
upgrades for existing customers;
- continue our efforts to enroll orthodontic customers in InfoLincx and we
plan to aggressively promote enrollment in InfoLincx by dentists and oral
and maxillofacial surgeons as we introduce the application in those
markets;
- promote use of our maintenance and support services by existing customers
who do not currently subscribe to these services through our new
dedicated sales force;
- increase utilization of our EDI applications by new and existing
customers through a direct marketing campaign; and
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- encourage existing customers to convert to subscription pricing as their
maintenance and support contracts expire or when they upgrade to either
our ASP applications or our core products.
MARKETING
In connection with the introduction of our subscription pricing model, the
rollout of InfoLincx and the upcoming release of our ASP application and
Internet portal, we have focused our resources on an enhanced marketing program.
Our new marketing program, which we intend to launch in the fourth quarter of
2000, includes the following components:
- INTENSE BRANDING CAMPAIGN. We will brand all components of our solutions
with our PracticeWorks logo. While using our practice management
applications, the user will constantly see our PracticeWorks logo. In
addition, we will use the "PracticeWorks" name in connection with all
trade shows and medical journals and other areas in which we have
historically advertised individual products under different names.
- NATIONAL SEMINAR PROGRAM. Our ongoing seminar program will enable us to
meet face-to-face with thousands of customers in major U.S. cities to
strengthen our customer relationships and apprise them of the new
products and features available through our practice management
applications and services.
- LEAD GENERATION. We are implementing a third party lead generation
application to track our contact with existing and potential customers to
increase the efficiency and management of our sales and our marketing
efforts.
We target our new and existing customers principally through customer
referrals, participation in trade shows, our seminar program, direct mailings
and advertising.
CUSTOMERS
As of July 31, 2000, we had an installed base of over 38,000 providers,
including 30,000 dentists, 4,300 orthodontists and 3,700 oral and maxillofacial
surgeons. We have systems installed in all 50 states.
In addition, as a result of a recent acquisition, as of July 31, 2000,
approximately 2,400 dentists in Sweden, representing approximately 30% of all
dentists in Sweden, and approximately 1,300 dentists in the United Kingdom,
representing approximately 5% of all dentists in the United Kingdom, utilized
our practice management applications. These providers currently utilize our core
and classic applications, which we expect will continue to be the primary
applications that we promote and support internationally.
CUSTOMER SERVICE AND SUPPORT
Our support staff provides a wide range of customer support functions. We
employ functional and technical support personnel who work directly with our
customers to resolve technical, operational and application problems or
questions.
Our support group also assists with the implementation process.
Implementation consists of training, hardware installation and, with respect to
new customers or existing customers that are upgrading from our classic systems,
data conversion. We train providers
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and their staffs on the use of our products through on-site training and we
regularly offer seminar training in major U.S. cities. Data conversion is
generally performed while providers are using their existing practice management
systems so that the day-to-day operations of their practices are not
interrupted. We recently established a centralized data conversion center which
we believe will enable us to more efficiently and effectively perform customer
data conversions. Hardware support is generally provided directly by the
manufacturer or its authorized reseller, although we provide the first level of
phone support and dispatch the service call to the appropriate vendor.
We recently established a centralized support center for our classic
applications and we intend to migrate a majority of the support for our classic
applications to customer support personnel at this location. We believe this
will offer a higher level of support to our customers at reduced expense levels.
We plan to leverage the capabilities of our support staff through the
implementation and use of sophisticated computer software that keeps track of
solutions to common computer and software related problems. Use of this software
will allow our support staff to learn from the experience of other personnel
within our company and is expected to reduce the time required to respond to
support requests.
We are also developing Internet-based training and maintenance and support
services for our ASP applications. Internet-based training will allow our
customers and their office staff to learn to utilize their practice management
systems as needed and on a more consistent basis than periodic on-site training
or seminars can offer. The benefit of training services being available on a
constant basis is particularly important due to frequent turnover in providers'
office personnel. Our Internet-based training will include competency testing
which we expect to increase the proficiency of users and to reduce unnecessary
maintenance and support requests. We expect our Internet-based training will
also reduce our training expenses by reducing the need for on-site training and
seminars. Our Internet-based maintenance and support services will include help
menus and a summary of frequently asked questions to allow users to solve common
problems. We expect these Internet-based services to reduce our costs by
reducing the necessary number of maintenance and support personnel.
As of July 31, 2000, we had approximately 285 employees and independent
contractors performing customer support functions.
PRODUCT DEVELOPMENT
We are currently focusing our product development efforts on our core
applications, ASP applications and our Internet portal and the services it will
enable. We will devote our product development resources on an ongoing basis to
the continuing development of our applications and services. Our product
development staff will develop additional functionality for our applications by
regularly communicating with our customers, our customer service and support
staff and our sales representatives to ensure our applications meet market
demands. Our product development staff will also develop additional
functionality by assessing the best attributes of our classic applications and
applications of companies we may acquire. As of July 31, 2000, we had
approximately 50 employees performing product development functions.
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TECHNOLOGY
CORE APPLICATIONS
We believe that PC-based practice management systems are standardizing on
the Windows family of operating systems. Our PC-based core applications use
industry standard relational database software, such as SQL-Server or B-Trieve,
and Microsoft Corporation's operating system software, such as Windows 95,
Windows 98 and Windows NT, and networking software, such as Windows Terminal
Server. We have adopted 32-bit client/server technology for our PC-based core
applications, increasing their scalability in local and wide area network
environments.
ASP APPLICATIONS
We plan to establish a strategic relationship with a partner that will host
our ASP applications on secure servers located at hosting centers it maintains.
We expect to select a hosting partner that will provide continuous back up of
data. All data will be transmitted through secure socket layers and will be
128-bit encrypted, the highest level commercially available. Our ASP
applications will utilize an Oracle relational database and the remaining
components will be Microsoft Corporation applications, including Microsoft
Transaction Server, Visual Basic, and Internet Information Server.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to protect
our proprietary intellectual property rights in our applications and services.
To protect these rights, we rely primarily on a combination of copyright, trade
secret and trademark laws, confidentiality agreements with third parties, and
protective contractual provisions such as those contained in agreements with
strategic partners, vendors and customers. In addition, we expect our employees
to sign an agreement to comply with our corporate policies and procedures,
including our policy regarding non-disclosure of confidential information.
Despite our efforts to protect our proprietary information, unauthorized parties
may attempt to obtain and use our proprietary information. Policing unauthorized
use of our proprietary information is difficult, and the steps we have taken
might not prevent misappropriation, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as do the laws of the
United States. In addition, competitors may independently develop similar
applications and services similar to ours.
COMPETITION
The market for healthcare information services is intensely competitive,
rapidly evolving, highly fragmented and subject to rapid technological change.
Our competitors can be categorized as follows:
- national and regional practice management application providers,
including InfoSoft, Inc., a subsidiary of DENTSPLY International, Inc.,
EagleSoft, a subsidiary of Patterson Dental Supply, Inc., and Dentrix
Dental Systems, Inc., a subsidiary of Henry Schein, Inc.;
- application services providers, such as the Trizetto Group, Inc.;
- traditional and online suppliers of dental, medical and office supplies,
such MediBuy, OfficeDepot.com, and Staples.com; and
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- website development companies.
Each of these types of companies can be expected to compete with us within
various segments of the market for information management technology for
dentists, orthodontists and oral and maxillofacial surgeons. Furthermore, major
software information systems companies and other entities, including those
specializing in the healthcare industry that are not presently offering
applications that compete with our applications and services, may enter our
markets. We believe that the primary competitive factors in our industry are:
- product features and functionality;
- customer service, support and satisfaction;
- price;
- ease of implementation; and
- ongoing product enhancements.
Although our position in the market as compared to our competitors is
difficult to characterize due principally to the variety of current and
potential competitors and the evolving nature of our market, we believe that we
presently compete favorably with respect to all of these factors. Some of our
competitors may have greater financial, development, technical, marketing and
sales resources than we have.
PRIVACY ISSUES
Because our applications and services are utilized to transmit and manage
highly sensitive and confidential health information, we must address the
security and confidentiality concerns of our customers and their patients. To
enable the use of our applications and services for the transmission of
sensitive and confidential medical information, we utilize advanced technology
designed to ensure a high degree of security. This technology generally
includes:
- security that requires a password to access our systems;
- user access restrictions that allow our customers to determine the
individuals who will have access to data and what level of access each
individual will have;
- encryption of data relating to our ASP applications and e-commerce
transactions transmitted over the Internet; and
- use of a mechanism for preventing outsiders from improperly accessing
private data resources on our internal network and our ASP applications,
commonly referred to as a "firewall."
The level of data encryption utilized by our products is in compliance with
the encryption guidelines set forth in the proposed rule regarding security and
electronic signature standards in connection with Health Insurance Portability
and Accountability Act of 1996. We also encourage each of our customers to
implement their own firewall to protect the confidentiality of information being
transferred into and out of their computer network.
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Internally, we work to ensure the safe handling of confidential data by
employees in our electronic services department by:
- using individual user names and passwords for each employee handling
electronic data; and
- requiring each employee to sign an agreement to comply with all company
policies, including our policy regarding handling confidential
information.
We monitor proposed regulations that might affect our applications and
services, in order to ensure that we are in compliance with such regulations
when and if they are effected.
GOVERNMENT REGULATION
HEALTHCARE REGULATION
As a participant in the healthcare industry, our operations and
relationships are subject to regulation by federal and state laws and
regulations and enforcement by federal and state governmental agencies.
Sanctions may be imposed for violation of these laws. We believe our operations
are in substantial compliance with existing laws that are material to our
operations.
HIPAA. The Health Insurance Portability and Accountability Act of 1996,
known as HIPAA, required the Secretary of the Department of Health and Human
Services, referred to as the Secretary, to promulgate national standards to
facilitate the electronic exchange of health information and to ensure the
confidentiality and security of such information.
A substantial part of our activities involves the receipt or delivery of
confidential health information concerning patients of the dentists,
orthodontists and oral and maxillofacial surgeons with whom we have direct
relationships. For example, we transfer confidential health information to
national healthcare clearinghouses through our EDI services and we will transmit
confidential health information over the Internet in connection with offering
our ASP applications. On November 3, 1999, the Secretary proposed a rule setting
standards to protect the privacy of individually identifiable health information
that is maintained or transmitted electronically by health care providers,
health plans and other health care entities. The requirements of the proposed
rule extend to "business partners" of the covered entities. The covered entities
are required to enter into agreements with their business partners, extending
the provisions of the proposed rule to those business partners. The covered
entities are responsible for enforcing those contractual provisions. The
Secretary received substantial public comment on the proposed rule and is
expected to issue a final rule in the future. The Secretary's actions are
mandated by HIPAA because Congress did not pass legislation protecting health
information privacy by the August 1999 deadline set by HIPAA.
Under the proposed rule, healthcare providers and healthcare clearinghouses
are considered covered entities. Because of the broad definition of "business
partners" under the proposed rule, we will be considered to be business partners
of covered entities. The proposed rule establishes a complex regulatory
framework on a variety of subjects, including (1) disclosure and use of health
information that require patient consent, (2) individuals' rights to access and
amend their health information, (3) individual's rights to an accounting of
disclosures and (4) administrative, technical and physical safeguards
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required of entities which use protected health information. The proposed rule
generally prohibits any disclosure of protected health information except as
authorized either by the proposed rule or by the patient under standards set by
the proposed rule. Disclosures for billing, medical data processing,
reimbursement, adjudication or subrogation of health benefit claims are
expressly authorized by the proposed rule.
In addition to the proposed federal rule described above, most states have
enacted patient confidentiality laws which prohibit the disclosure of
confidential medical information. The proposed rule would establish minimum
standards and would preempt state laws which are less restrictive than HIPAA
regarding health information privacy but would not preempt more restrictive
state laws. The proposed rule provides that the health information privacy
standards would become effective two years after final issuance. We are
monitoring the developments of HIPAA regulations, yet the final rule may require
substantial changes to our applications and services, policies and procedures.
In addition to the proposed federal rule, on August 12, 1998 the Secretary
issued proposed regulations addressing security standards regarding transmission
of health information data under HIPAA. The security standards address various
areas, including, administrative procedures, physical safeguards, technical
security services and technical security mechanisms. Security standards may
require us to enter into agreements with certain of our customers restricting
the dissemination of health information and requiring implementation of
specified security measures. Final regulations are expected at an undetermined
date and will be effective two years after final issuance. Although we are
working to design our applications and services to comply with the proposed
security standards, there can be no assurance that final security regulations
will not require additional modifications to our applications, policies and
procedures.
FDA REGULATION. The Food and Drug Administration, or FDA, generally has
the authority to regulate medical devices, including computer applications, when
devices are indicated, labeled or intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. We
do not believe that any of our current applications or services are subject to
FDA regulation as medical devices, however, expansion of our application and
service offerings could subject us to FDA regulation. However, there can be no
assurance that the FDA will not assert jurisdiction over certain aspects of our
business. FDA jurisdiction over our business, including our applications and
services, could materially impact our ability to introduce new applications and
services in a timely manner because of the FDA approval process. In addition,
compliance with FDA regulations could be expensive.
REGULATION OF THE INTERNET
Laws and regulations applicable to communications or commerce over the
Internet may be adopted covering user privacy, pricing, content, copyright,
distribution and characteristics and quality of products and services. In
addition, some states or foreign countries could apply existing laws concerning
issues such as property ownership, sales tax, libel and personal privacy to
transactions conducted over the Internet. Additional laws or regulations or
application of laws to transactions over the Internet could require us to change
our operations or increase our cost of doing business.
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<PAGE> 85
REGULATION OF OUR INTERNATIONAL OPERATIONS
Because we conduct business with dentists, orthodontists and oral and
maxillofacial surgeons in foreign countries, we may be subject to additional
laws and regulations concerning communications or commerce over the Internet,
international taxes and tariffs. Such laws and regulations could require us to
change our international operations or increase our cost of doing business
internationally.
EMPLOYEES
As of July 31, 2000, we had approximately 545 full-time employees. Our
employees are not subject to any collective bargaining agreements. We believe
our relationships with our employees are satisfactory.
FACILITIES
Our principal executive offices are located in a facility InfoCure owns in
Atlanta, Georgia. Following the distribution, we intend to operate seven
additional facilities currently leased by InfoCure. These facilities are located
in Sacramento, California; Ridgefield, Connecticut; Norcross, Georgia; Norwood,
Massachusetts and Lincoln, Nebraska and we have an office in each of Sweden and
the United Kingdom. The U.S. leases have expiration dates ranging from June 2002
to June 2004. Upon completion of the distribution, we will assume the leases on
all of these facilities. We believe that our facilities are adequate for our
current operations and that additional leased space can be obtained if needed.
LEGAL PROCEEDINGS
There are no material legal proceedings to which we are a party and our
management is unaware of any contemplated actions against us.
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<PAGE> 86
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors as of July 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard E. Perlman.................. 52 Chairman of the Board and Director
James K. Price...................... 41 Chief Executive Officer, President and Director
James C. Davis, D.M.D............... 53 Executive Vice President and Director Nominee
James A. Cochran.................... 52 Senior Vice President, Chief Financial Officer
Henry F. Nelson..................... 42 Vice President and Chief Operating Officer
</TABLE>
Richard E. Perlman has been Chairman of the Board since our formation in
August 2000. Mr. Perlman has served as InfoCure's chairman and treasurer since
December 1997 and as a director of InfoCure since March 1997. Mr. Perlman will
resign from InfoCure upon completion of the distribution. From December 1997
until October 1998, Mr. Perlman served as InfoCure's chief financial officer.
Mr. Perlman is the founder of Compass Partners, L.L.C., a merchant banking and
financial advisory firm specializing in corporate restructuring and middle
market companies, and has served as its president since its inception in May
1995. From 1991 to 1995, Mr. Perlman was executive vice president of Matthew
Stuart & Co., Inc., an investment banking firm. Mr. Perlman received a B.S. in
Economics from the Wharton School of the University of Pennsylvania and a
Masters in Business Administration from the Columbia University Graduate School
of Business.
James K. Price has been our Chief Executive Officer and a director since
our formation in August 2000. Mr. Price is a founder of InfoCure and has been
its executive vice president and secretary since its inception in November 1996.
Mr. Price will resign from InfoCure upon completion of the distribution. He has
served as a director of InfoCure since its inception. Mr. Price served as
executive vice president of American Medcare from 1996 until 1997 and was vice
president from 1993 to 1995. Mr. Price co-founded International Computer
Solutions and has served as its executive vice president since 1994, as vice
president from 1987 to 1994 and as president from 1985 to 1987. In addition,
from 1991 to 1993, Mr. Price was a vice president of Newport Capital. From 1983
to 1985, Mr. Price was healthcare sales manager of Executive Business Systems, a
practice management systems supplier, and from 1981 to 1983 was with Moore
Business Systems. Mr. Price holds a B.A. in Marketing from the University of
Georgia.
James C. Davis, D.M.D., has served as our Executive Vice President since
our formation in August 2000. Dr. Davis manages our e-commerce operations. Dr.
Davis has served as Chairman of InfoCure's orthodontic group since February
1999. Dr. Davis will resign from InfoCure upon completion of the distribution.
He has been a practicing orthodontist for the past 25 years and, in 1982, was a
co-founder of OMSystems, Inc., the largest orthodontic practice management
software company in North America. Dr. Davis has also served as chief executive
officer of InfoCure's orthodontic division. Dr. Davis
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<PAGE> 87
received a D.M.D. from the University of Alabama School of Dentistry and a
Certificate of Orthodontics from the UCLA School of Dentistry. Dr. Davis
previously served as president of the Georgia Association of Orthodontists.
James A. Cochran has served as our Chief Financial Officer since our
formation in August 2000. He has been InfoCure's chief financial officer since
August 1999 but will resign from InfoCure upon completion of the distribution.
From 1992 until joining InfoCure, Mr. Cochran was a member of the accounting
firm of BDO Seidman, LLP, serving as a partner since 1995. Mr. Cochran is a
Certified Public Accountant. Mr. Cochran received a B.B.A. in Accounting and an
M.B.A. in Corporate Finance from Georgia State University.
Henry F. Nelson has served as our Chief Operating Officer since our
formation in August 2000. He has been the Chief Operating Officer of InfoCure's
dental division since May 2000 but will resign upon completion of the
distribution. From June 1999 until it was acquired by InfoCure in December 1999,
Mr. Nelson served as director and chief operating officer of VitalWorks, an ASP
practice management applications provider. Mr. Nelson continued in a product
development role with VitalWorks from the time of its acquisition by InfoCure
until May 2000. From November 1996 until June 1999, Mr. Nelson was the chief
operating officer and chief financial officer of InterQual, a leading provider
of clinical decision support information. From November 1995 until May 1996, Mr.
Nelson was a director and chief financial officer of Sextant Corporation, an
enterprise resource planning (ERP) software company, and from 1989 to October
1995, he was chief financial officer of Versyss Incorporated, a practice
management systems provider. Mr. Nelson holds a B.S. in Business Administration
from Northeastern University.
BOARD OF DIRECTORS
We currently have two directors, and we intend to elect four additional
directors upon completion of the distribution. Our certificate of incorporation
provides that the terms of office of the directors are divided into three
classes: Class I, whose term will expire at the annual meeting of stockholders
to be held in 2001; Class II, whose term will expire at the annual meeting of
stockholders to be held in 2002; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2003. The Class I directors are
, the Class II directors are and the Class III
directors are . At each annual meeting of stockholders after the
initial classification or special meeting in lieu thereof, the successors to
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election or
special meeting held in lieu thereof. We expect that any additional
directorships resulting from an increase in the number of directors, if any,
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one third of the directors. This classification structure
of the board of directors may have the effect of delaying or preventing changes
in control or management of PracticeWorks.
Our bylaws provide that the authorized number of directors may be changed
by an amendment to the bylaws adopted by our board of directors or by the
stockholders. In addition, our certificate of incorporation and our bylaws
provide that, in general, vacancies on the board may be filled by a majority of
directors in office, although less than a quorum.
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<PAGE> 88
COMMITTEES OF THE BOARD
Upon completion of the distribution, we will establish an audit committee,
all of whose members will consist of independent directors. The audit committee
will review, act on and report to our board of directors on various auditing and
accounting matters, including the selection of our independent accountants, the
scope of our annual audits, fees to be paid to the independent accountants, the
performance of our independent accountants and our accounting practices.
Upon completion of the distribution, we will establish a compensation
committee, all of whose members consist of independent directors. Our
compensation committee will establish salaries, incentives and other forms of
compensation for officers and other employees. This committee will also
administer our incentive compensation and benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a compensation committee. Prior to completion of
the distribution, all compensation matters were handled by the full board of
directors. No interlocking relationships have existed between our board of
directors and the board of directors or compensation committee of any other
company.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors, but are reimbursed for their reasonable and necessary expenses for
attending board and board committee meetings. Members of the board who are not
our employees, or employees of any parent, subsidiary or affiliate of
PracticeWorks, will be eligible to participate in our stock option plan unless
they are representatives of venture capital funds or corporate investors. The
option grants under the plan will be automatic and nondiscretionary, and the
exercise price of the options will be the fair market value of our common stock
on the date of grant.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth certain information with respect to the
annual and long-term compensation for services to InfoCure for our chief
executive officer and other executive officers. During the fiscal years ended
December 31, 1999 and 1998 and the eleven months ended December 31, 1997, the
individuals were compensated in accordance with InfoCure's plans and policies.
All references in the following tables to stock and stock options relate to
awards of stock and stock options granted by InfoCure. InfoCure has not granted
stock appreciation rights. The amounts set forth below do not reflect the
compensation these persons will receive from PracticeWorks following the
distribution. InfoCure options held by InfoCure employees who will become our
employees will be replaced by PracticeWorks options. The option price for the
shares of PracticeWorks common stock subject to each PracticeWorks option will
be determined by dividing the option price for the related InfoCure option by
the PracticeWorks conversion factor, and the number of shares of PracticeWorks
common stock subject to each PracticeWorks option will be determined by
multiplying the number of shares subject to the related InfoCure option by the
PracticeWorks conversion factor. The PracticeWorks conversion factor is a number
equal to (1) the closing price of InfoCure common stock on the
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<PAGE> 89
Nasdaq National Market on the record date, divided by (2) the opening price of
PracticeWorks common stock on the day following the distribution date.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL -------------------------
COMPENSATION OTHER RESTRICTED SECURITIES
NAME AND PRINCIPAL ------------------ ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) OPTIONS/SARS COMPENSATION(3)
------------------ ---- -------- ------- --------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Perlman... 1999 $120,000 $23,500 $17,380 -- 440,100 --
Chairman of the 1998 120,000 33,333 -- 367,500 320,000 --
Board 1997 -- -- -- -- 240,000 --
James K. Price....... 1999 125,000 19,500 19,452 -- 440,200 --
Chief Executive 1998 125,000 33,333 19,270 367,500 320,200 --
Officer and 1997 126,036 -- -- -- 252,400 --
President
James C. Davis(4).... 1999 109,375 20,000 14,000 -- 3,400 1,000
Executive Vice 1998 -- -- -- -- -- --
President 1997 -- -- -- -- -- --
James A.
Cochran(5)......... 1999 52,083 -- 7,660 -- 300,000 --
Senior Vice 1998 -- -- -- -- -- --
President and Chief 1997 -- -- -- -- -- --
Financial Officer
Henry F. Nelson(6)... 1999 4,583 -- -- -- -- --
Vice President and 1998 -- -- -- -- -- --
Chief Operating 1997 -- -- -- -- -- --
Officer
</TABLE>
-------------------------
(1) The amounts presented for 1999 include an automobile allowance for the use
of a vehicle in the amount of $11,380 for Mr. Perlman, $13,292 for Mr.
Price, $9,500 for Dr. Davis and $5,000 for Mr. Cochran and compensation for
business expenses in the amount of $6,000 for each of Messrs. Perlman and
Price, $4,500 for Dr. Davis and $2,500 for Mr. Cochran. The amount presented
for Mr. Price in 1998 includes an automobile allowance for the use of a
vehicle in the amount of $12,000 and compensation for business expenses in
the amount of $6,000. The compensation set forth in this column does not
include compensation in the form of perquisites or other personal benefits
for Mr. Perlman in fiscal year 1998 and Mr. Price in fiscal year 1997
because such perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus for these
officers for such years.
(2) The amounts presented represent the value on the date of grant of restricted
stock awards of 60,000 shares to Mr. Perlman and 60,000 shares to Mr. Price,
calculated based on the closing price of InfoCure's common stock as reported
on The Nasdaq Stock Market on such date. One-half of the shares awarded to
Messrs. Perlman and Price vested in the first quarter of 1999 and the
remaining shares vested in the third quarter of 1999. In January 1999,
InfoCure entered into agreements with Messrs. Perlman and Price pursuant to
which the benefit of the restricted stock awards was credited to a deferred
compensation arrangement upon vesting of the restricted stock. The value of
the restricted stock awards as of December 31, 1999,
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<PAGE> 90
calculated on the basis of the closing price for our common stock on such
date, was $1,871,280 for each of Messrs. Perlman and Price.
(3) Represents an employee referral payment.
(4) Dr. Davis joined InfoCure in February 1999.
(5) Mr. Cochran joined InfoCure in August 1999.
(6) Mr. Nelson joined InfoCure in December 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to our chief executive officer and other executive officers by InfoCure
during fiscal 1999. The amounts shown for potential realizable values are based
upon assumed annualized rates of InfoCure stock price appreciation of five
percent and ten percent over the full ten year term (or shorter term) of the
options, as required by the SEC, and are not intended to represent or forecast
possible future appreciation, if any, of the price of InfoCure common stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------
% OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SHARES OF OPTIONS ANNUAL RATES OF STOCK
COMMON GRANTED PRICE
STOCK TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM
OPTIONS IN PRICE EXPIRATION ------------------------
NAME GRANTED(1) 1999 ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Perlman... 100 * $16.38 1/1/09 $ 2,060 $ 5,221
440,000 14.1% 17.50 6/9/09 4,842,489 12,271,817
James K. Price....... 200 * 16.38 1/1/09 2,060 5,221
440,000 14.1 17.50 6/9/09 4,842,489 12,271,817
James C. Davis....... 3,200 * 13.00 4/9/09 26,192 66,299
200 * 26.47 7/1/09 3,329 8,437
James A. Cochran..... 300,000 9.6 16.75 8/20/09 3,160,196 8,008,556
Henry F. Nelson...... -- -- -- -- -- --
</TABLE>
-------------------------
* Less than one percent.
(1) All options were granted with exercise prices equal to or in excess of the
fair market value of the common stock on the date of grant as determined by
the board of directors.
During August 2000, InfoCure granted our executive officers additional
options to acquire InfoCure common stock. Mr. Perlman received options, Mr.
Price received options, Dr. Davis received options, Mr. Cochran
received options and Mr. Nelson received options. The exercise price
of these options is $ per share
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<PAGE> 91
and they expire ten years from the date of grant. Fifty percent of the options
granted to each person vest in four equal annual installments beginning on the
first anniversary of the date of grant. The remaining 50% of the options granted
to each person will vest five years from the date of grant, but half of these
options will immediately vest upon the average closing price of InfoCure's
common stock for 20 consecutive trading days being equal to $ per share and
the remaining options will vest upon the average closing stock price for 20
consecutive trading days being equal to per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE TABLE
Shown below is information with respect to the number of InfoCure shares
acquired upon exercise of stock options and the aggregate gains realized on
exercises during 1999 for our chief executive officer and executive officers.
The table also sets forth the number of shares covered by exercisable and
unexercisable options held by these executives on December 31, 1999 and the
aggregate gains that would have been realized had these options been exercised
on December 31, 1999, even though these options were not exercised, and the
unexercisable options could not have been exercised at that time.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN
UNDERLYING UNEXERCISED THE MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard E. Perlman............. 418,152 581,948 $10,898,050 $9,971,831
James K. Price................. 420,272 592,528 10,959,780 10,277,944
James C. Davis................. -- 3,400 -- 59,145
James A. Cochran............... -- 300,000 -- 4,331,400
Henry F. Nelson................ -- -- -- --
</TABLE>
-------------------------
(1) The closing price for InfoCure's common stock as reported by The Nasdaq
Stock Market on December 31, 1999 was $31.188. The value is calculated on
the basis of the difference between the option exercise price and $31.188,
multiplied by the number of shares of common stock underlying the option.
EMPLOYMENT AGREEMENTS
Following the distribution, we plan to enter into three-year employment
agreements with Richard E. Perlman, James K. Price, James C. Davis, James A.
Cochran and Henry F. Nelson on substantially the terms described below. The
individual employment agreements will provide for an initial annual base salary
and a severance payment for each executive equal to three times his then current
annual base salary rate upon the termination of the executive's employment by us
without cause or by the executive for good reason or in the event of a change in
control. The employment agreements will entitle the executives to participate in
our employee benefit programs and will provide for other customary benefits. In
addition, each employment agreement will provide compensation pursuant to a
program established by the compensation committee of our board of directors, the
grant of stock options on the first day of the executive's employment and
periodic grants of options thereafter as recommended by the compensation
committee of our board of directors. Each employment agreement will provide for
100% vesting of all outstanding stock options upon a change in control. The
employment agreements also
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provide for an additional, tax gross-up payment to be made by us to the
executive in the event that, upon a change in the control, any payments made to
the executive that are subject to an excise tax under Section 4999 of the
Internal Revenue Code. Finally, the employment agreements will prohibit the
executive from engaging in certain activities which compete with us, seek to
recruit our employees or disclose any of our trade secrets or otherwise
confidential information.
2000 INCENTIVE STOCK PLAN
We adopted a stock option plan, effective August , 2000, pursuant to
which 10,000,000 shares of common stock are reserved for issuance. The plan
includes an annual grant limit of 1,000,000 options per individual. The plan is
administered by the compensation committee of our board of directors. The
compensation committee may grant nonqualified stock options to purchase shares
of common stock, stock appreciation rights and may make stock grants to our
directors and employees. Each such stock option, stock appreciation right and
stock grant shall be subject to the terms and conditions that the compensation
committee deems appropriate. The option price for each stock option granted is
the fair market value of common stock on the date of the grant. Upon a sale,
merger or a change in control of PracticeWorks, all stock options, stock
appreciation rights and stock grants shall be fully vested. The stock option
plan permits us to loan money to or guarantee loans made by a third party to
finance all or a part of the exercise of a stock option or the purchase of
common stock subject to a stock grant. Our board of directors can amend or
terminate the stock option plan at any time.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law.
Our bylaws provide that we will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection with
takeover defense measures. These provisions may have the effect of preventing
changes in the management.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and officers to
give them additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
for which indemnification from us is sought. We are not aware of any threatened
litigation that may result in claims for indemnification from us.
We currently have liability insurance for our directors and officers and
intend to extend that coverage for public securities matters.
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<PAGE> 93
BENEFICIAL OWNERSHIP OF COMMON STOCK
All of our outstanding common stock is, and prior to the distribution will
be, held beneficially and of record by a wholly owned subsidiary of InfoCure.
After the distribution, InfoCure and its subsidiaries will not own any of our
outstanding common stock. The following table sets forth information concerning
the shares of PracticeWorks common stock that are projected to be beneficially
owned after the distribution by the following individuals:
- each person that is expected to own beneficially more than five percent
of the PracticeWorks common stock outstanding immediately following the
distribution, based on the ownership of InfoCure common stock as known to
us;
- each of our directors or director nominees;
- our executive officers; and
- all of our directors, director nominees and executive officers as a
group.
Unless otherwise indicated, the projections are based on the number of
InfoCure shares held by such persons as of , 2000 and reflect the
distribution ratio of shares of PracticeWorks common stock for
every share of InfoCure common stock held on the record date. Unless otherwise
indicated in the footnotes to this table and subject to community property laws
where applicable, we believe that each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated as
beneficially owned. Unless otherwise indicated, the address for each person set
forth in the table is c/o PracticeWorks, Inc., 1765 The Exchange, Suite 500,
Atlanta, Georgia 30339.
The number of shares beneficially owned by each person includes shares that
can be acquired by that person through stock option exercises on or prior to
, 2000. In calculating the percentage owned by each person, we assumed
that all shares issuable upon exercise of options on or prior to ,
2000 are exercised by that person. The total number of shares outstanding used
in calculating the percentage owned assumes no exercise of options held by other
persons.
<TABLE>
<CAPTION>
TOTAL
COMMON EXERCISABLE NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER STOCK OPTIONS BENEFICIALLY OWNED OF CLASS(1)
------------------------ -------- ----------- ------------------ -----------
<S> <C> <C> <C> <C>
Richard E. Perlman......................
James K. Price..........................
James C. Davis..........................
James A. Cochran........................
Henry F. Nelson.........................
All executive officers and directors as
a group ( persons)................
</TABLE>
-------------------------
(1) Based on an aggregate of shares of InfoCure common stock issued
and outstanding as of , 2000 and the distribution ratio of
shares of PracticeWorks common stock for every share of InfoCure
common stock outstanding.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value, and 20,000,000 shares of preferred stock, $0.01 par
value.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
holders of common stock are entitled to receive ratably such dividends as may be
declared by the board out of legally available funds. In the event of our
liquidation, dissolution or winding up, holders of the common stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive rights or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
We are authorized, subject to limitations prescribed by Delaware law, to
issue preferred stock in one or more series, to establish from time to time the
number of shares to be included in each series, to fix the rights, preferences
and privileges of the shares of each wholly unissued series and any of its
qualifications, limitations or restrictions. The board can also increase or
decrease the number of shares of any series, but not below the number of shares
of that series then outstanding, without any further vote or action by the
stockholders. The board may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of PracticeWorks and may
adversely affect the market price of the common stock and the voting and other
rights of the holders of common stock. We currently do not plan to issue any
shares of preferred stock.
NO PREEMPTIVE RIGHTS
No holder of any of our stock of any class authorized at the distribution
date will have any preemptive right to subscribe to any of our securities of any
kind or class.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the PracticeWorks common stock
immediately following the distribution will be .
NASDAQ NATIONAL MARKET LISTING
We will apply for our common stock to be listed on The Nasdaq Stock
Market's National Market under the symbol "PWKS."
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ANTI-TAKEOVER PROVISIONS
OF PRACTICEWORKS' CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
GENERAL
Our certificate of incorporation, our bylaws and the Delaware General
Corporation Law contain certain provisions that could delay or make more
difficult an acquisition of control of PracticeWorks not approved by our board
of directors, whether by means of a tender offer, open market purchases, a proxy
contest or otherwise. These provisions have been implemented to enable us,
particularly but not exclusively in the initial years of our existence as an
independent, publicly owned company, to develop our business in a manner which
will foster our long-term growth without disruption caused by the threat of a
takeover not deemed by our board of directors to be in the best interests of
PracticeWorks and its stockholders. These provisions could have the effect of
discouraging third parties from making proposals involving an acquisition or
change of control of PracticeWorks, although such a proposal, if made, might be
considered desirable by a majority of our stockholders. These provisions may
also have the effect of making it more difficult for third parties to cause the
replacement of our current management without the concurrence of our board of
directors. In addition, some provisions of the Tax Disaffiliation Agreement to
be entered into by InfoCure and PracticeWorks may also have the effect of
discouraging third parties from making proposals involving an acquisition or
change of control of PracticeWorks prior to the second anniversary of the
distribution date. See "Relationship Between InfoCure and PracticeWorks
Following the Distribution -- Tax Disaffiliation Agreement" on page 37. Set
forth below is a description of the provisions contained in our certificate of
incorporation and bylaws and the Delaware General Corporation Law that could
impede or delay an acquisition of control of PracticeWorks that our board of
directors has not approved. This description is intended as a summary only and
is qualified in its entirety by reference to our certificate of incorporation
and bylaws, the forms of which are included as exhibits to the registration
statement, as well as the Delaware General Corporation Law.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation provides for our board of directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of our board of directors will be elected each
year. The first class of directors will initially serve a one-year term, and the
second class of directors will initially serve a two-year term. Thereafter, each
class of directors will be elected for a three-year term. See "Management"
beginning on page 75.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of our board of directors
until the second annual stockholders meeting following the date on which the
acquiror obtains the controlling stock interest and could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of PracticeWorks. Therefore, it could increase the
likelihood that incumbent directors will retain their positions.
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<PAGE> 96
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
Our certificate of incorporation and bylaws provide that the number of
directors shall be fixed only by resolution of our board of directors from time
to time. Our certificate of incorporation provides that the directors may be
removed by stockholders only both for cause and by the affirmative vote of at
least 66 2/3% of the shares entitled to vote.
Our certificate of incorporation and bylaws provide that vacancies on the
board of directors may be filled only by a majority vote of the remaining
directors or by the sole remaining director.
STOCKHOLDER ACTION
Our certificate of incorporation provides that stockholder action may be
taken only at an annual or special meeting of stockholders. Our certificate of
incorporation and bylaws provide that special meetings of stockholders may be
called only by the chairman of the board of directors, the chief executive
officer or a majority of the board of directors. Stockholders are not permitted
to call a special meeting or to require our board of directors to call a special
meeting of stockholders.
ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS OR NOMINATION AT MEETINGS
Our bylaws establish an advance notice procedure for stockholder proposals
to be brought before any annual or special meeting of stockholders and for
nominations by stockholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, including, without limitation, Rule 14a-8
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, only
such business may be conducted at a meeting of stockholders as has been brought
before the meeting by, or at the direction of, our board of directors, or by a
stockholder who has given our Secretary timely written notice, in proper form,
of the stockholder's intention to bring that business before the meeting. The
presiding officer at such meeting has the authority to make such determinations.
Only persons who are nominated by, or at the direction of, our board of
directors, or who are nominated by a stockholder who has given timely written
notice, in proper form, to our Secretary prior to a meeting at which directors
are to be elected will be eligible for election as directors of PracticeWorks.
To be timely, notice of nominations or other business to be brought before
any meeting must be delivered to our Secretary not less than 90 days nor more
than 120 days prior to the first anniversary date of the annual meeting for the
preceding year; provided, however, that if the annual meeting is not scheduled
to be held within a period that commences 30 days before and ends 30 days after
such anniversary date, such advance notice shall be given by the later of (1)
the close of business on the date 90 days prior to the date of the annual
meeting or (2) the close of business on the tenth day following the date that
the meeting date is first publicly announced or disclosed.
Any stockholder who gives notice of a proposal must provide the text of the
proposal to be presented, a brief written statement of the reasons why he or she
favors the proposal, the stockholder's name and address, the number and class of
all shares of each class of PracticeWorks stock owned, any material interest the
stockholder may have in the proposal, other than as a PracticeWorks stockholder,
and, in the case of any person that holds PracticeWorks stock through a nominee
or "street name" holder of record of such
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<PAGE> 97
stock, evidence establishing such person's indirect ownership of PracticeWorks
stock and entitlement to vote on the matter proposed at the annual meeting.
The notice of any nomination for election as a director must set forth the
name of the nominee, the number and class of all shares of each class of
PracticeWorks capital stock beneficially owned by the nominee, the information
regarding the nominee required by paragraphs (a), (e) and (f) of Item 401 of
Regulation S-K adopted by the SEC, the signed consent of each nominee to serve
as a director if elected, the nominating stockholder's name and address, the
number and class of shares of PracticeWorks stock owned by such nominating
stockholder and, in the case of any person that holds PracticeWorks stock
through a nominee or "street name" holder of record of such stock, evidence
establishing such person's indirect ownership of PracticeWorks stock and
entitlement to vote on the matter proposed at the annual meeting.
AMENDMENTS TO BYLAWS
Our certificate of incorporation provides that only our board of directors
or the holders of 66 2/3% of the shares of our capital stock entitled to vote at
an annual or special meeting of stockholders have the power to amend or repeal
our bylaws.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any proposal to amend, alter, change or repeal any provision of our
certificate of incorporation requires approval by the affirmative vote of a
majority of the voting power of all of the shares of our capital stock entitled
to vote on such matters, with the exception of certain provisions of our
certificate of incorporation which require a vote of 66 2/3% or more of such
voting power.
PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors by
resolution to issue one or more series of preferred stock and to determine, with
respect to any series of preferred stock, the terms and rights of such series.
We believe that the availability of the preferred stock will provide us
with increased flexibility in structuring possible future financing and
acquisitions and in meeting other corporate needs which might arise. Having such
authorized shares available for issuance will allow us to issue shares of
preferred stock without the expense and delay of a special stockholders'
meeting. The authorized shares of preferred stock, as well as PracticeWorks
common stock, will be available for issuance without further action by our
stockholders, unless such action is required by applicable law or the rules of
the Nasdaq Stock Market's National Market, any other inter-dealer quotation
system or any stock exchange on which our securities may be listed. Although our
board of directors has no intention at the present time of doing so, it would
have the power subject to applicable law to issue a series of preferred stock
that could, depending on the terms of such series, impede the completion of a
merger, tender offer or other takeover attempt. For instance, subject to
applicable law, such series of preferred stock might impede a business
combination by including class voting rights which would enable the holder to
block such a transaction.
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<PAGE> 98
DELAWARE LAW
Under Section 203 of the Delaware General Corporation Law, or Section 203,
which will be applicable to us after the distribution, certain "business
combinations," which are defined generally to include mergers or consolidations
between the Delaware corporation and an interested stockholder and transactions
with an interested stockholder involving the assets or stock of the corporation
or its majority-owned subsidiaries and transactions which increase the
interested stockholder's percentage ownership of stock, between a publicly held
Delaware corporation and an "interested stockholder," which is defined generally
as those stockholders who become beneficial owners of 15% or more of a Delaware
corporation's voting stock or their affiliates, are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless:
(1) the corporation has elected in its certificate of incorporation
not to be so governed;
(2) either the business combination or the proposed acquisition of
stock resulting in the person becoming an interested stockholder was
approved by the board of directors of the corporation before the other
party to the business combination became an interested stockholder;
(3) upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the commencement of the
transaction, excluding voting stock owned by officers who are also
directors or held in employee benefit plans in which the employees do not
have a confidential right to tender or vote stock held by the plan; or
(4) the business combination was approved by the board of directors of
the corporation and also ratified by two-thirds of the voting stock which
the interested stockholder did not own.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. Our certificate of incorporation does not exclude us from
restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring PracticeWorks to negotiate in
advance with our board of directors, since the stockholder approval requirement
would be avoided if a majority of the directors then in office approved either
the business combination or the transaction which results in the stockholder
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the management of PracticeWorks. It is possible that such
provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
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<PAGE> 99
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION ON LIABILITY OF DIRECTORS
Pursuant to authority conferred by Section 102 of the Delaware General
Corporation Law, Article XI of our certificate of incorporation, or Article XI,
eliminates the personal liability of our directors to PracticeWorks or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that such exemption from liability or limitation thereof is
not permitted under the Delaware General Corporation Law as currently in effect
or as it may hereafter be amended. Under the Delaware General Corporation Law as
in effect on the date hereof, our directors remain liable for:
(1) any breach of the duty of loyalty to PracticeWorks or its
stockholders;
(2) any act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law;
(3) any violation of Section 174 of the Delaware General Corporation
Law, which proscribes the payment of dividends and stock purchases or
redemptions under certain circumstances; and
(4) any transaction from which directors derive an improper personal
benefit.
Article XI provides that any future repeal or amendment of its terms
(including any amendment or repeal of Article XI made by virtue of any change in
the Delaware General Corporation Law) will not adversely affect any rights of
directors existing thereunder with respect to acts or omissions occurring prior
to such repeal or amendment.
INDEMNIFICATION
Our bylaws and Section 145 of the Delaware General Corporation Law, which
allows, and in some cases requires, the indemnification of directors and
officers under certain circumstances, grant our directors and officers a right
to indemnification to the full extent permitted by law for all expenses relating
to civil, criminal, administrative or investigative procedures to which they are
a party (1) by reason of the fact that they are or were our directors or
officers or (2) by reason of the fact that, while they are or were our directors
or officers, they are or were serving at our request as a director, officer or
employee of another enterprise. Our bylaws further provide that an advancement
for any such expenses shall only be made upon delivery to us by the indemnitee
of an undertaking to repay all amounts so advanced if it is ultimately
determined that such indemnitee is not entitled to be indemnified by us.
INDEMNIFICATION AGREEMENTS
In connection with the distribution, we will enter into indemnification
agreements with our directors and officers. These agreements will require us to
indemnify these directors and officers with respect to their activities as our
directors or officers or when serving at our request as a director, officer or
trustee of another corporation, trust or other enterprise against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by them in any threatened, pending or completed
suit or proceeding to which they are, or are threatened to be made, parties as a
result of their service to us. We will agree to indemnify each indemnitee for
any one or a combination of
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the following, whichever is most advantageous to the indemnitee: (1) the
benefits provided by our certificate of incorporation and bylaws in effect on
the date of the indemnification agreement; (2) the benefits provided by our
certificate of incorporation and bylaws at the time expenses are incurred by the
indemnitee; (3) the benefits allowable under Delaware law in effect on the date
of the indemnification agreement; (4) the benefits allowable under the law of
the jurisdiction under which we exist at the time expenses are incurred by the
indemnitee; (5) the benefits available under liability insurance obtained by us;
and (6) such other benefits as may be otherwise available to indemnitee under
our existing practices. Under the indemnification agreements, each indemnitee
will continue to be indemnified even after ceasing to occupy a position as our
officer, director, employee or agent with respect to suits or proceedings
arising out of acts or omissions during his or her service to us.
Each indemnitee will agree to notify us promptly of any proceeding brought
or threatened and not to make any admission or settlement without our consent,
unless the indemnitee determines to undertake his or her own defense and waives
the benefits of the indemnification agreement.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The financial statements of PracticeWorks as of December 31, 1999 and 1998
and for the years ended December 31, 1999 and 1998 and the eleven months ended
December 31, 1997 included in this information statement have been so included
in reliance on the report of BDO Seidman, LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Medical Dynamics, Inc. and Subsidiaries as of
September 30, 1999 and for the years ended September 30, 1999 and 1998 included
in this information statement have been so included in reliance on the report of
Hein + Associates LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement under the Exchange
Act, with respect to the PracticeWorks common stock. This document does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto, to which reference is hereby made. Statements
made in this document as to the contents of any contract, agreement or other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
registration statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The registration statement and the exhibits thereto filed by PracticeWorks
with the SEC may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the Regional Offices of the SEC at Seven World Trade
Center, Thirteenth Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such information
can be obtained by mail from the Public
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Reference Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The SEC maintains a website that contains reports, proxy and
information statements and other information regarding statements regarding
registrants that file electronically with the SEC. The address of the SEC's
website is http://www.sec.gov.
After the distribution, we will be required to comply with the reporting
requirements of the Exchange Act and to file with the SEC reports, proxy
statements and other information as required by the Exchange Act. Additionally,
we will be required to provide annual reports containing audited financial
statements to our stockholders in connection with our annual meetings of
stockholders. After the distribution, these reports, proxy statements and other
information will be available to be inspected and copied at the public reference
facilities of the SEC or obtained by mail or over the Internet from the SEC, as
described above. We will apply to list the PracticeWorks common stock on the
Nasdaq National Market. When the PracticeWorks common stock commences trading on
the Nasdaq National Market, these reports, proxy statements and other
information will be available for inspection at the offices of the Nasdaq
National Market, 9513 Key West Avenue, Rockville, Maryland 20850.
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<PAGE> 102
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRACTICEWORKS (A DIVISION OF INFOCURE CORPORATION)
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......... F-2
Balance sheets as of December 31, 1999 and 1998............. F-3
Statements of operations for the years ended December 31,
1999 and 1998 and the eleven months ended December 31,
1997...................................................... F-4
Statements of changes in divisional equity for the years
ended December 31, 1999 and 1998 and the eleven months
ended December 31, 1997................................... F-5
Statements of cash flows for the years ended December 31,
1999 and 1998 and the eleven months ended December 31,
1997...................................................... F-6
Notes to financial statements............................... F-7
Balance sheets as of June 30, 2000 (unaudited) and December
31, 1999.................................................. F-27
Statements of operations (unaudited) for the six months
ended June 30, 2000 and 1999.............................. F-28
Statements of cash flows (unaudited) for the six months
ended June 30, 2000 and 1999.............................. F-29
Notes to interim financial statements (unaudited)........... F-30
PRACTICEWORKS (A DIVISION OF INFOCURE CORPORATION) PRO FORMA
FINANCIAL STATEMENTS:
Introduction to unaudited pro forma condensed combined
financial statements...................................... F-34
Unaudited pro forma condensed combined balance sheet as of
June 30, 2000............................................. F-35
Unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999........... F-36
Unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 2000......... F-37
Notes to unaudited pro forma condensed combined financial
statements................................................ F-38
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES HISTORICAL FINANCIAL
STATEMENTS
Independent Auditor's Report................................ F-39
Consolidated balance sheet as of September 30, 1999......... F-40
Consolidated statements of operations for the fiscal years
ended September 30, 1999 and 1998......................... F-41
Consolidated statements of stockholders' equity for the
fiscal years ended September 30, 1999 and 1998............ F-42
Consolidated statements of cash flows for the fiscal years
ended September 30, 1999 and 1998......................... F-43
Notes to consolidated financial statements.................. F-45
Consolidated balance sheets as of June 30, 2000 (unaudited)
and September 30, 1999.................................... F-61
Unaudited consolidated statements of operations for the nine
months ended June 30, 2000 and 1999....................... F-62
Unaudited consolidated statements of cash flows for the nine
months ended June 30, 2000 and 1999....................... F-63
Notes to unaudited consolidated financial statements........ F-64
</TABLE>
F-1
<PAGE> 103
PRACTICE WORKS
(A DIVISION OF INFOCURE CORPORATION)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PracticeWorks
(A Division of InfoCure Corporation)
Atlanta, Georgia
We have audited the accompanying balance sheets of PracticeWorks (a
division of InfoCure Corporation) (the "Division") as of December 31, 1999 and
1998 and the related statements of operations, changes in divisional equity and
cash flows for the years ended December 31, 1999 and 1998 and the eleven months
ended December 31, 1997. These financial statements are the responsibility of
the Division's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Division as of December
31, 1999 and 1998 and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998 and the eleven months ended December 31,
1997, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
August 9, 2000
F-2
<PAGE> 104
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS (NOTES 1 AND 8):
CURRENT:
Cash and cash equivalents............................. $ 2,527 $ 1,633
Accounts receivable -- trade, net of allowance of
$1,113 and $339..................................... 9,041 6,109
Other receivables..................................... 97 98
Inventory............................................. 1,772 1,388
Deferred tax assets (Note 11)......................... 669 774
Prepaid expenses and other current assets............. 453 493
------- -------
Total current assets............................. 14,559 10,495
Property and equipment, net of accumulated
depreciation (Note 5)............................... 2,046 2,521
Goodwill, net of accumulated amortization of $3,927
and $1,594 (Notes 3 and 4).......................... 32,800 19,991
Other intangible assets (Note 6)...................... 7,806 2,914
Deferred tax assets (Note 11)......................... 108 1,177
Other assets.......................................... 523 --
------- -------
$57,842 $37,098
======= =======
LIABILITIES AND DIVISIONAL EQUITY:
CURRENT LIABILITIES:
Accounts payable...................................... $ 2,772 $ 775
Accrued expenses (Note 7)............................. 5,712 1,450
Accrued restructuring costs (Note 4).................. 445 283
Deferred revenue and customer deposits................ 6,704 6,046
Current portion of long-term debt (Note 8)............ 116 2,975
------- -------
Total current liabilities........................ 15,749 11,529
Long-term debt, less current portion (Note 9)......... 9,614 14,769
Other liabilities..................................... 60 --
------- -------
Total liabilities................................ 25,423 26,298
------- -------
Commitments and contingencies (Notes 3, 8 and 9)
DIVISIONAL EQUITY:
Net advances from parent.............................. 35,909 16,598
Accumulated deficit................................... (3,490) (5,798)
------- -------
Total divisional equity.......................... 32,419 10,800
------- -------
$57,842 $37,098
======= =======
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 105
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
REVENUE (NOTE 1):
Systems and software..................... $34,325 $27,825 $13,961
Maintenance, support and services........ 20,266 15,662 7,523
------- ------- -------
Total revenue....................... 54,591 43,487 21,484
------- ------- -------
OPERATING EXPENSE:
Hardware and other items purchased for
resale................................. 9,654 9,726 3,722
Selling, general and administrative
(excluding compensatory stock
awards)................................ 28,666 21,061 11,703
Research and development................. 4,185 3,537 3,267
Depreciation and amortization............ 3,284 2,272 551
Restructuring and other charges (Note
4)..................................... 1,814 1,031 6,463
Merger costs (Note 3).................... 659 69 --
Compensatory stock awards................ 428 6,447 14
------- ------- -------
Total operating expense............. 48,690 44,143 25,720
------- ------- -------
Operating income (loss).................. 5,901 (656) (4,236)
Interest expense and other, net.......... 1,335 966 198
------- ------- -------
Income (loss) before income taxes and
extraordinary item..................... 4,566 (1,622) (4,434)
Provision (benefit) for income taxes
(Note 11).............................. 2,186 873 (171)
------- ------- -------
Income (loss) before extraordinary
item................................... 2,380 (2,495) (4,263)
Extraordinary item -- debt extinguishment
cost, net of income taxes (Note 8)..... 72 -- --
------- ------- -------
Net income (loss)........................ 2,308 (2,495) (4,263)
Pro forma tax adjustments (Note 11)...... (384) (1,350) 653
------- ------- -------
Pro forma net income (loss).............. $ 2,692 $(1,145) $(4,916)
======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 106
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
NET ADVANCES (ACCUMULATED DIVISIONAL
FROM PARENT DEFICIT) EQUITY
------------ ------------ ----------
<S> <C> <C> <C>
Balance at January 31, 1997.................. $ 268 $ 960 $ 1,228
Net advances from InfoCure................... 4,018 -- 4,018
Net loss..................................... -- (4,263) (4,263)
------- ------- -------
Balance at December 31, 1997................. 4,286 (3,303) 983
Net advances from InfoCure................... 12,312 -- 12,312
Net loss..................................... -- (2,495) (2,495)
------- ------- -------
Balance at December 31, 1998................. 16,598 (5,798) 10,800
Net advances from InfoCure................... 19,311 -- 19,311
Net income................................... -- 2,308 2,308
------- ------- -------
Balance at December 31, 1999................. $35,909 $(3,490) $32,419
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 107
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES (NOTE 1):
Net income (loss)........................ $ 2,308 $(2,495) $(4,263)
Adjustments to reconcile net income
(loss) to cash flows provided by
operating activities:
Extraordinary item -- debt
extinguishment cost................. 110 -- --
Restructuring and other charges........ 1,814 1,031 6,463
Depreciation and amortization.......... 3,284 2,272 551
Allowance for doubtful accounts........ 774 247 (92)
Stock-based compensation............... 428 6,447 14
Deferred income taxes.................. 157 (702) 197
Changes in operating assets and
liabilities -- net of effects of
acquisitions:
Accounts receivable................. (3,150) (3,101) (1,334)
Inventory, prepaid expenses and
other current assets.............. (262) (240) 499
Accounts payable and accrued
expenses.......................... 618 (3,513) 536
Deferred revenue and customer
deposits.......................... (267) 2,312 445
-------- ------- -------
Net cash flows provided by
operating activities........ 5,814 2,258 3,016
-------- ------- -------
INVESTING ACTIVITIES:
Net cash paid for acquisitions........... (8,254) (12,501) (4,171)
Property and equipment expenditures...... (307) (894) (1,728)
Cash paid for other intangible assets.... (1,452) (2,252) (247)
Other.................................... (263) 72 416
-------- ------- -------
Net cash flows used in
investing activities........ (10,276) (15,575) (5,730)
-------- ------- -------
FINANCING ACTIVITIES:
Borrowings under credit facility and
other long-term debt................... 8,654 12,501 5,451
Principal payments on long-term debt..... (16,668) (208) (416)
Net cash advances from parent............ 13,370 1,916 107
Net repayment of other notes payable..... -- -- (2,325)
-------- ------- -------
Net cash flows provided by
financing activities........ 5,356 14,209 2,817
-------- ------- -------
Net increase in cash and cash
equivalents............................ 894 892 103
Cash and cash equivalents, beginning of
period................................. 1,633 741 638
-------- ------- -------
Cash and cash equivalents, end of
period................................. $ 2,527 $ 1,633 $ 741
======== ======= =======
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 108
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The accompanying financial statements include the operations, assets and
liabilities of the PracticeWorks Division (the "Division") of InfoCure
Corporation ("InfoCure"), which consists of InfoCure's information management
technology business for dental, orthodontic, oral and maxillofacial surgery
practices. In August 2000, InfoCure announced its plan to distribute to its
shareholders the shares of PracticeWorks, Inc., an indirect, wholly owned
subsidiary of InfoCure ("PracticeWorks"). Immediately prior to the distribution,
InfoCure will transfer the Division's assets and liabilities to PracticeWorks.
Those assets and liabilities will be reflected in PracticeWorks' financial
statements at InfoCure's historical cost.
The assets and liabilities of the Division (the "Contributed Businesses")
consist primarily of businesses InfoCure acquired at various times from the
consummation of InfoCure's initial public offering in July 1997 through 1999.
The Contributed Businesses include two acquisitions made by InfoCure in 1997,
one in 1998, and four in 1999, all of which were accounted for as purchases, and
also include five acquisitions during 1999 which were accounted for as poolings
of interests (see Note 3).
The Division's costs and expenses in the accompanying financial statements
include allocations from InfoCure for centralized legal, accounting, treasury,
real estate, information technology, and other InfoCure corporate services and
infrastructure costs. The expense allocations have been determined on the bases
that InfoCure and the Division considered to be reasonable reflections of the
utilization of services provided or the benefit received by the Division.
However, the financial information included herein may not necessarily reflect
the financial position and results of operations of PracticeWorks in the future
or what these amounts would have been had it been a separate, stand-alone entity
during the periods presented.
The Division is a leading provider of information management technology for
dentists, orthodontists and oral and maxillofacial surgeons. The Division's
offerings include practice management applications, business-to-business
e-commerce services, electronic data interchange, or EDI, services, ongoing
maintenance and support and training. These systems are designed to increase the
quality and reduce the cost of providing care by allowing dentists and
physicians to manage their practices more efficiently and reduce the
administrative burdens created by an increasingly complex healthcare
environment. The Division is currently developing new practice management
applications, tailored to the needs of dental, orthodontic, and oral and
maxillofacial surgery customers that can be delivered through its application
services provider, or ASP, delivery model and other Internet-based applications
and services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
InfoCure changed its fiscal reporting period to December 31 effective
February 1, 1997. Accordingly, the 1997 fiscal period is comprised of eleven
months.
F-7
<PAGE> 109
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenue from software sales is recognized when all shipment obligations
have been met, fees are fixed and determinable, collection of the sale proceeds
is deemed probable and persuasive evidence that an agreement exists. Revenue
from hardware sales is recognized upon product shipment. Revenue from support
and maintenance contracts, which are typically one year in length, is recognized
ratably over the life of the contract. Revenue from other services is recognized
as the services are provided.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with
initial maturity dates of no more than three months. Historically, InfoCure has
managed cash for its divisions on a centralized basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Division's financial
instruments included in the accompanying balance sheets are not materially
different from their fair values.
INVENTORIES
Inventory consists primarily of peripheral computer equipment and related
supplies. Inventory is accounted for on the first-in, first-out basis and
reported at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, are
stated at the lower of the fair value or cost. Depreciation is computed over the
estimated useful lives of the related assets using both straight-line and
accelerated methods for financial reporting and primarily accelerated methods
for income tax purposes. Substantial betterments to property and equipment are
capitalized and repairs and maintenance are expensed as incurred.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred prior to establishing
the technological feasibility of a product. For the period between the
establishment of technological feasibility and the time a product is available
for general release, such costs are capitalized. Capitalized software costs are
amortized using the straight-line method over the estimated lives of the related
products (generally 48 months). During the fourth quarter of 1999, PracticeWorks
adopted a new product strategy involving the development of ASP applications and
other Internet-based applications and services. Additionally, in
F-8
<PAGE> 110
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
connection with restructuring the businesses of recently acquired companies,
management decided to modify future product offerings. As a result of these
decisions, the Division recorded a charge of approximately $874,000 million in
the fourth quarter of 1999 representing the write-off of the carrying value of
software development costs.
A write-down of capitalized software in the amount of $339,000 was also recorded
in 1997 (Note 4).
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the
excess of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. All goodwill is amortized on a
straight-line basis over its estimated useful life. Prior to the fourth quarter
of 1999, goodwill was amortized over a 15 year estimated useful life, which was
reflective of management's analysis that goodwill is derived from the historical
and estimated future lives of its customer relationships, the longevity and
continuing use of its core products and the relatively minor impact of
technological obsolescence on these core products. As a result of InfoCure's
change in product strategy involving the development of ASP applications and
other Internet-based applications and services, its transition to a subscription
pricing model and the current rate of change within the industry, management now
estimates that the useful life of its remaining goodwill will be three years.
Other intangible assets also include (1) purchased technology, to be
amortized over four years, (2) customer lists, amortized over three years and
(3) deferred loan costs, amortized over the life of the respective loans at
rates which approximate the interest method.
LONG-LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment are
periodically evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows resulting from the use of the
assets. When any such impairment exists, the related assets will be written down
to fair value. A write-down of assets due to impairment in the aggregate amount
of $3.6 million, primarily related to goodwill, was required for the eleven
months ended December 31, 1997 (Note 4).
CHANGE IN ACCOUNTING ESTIMATES
In view of recent competitive developments, the rapid pace of change
engendered by the encroachment of Internet companies into the marketplace and
InfoCure's change in product strategy involving the development of ASP
applications and other Internet-based applications and services and the
transition to a subscription pricing model, management has reassessed the useful
life of goodwill. While in management's opinion, there is currently no
impairment in the carrying value of this long-lived intangible asset (based on
an analysis of undiscounted future cash flows), management has determined that
the
F-9
<PAGE> 111
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
useful life of goodwill should be shortened substantially to be more reflective
of the current rate of technological change and competitive conditions.
Accordingly, management changed the estimated useful life of goodwill from an
original life of 15 years to a remaining life of three years, which change has
been applied prospectively from the fourth quarter of 1999. This change in
accounting estimate increased amortization expense by approximately $800,000 in
1999.
Additionally, based on InfoCure's analysis of current business and market
conditions, its cash collection experience and, in light of the change to a
subscription pricing model announced in the fourth quarter of 1999, management
also increased the allowance for doubtful accounts. This change of accounting
estimate, recorded in the fourth quarter of 1999, increased selling, general and
administrative expenses by $600,000 in 1999.
DIVISIONAL EQUITY
Divisional Equity represents InfoCure's net investment in and advances to
the Division. Intercompany interest expense has been allocated to, or included
in, the accompanying financial statements only for that portion of third-party
debt attributed to the Division. No intercompany interest income or expense has
been allocated to the Division for InfoCure's net investment in the Division.
STOCK-BASED COMPENSATION PLANS
The Division accounts for its stock-based compensation plans under the
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." In Note 10, the Division presents the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-based Compensation." SFAS No. 123 requires that companies
which elect not to account for stock-based compensation as prescribed by that
statement shall disclose, among other things, the pro forma effects on net loss
as if SFAS No. 123 had been adopted.
INCOME TAXES
For the periods presented, the Division was not a separate taxable entity
for federal, state or local income tax purposes and its operating results are
included in InfoCure's tax returns. The Division calculates its income taxes
under the separate return method and accounts for income taxes under an asset
and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Division's financial statements or tax returns. In estimating
future tax consequences, management generally considers all expected future
events other than possible enactments of changes in the tax laws or rates.
RESTRUCTURING COSTS
The Division records the costs of consolidating acquired operations into
the Division's existing facilities, including the external costs and liabilities
to close redundant Division
F-10
<PAGE> 112
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
facilities and severance and relocation costs related to the Division's
employees in accordance with Emerging Issues Task Force Issue ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in Restructuring)."
PER SHARE DATA
The historical capital structure of the Division is not representative of
the future capital structure of PracticeWorks. The Division issued common stock
to a wholly owned subsidiary of InfoCure in August 2000 and will commence
operations as a separate legal entity upon completion of the distribution.
Accordingly, the historical net (loss) income per share and weighted average
number of shares of common stock outstanding are not shown for any of the
periods presented. The financial information included herein may not reflect the
financial position, results of operations, changes in divisional equity and cash
flows of the Division in the future or what they would have been had the
Division been a separate, stand-alone entity during the periods presented.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and determining whether computer software is for
internal use. SOP No. 98-1 was effective in 1999. Adoption of this statement did
not have a significant impact on the Division's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. Historically, the Division has not entered into derivatives
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Division does not expect adoption of the new standard on
January 1, 2001, to affect its financial statements.
The Financial Accounting Standards Board issued Interpretation
("Interpretation") No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an
F-11
<PAGE> 113
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interpretation of APB Opinion No. 25" which is effective July 1, 2000.
Interpretation No. 44 clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a stock
compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Adoption of the provisions of the
Interpretation are not expected to have a significant impact on the Division's
financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition" which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The Division believes that adopting SAB No. 101 will not have a
material impact on its financial position or results of operations.
3. BUSINESS COMBINATIONS
As discussed in Note 1, InfoCure completed 18 acquisitions attributable to
the Division at various times from the consummation of InfoCure's initial public
offering in July 1997 through 1999.
ACQUISITIONS ACCOUNTED FOR USING THE PURCHASE METHOD OF ACCOUNTING
The following tables summarize the fair values of the assets acquired,
liabilities assumed and consideration given in connection with the acquisitions
completed in each of the following years within the Division accounted for as
purchases:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable.................................. $ 555 $ 134 $ 649
Inventory............................................ 43 -- 261
Prepaid expenses..................................... 39 152 94
Property and equipment............................... 260 159 582
Goodwill............................................. 10,526 14,988 9,099
Capitalized software................................. 116 420 828
Other assets......................................... 200 72 393
Deferred revenue..................................... (925) (715) (1,292)
Accounts payable and accrued expenses................ (560) (9) (418)
Notes payable........................................ -- -- (1,347)
Other liabilities.................................... -- -- (978)
------- ------- -------
Net assets acquired................................ $10,254 $15,201 $ 7,871
======= ======= =======
These acquisitions were funded as follows:
InfoCure common stock................................ $ 2,000 $ 2,700 $ 3,700
Cash................................................. 8,254 12,501 4,171
------- ------- -------
$10,254 $15,201 $ 7,871
======= ======= =======
</TABLE>
F-12
<PAGE> 114
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the purchase acquisition agreements provided for additional
consideration based on the acquired company attaining specified revenue or
operating income goals. Maximum determinable contingent consideration aggregated
$2.0 million, $4.4 million and $3.4 million for acquisitions accounted for as
purchases during 1999, 1998 and 1997, respectively. As more fully described in
Note 4, portions of the contingent consideration related to certain acquisitions
were deemed earned and payable in connection with the Division's restructuring
plans. Accordingly, restructuring costs for the years ended December 31, 1999
and 1998 and the eleven months ended December 31, 1997 included approximately
$700,000, $750,000 and $2.2 million, respectively, in settlement of estimated
contingent consideration obligations related to the affected companies.
In 1999, contingent consideration of approximately $4.4 million was earned
and accrued as additional purchase price pursuant to the terms of the original
purchase agreements and was paid during 2000. As of December 31, 1999, maximum
contingent consideration payable based on future performance is $2.0 million.
The following unaudited pro forma information presents the results of
operations of the Division as if each of the acquisitions had occurred as of the
beginning of the immediately preceding period. The pro forma information is not
necessarily indicative of what would have occurred had the acquisitions been
made as of such periods, nor is it indicative of future results of operations.
The pro forma amounts give effect to appropriate adjustments for the fair value
of the assets acquired, reductions in personnel costs and other operating
expenses not assumed as part of the acquisitions, amortization of intangibles,
interest expense and income taxes.
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------- DECEMBER 31,
PRO FORMA AMOUNTS 1999 1998 1997
----------------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue............................ $61,633 $52,044 $26,687
Pro forma net income (loss)........ 1,501 (3,100) (3,983)
</TABLE>
F-13
<PAGE> 115
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITIONS ACCOUNTED FOR USING THE POOLING OF INTERESTS METHOD OF ACCOUNTING
Five of the Contributed Businesses acquired by InfoCure during 1999 were
accounted for as poolings of interests which provided for the exchange of
substantially all of the outstanding equity interest of each entity for shares
of InfoCure common stock. Accordingly, the accompanying financial statements
have been restated for all periods presented to include the financial position,
results of operations and cash flows of the combined companies. The following
table summarizes shares of InfoCure stock issued in these acquisitions:
<TABLE>
<CAPTION>
SHARES OF
COMPANY INFOCURE ISSUED CLOSING DATE
------- --------------- -----------------
<S> <C> <C>
OMSystems, Inc. ("OMS")....................... 2,287,998 February 18, 1999
Ardsley, M.I.S., Inc. ("Orthoware")........... 209,016 August 17, 1999
Kevin Kozlowski, Inc. d/b/a Human Touch
Software ("Human Touch").................... 255,247 December 20, 1999
Unident Corporation ("Unident")............... 357,796 December 21, 1999
InfoLogic, Inc. ("InfoLogic")................. 102,096 December 21, 1999
</TABLE>
The following table presents a reconciliation of revenue, income (loss)
before extraordinary item and pro forma net income (loss) to those presented in
the accompanying financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, ELEVEN MONTHS ENDED
--------------------------- DECEMBER 31,
1999 1998 1997
------------ ------------ -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE:
The Division........................ $22,238 $18,815 $ 4,898
OMS................................. 18,651 14,993 12,325
Orthoware........................... 2,330 1,800 1,301
Human Touch......................... 2,288 1,007 798
Unident............................. 6,518 4,510 353
InfoLogic........................... 2,566 2,362 1,809
------- ------- -------
$54,591 $43,487 $21,484
======= ======= =======
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM:
The Division........................ $ 3,239 $ 1,022 $(5,931)
OMS................................. 1,623 (3,296) 1,703
Orthoware........................... 260 (73) (2)
Human Touch......................... 34 (1) (17)
Unident............................. (1,545) (163) (27)
InfoLogic........................... (1,231) 16 11
------- ------- -------
$ 2,380 $(2,495) $(4,263)
======= ======= =======
</TABLE>
F-14
<PAGE> 116
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, ELEVEN MONTHS ENDED
--------------------------- DECEMBER 31,
1999 1998 1997
------------ ------------ -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA NET INCOME (LOSS) -- AFTER
EXTRAORDINARY ITEM:
The Division........................ $ 3,167 $ 1,022 $(5,931)
OMS................................. 1,623 (3,296) 1,703
Orthoware........................... 260 (73) (2)
Human Touch......................... 34 (1) (17)
Unident............................. (1,545) (163) (27)
InfoLogic........................... (1,231) 16 11
Pro forma tax adjustments........... 384 1,350 (653)
------- ------- -------
$ 2,692 $(1,145) $(4,916)
======= ======= =======
</TABLE>
Certain of the companies acquired in 1999 as poolings of interests ("1999
Pooled Companies") had fiscal years that differed from that of the Division.
Therefore, the balance sheet as of December 31, 1998 reflects the combination of
the Division's balance sheet as of this date with the balance sheets of the 1999
Pooled Companies as of the dates that most closely correspond thereto. The
statements of operations for the year ended December 31, 1998 and the eleven
months ended December 31, 1997 reflect the combination of the Division's results
for these periods with the results of each of the 1999 Pooled Companies for the
most closely comparable periods. As of and for the year ended December 31, 1999,
the 1999 Pooled Companies' balance sheets and statements of operations have been
restated to coincide with the Division's year-end. As a result, certain of the
1999 Pooled Companies' operations are included in both 1999 and 1998. The net
revenue and net loss for such duplicated periods was approximately $300,000 and
$161,000, respectively.
The Division incurred costs of approximately $659,000 in completing the
acquisition of the 1999 Pooled Companies'. Such costs consisted principally of
professional fees and related transaction costs.
4. RESTRUCTURING AND OTHER CHARGES
THE 1999 PLAN. In the fourth quarter of 1999, InfoCure decided to
restructure its business into a medical division and a dental division. The
dental division formed in this restructuring constitutes the business that will
be transferred to PracticeWorks immediately prior to the distribution. At the
time of the restructuring, the Division's management decided to transition to
subscription pricing and to commence development of ASP applications and other
Internet-based applications and services. The Division's management committed to
a plan of restructuring and reorganization in connection with the establishment
of the dental division and these changes in the Division's pricing model and
product strategy. This restructuring plan, which was substantially completed in
the second quarter of 2000, included consolidating facilities and eliminating
staffing redundancies involving approximately 30 employees.
F-15
<PAGE> 117
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the change in product strategy, management also
re-evaluated the carrying value of its investment in capitalized software. As a
result, the Division recorded as a part of restructuring and other charges for
1999, an $874,000 write-off of capitalized software.
Staffing reductions were finalized for the new dental division and
communicated in the first quarter of 2000. Accordingly, compensation costs,
including severance and other termination benefits aggregating approximately
$600,000 are expected to be recorded in the first quarter of 2000 in accordance
with the provisions of EITF No. 94-3.
THE 1997 PLAN. Effective December 1, 1997, management determined to
restructure through a plan to consolidate existing facilities and acquired
operations. This restructuring plan enabled the Division to leverage more
effectively present and planned acquisitions, streamline its offering of
products and services and respond more effectively to changing market
conditions. In connection therewith, management also re-evaluated the Division's
investment in goodwill and capitalized software in light of current market
conditions and the restructuring plan. Management determined that, based on
current market conditions and an analysis of projected undiscounted future cash
flows calculated in accordance with the provisions of SFAS No. 121, the carrying
amount of certain long-lived assets may not be recoverable. The resultant
impairment of long-lived assets, due principally to the impact of then-pending
acquisitions (Notes 1 and 3), necessitated a write-down of approximately $3.5
million of goodwill representing the excess of cost over net assets of an
acquisition completed in July 1997. The estimated fair values of these
long-lived assets were determined by calculating the present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved. Additionally, a $339,000 write-down of capitalized software, whose
future utility was diminished based on market conditions, was also recorded.
Under the 1997 restructuring plan, which was completed in the second
quarter of 1998, the Division also recorded approximately $401,000 of costs and
accrued liabilities to close redundant facilities, cancel leases and other
executory contracts, recognized approximately $2.2 million related to contingent
consideration earned or deemed payable under terms of certain acquisition
agreements for acquired companies affected by the consolidation and
restructuring and terminated certain redundant staff positions. Details of this
element of the restructuring plan were finalized and communicated in the first
quarter of 1998. Accordingly, compensation costs, including severance and other
termination benefits for approximately 15 employees, and other future costs
related to the restructuring aggregating $281,000, were recognized in the first
quarter of 1998 in accordance with EITF No. 94-3. Additionally, in the first
quarter of 1998, the Division recognized $750,000 in final settlement of the
contingent consideration.
F-16
<PAGE> 118
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A description of the type and amount of restructuring costs and other
charges recorded at the commitment date and subsequently incurred for all of the
restructurings discussed above are as follows:
<TABLE>
<CAPTION>
RESERVES
ESTABLISHED
ELEVEN
MONTHS COSTS RESERVE COSTS RESERVE
ENDED APPLIED BALANCE APPLIED BALANCE
DECEMBER AGAINST DECEMBER RESERVE AGAINST DECEMBER
DESCRIPTION 31, 1997 RESERVES 31, 1997 ADJUSTMENTS RESERVES 31, 1998
----------- ----------- -------- -------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Write-off of goodwill.......................... $3,483 $(3,483) $ -- $ -- $ -- $ --
Write-off of capitalized software development
costs......................................... 339 (339) -- -- -- --
Facility closure, consolidation and lease
termination costs............................. 401 -- 401 -- (118) 283
Contingent consideration earned or deemed
payable to former stockholders of entities
affected by the consolidation and
restructuring................................. 2,150 -- 2,150 750 (2,900) --
Compensation costs for severance and other
termination benefits.......................... -- -- -- 281 (281) --
Other asset write-downs and costs.............. 90 -- 90 -- (90) --
------ ------- ------ ------ ------- ----
$6,463 $(3,822) $2,641 $1,031 $(3,389) $283
====== ======= ====== ====== ======= ====
<CAPTION>
COSTS RESERVE
APPLIED BALANCE
RESERVE AGAINST DECEMBER
DESCRIPTION ADJUSTMENTS RESERVES 31, 1999
----------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Write-off of goodwill.......................... $ -- $ -- $ --
Write-off of capitalized software development
costs......................................... 874 (874) --
Facility closure, consolidation and lease
termination costs............................. 95 (283) 95
Contingent consideration earned or deemed
payable to former stockholders of entities
affected by the consolidation and
restructuring................................. 700 (350) 350
Compensation costs for severance and other
termination benefits.......................... 48 (48) --
Other asset write-downs and costs.............. 97 (97) --
------ ------- ----
$1,814 $(1,652) $445
====== ======= ====
</TABLE>
The terminated leases have various expiration dates through 2004 and the
other costs will be substantially paid in the first half of 2000.
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------
(YEARS) 1999 1998
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Buildings........................................... 40 $1,883 $1,871
Office and computer equipment....................... 3-5 2,193 1,985
Furniture and fixtures.............................. 5-7 733 713
Leasehold improvements and other.................... 3-5 302 307
------ ------
5,111 4,876
Less accumulated depreciation....................... 3,065 2,355
------ ------
$2,046 $2,521
====== ======
</TABLE>
Depreciation expense was approximately $900,000, $800,000 and $300,000 for
the years ended December 31, 1999 and 1998 and the eleven months ended December
31, 1997, respectively. In connection with the restructuring plans described in
Note 4, the Division disposed of property and equipment, primarily office and
computer equipment, with a net book value of approximately $97,000 and $90,000
in 1999 and 1997, respectively.
F-17
<PAGE> 119
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Purchased technology........................................ $6,530 $ --
Capitalized software development costs...................... 1,118 2,207
Loan costs.................................................. 423 1,155
Other....................................................... 102 209
------ ------
8,173 3,571
Less accumulated amortization............................... 367 657
------ ------
$7,806 $2,914
====== ======
</TABLE>
In the fourth quarter of 1999, InfoCure acquired technology for delivering
practice management applications in an ASP delivery model in exchange for cash
and common stock aggregating approximately $6.5 million. This technology will be
utilized by the Division's research and development staff in the development of
its own ASP applications. Costs to complete this technology will be capitalized
until products are ready for general release and then will be amortized over the
estimated useful life of the related products. As described in Note 4,
approximately $874,000 of capitalized software was written off in 1999 as a
result of this change in product strategy. The remaining capitalized software
development costs relate to products not being replaced, primarily those related
to various e-commerce applications.
Amortization of capitalized software charged to operations was
approximately $267,000, $135,000, $29,000 for the years ended December 31, 1999
and 1998 and the eleven months ended December 31, 1997, respectively. As
discussed in Note 8, approximately $110,000 was allocated to the Division for
the write-off of unamortized loan costs in conjunction with the April 1999
prepayment of InfoCure's acquisition credit facility.
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Additional purchase price consideration..................... $4,400 $ --
Compensation................................................ 24 137
Interest.................................................... 426 334
Taxes, other than income.................................... 93 511
Other....................................................... 769 468
------ ------
$5,712 $1,450
====== ======
</TABLE>
F-18
<PAGE> 120
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
The amounts recorded as notes payable and other long-term debt attributable
to the Division represent borrowings under Infocure's credit facility or other
note agreements which were used primarily to acquire the Contributed Businesses
and other Division assets. Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Notes payable, FINOVA Capital Corporation
("FINOVA") (a)............................................ $8,604 $16,668
Other....................................................... 1,126 1,076
------ -------
9,730 17,744
Less current portion........................................ 116 2,975
------ -------
$9,614 $14,769
====== =======
</TABLE>
-------------------------
(a) Under provisions of an agreement dated August 11, 1999, InfoCure has a
$100.0 million credit facility with FINOVA including a revolving loan for
the funding of the acquisition program and working capital needs and a term
loan for certain real estate purchases. The total amount outstanding under
this facility was $36.8 million and $68.4 million, as of December 31, 1999
and 1998, respectively. The credit facility has a five-year term and is
collateralized by substantially all of InfoCure's assets and accounts
receivable, cash flows and assets of any companies acquired in the future.
Interest accrues at an annual rate based, at InfoCure's option, on prime
plus 0.5% to 1.25% or LIBOR plus 2.0% to 2.75%, depending on the achievement
of certain debt service ratios. At December 31, 1999, the rate was 9.0%. The
agreement provides for mandatory prepayments based upon achieving certain
defined levels of cash flows and contains certain restrictive covenants. The
agreement was amended in August 2000. See Note 13 regarding the distribution
agreement.
InfoCure's previous credit facility was repaid in April 1999 with proceeds
from the sale of its common stock. In connection with this early retirement of
debt, an extraordinary item was recognized for the unamortized portion of the
loan costs and prepayment costs which aggregated approximately $4.9 million and,
net of estimated tax effect, approximately $2.9 million. The Division was
allocated approximately $72,000, net of estimated tax effect, based on its
respective share of the borrowings.
F-19
<PAGE> 121
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 116
2001........................................................ 561
2002........................................................ 1,837
2003........................................................ 1,837
2004........................................................ 4,848
Thereafter.................................................. 531
------
$9,730
======
</TABLE>
9. COMMITMENTS
OPERATING LEASES
InfoCure leases office facilities and certain equipment under operating
leases having original terms ranging from one to seven years. Approximate future
minimum rentals, by year and in the aggregate, under noncancellable operating
leases with remaining terms of more than one year that relate to facilities and
equipment utilized by the Division are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 773
2001........................................................ 609
2002........................................................ 583
2003........................................................ 551
2004........................................................ 481
------
Total..................................................... $2,997
======
</TABLE>
Rent expense was approximately $528,000, $323,000 and $485,000 for the
years ended December 31, 1999 and 1998 and the eleven months ended December 31,
1997, respectively.
EMPLOYEE BENEFIT PLAN
The Division's eligible employees may participate in a plan known as the
InfoCure 401(k) Plan (the "Plan"). Eligible employees may contribute up to 15%
of their annual salary to the Plan, subject to certain limitations. InfoCure may
make matching contributions and may also provide profit-sharing contributions at
its sole discretion. Employees become fully vested in any employer contributions
after five years of service. The Division's expense related to employee benefit
plans for the years ended December 31, 1999 and 1998 and the eleven months ended
December 31, 1997 were $680,000, $205,000 and $40,000, respectively. During 2000
and 1999, InfoCure, using InfoCure common stock, made the contribution for the
years ended December 31, 1999 and 1998, respectively.
F-20
<PAGE> 122
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK COMPENSATION PLANS
InfoCure has stock option plans under which the Division's employees and
directors may be granted options to purchase common stock. Options are granted
at not less than the fair market value at grant date (110% of such value for 10%
stockholders). Options vest ratably over the four-year period beginning on the
grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a "fair
value method" of accounting for employee stock options. It also allows
accounting for such options under the "intrinsic value method" in accordance
with APB No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. If a company elects to use the intrinsic value method, then pro
forma disclosures of earnings and earnings per share are required as if the fair
value method of accounting was applied. The effects of applying SFAS No. 123 in
the pro forma disclosures are not necessarily indicative of future amounts
because the pro forma disclosures do not take into account the amortization of
the fair value of awards prior to 1995.
Management has elected to account for its stock options under the intrinsic
value method as outlined in APB No. 25. The fair value method requires use of
option valuation models, such as the Black-Scholes option valuation model, to
value employee stock options, upon which a compensation expense is based. The
Black-Scholes option valuation model was not developed for use in valuing
employee stock options. Instead, this model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
InfoCure's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing models do not necessarily provide a reliable measure of the fair value
of its employee stock options. Under the intrinsic value method, compensation
expense is only recognized if the exercise price of the employee stock option is
less than the market price of the underlying stock on the date of grant.
The fair value for InfoCure's employee stock options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for the years ended December 31, 1999 and 1998 and
the eleven months ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, ELEVEN MONTHS
------------------------------------- ENDED DECEMBER 31,
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Risk-free interest rate...... 6.2% 6.0% 5.7-6.2%
Dividend yield............... 0.0% 0.0% 0.0%
Volatility factor............ 119.0% 58.0% 19.7%
Weighted average expected
life (in years)............ 4 4 5
</TABLE>
F-21
<PAGE> 123
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Division's
pro forma information, based on the estimated options to be held by the
Division's employees, follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, ELEVEN MONTHS
----------------- ENDED DECEMBER 31,
1999 1998 1997
------- ------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA NET INCOME (LOSS):
As reported................................. $ 2,308 $(2,495) $ (4,263)
Pro forma................................... (1,446) (3,052) (4,313)
</TABLE>
11. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
ELEVEN
MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1997
------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal............................................ $1,316 $ 420 $ --
State.............................................. 291 90 --
------ ------ -----
Total current expense......................... 1,607 510 --
------ ------ -----
DEFERRED:
Federal............................................ 138 (619) 174
State.............................................. 19 (83) 23
Change in deferred tax asset valuation allowance... -- (285) 285
------ ------ -----
Total deferred expense (benefit).............. 157 (987) 482
------ ------ -----
Total income tax expense (benefit) before
extraordinary item.......................... 1,764 (477) 482
Income tax benefit on extraordinary item........... 38 -- --
Pro forma tax adjustments for pooled companies..... 384 1,350 (653)
------ ------ -----
Provision (benefit) for income taxes.......... $2,186 $ 873 $(171)
====== ====== =====
</TABLE>
F-22
<PAGE> 124
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes result from temporary differences between the bases of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. The sources of the temporary differences
and their effect on deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ------
(IN THOUSANDS)
<S> <C> <C>
CURRENT:
Deferred tax assets:
Allowance for doubtful accounts........................... $203 $ 63
Deferred revenue and customer deposits.................... 246 416
Accrued restructuring costs............................... 211 72
Accrued expenses.......................................... 9 223
---- ------
Total current deferred tax assets.................... $669 $ 774
==== ======
NONCURRENT:
Deferred tax assets:
Basis difference of goodwill, capitalized software costs,
property and equipment and other intangible assets..... $108 $ 888
Net operating loss carry forwards......................... -- 289
---- ------
Total noncurrent deferred tax assets................. 108 1,177
---- ------
$777 $1,951
==== ======
</TABLE>
The Division's effective income tax rate varied from the U.S. federal
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
1999 1998 DECEMBER 31, 1997
------ ----- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax expense (benefit).................. $1,552 $(552) $(1,505)
Increase (decrease) in income taxes resulting
from:
State income taxes............................ 213 (76) (207)
Nondeductible goodwill amortization........... 104 372 2,201
Other, net.................................... (67) 64 (292)
Effect of operations of pooled companies which
were pass-through entities................. 384 1,350 (653)
Change in deferred tax asset valuation
allowance.................................. -- (285) 285
------ ----- -------
Net income tax expense (benefit)........... $2,186 $ 873 $ (171)
====== ===== =======
</TABLE>
As discussed in Notes 1 and 3, acquisitions attributed to the Division
included five companies accounted for as pooling of interests. Four of these
five companies were pass-through entities for tax purposes in which the
then-owners agreed to report their share of income or loss in their respective
individual income tax returns. Upon their acquisition, the pass-through tax
status terminated. Pro forma net income (loss) is presented in the
F-23
<PAGE> 125
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statement of operations as if each of these entities had been a taxable
corporation during the periods presented.
12. SUPPLEMENTAL CASH FLOW INFORMATION
All required cash payments for interest and income taxes were made by
InfoCure on behalf of the Division.
13. SUBSEQUENT EVENTS
ACQUISITION
During 1999, InfoCure entered into a definitive agreement to acquire all
the outstanding equity interests of Medical Dynamics, Inc. ("MEDY"), a dental
practice management company, in exchange for shares of InfoCure common stock.
The transaction is expected to close in the third quarter of 2000 and is being
attributed to the Division. In connection with this proposed transaction, as of
July 31, 2000, InfoCure has advanced MEDY $1.3 million under terms of a loan
agreement dated October 1999. As of December 31, 1999, $500,000 had been
advanced, which is reflected in other non-current assets in the accompanying
balance sheet.
AGREEMENTS WITH INFOCURE
For purposes of governing certain of the ongoing relationships between
PracticeWorks and InfoCure and to provide for an orderly transition to the
status of two independent companies, PracticeWorks and InfoCure will enter into
various agreements. A brief description of each of the agreements follows:
DISTRIBUTION AGREEMENT. Prior to the distribution date, InfoCure and
PracticeWorks will enter into a Distribution Agreement, which will provide
for, among other things, the principal corporate transactions required to
effect the distribution and other agreements relating to the continuing
relationship between PracticeWorks and InfoCure after the distribution.
Pursuant to the Distribution Agreement, InfoCure will transfer to its
wholly owned subsidiary, InfoCure Systems, Inc., or ISI, the stock of all
of InfoCure's direct subsidiaries, other than ISI. Then, ISI will
contribute to PracticeWorks the assets and liabilities relating to
InfoCure's information management technology provider business for
dentists, orthodontists and oral and maxillofacial surgeons. In exchange
for that contribution, PracticeWorks will issue to ISI shares of its common
stock. Immediately before the distribution to the InfoCure stockholders,
ISI will distribute all of PracticeWorks' issued and outstanding stock to
InfoCure. Finally, InfoCure will effect the distribution by delivering a
certificate or certificates representing all of the shares of PracticeWorks
common stock to be distributed to InfoCure's stockholders to the
distribution agent.
Under the Distribution Agreement and effective as of the distribution
date, PracticeWorks will assume, and will agree to indemnify InfoCure
against, all liabilities, litigation and claims, including related
insurance costs, arising out of its
F-24
<PAGE> 126
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
business, and InfoCure will retain, and will agree to indemnify
PracticeWorks against, all liabilities, litigation and claims, including
related insurance costs, arising out of InfoCure's businesses. The
foregoing obligations will not entitle an indemnified party to recovery to
the extent any such liability is covered by proceeds received by such party
from any third party insurance policy.
The Distribution Agreement will provide that each of InfoCure and
PracticeWorks will be granted access to certain records and information in
the possession of the other, and will require the retention by each of
InfoCure and PracticeWorks for a period of eight years following the
distribution date of all such information in its possession.
TRANSITION SERVICES AGREEMENT. InfoCure and PracticeWorks will enter
into a Transition Services Agreement prior to the distribution date under
which, in exchange for the fees specified in that agreement, InfoCure and
PracticeWorks will agree to continue to provide specified administrative
services to one another, including accounting services, payroll services,
information management services and other services. The Transition Services
Agreement will provide that each of InfoCure and PracticeWorks will
undertake to provide the same degree of care and diligence as it uses in
providing these services to itself and its subsidiaries. Provision of
services under the Transition Services Agreement will terminate upon 120
days prior written notice by either company, but in no event prior to
December 31, 2000.
TAX DISAFFILIATION AGREEMENT. InfoCure and PracticeWorks will enter
into a Tax Disaffiliation Agreement which will identify each party's rights
and obligations with respect to deficiencies and refunds, if any, of
federal, state, local or foreign taxes for periods before and after the
distribution and related matters such as the filing of tax returns and the
conduct of Internal Revenue Service and other audits. Under the Tax
Disaffiliation Agreement, PracticeWorks will indemnify InfoCure for any tax
liability of PracticeWorks or its affiliates for any period. PracticeWorks
will also indemnify InfoCure for all taxes and liabilities incurred solely
because (1) PracticeWorks breaches a representation or covenant given to
King & Spalding in connection with rendering its tax opinion, which breach
contributes to an Internal Revenue Service determination that the
distribution was not tax-free or (2) a post-distribution action or omission
by PracticeWorks or an affiliate of PracticeWorks contributes to an
Internal Revenue Service determination that the distribution was not
tax-free. InfoCure will indemnify PracticeWorks for all taxes and
liabilities incurred solely because (1) InfoCure breaches a representation
or covenant given to King & Spalding in connection with rendering its tax
opinion, which breach contributes to an Internal Revenue Service
determination that the distribution was not tax-free, or (2) a post-
distribution action or omission by InfoCure or an affiliate contributes to
an Internal Revenue Service determination that the distribution was not
tax-free. If the Internal Revenue Service determines that the distribution
was not tax-free for any other reason, InfoCure and PracticeWorks will
indemnify each other against 50% of all taxes and liabilities.
F-25
<PAGE> 127
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PracticeWorks will also indemnify InfoCure for any taxes resulting
from any internal realignment undertaken to facilitate the distribution on
or before the distribution date. Any such taxes are not expected to be
material.
EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT. Prior to the
distribution, InfoCure and PracticeWorks will enter into an Employee
Benefits and Compensation Allocation Agreement, which will contain
provisions relating to employee compensation, benefits and labor matters
and the treatment of options to purchase InfoCure common stock held by
InfoCure employees who will become PracticeWorks employees. This agreement
will provide that InfoCure options held by InfoCure employees who will
become PracticeWorks employees will be replaced by PracticeWorks options.
The option price for the number for the shares of PracticeWorks common
stock subject to each option will be determined by dividing the option
price for the related InfoCure option by the PracticeWorks conversion
factor, and the number of shares of PracticeWorks common stock subject to
each PracticeWorks option will be determined by multiplying the number of
shares subject to the related InfoCure option by the PracticeWorks
conversion factor. The PracticeWorks conversion factor is a number equal to
(1) the closing price of InfoCure common stock on the Nasdaq National
Market on the record date, divided by (2) the opening price of the
PracticeWorks common stock on the Nasdaq National Market on the day
following the distribution date.
F-26
<PAGE> 128
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents................................ $ 4,915 $ 2,527
Accounts receivable-trade, net of allowance of $1,323 and
$1,113................................................. 5,819 9,041
Other receivables........................................ 439 97
Inventory................................................ 2,216 1,772
Deferred tax assets...................................... 704 669
Prepaid expenses and other current assets................ 100 453
-------- -------
Total current assets................................ 14,193 14,559
Property and equipment, net of accumulated depreciation
of $2,077 and $3,065................................... 2,512 2,046
Intangible assets, net of accumulated amortization of
$11,606 and $4,294 (Note 3)............................ 50,969 40,606
Deferred tax assets...................................... 5,354 108
Other assets............................................. 1,452 523
-------- -------
$ 74,480 $57,842
======== =======
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 984 $ 2,772
Accrued expenses (Note 5)................................ 4,466 5,712
Accrued restructuring costs (Note 7)..................... 203 445
Deferred revenue and customer deposits................... 7,971 6,704
Current portion of long-term debt........................ 5 116
-------- -------
Total current liabilities........................... 13,629 15,749
Long-term debt, less current portion (Note 6)............ 19,681 9,614
Other liabilities........................................ -- 60
-------- -------
Total liabilities................................... 33,310 25,423
-------- -------
Commitments and contingencies
DIVISIONAL EQUITY:
Net advances from parent................................. 53,326 35,909
Accumulated deficit...................................... (12,156) (3,490)
-------- -------
Total divisional equity............................. 41,170 32,419
-------- -------
$ 74,480 $57,842
======== =======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 129
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
STATEMENTS OF OPERATIONS -- (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
REVENUE (NOTE 2):
Systems and software........................................ $ 6,562 $17,851
Maintenance, support and services........................... 13,454 8,730
-------- -------
Total revenue.......................................... 20,016 26,581
-------- -------
OPERATING EXPENSE:
Hardware and other items purchased for resale............... 2,851 4,864
Selling, general and administrative (excluding compensatory
stock).................................................... 18,980 14,574
Research and development.................................... 1,541 1,341
Depreciation and amortization............................... 7,898 1,010
Restructuring and other charges (Note 5).................... 816 560
Loss (gain) on disposal of fixed assets..................... (632) --
-------- -------
Total operating expense................................ 31,454 22,349
-------- -------
Operating (loss) income..................................... (11,438) 4,232
Interest expense and other, net............................. 959 1,044
-------- -------
(Loss) income before income taxes and extraordinary item.... (12,397) 3,188
(Benefit) provision for income taxes........................ (3,731) 1,561
-------- -------
Net (loss) income before extraordinary item................. (8,666) 1,627
Extraordinary item -- debt extinguishment cost, net of
income taxes.............................................. -- 72
-------- -------
Net (loss) income...................................... $ (8,666) $ 1,555
======== =======
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 130
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
STATEMENTS OF CASH FLOWS -- (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income........................................... $ (8,666) $ 1,555
Extraordinary item -- debt extinguishment cost.............. -- 110
Restructuring and other charges............................. 816 560
Depreciation and amortization............................... 7,898 1,010
Allowance for doubtful accounts............................. 454 195
Gain on disposal of fixed assets............................ (632) --
Deferred taxes.............................................. (5,281) 587
Changes in current assets and liabilities, net of
acquisitions:
Accounts and other receivables............................ 3,135 (1,853)
Inventory, prepaid expenses and other assets.............. 63 (170)
Accounts payable and accrued expenses..................... (4,571) 481
Deferred revenue and deposits............................. 475 329
-------- -------
Cash (used in) provided by operating activities........... (6,309) 2,804
-------- -------
CASH USED IN INVESTING ACTIVITIES:
Cash paid for acquisitions.................................. (13,422) (4,616)
Property and equipment expenditures......................... (1,044) (118)
Cash paid for other intangible assets....................... (1,275) (25)
Other....................................................... (1,643) (12)
-------- -------
Cash used in investing activities......................... (17,384) (4,771)
-------- -------
CASH PROVIDED BY FINANCING ACTIVITIES:
Borrowings of long-term debt................................ 10,950 --
Principal payments of long-term debt........................ -- (16,668)
Net cash advances from parent............................... 15,131 19,083
-------- -------
Cash provided by financing activities..................... 26,081 2,415
-------- -------
Net change in cash flows.................................... 2,388 448
Cash and cash equivalents, beginning of period.............. 2,527 1,633
-------- -------
Cash and cash equivalents, end of period.................. $ 4,915 $ 2,081
======== =======
NONCASH TRANSACTIONS:
InfoCure stock issued for acquisitions...................... $ 2,386 $ --
Disposal of building under capital lease obligation......... (1,109) --
InfoCure stock issued to settle obligations................. 400 --
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 131
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO INTERIM FINANCIAL
STATEMENTS -- UNAUDITED
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The information presented at June 30, 2000, and for the periods ended June
30, 2000 and 1999 is unaudited, however, in the opinion of management, includes
all normal recurring adjustments necessary for a fair presentation of the
financial position, results of operations and cash flows of PracticeWorks (a
division of InfoCure Corporation ("InfoCure")) (the "Division") for the periods
presented. Historical results may not be indicative of the results to be
expected in the future. Certain information in footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"Commission"). The financial statements, notes thereto and other information
should be read in conjunction with the financial statements and related notes
contained in this information statement.
The Division consists of InfoCure's information management technology
business for dental, orthodontic, oral and maxillofacial surgery practices. In
August 2000, InfoCure announced its plan to distribute to its shareholders the
shares of PracticeWorks, Inc., an indirect, wholly owned subsidiary of InfoCure
("PracticeWorks"). Immediately prior distribution date, InfoCure will transfer
the Division's assets and liabilities to PracticeWorks. Those assets and
liabilities will be reflected in PracticeWorks' financial statements at
InfoCure's historical cost.
The assets and liabilities of the Division (the "Contributed Businesses")
consist primarily of businesses InfoCure acquired at various times since the
consummation of InfoCure's initial public offering in July 1997. The Contributed
Businesses include two acquisitions made by InfoCure in 1997, one in 1998, four
in 1999, and six in the six months ended June 30, 2000, all of which were
accounted for as purchases, and also include five acquisitions made in 1999
which were accounted for as pooling of interests (see Note 4).
The Division's costs and expenses in the accompanying financial statements
include allocations from InfoCure for centralized legal, accounting, treasury,
real estate, information technology, and other InfoCure corporate services and
infrastructure costs. The expense allocations have been determined on the bases
that InfoCure and the Division considered to be reasonable reflections of the
utilization of services provided or the benefit received by the Division.
However, the financial information included herein may not necessarily reflect
the financial position and results of operations of PracticeWorks in the future
or what these amounts would have been had it been a separate, stand-alone entity
during the periods presented.
The historical capital structure of the Division is not representative of
PracticeWorks' future capital structure. PracticeWorks issued common stock to
InfoCure in August 2000 and will commence operations as a separate legal entity
upon completion of the Distribution. Accordingly, the historical net income
(loss) per share and weighted average number of shares of common stock
outstanding are not shown for any of the periods
F-30
<PAGE> 132
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO INTERIM FINANCIAL
STATEMENTS -- UNAUDITED (CONTINUED)
presented. The financial information included herein may not reflect the
financial position, results of operations, changes in divisional equity and cash
flows of PracticeWorks in the future or what they would have been had the
Division been a separate, stand-alone entity during the periods presented.
The financial statements of the Division included herein give retroactive
effect to all of its historical acquisitions that were accounted for as poolings
of interest. As a result, the financial position, results of operations and cash
flows are presented as if the combining companies had been consolidated for all
periods presented. Results of operations for the interim periods may not be
indicative of annual results. Certain amounts in the 1999 quarterly financial
statements have been reclassified for comparative purposes.
NOTE 2. REVENUE RECOGNITION
During the three months ended June 30, 2000, the Division began offering
subscription pricing for its products. Contracts are generally for a period of
three years with revenue being recognized ratably over the contract period
commencing, generally, when the product has been installed and training has been
completed.
NOTE 3. GOODWILL AMORTIZATION
During the fourth quarter of 1999, management changed its estimate of the
useful life of its remaining goodwill from 15 years to three years. The effect
of this change was to increase the net loss on a pre-tax basis by approximately
$3.4 million and $5.8 million for the three and six months ended June 30, 2000,
respectively.
NOTE 4. BUSINESS COMBINATIONS
InfoCure completed four acquisitions attributable to the Division during
1999 which were accounted for as purchases (the "1999 Purchase Acquisitions").
In addition, InfoCure completed three acquisitions attributable to the Division
during the three months ended March 31, 2000, for which the total consideration
paid was approximately $6.1 million in cash and $2.4 million in InfoCure common
stock. During the three months ended June 30, 2000, InfoCure completed three
additional acquisitions attributable to the Division for which the total
consideration paid was approximately $7.3 million in cash. Each of the
acquisitions will be contributed to PracticeWorks in connection with the
Distribution. The following unaudited pro forma information presents the results
of operations of the Division as if the acquisitions had occurred as of the
beginning of each of the periods presented. The pro forma information is not
necessarily indicative of what would have occurred had the acquisitions been
made as of such periods, nor is it indicative of future results of operations.
The pro forma amounts give effect to appropriate adjustments for the fair value
of the assets acquired, reductions in personnel costs and
F-31
<PAGE> 133
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO INTERIM FINANCIAL
STATEMENTS -- UNAUDITED (CONTINUED)
other operating expenses not assumed as part of the acquisitions, amortization
of intangibles, interest expense and income taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PRO FORMA AMOUNTS
Revenue...................... $10,396 $19,262 $ 21,805 $38,724
Net (loss) income............ (5,826) 1,695 (9,491) 924
</TABLE>
NOTE 5. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1999, management changed the Division's product
strategy to begin development of ASP applications and other Internet-based
applications and services, decided to transition to a subscription pricing model
and completed six acquisitions. Concurrently, management committed to a plan of
restructuring and reorganization related to acquisitions completed during 1999
to consolidate certain facilities and eliminate staffing redundancies involving
approximately 30 employees. The restructuring was substantially completed in the
second quarter of 2000. The following table sets forth changes in the
restructuring reserves as a result of actions taken to implement the Division's
restructuring and reorganization plans during the six months ended June 30,
2000:
<TABLE>
<CAPTION>
RESERVE COSTS RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE APPLIED BALANCE
DECEMBER AGAINST MARCH AGAINST JUNE
31, 1999 ADJUSTMENTS RESERVES 31, 2000 ADJUSTMENTS RESERVES 30, 2000
-------- ----------- -------- -------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Facility closure and
consolidation........ $ 95 $ -- $ (95) $ -- $14 $ (14) $ --
Compensation costs for
severance and other
termination
benefits............. -- 603 (400) 203 25 (25) 203
Contingent
consideration payable
to former
stockholders......... 350 -- (350) -- -- -- --
Other asset write-downs
and costs............ -- 174 (29) 145 -- (145) --
---- ---- ----- ---- --- ----- ----
$445 $777 $(874) $348 $39 $(184) $203
==== ==== ===== ==== === ===== ====
</TABLE>
NOTE 6. NOTES PAYABLE AND LONG TERM DEBT
The amounts recorded as notes payable and long-term debt attributed to the
Division represent borrowings under InfoCure's credit facility or other note
agreements which were used primarily to acquire the Contributed Business, or
acquire other assets of the Division. InfoCure was not in compliance with
certain pre-amendment financial covenants contained
F-32
<PAGE> 134
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO INTERIM FINANCIAL
STATEMENTS -- UNAUDITED (CONTINUED)
in the credit facility as of June 30, 2000 and received a waiver for such
non-compliance. During July 2000 InfoCure finalized negotiations to amend to the
credit facility to eliminate certain financial covenants and establish new
financial covenants.
NOTE 7. SUBSEQUENT EVENTS
On August 1, 2000 the Division announced its plans to restructure through a
plan of employee reductions and consolidation of existing facilities. Over the
next twelve months the Division plans to close or consolidate 10 facilities and
terminate approximately 140 employees. Compensation costs, including severance
and other termination benefits, and other exit costs aggregating approximately
$4.0 million are expected to be recorded in the third quarter of 2000.
F-33
<PAGE> 135
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
INTRODUCTION TO
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements have been
prepared to give effect to InfoCure Corporation's ("InfoCure's") proposed
acquisition of all the outstanding equity interest of Medical Dynamics Inc.
("Medical Dynamics"), a dental practice management company. The business of
Medical Dynamics will be attributed to PracticeWorks (a division of InfoCure)
(the "Division") after the acquisition is consummated. The unaudited pro forma
condensed combined financial statements assume 13.2 million shares of Medical
Dynamics common stock are outstanding on a fully diluted basis as of the date of
the acquisition. The pro forma condensed combined financial statements included
herein reflect application of the purchase method of accounting for the
acquisition. Such financial statements have been prepared and/or derived from,
and should be read in conjunction with, the historical consolidated financial
statements and notes thereto of the Division for the year ended December 31,
1999 and for the six months ended June 30, 2000, and the Medical Dynamics
historical consolidated financial statements and notes thereto for the year
ended September 30, 1999 and for the nine months ended June 30, 2000 included
elsewhere in this information statement.
The pro forma condensed combined balance sheet gives effect to the
acquisition as if it had occurred on June 30, 2000 combining the balance sheets
of the Division and Medical Dynamics as of that date. The pro forma condensed
combined statements of operations give effect to the acquisition as if it had
occurred on January 1, 1999, combining the results of the Division for the six
months ended June 30, 2000 and for the year ended December 31, 1999 with those
of Medical Dynamics for the six months ended March 31, 2000 (as derived from the
June 30, 2000 financial statements) and for the year ended September 30, 1999
which, for pro forma purposes, are considered comparable to the results of a
calendar six-month and twelve-month period.
The pro forma combined statements of operations for the six months ended
June 30, 2000 and for the year ended December 31, 1999 include appropriate
adjustments for amortization and other items related to the transaction, but
exclude any potential cost savings. The Division believes that it may be able to
reduce salaries and related costs and general and administrative expenses as it
eliminates duplication of overhead and, together with Medical Dynamics, has
formulated a plan to implement such savings. There can be no assurance that the
plan will be successful in effecting such cost savings.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate. The pro
forma combined financial information is unaudited and does not purport to
represent the combined results that would have been obtained had the transaction
occurred at the dates indicated, as assumed, nor does it purport to present the
results which may be obtained in the future.
F-34
<PAGE> 136
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEDICAL PRO FORMA
PRACTICEWORKS DYNAMICS ADJUSTMENTS COMBINED
------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 4,915 $ 417 $ (475)(A) $ 4,857
Accounts and notes receivable,
net........................... 6,258 28 -- 6,286
Inventory....................... 2,216 3 -- 2,219
Deferred tax assets............. 704 -- -- 704
Prepaid expense and other
current assets................ 100 1 -- 101
-------- -------- -------- --------
Total current assets....... 14,193 449 (475) 14,167
Property and equipment, net..... 2,512 332 -- 2,844
Intangible assets, net.......... 50,969 3,834 8,933(B) 63,736
Deferred tax asset.............. 5,354 -- -- 5,354
Other assets.................... 1,452 22 (1,300)(C) 174
-------- -------- -------- --------
Total assets............... $ 74,480 $ 4,637 $ 7,158 $ 86,275
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 984 $ 97 $ -- $ 1,081
Accrued expense................. 4,466 501 (148)(A) 4,919
100(B)
Accrued restructuring costs..... 203 -- -- 203
Deferred revenue and customer
deposits...................... 7,971 300 -- 8,271
Current portion of long-term
debt.......................... 5 2,003 (1,300)(C) 381
(327)(A)
-------- -------- -------- --------
Total current
liabilities.............. 13,629 2,901 (1,675) 14,855
Long-term debt, less current
portion....................... 19,681 139 -- 19,820
-------- -------- -------- --------
Total liabilities.......... 33,310 3,040 (1,675) 34,675
-------- -------- -------- --------
Stockholders' equity:
Common stock.................... -- 13 (13)(B) --
Additional paid-in capital...... -- 28,353 (28,353)(B) --
Divisional equity............... 53,326 10,430(B) 63,756
Accumulated deficit............. (12,156) (26,769) 26,769(B) (12,156)
-------- -------- -------- --------
Total stockholders'
equity................... 41,170 1,597 8,833 51,600
-------- -------- -------- --------
Total liabilities and
stockholders' equity..... $ 74,480 $ 4,637 $ 7,158 $ 86,275
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-35
<PAGE> 137
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRACTICEWORKS MEDICAL DYNAMICS ADJUSTMENTS COMBINED
------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenue............. $54,591 $10,959 $ -- $65,550
------- ------- ------- -------
Operating expense:
Hardware and other items
purchased for
resale............... 9,654 4,050 -- 13,704
Selling, general and
administrative....... 28,666 9,592 -- 38,258
Research and
development.......... 4,185 3 -- 4,188
Depreciation and
amortization......... 3,284 1,129 309(D) 4,722
Restructuring and other
charges.............. 1,814 655 -- 2,469
Merger costs............ 659 -- -- 659
Compensatory stock
awards............... 428 50 -- 478
------- ------- ------- -------
Total operating
expense............ 48,690 15,479 309 64,478
------- ------- ------- -------
Operating income (loss)... 5,901 (4,520) (309) 1,072
Interest and other
expense, net............ 1,335 878 -- 2,213
------- ------- ------- -------
Loss before income taxes
and extraordinary
item.................... 4,566 (5,398) (309) (1,141)
Provision (benefit) for
income taxes............ 2,186 -- (2,051)(E) 135
------- ------- ------- -------
Loss before extraordinary
item.................... $ 2,380 $(5,398) $ 1,742 $(1,276)
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma financial statements
F-36
<PAGE> 138
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEDICAL PRO FORMA PRO FORMA
PRACTICEWORKS DYNAMICS ADJUSTMENTS COMBINED
------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenue................... $ 20,016 $ 2,243 $ -- $ 22,259
-------- ------- ----- --------
Operating expense:
Hardware and other items
purchased for resale....... 2,851 356 -- 3,207
Selling, general and
administrative............. 18,980 2,280 -- 21,260
Research and development...... 1,541 -- -- 1,541
Depreciation and
amortization............... 7,898 508 778(D) 9,184
Restructuring and other
charges.................... 816 -- -- 816
Gain on disposal of fixed
assets..................... (632) -- -- (632)
-------- ------- ----- --------
Total operating expense.... 31,454 3,144 778 35,376
-------- ------- ----- --------
Operating (loss) income......... (11,438) (901) (778) (13,117)
Interest and other expense,
net........................... 959 172 -- 1,131
-------- ------- ----- --------
Loss before income taxes and
extraordinary item............ (12,397) (1,073) (778) (14,248)
Income tax benefit.............. (3,731) -- (408)(E) (4,139)
-------- ------- ----- --------
Net loss $ (8,666) $(1,073) $(370) $(10,109)
======== ======= ===== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-37
<PAGE> 139
PRACTICEWORKS
(A DIVISION OF INFOCURE CORPORATION)
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
(A) Records payments of accrued salary and vacation and certain promissory notes
to Medical Dynamics stockholders, officers and directors upon closing.
(B) Records the effect on the Division's financial statements of issuance of
shares of InfoCure common stock with an aggregate value of approximately
$9.9 million in exchange for 13.2 million shares of Medical Dynamics common
stock, including the estimated fair value of InfoCure options exchanged for
Medical Dynamics options and estimated merger costs of the transaction.
(C) Records elimination of InfoCure loan to Medical Dynamics
This acquisition will be accounted for as a purchase with the total
consideration estimated to be allocated to the assets acquired as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- --------------
(IN THOUSANDS)
<S> <C>
Current assets............................................. $ 449
Property and equipment..................................... 332
Other assets............................................... 22
Current liabilities........................................ (2,901)
Long-term debt, net of current portion..................... (139)
-------
Net assets............................................... (2,237)
Goodwill................................................... 12,767
-------
$10,530
=======
</TABLE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(D) Records adjustment to amortization expense to reflect increase for new basis
of goodwill and eliminate amortization for other intangibles to which no
value was assigned. Goodwill is amortized using the straight line method
over a 15 year life from January 1 to November 15, and over a 3 year life
effective in the fourth quarter consistent with InfoCure's adoption of a
change in accounting estimate effected in 1999.
(E) Provides the effect of income taxes as though the companies filed
consolidated tax returns. Goodwill arising from the transaction is not
deductible for income tax purposes and therefore does not provide a pro
forma income tax benefit.
F-38
<PAGE> 140
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Medical Dynamics, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Medical
Dynamics, Inc. and subsidiaries (the "Company") as of September 30, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended September 30, 1999 and 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medical
Dynamics, Inc. and subsidiaries as of September 30, 1999, and the results of
their operations and their cash flows for the years ended September 30, 1999 and
1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring losses and
negative cash flows from operations. This raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
December 20, 1999
F-39
<PAGE> 141
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 180,000
Trade receivables, less allowance for doubtful accounts of
$67,300................................................. 254,400
Inventories............................................... 189,200
Prepaid expenses and other................................ 21,100
------------
Total current assets.................................... 644,700
------------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of accumulated
amortization of $856,200................................ 2,345,600
Technical support contracts, net of accumulated
amortization of $593,800................................ 890,700
------------
Total software development and support.................. 3,236,300
------------
PROPERTY AND EQUIPMENT:
Demonstration equipment................................... 438,200
Machinery and equipment................................... 606,100
Furniture and fixtures.................................... 235,600
Leasehold improvements.................................... 54,500
------------
1,334,400
Less accumulated depreciation and amortization............ (913,300)
------------
Property and equipment, net............................. 421,100
------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $139,900..... 1,136,200
Non-compete agreements, net of accumulated amortization of
$151,700................................................ 47,500
Debt issuance costs, net of accumulated amortization of
$481,000................................................ 80,100
Patents and trademarks, net of accumulated amortization of
$785,900................................................ 12,800
Deposits and other........................................ 24,300
------------
Total other assets...................................... 1,300,900
------------
Total Assets............................................ $ 5,603,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable and convertible
debentures.............................................. $ 943,700
Accounts payable.......................................... 622,000
Accrued expenses.......................................... 497,600
Unearned revenue.......................................... 368,500
------------
Total current liabilities............................... 2,431,800
------------
Notes payable, net.......................................... 207,600
Convertible debentures, net................................. 370,800
Commitments and contingencies (Notes 2, 5, and 8)
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000
shares; none issued
Common stock, $.001 par value; authorized 30,000,000
shares, issued and outstanding 12,214,300 shares........ 12,200
Additional paid-in capital................................ 27,771,700
Accumulated deficit....................................... (25,191,100)
------------
Total stockholders' equity.............................. 2,592,800
------------
Total liabilities and stockholders' equity.............. $ 5,603,000
============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-40
<PAGE> 142
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES:
Dental products:
Software, training, and installation................ $ 3,809,700 $ 2,906,900
Equipment........................................... 4,495,900 2,836,700
Support services.................................... 2,522,400 1,831,300
Medical products...................................... 130,700 271,800
----------- -----------
10,958,700 7,846,700
----------- -----------
COST OF SALES:
Dental products:
Software, training, and installation................ 1,133,000 687,200
Equipment........................................... 4,015,300 2,542,100
Support services.................................... 924,700 583,200
Medical products...................................... 34,600 246,300
----------- -----------
6,107,600 4,058,800
----------- -----------
GROSS PROFIT.......................................... 4,851,100 3,787,900
----------- -----------
OPERATING EXPENSES:
Selling and marketing............................... 3,679,800 2,078,900
General and administrative.......................... 4,983,300 3,932,800
Stock-based compensation............................ 49,600 33,900
Research and development............................ 2,900 46,700
Impairment of goodwill.............................. 655,200 --
----------- -----------
Total operating expenses......................... 9,370,800 6,092,300
----------- -----------
OPERATING LOSS........................................ (4,519,700) (2,304,400)
OTHER INCOME (EXPENSE):
Other income........................................ 44,900 51,200
Interest income..................................... 13,500 37,400
Interest expense.................................... (650,000) (305,700)
Loss on Command settlement.......................... (286,800) --
----------- -----------
(878,400) (217,100)
----------- -----------
Net Loss.............................................. $(5,398,100) $(2,521,500)
=========== ===========
Net Loss Per Common Share............................. $ (.52) $ (.27)
=========== ===========
Weighted Average Number of Shares Outstanding......... 10,312,700 9,512,200
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-41
<PAGE> 143
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1997.......... 7,627,300 $7,600 $18,811,100 $(17,271,500) $ 1,547,200
Issuance of common stock for
acquisition of:
Computer Age Dentist, Inc....... 1,600,000 1,600 4,478,400 -- 4,480,000
Information Presentation
Systems, Inc.................. 320,000 300 687,900 -- 688,200
DOM, Inc........................ 141,700 200 339,800 -- 340,000
Conversion of debentures to common
stock:
Principal, net of discount...... 315,700 300 602,600 -- 602,900
Accrued interest................ 17,300 -- 35,800 -- 35,800
Fair value of warrants issued for
debt discount................... -- -- 223,000 -- 223,000
Proceeds from exercise of stock
options......................... 12,500 -- 34,400 -- 34,400
Attribution of compensation
expense under stock options and
warrants:
Employees....................... -- -- 8,900 -- 8,900
Non-employees................... -- -- 25,000 -- 25,000
Net loss.......................... -- -- -- (2,521,500) (2,521,500)
---------- ------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1998....... 10,034,500 10,000 25,246,900 (19,793,000) 5,463,900
Conversion of debentures to common
stock:
Principal, net of discount...... 1,144,900 1,200 1,142,200 -- 1,143,400
Accrued interest................ 101,300 100 125,900 -- 126,000
Fair value of warrants issued for
debt discount and issuance
costs........................... -- -- 299,400 -- 299,400
Proceeds from exercise of
options......................... 98,000 100 141,400 -- 141,500
Proceeds from sale of common
stock, net of offering costs of
$32,900......................... 523,800 500 766,600 -- 767,100
Additional shares issued pursuant
to terms of agreement........... 311,800 300 (300) -- --
Attribution of compensation under
stock options and warrants:
Employee........................ -- -- 32,100 -- 32,100
Non-employee.................... -- -- 17,500 -- 17,500
Net loss.......................... -- -- -- (5,398,100) (5,398,100)
---------- ------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1999....... 12,214,300 $12,200 $27,771,700 $(25,191,100) $ 2,592,800
========== ======= =========== ============ ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-42
<PAGE> 144
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(5,398,100) $(2,521,500)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock options granted for compensation and
other services................................... 49,600 33,900
Depreciation expense................................ 191,800 71,400
Amortization of intangible assets................... 937,000 955,500
Amortization of debt discount and issuance costs.... 446,500 166,000
Conversion of accrued interest on debentures to
common stock..................................... 126,000 35,800
Bad debt expense.................................... 82,300 --
Impairment of goodwill.............................. 655,200 --
Loss on disposal of Command, less cash received..... 279,500 --
Provision for obsolete and slow-moving
inventories...................................... 23,700 50,100
Other............................................... (23,200) --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease (increase) in:
Trade receivables................................ 454,000 (295,000)
Inventories...................................... 621,700 (51,200)
Prepaid expenses and other....................... 13,100 37,200
Increase (decrease) in:
Accounts payable................................. 174,800 9,800
Accrued expenses................................. 88,700 263,600
Unearned revenue................................. (1,600) 5,400
----------- -----------
Net cash used in operating activities.......... (1,279,000) (1,239,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash........................... 50,000 --
Software development costs............................ (229,100) (238,100)
Purchase of property and equipment.................... (85,800) (266,600)
Payments for acquisition of businesses, net of cash
acquired............................................ -- (599,200)
Proceeds from sale of property and equipment.......... -- 12,400
Other................................................. -- (11,500)
----------- -----------
Net cash used in investing activities.......... $ (264,900) $(1,103,000)
=========== ===========
</TABLE>
F-43
<PAGE> 145
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable................... $ (453,900) $ (52,600)
Payment of debt issue costs........................... (90,900) --
Proceeds from issuance of common stock................ 767,100 --
Proceeds from exercise of common stock options........ 141,500 34,400
Proceeds from issuance of convertible debentures...... 400,000 1,989,300
Proceeds from capital lease financing................. -- 87,600
Proceeds from shareholder loan........................ 400,000 --
Proceeds from short-term borrowings................... 5,991,500 --
Repayment of short-term borrowings.................... (5,984,500) --
----------- -----------
Net cash provided by financing activities...... 1,170,800 2,058,700
----------- -----------
Net decrease in cash and equivalents.................. (373,100) (283,300)
Cash and equivalents, beginning of year............... 553,100 836,400
----------- -----------
Cash and equivalents, end of year..................... $ 180,000 $ 553,100
=========== ===========
Supplemental disclosures of cash flow
information -- Cash paid for interest............... $ 100,500 $ 13,300
=========== ===========
Supplemental schedule of noncash investing and
financing activities:
Conversion of accounts payable to debt.............. $ 118,600 $ --
=========== ===========
Issuance of common stock for acquisition of
business......................................... $ -- $ 5,508,200
=========== ===========
Notes payable incurred for acquisition of
businesses, net of discounts..................... $ -- $ 865,300
=========== ===========
Conversion of debentures to common stock, net of
discount......................................... $ 1,143,400 $ 602,900
=========== ===========
Conversion of accrued interest to notes payable..... $ 9,200 $ --
=========== ===========
Fair value of warrants issued for debt discount..... $ 40,000 $ 223,000
=========== ===========
Debt issuance costs incurred for convertible
debentures....................................... $ 259,400 $ 210,800
=========== ===========
Debt assumed in business acquisitions............... $ -- $ 67,900
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-44
<PAGE> 146
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS OPERATIONS. Medical Dynamics, Inc. (the "Company") is
engaged in the development and marketing of practice management software and
related products for the dental profession. The Company's principal products are
practice management software, patient education systems, digital x-ray systems
and a wide variety of ancillary products utilized by the dental profession.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the accompanying
consolidated financial statements.
USE OF ESTIMATES. The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The actual results could differ
from those estimates.
The Company's consolidated financial statements are based on a number of
estimates, including the allowance for doubtful accounts, the provision for
obsolete and slow-moving inventories, the selection of estimated useful lives of
intangible assets and property and equipment, realization of long-lived assets,
and assumptions affecting the valuation of common stock issued in business
combinations, and stock options and warrants granted to non-employees. It is
reasonably possible that estimates affecting the provision for obsolete and
slow-moving inventories and realization of long-lived assets will change in the
forthcoming year and such revisions could be material.
CASH EQUIVALENTS. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. At September 30, 1999, cash equivalents include a mutual fund that
invests in money market instruments.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Demonstration equipment..................................... 3
Machinery and equipment..................................... 3 - 10
Furniture and fixtures...................................... 3 - 10
</TABLE>
Leasehold improvements are amortized over the lesser of the life of the
lease or the estimated useful life of the improvement.
SOFTWARE DEVELOPMENT COSTS. The Company capitalizes costs of producing
software to be sold, leased, or otherwise marketed, incurred subsequent to
establishing technological feasibility in accordance with Statement of Financial
Accounting Standards No. 86.
F-45
<PAGE> 147
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization of capitalized software development costs is computed on a
product-by-product basis. The annual amortization is the greater of the amount
computed using the ratio of current gross revenue for a product to the total of
current and anticipated future gross revenue for that product or the
straight-line method, not to exceed 7 years. In addition, management
periodically compares the unamortized capitalized costs for each product to the
net realizable value of that product. If the unamortized capitalized costs
exceed the net realizable value, the excess will be charged to operations.
The total amount charged to expense in the statements of operations for
amortization of capitalized software costs was $446,100 and $417,800 for the
years ended September 30, 1999 and 1998, respectively, and is included in cost
of sales.
Costs incurred in researching, designing and planning for the development
of new software are classified as research and development expenses and are
charged to operations as incurred.
OTHER INTANGIBLE ASSETS. Other intangible assets are stated at cost and
are amortized utilizing the straight-line method over the following estimated
useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Technical support contracts................................. 5
Goodwill.................................................... 15
Non-compete agreements...................................... 2.5
Patents and trademarks...................................... 3 - 10
</TABLE>
DEBT ISSUANCE COSTS. Debt issuance costs are amortized using the interest
method over the term of the related debt.
IMPAIRMENT OF LONG-LIVED ASSETS. Management of the Company assesses
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If the net
carrying value exceeds the net cash flows, then impairment will be recognized to
reduce the carrying value to the estimated fair value. During the year ended
September 30, 1999, management determined that certain goodwill was impaired due
to the closing of certain regional operations, and recorded a loss on impairment
of $655,200.
WARRANTY RESERVE. The Company provides a warranty against defects in
materials and workmanship, generally for a period between one month and one year
following the date of sale of the equipment. Estimated future costs of product
warranties are included in accrued expenses in the accompanying balance sheet.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to
operations in the period incurred.
ADVERTISING. Advertising costs are expensed the first time the
advertisement is run. Total advertising costs charged to operations amounted to
$503,400 and $456,300 for the years ended September 30, 1999 and 1998,
respectively.
EARNINGS PER SHARE. Net loss per common share is presented in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per
F-46
<PAGE> 148
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Share. SFAS No. 128 replaces the presentation of primary and fully diluted
earnings per share (EPS), with a presentation of basic EPS and diluted EPS.
Under SFAS No. 128, basic EPS excludes dilution for potential common shares and
is computed by dividing the net loss by the weighted average number of common
shares outstanding for the year. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock and resulted in the issuance of common
stock. Basic and diluted EPS are the same in 1999 and 1998 as all potential
common shares were antidilutive.
INCOME TAXES. The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
REVENUE RECOGNITION. The Company recognizes sales when finished goods are
shipped to a customer. Revenue from the sale of the Company's proprietary
software is recognized when the software is delivered and the Company has
substantially performed all material obligations relating to the sale agreement
and collectibility is deemed probable by management. Revenue from software
services is recognized ratably over the contractual period or as the services
are performed.
Unearned revenue primarily represents payments received on deferred
maintenance contracts that has not been earned. The amounts are amortized into
revenue on a monthly basis using the straight-line method over the life of the
contracts.
Costs for maintenance and customer support are charged to expense when the
related revenue is recognized or when those costs are incurred, whichever occurs
first.
STOCK-BASED COMPENSATION. The Company accounts for stock-based
compensation for employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for stock
options granted to employees is measured as the excess, if any, of the quoted
market price of the Company's common stock at the measurement date (generally,
the date of grant) over the amount an employee must pay to acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled Accounting for Stock-Based Compensation (SFAS No. 123). SFAS
No. 123 requires that options, warrants, and similar instruments which are
granted to non-employees for goods and services be recorded at fair value on the
grant date. Fair value is generally determined under an option pricing model
using the criteria set forth in SFAS No. 123. The Company did not adopt SFAS No.
123 to account for stock-based compensation for employees but is subject to the
pro forma disclosure requirements.
SEGMENT DISCLOSURES Operating segments are components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The
F-47
<PAGE> 149
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
only material segment that the Company is currently engaged in is the dental
products segment. Accordingly, the accompanying financial statements do not
include disclosures for the immaterial medical products segment.
2. LIQUIDITY
Through September 30, 1999, the Company has incurred substantial operating
losses and negative cash flows from operations. The Company's future viability
depends on its ability to increase sales and become profitable.
As discussed in Note 4, the Company completed three business acquisitions
during the year ended September 30, 1998. As a result of these activities, the
Company realized increases in sales in fiscal 1998 of approximately $6.9 million
and in fiscal 1999 of approximately $3.1 million. However, despite the positive
impact of increases in sales, the Company has struggled to generate adequate
working capital to finance this growth. At September 30, 1999, the Company had
negative working capital of approximately $1.5 million. Management has devoted
substantial efforts to obtain additional capital to finance planned activities
for fiscal 2000.
As discussed further in Note 5, the Company was successful in obtaining
additional debt financing of $500,000 in October 1999 and payment terms were
extended on certain notes payable to related parties. However, management
believes additional capital is necessary to fund existing working capital
requirements. The Company's ability to continue as a going concern is dependent
on raising additional capital and to ultimately achieve profitable operations
and positive cash flows from operating activities.
3. INVENTORIES
Inventories consist of the following at September 30, 1999:
<TABLE>
<S> <C>
Raw materials and replacement parts......................... $186,700
Finished goods.............................................. 121,900
--------
Total inventory........................................... 308,600
Less provision for obsolete and slow-moving inventory....... (119,400)
--------
Net inventories........................................... $189,200
========
</TABLE>
4. BUSINESS COMBINATIONS
During the year ended September 30, 1998, the Company completed three
acquisitions of businesses engaged in various aspects of the development and
sale of practice management systems for the dental profession. In October 1997,
the Company acquired 100% of the outstanding common stock of Computer Age
Dentist, Inc. (CADI). CADI, which is located in Los Angeles, California, is
engaged in the design, sale, and support of practice management software for the
dental profession. The Company paid total consideration of $5,183,600 to acquire
CADI, consisting of $334,300 in cash
F-48
<PAGE> 150
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments, $369,300 (net of discount) in notes payable, and 1,600,000 shares of
the Company's common stock with an estimated fair value of $4,480,000.
In February 1998, the Company completed the acquisition of 100% of the
outstanding common stock of Information Presentation Systems, Inc. (IPS). IPS is
located in Marietta, Georgia, and is engaged in the sale of customized
multimedia systems for use in a variety of dental operatory applications. The
Company paid total consideration of $888,200 to acquire IPS, consisting of
$200,000 in cash payments, and 320,000 shares of the Company's common stock with
an estimated fair value of $688,200.
In April 1998, the Company completed the acquisition of 100% of the
outstanding common stock of DOM, Inc., d/b/a Command Dental Systems (Command).
Command is located in Farmington Hills, Michigan, and is engaged in the
development and sale of computer software and hardware systems for the
management of dental practices. The Company paid total consideration of $719,600
to acquire Command, consisting of notes payable of $379,600 (net of discount)
and 141,700 shares of the Company's common stock with an estimated fair value of
$340,000.
The acquisitions were accounted for using the purchase method of accounting
for business combinations and, accordingly, the accompanying consolidated
financial statements include the results of operations of the acquired
businesses since the respective dates of acquisition. The Company recorded
goodwill of approximately $1,024,500, $731,000, and $257,600 related to the
acquisitions of CADI, IPS, and Command, respectively. In connection with the
acquisitions, IPS and Command were merged into CADI. The following unaudited pro
forma information assumes that the acquisitions had occurred on October 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
Revenue..................................................... $ 9,327,000
Net loss.................................................... $(2,478,000)
Net loss per share.......................................... $ (.26)
</TABLE>
In March 1999, the Company filed litigation against the former Command
principals. The litigation sought, among other things, rescission of the April
1998 merger agreement by which the Company acquired the assets of Command Dental
Systems, Inc. from the Command shareholders, rescission of an employment
agreement and damages. The Command principals filed actions against the Company
for breach of an office lease and breach of the employment agreement, an for
other claims. Both of these suits were settled in August 1999. As a result of
the settlement, the Company reduced its indebtedness to the former Command
principals from approximately $500,000 (which was current indebtedness) to
$250,000 of long-term indebtedness; the Company retained approximately 150
former Command clients who had converted to the Company's software; and the
Company terminated all lease obligations on the Command office space and the
employment agreement with the Command principal. In addition, the parties
entered into mutual, general releases and stipulations to dismiss the
litigation. The Company recognized
F-49
<PAGE> 151
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a loss of approximately $287,000 which represented the excess of assets
surrendered over liabilities retained.
5. LONG-TERM LIABILITIES
CONVERTIBLE DEBENTURES. In October 1997, the Company issued convertible
debentures totaling $1,100,000. The debentures are uncollateralized and bear
interest at 8% per annum, payable semi-annually in cash or, at the Company's
option, in shares of the Company's common stock. The principal balance is due
October 2000 and the holder of the debentures has the option to convert the
debentures into shares of the Company's common stock. Any unpaid principal and
interest as of October 31, 2000 will automatically be converted into shares of
the Company's common stock. The conversion price is equal to the average of the
two lowest closing bid prices of the Company's common stock as reported by
NASDAQ during the 60 trading days preceding the conversion date. The Company
received net proceeds of $986,000 from the debentures, after paying all costs
related to the issuance. Through September 30, 1998, the holder had converted
$660,000 of debentures to 315,700 shares of common stock. In October 1998, the
holder converted the remaining $440,000 of debentures to 234,667 shares of
common stock.
The Company also granted the debenture holder a warrant to purchase 84,615
shares of the Company's common stock. The warrant is exercisable until October
31, 2000 at an exercise price of $3.38. The estimated fair value of this warrant
of $120,000 was accounted for as a discount on the convertible debentures.
During 1999, these warrants were canceled.
In July 1998, the Company issued additional convertible debentures totaling
$1,100,000. The debentures are uncollateralized and bear interest at 8% per
annum, payable semi-annually in cash or, at the Company's option, in shares of
the Company's common stock. The principal balance is due July 2003 and the
holder of the debentures has the option to convert the debentures into shares of
the Company's common stock beginning in November 1998, when one-third of the
principal balance may be converted, January 1999 when two-thirds may be
converted, and March 1999 when the entire balance may be converted. Any unpaid
principal and interest as of July 31, 2003 will automatically be converted into
shares of the Company's common stock. The conversion price is equal to the
average of the two lowest closing bid prices of the Company's common stock as
reported by NASDAQ during the 60 trading days preceding the conversion date. The
Company received net proceeds of $1,003,000 from the debentures, after paying
all costs related to the issuance. Through September 30, 1999, the holder had
converted $800,000 of debentures to 910,200 shares of common stock.
The Company also granted the Debenture holder a warrant to purchase 110,000
shares of the Company's common stock. The warrant is exercisable until July 31,
2003 at an exercise price of $2.58. The estimated fair value of this warrant of
$100,000 was accounted for as a discount on the convertible debentures.
In November 1998, the Company issued an additional $400,000 of convertible
debentures with terms similar to the July 1998 issuance described above, except
for a 3-month delay for the principal conversion privileges. The Company also
agreed to
F-50
<PAGE> 152
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issue an additional warrant for 40,000 shares exercisable until November 2003 at
an exercise price of $2.58 per share. The estimated fair value of the warrants
of $40,000 was accounted for as a discount on the convertible debenture.
During fiscal 1999, the Company entered into amendments to modify certain
terms and conditions of the debentures. The conversion price will be equal to
85% of the average of the two lowest closing bid prices over a 60-day period
immediately preceding the date of conversion. As a result of the issuance of
warrants in 1999 private placement, the exercise price of the outstanding
warrants to acquire 150,000 shares at $2.58 per share was decreased to $1.832.
Up to one third of the July 1998 and November 1998 debentures is convertible
from and after January 1, 1999, up to two thirds is convertible after June 1,
1999 and the entire debenture is convertible after January 1, 2000.
The debenture holder may not convert 1998 debentures which would result in
the issuance of more than 1,880,000 shares. If the holder is precluded from
converting any debentures because of this provision, it may demand, upon six
months' notice, that the Company redeem the remaining debentures for 115% of the
principal amount. As of September 30, 1999, this limitation would result in
approximately $275,000 of the debentures (net of discount) being potentially
redeemable. This amount has been classified as a current liability in the
accompanying consolidated balance sheet.
As a result of the amendments, additional debt issuance costs of
approximately $260,000 were recorded.
F-51
<PAGE> 153
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1999, convertible debentures consist of the following:
<TABLE>
<S> <C>
Interest at 8%, due July 2003, unsecured.................... $ 300,000
Discount for fair value of warrant, net of accumulated
amortization of $6,600.................................... (21,500)
---------
Net.................................................. 278,500
---------
Interest at 8%, due November 2003, unsecured................ 400,000
Discount for fair value of warrant, net of accumulated
amortization of $7,300.................................... (32,700)
---------
Net.................................................. 367,300
---------
Convertible debentures............................... 645,800
Less current maturities..................................... (275,000)
---------
Convertible debentures, less current maturities...... $ 370,800
=========
Notes Payable -- At September 30, 1999, long-term debt
consists of the following:
Notes payable to former shareholders of CADI:
Interest at 12%, due July 2000 or upon sale of the
Company............................................... $ 126,700
---------
Notes payable to former owners of Command:
Interest at 6%, due April 2003, unsecured.............. 250,000
Discount for below-market interest, net of accumulated
amortization of $2,758................................ (44,900)
---------
Net.................................................. 205,100
---------
Note payable to shareholder:
Interest at 12%, due July 2000 or upon sale of the
Company, collateralized by substantially all of the
Company's assets...................................... 400,000
Notes payable to vendors:
Interest at 8%, due April 2000, unsecured.............. 48,800
Interest at 8%, due December 1999, unsecured........... 40,300
Other.................................................. 55,400
---------
Total notes payable.................................. 876,300
Less current maturities..................................... (668,700)
---------
Notes payable, less current maturities............... $ 207,600
=========
</TABLE>
The effective interest rate on the debt incurred under the notes payable to
the former owners of CADI and Command was 15% to 16%.
F-52
<PAGE> 154
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGGREGATE MATURITIES. As of September 30, 1999, aggregate maturities of
notes payable and convertible debentures are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, PRINCIPAL DISCOUNT NET
------------------------- ---------- -------- ----------
<S> <C> <C> <C>
2000........................................... $1,002,500 $ 58,800 $ 943,700
2001........................................... 106,000 29,500 76,500
2002........................................... 106,000 22,700 83,300
2003........................................... 308,500 14,200 294,300
2004........................................... 125,000 700 124,300
---------- -------- ----------
Total $1,648,000 $125,900 $1,522,100
========== ======== ==========
</TABLE>
LINE-OF-CREDIT. In October 1998, the Company entered into a line-of-credit
agreement with a financial institution. The line-of-credit provided for maximum
borrowings of $1.0 million with an initial borrowing base of $400,000. In August
1999, all amounts due under the line were repaid and the agreement was
terminated.
6. STOCKHOLDERS' EQUITY
In March 1999, an unaffiliated entity purchased 523,800 shares of the
Company's common stock for $800,000. In addition, the Company agreed to issue
additional shares to this entity at various determination dates which are
intended to compensate the entity for one-third of any decrease in the market
price of the Company's stock. The Company is obligated to issue no more than
2,060,033 shares and warrants pursuant to this obligation. As of September 30,
1999, the Company has issued an additional 311,800 shares under this agreement.
In November 1999, the Company issued 77,866 additional shares and warrants to
purchase 523,834 shares of restricted common stock at $1.527 per share through
May 2000. The Company has no further obligations under the agreement.
STOCK OPTION PLAN. The Company has two stock option plans under which
incentive and non-qualified stock options may be granted to officers, directors,
employees, and consultants. Incentive stock options are required to have an
exercise price which is not less than the fair market value of the stock at the
date of grant. Under the first plan which was approved by shareholders in
October 1988, an aggregate of 1,000,000 shares were reserved for issuance
pursuant to the terms of the plan. Under the second plan which was approved by
shareholders in June 1998, an aggregate of 1,500,000 shares were reserved for
issuance pursuant to the terms of the plan. The maximum term is 10 years for
options granted
F-53
<PAGE> 155
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under both plans. Activity in the 1988 and 1998 stock option plans for the years
ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1988 PLAN 1998 PLAN
-------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE PRICE NUMBER EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE
--------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, September 30, 1997... 61,700 $1.83 -- $ --
Granted......................... 5,000 2.63 -- --
Exercised....................... (7,500) 2.75 -- --
Canceled........................ (2,000) 3.00 -- --
------ ----- ------- ------
Outstanding, September 30, 1998... 57,200 1.74 -- --
Granted......................... -- -- 234,800 .93
Exercised....................... -- -- -- --
Canceled........................ (5,000) 3.00 -- --
------ ----- ------- ------
Outstanding, September 30, 1999... 52,200 $1.61 234,800 $ .93
====== ===== ======= ======
</TABLE>
Options available for future grant at September 30, 1999 totaled 1,265,200
shares under the 1998 plan. No shares were available for future grants under the
1988 plan.
As of September 30, 1999, all options outstanding under the 1988 plan are
vested and 214,800 are vested under the 1998 plan. If not previously exercised,
options outstanding at September 30, 1999, will expire as follows:
<TABLE>
<CAPTION>
1988 PLAN 1998 PLAN
-------------------- --------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
YEAR ENDING SEPTEMBER 30, SHARES PRICE SHARES PRICE
------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
2000..................................... -- $ -- 20,000 $1.50
2001..................................... 37,200 1.38 -- --
2002..................................... 10,000 2.00 -- --
2003..................................... 5,000 2.63 -- --
2004..................................... -- -- 214,800 .88
------ ----- ------- -----
52,200 $1.61 234,800 $ .93
====== ===== ======= =====
</TABLE>
F-54
<PAGE> 156
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-QUALIFIED STOCK OPTIONS AND WARRANTS. The Company has also granted
non-qualified stock options and warrants to officers, directors, employees,
consultants, and lenders. The following is a summary of activity during the
years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
OUTSTANDING, SEPTEMBER 30, 1997........................ 1,593,900 $2.80
Granted to:
Employees............................................ 2,358,200 3.48
Consultants.......................................... 300,000 4.42
Convertible debenture holders........................ 194,600 2.93
Canceled............................................... (205,200) 3.22
Exercised.............................................. (5,000) 2.75
---------- -----
OUTSTANDING, SEPTEMBER 30, 1998........................ 4,236,500 3.28
Granted to:
Employees............................................ 610,800 3.04
Consultants.......................................... 100,000 1.50
Convertible debenture holders........................ 40,000 2.58
Canceled............................................... (1,566,700) 3.70
Exercised.............................................. -- --
---------- -----
OUTSTANDING, SEPTEMBER 30, 1999........................ 3,420,600 2.99
========== =====
</TABLE>
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<PAGE> 157
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If not previously exercised, non-qualified options and warrants expire as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
YEAR ENDING SEPTEMBER 30, SHARES PRICE
------------------------- --------- --------
<S> <C> <C>
2000....................................................... 160,900 $1.13
2000....................................................... 40,000 2.58
2000....................................................... 75,000 4.50
2001....................................................... 82,000 2.00
2001....................................................... 250,000 2.87
2001....................................................... 115,000 3.75
2002....................................................... 100,000 1.50
2002....................................................... 10,200 3.00
2003....................................................... 52,000 1.50
2003....................................................... 258,900 2.68
2003....................................................... 415,800 3.64
2004....................................................... 140,800 1.60
2004....................................................... 20,000 3.25
2005....................................................... 1,200,000 3.25
2006....................................................... 500,000 3.25
---------
3,420,600
=========
</TABLE>
At September 30, 1999, a total of 2,715,600 non-qualified stock options and
warrants are vested. Unvested employee performance options were outstanding for
550,000 shares. These options vest when the Company achieves various revenue
levels. The Company also has 175,000 options outstanding that vest at future
dates. Vesting under most of these options can be accelerated if various
performance targets are achieved.
During the years ended September 30, 1999 and 1998, the Company recognized
compensation expense of $32,100 and $8,900, respectively, related to employee
performance options. The ultimate amount of compensation expense related to the
employee performance options will be determined based on the market value of the
Company's common stock on the date that the options vest.
F-56
<PAGE> 158
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of options granted to non-employees in 1999 and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Expected volatility......................................... 78.0% 70.0%
Risk-free interest rate..................................... 6.0% 5.7%
Expected dividends.......................................... .0% .0%
Expected terms (in years)................................... .7 1.5
</TABLE>
For the years ended September 30, 1999 and 1998, options granted to
non-employees resulted in the recognition of approximately $17,400 and $25,000,
respectively, of compensation expense.
PRO FORMA STOCK-BASED COMPENSATION DISCLOSURES. The Company applies APB
Opinion 25 and related interpretations in accounting for stock options which are
granted to employees. Accordingly, no compensation cost is recognized for grants
of options to employees if the exercise prices were not less than the market
value of the Company's common stock on the measurement dates. Had compensation
cost been determined based on the fair value at the measurement dates consistent
with the method of SFAS No. 123, the Company's net loss and loss per share would
have been changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss:
As reported......................................... $(5,398,100) $(2,521,500)
Pro forma........................................... (6,739,100) (4,838,700)
Net loss per common share:
As reported......................................... $ (.52) $ (.27)
Pro forma........................................... (.65) (.51)
</TABLE>
F-57
<PAGE> 159
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of the above pro forma amounts, the weighted average fair
value of options granted to employees for the years ended September 30, 1999 and
1998 was $1.00 and $1.67, respectively. The fair value of each employee option
granted in 1999 and 1998 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Expected volatility......................................... 81.0% 70.0%
Risk-free interest rate..................................... 6.0% 5.7%
Expected dividends.......................................... .0% .0%
Expected terms (in years)................................... 4.5 4.0
</TABLE>
7. INCOME TAXES
The amounts which give rise to the net deferred tax asset at September 30,
1999, are as follows:
<TABLE>
<S> <C>
Current Assets:
Allowance for doubtful accounts........................... $ 25,100
Provision for obsolete and slow-moving inventories........ 100,900
Accrued expenses.......................................... 11,200
-----------
Total current assets................................... 137,200
-----------
Long-term Assets:
Property and equipment.................................... 29,700
Patents, patents pending, and trademarks.................. 3,500
Compensation expense related to stock options............. 145,100
Net operating loss carryforwards.......................... 8,600,000
Research and development tax credit carryforwards......... 23,100
-----------
Total long-term assets................................. 8,801,400
-----------
Total deferred tax assets.............................. 8,938,600
Valuation allowance......................................... (8,938,600)
-----------
$ --
===========
</TABLE>
Management has determined that a valuation allowance equal to the deferred
tax assets is required since it is more likely than not that the benefits of
these assets will not be realized. The valuation allowance increased by $900,000
and $397,000 during the years ended September 30, 1999 and 1998, respectively,
due to the increase in the deferred tax asset balances which were completely
offset by a valuation allowance at each of those dates.
At September 30, 1999, the Company has approximately $23,100,000 of net
operating loss carryforwards, and approximately $62,000 of research and
development tax credit carryforwards, both of which expire in varying amounts
from 2000 through 2019. Usage of
F-58
<PAGE> 160
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the net operating loss carryforwards may be limited by Section 382 of the
Internal Revenue Code.
8. COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENT. The Company has various agreements to pay royalties to
both a former officer and current directors of the Company. These royalties are
based on the sales of specified products, some of which are no longer
manufactured by the Company. In June 1987, the Company entered into a license
agreement with its then CEO and Chairman relating to the use of certain
technology invented and developed by the Chairman. In connection with the
agreement, the Company agreed to pay royalties based on the greater of 2% of
sales of products which relate to this technology or minimum annual royalties of
$120,000.
During 1997, the license agreement was amended to eliminate the minimum
annual royalty and to provide for future royalties generally equal to 2% of
sales of the products that relate to the technology. For the years ended
September 30, 1999 and 1998, the Company did not incur any royalty expense
related to this agreement. The license agreement may be terminated by the
Chairman in certain circumstances and the rights to the patents may revert to
him if commercial development of the related products does not occur within
prescribed deadlines.
DISTRIBUTION AGREEMENT. During the year ended September 30, 1995, the
Company transferred to an entity owned by the Chairman the rights to patents
with a net book value of approximately $21,000. The patents had originally been
obtained from the Chairman under the license agreement described above, and were
transferred because the Company was unable to obtain FDA approval for products
using the patents. The related entity has since obtained FDA approval and has
entered into an exclusive agreement to have the Company distribute all products
it manufactures. The agreement expires in June 2000. The Company did not
purchase any product under the agreement through September 30, 1999.
REGULATORY MATTERS. The Company's medical products are regulated by the
Federal Food and Drug Administration (FDA). The Company cannot ensure that an
adverse financial impact will not occur should the FDA find the Company's Good
Manufacturing Practices are in non-compliance with current Federal regulations.
If the FDA finds that a manufacturer is not in compliance, the manufacturer may
be prohibited from marketing the products for which they are not in compliance,
until such time as the manufacturer complies with the applicable FDA regulation.
OPERATING LEASES. The Company conducts its operations from leased
facilities and leases certain equipment. The terms of the facilities leases
require the Company to pay all maintenance, utilities, property taxes and
insurance. The Company has subleased a portion of its Englewood, Colorado office
space to its chairman for $9,000 per month on a month-to-month basis. Rent
expense has been recorded on a straight-line basis over the life of the lease.
Following is a schedule of future minimum commitments under operating leases
having an initial or remaining term of more than one year.
F-59
<PAGE> 161
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30,
--------------------------
<S> <C>
2000........................................................ $256,200
2001........................................................ 170,900
2002........................................................ 23,200
2003........................................................ --
--------
$450,300
========
</TABLE>
Total rent expense was $430,400 and $421,900, net of sublease rentals
received, for the years ended September 30, 1999 and 1998, respectively.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with two
individuals who are officers or directors of the Company or CADI. As of
September 30, 1999, the agreements were effective for a period of three years
with an annual aggregate compensation of $210,000.
CONTINGENCIES. The Company may from time to time be involved in various
claims, lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract incidental to the operations of its
business. The Company is currently involved in some incidental litigation which
it believes will not have a material adverse effect on its financial condition
or results of operations.
9. SUBSEQUENT EVENTS (UNAUDITED)
In December 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization with InfoCure Corporation (InfoCure) wherein InfoCure will
acquire 100% of the outstanding common stock of the Company in exchange for
shares of InfoCure.
In October 1999, InfoCure lent the Company a total of $500,000 at an
interest rate of 12%, due at maturity, for the purpose of repayment of debt and
for working capital. Unless further extended by InfoCure, this loan will come
due March 28, 2000. As collateral for the loan, the Company pledged
substantially all of its assets. As part of the Merger Agreement, InfoCure has
agreed to lend the Company an additional $500,000 for working capital purposes
by January 15, 2000 and amend the maturity date on the total of $1,000,000 in
debt to the later of 120 days from any termination date by InfoCure, or July 31,
2000.
F-60
<PAGE> 162
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents........................................ $ 417,400 $ 180,000
Trade receivables, less allowance for doubtful accounts of
$54,800 and $67,300....................................... 28,200 254,400
Inventories................................................. 2,500 189,200
Prepaid expenses............................................ 800 21,100
------------ -----------
Total current assets.................................... 448,900 644,700
------------ -----------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of accumulated amortization
of $1,205,000 and $856,200
2,065,000 2,345,600
Technical support contracts, net of accumulated amortization
of $816,500 and $593,800
668,000 890,700
------------ -----------
Total software development and support.................. 2,733,000 3,236,300
------------ -----------
PROPERTY AND EQUIPMENT:
Demonstration equipment..................................... 438,200 438,200
Machinery and equipment..................................... 606,100 606,100
Furniture and fixtures...................................... 235,600 235,600
Leasehold improvements...................................... 54,500 54,500
------------ -----------
1,334,400 1,334,400
Less accumulated depreciation and amortization.............. (1,002,400) (913,300)
------------ -----------
Property and equipment, net............................. 332,000 421,100
------------ -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $204,100 and
$139,900.................................................. 1,072,000 1,136,200
Non-compete agreements, net of accumulated amortization of
$174,200 and $151,700..................................... 25,000 47,500
Debt issuance costs, net of accumulated.....................
amortization of $560,300 and $481,000..................... 800 80,100
Patents and trademarks, net of accumulated amortization of
$795,600 and $785,900..................................... 3,100 12,800
Deposits and other.......................................... 22,000 24,300
------------ -----------
Total other assets...................................... 1,122,900 1,300,900
------------ -----------
Total assets............................................ $ 4,636,800 $ 5,603,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable & convertible
debentures:............................................... $ 2,003,200 $ 943,700
Accounts payable............................................ 97,000 622,000
Accrued expenses............................................ 501,100 497,600
Unearned revenue............................................ 299,300 368,500
------------ -----------
Total current liabilities............................... 2,900,600 2,431,800
------------ -----------
Notes payable, net.......................................... 138,800 207,600
Convertible debentures, net................................. -- 370,800
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized 5,000,000
shares; none issued and outstanding....................... -- --
Common stock, $.001 par value; authorized 30,000,000 shares;
issued & outstanding 13,247,000 and 12,214,300 shares..... 13,200 12,200
Additional paid-in capital.................................. 28,353,100 27,771,700
Accumulated deficit......................................... (26,768,900) (25,191,100)
------------ -----------
Total stockholders' equity.............................. 1,597,400 2,592,800
------------ -----------
Total liabilities and stockholders' equity.............. $ 4,636,800 $ 5,603,000
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-61
<PAGE> 163
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
NET SALES:
Software & training................................... $ 766,900 $ 3,348,200
Equipment & installation.............................. 226,800 3,949,100
Support services...................................... 1,971,000 1,832,400
----------- -----------
2,964,700 9,129,700
----------- -----------
COST OF SALES:
Software & training................................... 472,700 1,040,800
Equipment & installation.............................. 416,300 2,891,100
Support services...................................... 529,000 628,200
----------- -----------
1,418,000 4,560,100
----------- -----------
Gross profit.......................................... 1,546,700 4,569,600
----------- -----------
OPERATING EXPENSES:
Selling & marketing................................... 469,700 2,401,100
General & administrative.............................. 2,337,300 4,856,100
Stock based compensation.............................. 24,400 42,500
Research & development................................ -- 2,700
----------- -----------
Total operating expenses............................ 2,831,400 7,302,400
----------- -----------
Operating loss........................................ (1,284,700) (2,732,800)
OTHER INCOME (EXPENSE):
Other income.......................................... 3,800 41,000
Interest income....................................... 10,100 11,100
Interest expense...................................... (307,000) (412,200)
----------- -----------
Net loss............................................ $(1,577,800) $(3,092,900)
=========== ===========
Earnings per share.................................... $ (0.12) $ (0.29)
=========== ===========
Weighted average number of shares outstanding......... 12,720,900 10,628,600
</TABLE>
See Notes to Consolidated Financial Statements.
F-62
<PAGE> 164
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................... $(1,577,800) $(3,092,900)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock options granted for compensation and other
services................................................ 24,400 42,000
Depreciation expense...................................... 89,100 117,200
Amortization of intangible assets......................... 667,900 529,700
Amortization of debt discount and issuance costs.......... 117,000 202,000
Conversion of accrued interest on debentures to common
stock................................................... -- 83,700
Provision for obsolete and slow moving inventories........ (31,600) 230,000
Changes in operating assets and liabilities, net of effect
of acquisitions:
Decrease (increase) in:
Trade receivable..................................... 226,200 386,700
Restricted cash...................................... -- 50,000
Inventories.......................................... 218,300 (205,800)
Prepaid expenses and other assets.................... 22,600 (8,300)
Deposits and other................................... -- (36,800)
Increase (decrease) in:
Accounts payable..................................... (525,000) 345,700
Accrued expenses..................................... 3,500 391,200
Unearned revenue..................................... (69,200) (29,800)
----------- -----------
Net cash used in operating activities.............. (834,600) (995,400)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs.................................. (68,200) (156,000)
Purchase of property and equipment.......................... -- (83,600)
----------- -----------
Net cash used in investing activities.............. (68,200) (239,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... 1,300,000 671,800
Principal payments related to:
Notes payable............................................. (304,700) (486,000)
Capital lease obligations................................. (39,400) (28,800)
Debt issuance costs......................................... -- (58,000)
Proceeds from exercise of options of common stock........... 184,300 124,400
Net proceeds from issuance of convertible debenture......... -- 767,100
----------- -----------
Net cash provided by financing activities.......... 1,140,200 990,500
----------- -----------
Net increase/(decrease) in cash and equivalents............. 237,400 (244,500)
Cash and equivalents, beginning of period................... 180,000 553,100
----------- -----------
Cash and equivalents, end of period......................... $ 417,400 $ 308,600
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.................................... $ 24,800 $ 47,800
=========== ===========
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Conversion of debentures to common stock, net of
discount................................................ $ 373,700 $ 1,140,000
Fair value of inducement related to amendment to
convertible debentures.................................. -- $ 259,400
Increase(decrease)in payables for capital expenditures.... -- $ (17,300)
Debt issuance costs incurred for convertible debenture.... -- $ 40,000
</TABLE>
See Notes to Consolidated Financial Statements.
F-63
<PAGE> 165
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with Medical Dynamics, Inc.'s ("MEDY" or the "Company")
Form 10-KSB for the year ended September 30, 1999. The results of operations for
the periods ended June 30, 2000 and June 30, 1999 are not necessarily indicative
of operating results for the full years.
The Consolidated Financial Statements and other information furnished
herein reflect all adjustments which are, in the opinion of management of MEDY,
necessary for a fair presentation of the results of the interim periods covered
by this report. Adjustments to the financial statements were of a normal
recurring nature.
NOTE 2. EARNINGS PER SHARE
Shares issuable under common stock options and warrants were excluded from
the computation of fully diluted earnings per share because the effect was
anti-dilutive. At June 30, 2000, MEDY had 2,596,737 of vested common stock
options and warrants outstanding. Total common stock options and warrants
outstanding (including both vested and unvested) were 3,316,737 at June 30,
2000.
NOTE 3. INVENTORIES
Inventories consist of the following at June 30, 2000 and September 30,
1999:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------- -------------
<S> <C> <C>
Raw materials and replacement parts.................... $ 186,700 $ 186,700
Finished goods......................................... 29,200 247,500
Allowance for obsolescence............................. (213,400) (245,000)
--------- ---------
$ 2,500 $ 189,200
========= =========
</TABLE>
At June 30, 2000 total inventories have decreased $ 186,700 due to
liquidated sales of finished goods inventories.
NOTE 4. UNEARNED REVENUE
Unearned revenue represents payments received on deferred software support
contracts, installation charges and training that have not been earned. The
amounts for deferred software support contracts are amortized into revenue on a
monthly basis using the straight-line method over the life of the contract.
Deferred amounts for installation and training are recognized when the services
are performed.
Costs for software support contracts, installation and training, are
charged to expense when those costs are incurred.
F-64
