UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
For the Fiscal year ended March 31, 1997
Commission File Number 0-15352NY
US SERVIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2467332
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) Number)
220 Davidson Avenue, Somerset, New Jersey 08873
(Address of principal executive offices) (Zip Code)
(732) 764-9898
(Registrant's telephone number, including area code)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.
[ ]
At June 20, 1997, the aggregate market value of the voting stock of the
registrant held by non-affiliates was approximately $8 million.
At June 20, 1997, the registrant had 6,351,000 outstanding shares of Common
Stock, par value $0.01 per share, 1,500,000 shares of Series A Convertible
Preferred Stock, par value $0.01 per share, and 1,000,000 shares of Series B
Convertible Preferred Stock, par value $0.01 per share.
Documents Incorporated by Reference:
Specified portions of the US Servis, Inc. proxy statement to be distributed in
connection with the registrant's 1997 Annual Meeting are incorporated by
reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
ITEM 1: BUSINESS.............................................................................................. 1
Company Overview...................................................................................... 1
Company Mission and Company Goal................................................................... 1
Recent Developments................................................................................. 1
Industry Overview..................................................................................... 3
Physician Practice Management Services...............................................................4
Hospital Billing and Accounts Receivable Management Services....................................... 4
Regulation..............................................................................................5
Governmental Constraints and Healthcare Reform..........................................................6
Company's Principal Markets............................................................................ 6
Company's Principal Products ...........................................................................7
Company's Relationship with Clients.....................................................................9
Information Systems.................................................................................. 10
Fiscal 1997 Financial Information.................................................................... 11
Company's Business Strategy........................................................................... 12
Competition........................................................................................... 13
Operations and Employees.............................................................................. 14
Board of Directors................................................................................... 15
Executive Officers of the Company..................................................................... 16
ITEM 2: PROPERTIES............................................................................................ 19
ITEM 3: LEGAL PROCEEDINGS..................................................................................... 19
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 21
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS............................. 21
ITEM 6: SELECTED FINANCIAL DATA............................................................................... 22
ITEM 7: MANAGEMENT'S DISCUSSION OF FINANCIAL RESULTS.......................................................... 24
General............................................................................................... 24
Liquidity and Capital Resources....................................................................... 24
Results of Operations................................................................................. 25
1997 Compared to 1996................................................................................. 26
1995 Compared to 1994................................................................................. 26
ITEM 8: FINANCIAL STATEMENTS AND SCHEDULES.................................................................... 27
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................. 27
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................... 27
ITEM 11: EXECUTIVE COMPENSATION................................................................................ 28
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................ 28
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................ 28
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................................... 28
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ITEM 1: BUSINESS
COMPANY OVERVIEW US Servis, Inc., together with its subsidiaries("US Servis" or
the "Company"), is a management services company that provides outsourced
billing, accounts receivable and other business and information management
services to physicians and physician networks, hospital business offices, and
ambulatory care centers. The Company's primary market is Integrated Delivery
Systems ("IDS"). As providers (physicians and hospitals) consolidate into IDSs,
encounter more competition and higher managed care penetration and experience
increased pressure to provide more services with fewer resources, the Company's
management believes that the managers of these systems will have sound business
reasons to outsource some or all of their business management activities and
contract with a management services company such as US Servis.
COMPANY MISSION The Company's mission is to provide superior, cost-effective
business and information management services that support its customers' efforts
to improve their strategic position and financial performance and relieve them
of administrative burdens so they can focus on network development and the
efficient delivery of healthcare services.
COMPANY GOAL The Company's primary goal is to develop a leadership position in
the healthcare business management services industry. Management believes this
goal will be achieved through internal growth aided by strategic alliances with
companies and organizations that have leadership positions in the healthcare
services and information systems market. The achievement of these goals will
allow the Company to develop a network of regional service centers capable of
providing high quality, cost effective accounts receivable and other business
and information management services to the Company's clients. The Company's
development of its service center in central New Jersey to support several
hospital business offices and a new, major northern New Jersey physician faculty
practice plan and its service center in Denver, Colorado, where the Company was
awarded a contract to manage a major IDS's physician network, are examples of
the Company's success in establishing regional service centers to provide
accounts receivable and other business management services to physicians,
physician organizations, and hospitals associated with Integrated Delivery
Systems.
RECENT DEVELOPMENTS Key events during Fiscal 1997 include:
(a) SALES AND MARKETING PROGRESS DURING FISCAL 1997, the
Company was successful in obtaining business management
services contracts that, when fully implemented, will provide
approximately $6.5 million of incremental annual revenues.
These contracts include: (1) an agreement with
University Physician Associates, the Faculty Practice Plan
associated with the University of Medicine and Dentistry of
New Jersey to develop and manage a central business office;
(2) an agreement with the Hospital for Special Surgery
in New York City to extend the term of the
existing hospital outpatient business management services
agreement and provide outsourced inpatient billing and
accounts receivable management services; and (3)
agreements to provide business management services to the
Medical Services Organizations ("MSO") associated with the
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Columbia HealthOne System in Denver, Colorado and the North
General Hospital System in New York City. The Company also
renewed for two years its agreement to provide business
management services to Mount Sinai Medical Group in Elmhurst,
New York and its agreement to provide remote
computing services to Beth Israel Medical Center in New York,
New York. Contract terminations in Fiscal 1997 will reduce
annual revenues, on a going forward basis, by
approximately $1.1 million.
(b) INSTALLATION AND CLIENT RELATIONSHIP DIFFICULTIES AT
METROPLUS, THE COMPANY'S LARGEST CLIENT During Fiscal 1997,
the Company experienced material difficulties at its largest
client, MetroPlus. MetroPlus, a public health HMO serving the
New York City Medicaid population is the Company's only HMO
client. During Fiscal 1997, MetroPlus accounted for 21.2%,
($4.7 million) of the Company's revenues. (See Item 3: Legal
Proceedings for a more complete discussion of the existing
dispute and litigation between the Company and MetroPlus).
(c) THE CREATION OF A STRATEGIC ALLIANCE WITH IDX SYSTEMS
CORPORATION. IDX Systems Corporation ("IDX") is a leading
provider of healthcare information systems to medical
group practices, physician delivery systems and faculty
practice plans. IDX software products are installed in
more than 1000 client sites nationwide. Under the terms
of a strategic alliance agreement executed in December
1996, the Company and IDX will provide the physician market
with a "total solution" consisting of IDX providing
state-of-the-art information systems, and US Servis
providing business office outsourcing servicing and
appropriate consulting, implementation and
support services. The two firms will work together to
identify and promote their combined
"total solution" to prospective clients as well as current
IDX and US Servis customers. The alliance includes
provisions under which the two firms agree that each will be
the preferred provider of their respective products and
services to current and prospective customers.
Management believes that the IDX strategic alliance
will enhance the Company's product offerings and provide
the Company with the opportunity to become involved in
new sales opportunities that may not have been otherwise
possible.
(d) RESTRUCTURING OF THE COMPANY'S SALES AND MARKETING
ORGANIZATION The creation of the IDX strategic alliance
together with the difficulties at MetroPlus have resulted in
management's re-evaluation and subsequent restructuring of
the Company's sales and marketing organization.
This restructuring included a consolidation and reduction
of the field sales organization to focus resources on
opportunities created as a result of the IDX strategic
alliance, a de-emphasis of sales and marketing efforts
directed toward managed care organizations
(including HMOs), and a de-emphasis of the Company's
sales and marketing efforts in the hospital based
physician market where the Company's management concluded
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that the sales and marketing model did not provide an adequate
economic return.
(e) COMPLETION OF A SECOND ROUND OF PRIVATE EQUITY CAPITAL
FINANCING In October 1996, the Company closed a $4.0 million,
Series B Convertible Preferred Stock, private equity
financing. Frontenac VI Limited Partnership, a Chicago,
Illinois based venture capital firm, served as the lead
investor. Frontenac VI also served as the lead investor for
the Company's 1995 Series A Convertible Preferred Stock
offering. The Series B Convertible Preferred Stock financing
provided the Company with cash to fund growth and ongoing
operations.
(f) IMPLEMENTATION OF A CHANGE IN THE COMPANY'S METHOD FOR
REPORTING REVENUE ON ITS FINANCIAL STATEMENTS In June
1997, the Company requested from the Securities and
Exchange Commission (the "SEC") permission to include work
in process as revenue on its financial statements. The
SEC, upon review, concluded that such recognition was
appropriate. The Company believes this change will allow it
to more accurately match revenue and expense and bring
the Company's revenue recognition reporting policies in
line with those of most other publicly traded
providers of healthcare business management services.
This change in revenue recognition, which is retroactively
applied in the Fiscal 1996 and 1995 financial statements
included in this report, does not have a material effect on
the income statements for Fiscal 1996 and 1995. It does,
however, result in a material increase ($794,000) in the
stated net worth of the Company.
INDUSTRY OVERVIEW The United States Healthcare Financing Administration("HCFA")
estimated healthcare expenditures in the United States for 1994 at $1 trillion,
representing more than 16% of the Gross National Product ("GNP"), an increase
from $666 billion, or 12% of GNP, in 1990. In 1994, expenditures for hospital
services totaled $400 billion and expenditures for physician services were $195
billion. In response to the pressure being placed on physicians and hospitals to
improve access and stabilize costs, providers have moved more and more of the
focus of healthcare out of the institutional, inpatient setting into less costly
alternative sites that include physicians' offices, ambulatory/outpatient
centers and alternative care sites. Based on information released by HCFA,
between 1981 and 1991, the number of hospital admissions declined by 15% while
the number of hospital outpatient visits increased from 92 million to 360
million. During the same period, the percentage of the national healthcare
dollars spent on physician and professional services increased by 18%.
These trends, together with increased penetration of managed care organizations
and other pre-paid health plans, have made it increasingly difficult for
physicians, hospitals, hospital outpatient departments and free standing
ambulatory care centers to manage their billing and accounts receivable
collection activities.
Healthcare providers receive payment for medical services from the patients they
serve and a variety of third party payors, including employers, private
insurance companies, the Medicare program and state Medicaid programs.
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Healthcare providers are under increasing pressure to accept the assignment of
insurance benefits from their patients and assume the primary responsibility for
obtaining payment from third party payors. The task of collecting these third
party payments is frequently made more difficult by the need to submit payor
specific claims forms, secure pre-approval from the payor before care is
provided and reconcile payments to amounts negotiated in provider agreements and
submitted claims.
The Company's management believes that shifts in the structure of the healthcare
delivery system, efforts to optimize revenue, convert accounts receivable to
cash more quickly, and more effectively manage the business of healthcare have
increased the demand for the types of services the Company offers. The Company's
management also believes that the changes currently underway in today's
healthcare environment, including healthcare reform initiatives, create an
opportunity for the Company to expand its scope of services and the number of
clients served.
PHYSICIAN BUSINESS MANAGEMENT SERVICES The market for business and practice
management services to hospital based physicians and certain sub-specialists is
well established. These physicians have historically been willing to utilize the
services of outside contractors to manage their billing and accounts receivable
management activities and in many cases all of the non-clinical, administrative
activities of their practices. Based on American Medical Association data,
management estimates that there are currently approximately 350,000 hospital
based physicians and specialists practicing in the United States.
Due to the size and financial characteristics of their practices, primary care
physicians (i.e., family practitioners, general internists, pediatricians and
obstetrician/gynecologists) have historically not been significant users of
contract business management services. Management believes, however, that as
primary care physicians aggregate into larger practice groups and more
administrative responsibilities are placed on them by managed care companies,
they will increasingly utilize practice management, billing and accounts
receivable management services to optimize their revenues and minimize the
non-clinical costs characteristics of their practices. Based on American Medical
Association data, management estimates that there are currently approximately
250,000 primary care physicians practicing in the United States.
According to HCFA, in 1993 physicians generated revenues of $195 billion and
spent 8% of revenues, or $15.6 billion, on non-clinical administrative
activities. Estimates provided by industry analysts indicate that the 50 largest
physician practice management companies accounted for less than 10% of the total
amount spent on non-clinical administrative activities.
HOSPITAL BILLING AND ACCOUNTS RECEIVABLE MANAGEMENT SERVICES Hospitals and free
standing ambulatory care centers have historically relied upon their own
personnel and in-house or turnkey software systems to manage their billing and
account receivable activities. Because the healthcare industry has had a
historical focus on inpatient care, the policies, procedures and information
systems developed to support patient registration, scheduling, billing and
accounts receivable management activities have historically been designed to
meet the needs of inpatient billing and accounts receivable management. As
hospitals experience increased levels of managed care penetration and as the
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volume of outpatient activity increases (in the outpatient setting the number of
transactions is relatively high and the dollar volume per transaction is
relatively low), hospitals and free standing ambulatory care centers have found
it increasingly difficult to manage their workloads and efficiently covert their
accounts receivables to cash. Management believes that the trend towards more
outpatient activity and the lack of state-of-the art information systems to meet
the needs of the outpatient market, particularly with regard to multiple visit
patients, presents the Company with a unique opportunity to build on its base of
expertise and increase the number of clients served. Management further believes
that the business of providing billing and accounts receivable management
services to hospital business offices and free standing ambulatory care centers
is relatively new, and that the demand for such services will increase and that
the Company's core competencies will provide opportunities to expand its
contract management activities.
Outsourcing of hospital billing and accounts receivable activities is typically
provided to hospitals with more than 6,000 annual inpatient discharges and
50,000 annual outpatient visits. Management believes that an estimated 50% of
the country's hospitals are candidates to outsource all or a portion of their
business office activities to third parties which, in management's judgment,
creates a $10 billion potential market.
REGULATION Billing and collection activities are governed by numerous Federal
and state civil and criminal laws. In general, these laws provide for various
fines, penalties, damages and assessments and sanctions for violations,
including the possible exclusion from Medicare, state Medicaid and commercial
payment programs.
Physicians and hospitals are permitted to assign Medicare claims to a contract
business management services provider under certain limited circumstances as
outlined in Medicare regulations in the Medicare Carrier's Manual. These
regulations dictate that a contract business management services company that
prepares and sends bills for a hospital or physician not receive and negotiate
checks made payable to the provider or violate the restrictions provided with
regard to the assignment of Medicare claims. Management believes that its
practices do not violate the restrictions on assignment of Medicare claims. The
Company bills only in the name of the medical provider (its client). Checks and
payments for Medicare services are made payable to the medical provider.
A business management services provider's submission of claims for services or
procedures that were not actually provided may lead to civil monetary penalties,
criminal fines, imprisonment and/or exclusion from certain state and Federally
funded programs. The Federal False Claims Act allows a private person to bring
suit alleging false Medicare and/or Medicaid claims and to participate in as
much as 30% of the amounts paid to the government in damages and civil
penalties. Such acts increase the likelihood that providers of medical services
and providers of business management services, (i.e., the Company), may be
subject to governmental investigations and/or false claims. Some states also
have laws that provide for private persons to participate in amounts paid to
state government for damages and civil penalties if the private person assisted
in the identification of fraudulent billing activities. Although the Company is
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not aware of it being the subject of any such investigations, there can be no
assurance that such investigation may not occur in the future.
GOVERNMENTAL CONSTRAINTS AND HEALTHCARE REFORM In recent years, the Federal
government has placed increased scrutiny on the billing and accounts receivable
collection activities of healthcare providers. Much of this scrutiny has been
directed toward fraudulent billing practices.
The Health Insurance Portability and Accounting Act of 1996, Pub. L. No.
104-191, 1996 U.S.C.A.C.A.N.(110 Stat 1936) includes an expansion of certain
fraud and abuse provisions such as expanding the application of Medicare
and Medicaid fraud penalties and creating additional criminal offenses relating
to "healthcare benefit programs" which are defined as both public and private
companies.
During the 1995 and 1996 sessions of the Untied States Congress, healthcare
budgeting and funding mechanisms received considerable attention. The 1995
Annual Report of the Board of Trustees of the Federal Hospital Insurance Program
projected that the Medicare "trust fund" is likely to become insolvent by the
year 2002 if current growth rates continue. Federal and state expenditures under
the Medicaid program are also expected to increase significantly over the next
seven years. Although proposals by the Clinton Administration to reduce the rate
of increase in Federally sponsored healthcare insurance programs were not passed
during the 1996 legislative year, the Company anticipates that certain proposals
will be passed during the 1997 legislative year. The Company believes that these
changes may impact the methodologies used and amounts hospitals and physicians
are reimbursed for providing medical services and could provide incentives for
Medicare and Medicaid beneficiaries to join health maintenance organizations and
other managed care plans. The Company cannot predict the impact such
legislation, if enacted, would have on its operations.
A number of states in which the Company has operations have either adopted or
are considering the adoption of healthcare reform initiates to incentivize
and/or require Medicaid recipients to join health maintenance organizations.
Such initiatives tend to cause delays and/or reductions in the amounts hospitals
and physicians are reimbursed for providing medical services. These reductions
and/or delays could have an impact on the Company's revenues.
COMPANY'S PRINCIPAL MARKETS The Company's principal markets are physicians and
hospitals.
Physician business management services are services that address the
non-clinical, administrative aspects of a medical practice. The Company focuses
on providing these services primarily to physicians affiliated with or owned by
Integrated Delivery Systems. Activities under a physician business management
agreement can be as comprehensive as to include the recruitment, training,
supervision, and evaluation of the billing/accounts receivable staff, billing
and accounts receivable management, financial management and reporting, practice
development and assistance in contract negotiations with payors, and the
development and implementation of management information systems. The Company
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provides billing, accounts receivable management, information systems, and other
business management services to approximately 2500 physicians. The Company's
1997 revenues associated with these services were $7.3 million. These services
are provided by Company personnel working at business service centers located in
central New Jersey, suburban Chicago, Illinois and Denver, Colorado. During
Fiscal 1997, the Company closed its processing center in Florida in connection
with the termination of a client contract. Billing, accounts receivable
management, and information systems management are core competencies of the
Company and represent the majority of the Company's physician business
management revenues. The Company's physician clients cover a broad range of
medical specialists and sub-specialties, including hospital based physicians
(anesthesiologists, radiologists, pathologists, emergency room physicians,
etc.), office based specialties (cardiologists, surgeons, etc.) and primary care
physicians (general practitioners and family physicians, internists,
pediatricians and obstetricians/gynecologists).
The Company's management believes physicians are becoming increasingly sensitive
to the business aspects of medical practice, and are looking for managerial
expertise and technology to help manage the complexities of their practices.
Management believes that the Company's size, commitment to superior client
service, expertise in critical areas, such as the use of management information
systems, billing, accounts receivable and practice management, and its strategic
alliance with IDX give the Company a competitive advantage over "in-house"
alternatives, small billing and collection companies and large, highly
centralized national companies that also offer these services to physicians and
physician networks.
HOSPITAL BUSINESS OFFICE MANAGEMENT The Company also provides business
management and information systems to hospital business offices and free
standing ambulatory care centers. These services are provided under a "contract
management model." Under a this model, a provider of inpatient or outpatient
healthcare services outsources all or a portion of the activities associated
with its business offices to the Company. Traditionally, healthcare providers
have embraced contract management for certain "hotel" services (dietary,
housekeeping, maintenance) associated with their operations. More recently,
hospital boards and executives have embraced the "outsourcing" of activities as
diverse as information systems management (facility management), billing and
accounts receivable management, clinical engineering, and certain clinical
services including laboratory, radiology, physical medicine and rehabilitation.
In a business or contract management engagement, the Company interfaces its or
another software provider's proprietary software to the client hospital's
information system, hires and manages the billing and accounts receivable
management staff and directs the client hospital's cash collection activities.
The Company's 1997 revenues attributed to hospital outpatient and ambulatory
billing and accounts receivable management were $6.1 million.
COMPANY'S PRINCIPAL PRODUCTS US Servis' core business is the outsourcing of
billing, accounts receivable and information management services to the
physicians, hospitals and free standing ambulatory care centers affiliated or
associated with Integrated Delivery Systems.
The Company's primary focus is the large physician networks that are aggregating
around hospital sponsored Integrated Delivery Systems. In some situations, IDS
sponsored MSOs serve as the aggregator. MSOs typically provide administrative
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services (i.e., registration, scheduling, billing, accounts receivable
collections, financial management and information systems) to office based
physicians located in clinics or free standing offices located throughout the
IDS' service area. Occasionally, IDSs have sponsored or acquired large
multi-specialty group practices. These multi-specialty group practices typically
have Central Billing Offices ("CBOs") that need to be integrated into the IDS'
administrative organization. Academic Medical Centers, particularly those
associated with medical schools, frequently have associated or affiliated
Faculty Practice Plans ("FPPs"). FPPs are essentially large multi-specialty
group practices composed of members of the teaching faculty of a medical school.
Integrated Delivery Systems associated with academic medical centers recognize
the benefits of establishing CBOs for their Faculty Practice Plans. The creation
of a FPP-CBO is frequently the first step in the creation of an integrated
contracting entity that affords the FPP the opportunity to negotiate more
comprehensive at-risk payment agreements with managed care organizations. The
Company, through its experience and expertise and its strategic alliance with
IDX, is in the business of developing and managing the CBO activities of the
physician networks (i.e., MSOs, multi-specialty group practices and/or FPPs)
affiliated with IDSs. During Fiscal 1997, these activities represented
approximately 18% ($4.0 million) of the Company's revenues.
The creation of CBOs to service the physicians associated with an IDS and/or a
multi-hospital system is a large, complex undertaking. As part of its core
business, the Company provides implementation services designed to manage the
development of a CBO or the integration of new acquired physician practices into
an existing CBO. These services include the management and the installation of
the CBO's legacy billing and accounts receivable information system, the
introduction of standardized policies and procedures, the training of the staff
and the conversion and/or collection of the "old accounts receivable". The
Company believes that these implementation services will be an increasingly
important part of its revenues.
Company management expects to receive substantial benefits from its IDX
strategic relationship in the physician network market. It is the understanding
of the Company management that IDX software is the software of choice for most
of the country's larger physician networks and FFPs and many of these
organizations may be candidates for outsourcing their billing and accounts
receivable activities to the Company.
In addition to managing the central billing offices affiliated with IDSs, the
Company is a provider of billing and accounts receivable management services to
hospital based physicians. Hospital based physician (anesthesiologists,
radiologists, pathologists, emergency room physicians) billing and accounts
receivable services are provided through the Company's suburban Chicago,
Illinois service center. During Fiscal 1997, billing and accounts receivable
services provided to hospital based physicians represented 15.2% ($3.3 million)
of the Company's revenues.
The Company also provides outsourced billing and accounts receivable management
services to hospitals. This product line represented 27.6% ($6.1 million) of the
Company's Fiscal 1997 revenues. Outsourced billing and accounts receivable
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management services to hospitals encompass both inpatient and outpatient
services and are delivered through a business model that typically centralizes
the majority of the billing and accounts receivable management staff at the
Company's processing center in Somerset, New Jersey where economies of scale
associated with critical mass can be attained.
In addition to its core business activities, the Company provides remote
computing services ("RCS") to hospitals. These RCS services provide clients with
access to the Company's proprietary billing and accounts receivable software
through on-line linkage to the Company's central New Jersey data center. The
Company also provides implementation services associated with the installation
of the MedicaLogic Automated Medical Records System and support services
associated with the MedTake Clinical Information System. During Fiscal 1997,
these activities including related equipment sales and licenses, represented
approximately $1.7 million of the Company's revenues.
As discussed in recent developments, the Company also provides outsourced
business and information management services to a single HMO. In light of the
difficulties associated with MetroPlus (see Item 3: Legal Proceedings), the
Company has temporarily suspended its sales activities associated with this
line. During Fiscal 1997, business management services provided to MetroPlus
represented 21.2% ($4.7 million) of the Company's revenues.
COMPANY'S RELATIONSHIPS WITH CLIENTS The Company's portfolio of business
management services includes billing and accounts receivable management, claims
management, and related consulting services. With regard to billing and accounts
receivable management services, the Company typically enters into contracts with
its clients under contingent fee arrangements that are based upon a percentage
of cash collected with performance bonuses paid to the Company upon the
attainment of certain performance objectives. The Company typically bills
clients on a monthly basis for services provided during the immediately
preceding month. The Company's fees for hospital inpatient and outpatient
contract management and physician billing and accounts receivable management
services range from 2% to 14% of collections depending upon the size of the
client and the financial sponsorship of patients serviced.
In performing billing and accounts receivable management services for its
clients, the Company obtains relevant demographic, financial and clinical
information from its clients on paper forms, magnetic tape and through direct
interfaces with client in-house information computer systems. Demographic and
medical records information is then entered (or transferred) into the billing
and accounts receivable management system. The system then generates claims,
follow-up notices and other related correspondence for patients and third party
payors.
In some situations the Company utilizes physician practice management and
hospital inpatient billing and accounts receivable management systems that have
been developed by other companies and subsequently leased or purchased by the
Company's clients. The company's creation of a strategic alliance with IDX will
create the opportunity for the Company to become an expert user of IDX's
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practice management systems. The Company assigns an account manager to each
major business management services client. The account manager is generally an
experienced accounts receivable professional who manages the Company's business
management activities, including initial billing, monitoring third party payors'
responses to claims, the collection of amounts due under claims, the receipt of
such payment amounts by the client and the collection of co-payments or amounts
due on account of uncovered services. The Company, working through the account
manager, provides clients with periodic status reports and analyses of the
Company's contract management performance and uses these reports to conduct
periodic meetings with client management. In addition to billing and accounts
receivable management, the Company also provides consulting, accounting,
financial reporting, contract/payor negotiation and information management
services.
INFORMATION SYSTEMS The information systems used to support the Company's
business management services operate on IBM AS/400 and RS/6000 computers,
various processors manufactured by Digital Equipment Corporation ("DEC") and
personal computers.
Physician business management services are provided using either the Company's
proprietary practice management system, known as Infinity(TM) or practice
management systems developed by others.
The Company's "Infinity(TM)" Practice Management System has been specifically
designed and is maintained by the Company to meet the practice management
requirements of medical groups and physician delivery systems. Infinity's major
applications include billing, accounts receivable management, resource
scheduling, and decision support.
As part of its strategic business alliance with IDX the Company intends to
become an "expert user" of the IDX practice management systems. IDX offers
several comprehensive practice management systems. IDX systems are installed in
nearly 1,000 locations. One of the Company's clients, HealthOne, in Denver,
Colorado is currently installing the IDX GPS system as the information systems
for a CBO managed by the Company to serve the billing and accounts receivable
needs of HealthOne's physician network.
Hospital business management services are provided using either the Company's
proprietary billing and accounts receivable system known as Alliant(TM) or the
legacy systems installed at hospital client's location.
Alliant(TM) was developed by the Company to meet the complex ambulatory billing,
accounts receivable and collection requirements of hospitals, clinics, emergency
rooms and ambulatory care centers. Alliant(TM) has particular strength in
dealing with the higher volume, lower per unit revenue transactions associated
with the delivery of ambulatory services. It is particularly well suited to
process multi-visit transactions associated with recurring patients in renal
dialysis, physical, occupational and speech therapy departments. Alliant(TM)'s
features include integrated and streamlined triage, on-line registration and
check-in, unlimited patient data retention, complete third party/patient bills,
recurring patient processing, automatic calculation and posting of third party
10
<PAGE>
billing, complete bad debt system, on-line patient financial history, automatic
rebilling, payor follow-up and write-off parameters, appointment scheduling,
pre-registration, complete statistic data capture on integrated text writer and
an ad hoc report generator.
The Company, through a joint venture agreement, markets a managed care product
(MG400) that operates on the same platform as its Infinity(TM) product. The
MG400 product was developed by UniHealth Ventures Systems of Burbank,
California, and is widely used by medical groups, HMO's, IPAs, PPOs and MSOs.
The MG400 product is available to the Company under an agreement that gives the
Company exclusive use of the product in contract management situations. The
MG400 module provides full integration of membership, claims and financial
administration and performs precise validation of carrier, plan and member
records.
Infinity(TM) is not currently year 2000 compliant. Management has estimated that
the costs associated with making it year 2000 compliant are less than $250,000.
Alliant(TM) is also not year 2000 compliant. The Company has no present plans
for making Alliant(TM) year 2000 compliant. It is currently considering
alternatives for Alliant(TM) which will be year 2000 compliant.
FISCAL 1997 FINANCIAL INFORMATION During 1997, business management services
provided to hospitals, physicians and managed care organizations represented
approximately 82.4% ($18.1 million) of revenues. Approximately $7.4 million of
these revenues were derived from physicians; $6.1 million were attributed to the
Company's hospital client base and $4.7 million related to the Company's managed
care client. (See Item 3: Legal Proceedings).
Business management services provided to physicians and physician groups
typically are provided under agreements having an initial term of three years,
automatically renewable on an annual basis following the end of the initial
term. These contracts typically provide for cancellation for cause upon ninety
days written notice. As of March 31, 1997, the Company provided billing,
accounts receivable, contract management and information services to
approximately 2500 physicians.
Business management services provided to the Company's hospital clients are
typically provided under long-term service agreements of up to seven years.
During Fiscal 1997, the Company had four major hospital clients. A fifth
contract for a new hospital client was signed late in the fiscal year. Revenues
associated with this new client should materialize during Fiscal 1998
The Company's remote computing services are provided under multi-year
agreements. During Fiscal 1997, revenues associated with remote computing
services represented approximately 8% ($1.7 million) of the Company's revenues.
The Company has two major hospital remote computing service clients. Remote
computing services to these two clients represented substantially all of the
Company's Fiscal 1997 remote computing service revenue. In June of 1997, the
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<PAGE>
Company negotiated a contract extension of 24 months at its major remote
computing service client. The contract for the Company's other RCS client
expires in November 1997.
Approximately 4.6% ($1.0 million) of the Company's Fiscal 1997 revenues related
to its clinical information systems products and services. These products and
services have been provided through the Company's Clinical Dimensions division
and had been marketed under the MedTake and CarePoint product labels. As part of
its restructuring announced in Fiscal 1995, the Company is phasing out of this
line of business.
The remaining 4.3% of revenues ($1.0 million) in Fiscal 1997 revenues was
derived from implementation fees, maintenance and service fees on turnkey
products, interest income and other miscellaneous revenue items.
One of the Company's clients, MetroPlus, represented 21.2% of the Company's
total Fiscal 1997 revenues. A second client, the University of Medicine and
Dentistry of New Jersey, represented 11.6% of Fiscal 1997 revenues. Other
clients, the Hospital for Special Surgery, located in New York City, and the
Mount Sinai Medical Practice Group, Elmhurst, New York, represented 8.4% and
7.4%, respectively, of the Company's 1997 revenues. No other single customer
represented more than 6.5% of 1997 revenues.
COMPANY'S BUSINESS STRATEGY The Company's business strategy is to build on its
strategic alliance relationships, its relationships with large integrated
delivery systems and its core competencies of billing and accounts receivable
management and the expert use of information systems management to become a
leading provider of business and information management services to physicians,
physician networks and hospitals. Management believes that these segments of the
market will continue to aggregate and integrate in response to increased managed
care penetration and intensified pressure to control costs and improve quality.
Management further believes that the growth and complexity associated with these
trends will create increased demand for the Company's business and information
management services.
Specific elements of this strategy are:
1. Form Strategic Alliances:
The Company believes in the need to develop synergistic relationships with other
companies to acquire additional services, products, and additional market share.
The Company's recently executed strategic business alliance with IDX is
indicative of management's commitment and ability to establish and expand
strategic business relationships.
2. Emphasis on internal growth:
The Company's business strategy is to expand its business with physicians
through the efforts of its internal sales efforts by building on its strategic
business alliances to create a network of regional client service centers from
which high quality, cost effective, business management services can be
12
<PAGE>
provided. The Company's business strategy to grow its hospital inpatient and
outpatient billing and accounts receivable contract management business is to
leverage its existing client base to increase business from new and existing
clients.
3. Provide superior customer service at an affordable cost:
An important element of the Company's strategy is its commitment to expand and
augment the skills and expertise of its employees so they can better understand,
analyze and manage its client's business activities. Investments in the
Company's employees allows them to help optimize client revenues, streamline
operating procedures and increase cash collections. The Company also recognizes
the importance of establishing and maintaining long-term "partnership"
relationships with its clients. The Company's service standard is reflected
through its customer focused culture and its performance based pricing
philosophy that aligns the Company's and the client's objectives.
Management believes it is important to have a local presence in order to better
serve its clients, keep abreast of regional issues and achieve the cost
advantages associated with efficient, regional service/processing centers. The
Company presently has service centers in central New Jersey, suburban Chicago,
and Denver, Colorado. The Company anticipates establishing additional regional
service centers as part of initial sales to large Integrated Delivery Systems.
4. Cross sell to existing clients:
A key reason that the Company selected hospital sponsored integrated delivery
systems as a target market is significant opportunity that exists within these
integrated delivery systems for cross selling the Company's business and
information management services. Within a single integrated delivery system, the
Company has the opportunity to sell a portfolio of business and information
management services to a number of constituencies: MSOs created to manage
acquired physician practicees and provide services to community based
physicians; PHOs created to contract with payors for hospital and physician
services; faculty practice plans related to academic medical center clients;
affiliated hospital based physicians and hospital business offices. The Company
believes that once it has established its presence in a client's integrated
delivery system, it can leverage its performance to identify and obtain new
business.
COMPETITION The industry segment that provides billing and accounts receivable
management services to hospital based physicians, office based practitioners and
hospitals is becoming increasingly competitive. Medaphis, a public (Nasdaq)
company, headquartered in Atlanta, Georgia, is a national provider of physician
business management services and a dominant provider in this industry segment.
Physician Support Systems, Inc., a public (Nasdaq) company headquartered in
Mount Joy, Pennsylvania, is also a national provider of business management
services to physicians and hospitals. There are also a large number of smaller
companies providing these services. Most of these companies are regional in
nature and privately owned. Management believes that there may be as many as
1,200 local and regional companies in the U.S. providing business management,
13
<PAGE>
billing and accounts receivable management services to physicians and physician
delivery systems. Recent industry estimates indicate that over 99% of these
regional companies have revenues less than $20 million.
The Company also competes with the "in-house mentality" in the physician
business management services market. In these situations, typically restricted
to larger, better established physician groups, the physicians hire practice
managers and utilize turnkey software and their own administrative/clerical
personnel to manage billing and accounts receivable collections activities and
other practice management functions. To a lesser extent, the Company also
competes with certain hospitals that provide billing and accounts receivable
management services to physicians and physician groups that are part of their
medical staffs or otherwise affiliated with the hospitals.
Over the past several years a number of companies that acquire physician
practices and provide comprehensive practice management services to physicians
and multi-specialty group practices have begun to establish a presence in the
physician market. These companies include PhyCor, Inc. and Med Partners and a
number of sub-specialty carve-out companies. Although these companies may
compete with the Company in that they may acquire physician practices and may
provide comprehensive practice management services to the physicians whose
practices they acquire, they may also be prospective customers in that they may
entertain proposals to outsource the billing and accounts receivable management
activities associated with physicians and physician groups that they have
acquired.
The hospital billing and accounts receivable contract management industry is not
mature. Management believes that the Company's major competition in this area of
focus is the "in-house mentality" - hospital managers utilizing their own or
licensed information systems products, together with their own hospital or
clinic employees to mange their billing and accounts receivable management
activities. In addition to publicly owned companies like Medaphis, Physician
Systems Services, Inc., and QuadraMed, the Company is aware of a few regional
firms that provide inpatient and outpatient billing and accounts receivable
contract management services. In addition, some of the major healthcare
information systems companies may be considering entering this market. If major
healthcare information systems companies elect to aggressively pursue this
market segment, they could mobilize financial and other resources in excess of
those available to the Company.
In selling its contract management services to hospitals and integrated delivery
systems, the Company stresses the benefits of its proprietary software and/or
its "expert user" capabilities; its experience in managing billing and accounts
receivable activities and its willingness to enter into performance based fee
arrangements. The Company believes that many of its hospital contract management
prospects will be institutions that are having difficulty managing the volume
and complexity of their current billing and accounts receivable management
activities.
OPERATIONS AND EMPLOYEES In January of 1997, the Company moved its headquarters
and metropolitan New York/New Jersey service center to a modern and efficient
facility at 220 Davidson Avenue, Somerset, New Jersey 08873. In addition to the
Company's corporate offices, the Somerset facility houses the northeastern
region data center, sales personnel, the software development and support
14
<PAGE>
organization, most of the activities associated with the hospital contract
management business and parts of the physician business management business
services business. Approximately 50% of the Company's employees are located at
the Somerset facility. The remaining 50% of the Company's employees are located
at service centers in suburban Chicago, Illinois and Denver, Colorado or are
physically located "on-site" at client facilities providing billing and accounts
receivable management services under contract management agreements.
The Company's physician business management activities are conducted primarily
from its New Jersey corporate office and service centers in suburban Chicago,
Illinois and Denver, Colorado.
On June 20, 1997, the Company employed 304 persons.
The Company's employees are not represented by any labor organization and
management believes that its relationships with its employees are generally
good.
BOARD OF DIRECTORS A Board of Directors consisting of eight individuals
was elected at the August 27, 1996 Annual Meeting to serve until the next
annual meeting or until successors are elected and qualified. The
following individuals are currently members of the Board of Directors.
Name Position
Graham O. King Chairman of the Board and Chief
Executive Officer
S. M. Caravetta Vice Chairman of the Board
Frederick R. Blume Director
Robert C. Bowers Director
James E. Cowie Director
Stanford J. Goldblatt Director
Robert E. King Director
James A. Pesce President and Director
GRAHAM O. KING joined the Company on October 12, 1994 as the Company's Chief
Executive Officer. He was appointed Chairman of the Board of Directors at a
Board of Directors meeting held on October 28, 1994. He was formerly
with Shared Medical Systems, Inc., a healthcare information service company,
from October 1, 1986 until October 31, 1993, where he served as its President
from April 1987. From October 31, 1993 until joining the Company, he
was a partner with Salt Creek Ventures, a private investment company.
Mr. King currently serves as a director for ADAC Laboratories, Inc. and
Optika Imaging, Inc. Mr. King and Mr. Robert E. King, another director of the
Company, are brothers.
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<PAGE>
S. M. CARAVETTA was the Chairman of the Board of Directors, and Chief Executive
Officer from its organization in 1976 through October 28, 1994. He became
Vice Chairman of the Board of Directors on October 28, 1994. Mr.Caravetta
has been a director of the Company since 1976.
FREDERICK R. BLUME has been a director of the Company since 1993. He has been a
Managing Partner of Capital Health Venture Partners, a healthcare venture
capital firm, since June 1986. Prior to founding Capital Health, Mr. Blume was a
Managing Director of a Paine Webber group specializing in corporate healthcare
financing. He is presently a director of Cytyc Corporation and Washington
National Corporation.
ROBERT C. BOWERS has been a director of the Company since April 20, 1995.
Since May 7, 1996, Mr. Bowers has been Vice President and Chief Financial
Officer of COLLEGIS, Inc. From June 1995 through May 1996, Mr. Bowers was
Vice President and Chief Financial Officer of HTE, Inc., a software service
company. From June 1985 through October 1994, Mr. Bowers was Senior Vice
President and Chief Financial Officer of CA Newtrend, Inc., the general
partner of Newtrend, L.P. (and its partnership and corporate predecessors).
JAMES E.COWIE has been a director of the Company since July 18, 1995. Mr. Cowie
has been a general partner of Frontenac Company, a Delaware general
partnership that is the general partner of Frontenac VI and other venture
capital partnerships, since 1989. He also serves on the Boards of Directors
of PLATINUM technology, inc. and 3Com Corporation.
STANFORD J. GOLDBLATT has been a director of the Company since April 20,1995.
He has been a partner in the law firm of Hopkins & Sutter, counsel to the
Company, since 1979.
ROBERT E. KING has been a director of the Company since April 20, 1995.
Mr. King is a partner in Salt Creek Ventures, a private investment company and
Chairman of the Executive Committee of COLLEGIS, Inc. an outsourcer of
information systems services to colleges and universities. For a twelve year
period prior to October 1994, Mr. King was a director and Chief Executive
Officer of CA Newtrend, Inc., the general partner of Newtrend, L.P. (and
its partnership and corporate predecessors), a software, service and
outsourcing provider in the financial institutions market. He is presently a
director of DEVRY, Inc. Mr. King and Mr. Graham O. King are brothers.
JAMES A. PESCE has been the President and a director of the Company since 1982.
From 1979 to 1982 he was employed as the Northeast and Southeast Regional
Director of Client Services for McDonnell Douglas Automation Company which
provided healthcare data processing services.
EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain
information regarding the officers of the Company. Executive Officers of the
Company, for purposes of Section 16 of the Securities Exchange Act of 1934, are
designated with an asterisk.
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<TABLE>
<S> <C> <C> <C>
Name Age Position Year of
Employment
Graham O. King* 57 Chairman and Chief Executive 1994
Officer
James A. Pesce* 53 President 1982
Michael B. Loscalzo* 52 Treasurer and Vice President 1995
Derek A. Pickell 36 Vice President, Sales 1995
Robert E. Van Metre* 56 Secretary and Vice President, 1995
Accounting and Finance
Sophia V. Bilinsky 31 Vice President, Physician 1995
Delivery Systems
</TABLE>
Graham O. King: Chairman and Chief Executive Officer
Mr. King has been with the Company since October of 1994, when he was appointed
Chairman and CEO. Previously, Mr. King was President of Shared Medical Systems,
the largest provider of software and outsourcing services to hospitals, clinics
and physician groups.
Mr. King has served as president of three companies. His accomplishments at
these firms included successful direction of one company post-IPO and the
implementation of a repositioning and restructuring program at a second
firm to facilitate future growth. Mr. King also served as Executive Assistant
to the President of IBM where he had broad exposure to the technology industry.
James A. Pesce: President
Mr. Pesce has 31 years of experience in the healthcare information systems
industry. Since April 1992, Mr. Pesce has served as a Director of US Servis
and has held a variety of senior management positions. Currently, Mr.Pesce is
responsible for all of the Company's development, data center and customer
support activities.
From 1979 to 1982, Mr. Pesce was employed as Northeast and Southeast Regional
Director of Client Services for McDonnell Douglas Automation Company which
provided healthcare data processing services.
Michael B. Loscalzo: Treasurer and Vice President
Mr. Loscalzo has 28 years of experience in the healthcare industry. From 1992 to
1995, Mr. Loscalzo served as Senior Vice President of Cain Brothers & Company, a
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New York healthcare investment banking firm. He has been a member of the US
Servis Management Team since 1995.
Mr. Loscalzo was a co-founder of The Hunter Group, a healthcare workout firm. As
Managing Director from 1988 to 1992, he served as a member of the on-site
management team in a number of high profile healthcare turnarounds. Between 1988
and 1991, he served as CEO or CFO of hospital workout clients in Seattle,
Washington, St. Paul, Minnesota, Miami, Florida, and San Francisco, California.
Derek A. Pickell: Vice President, Sales
Mr. Pickell has 14 years of experience in the healthcare industry providing
management services and information systems to healthcare providers.
Prior to joining US Servis, Mr. Pickell served as Senior Vice President of Sales
and Service for Wellmark Incorporated. He held this position from 1992 to 1995
and had national sales, implementation, and ongoing client support
responsibilities. Prior to 1992, Mr. Pickell served as the National Director of
Sales for the Health Care Systems Division of Ferranti International. Mr.
Pickell joined the US Servis Management Team in March 1995.
Robert E. Van Metre: Secretary and Vice President, Accounting and Finance
Mr. Van Metre has over 21 years of experience in financial management in the
financial services industry.
From 1987-1994, Mr. Van Metre held several senior management positions with
Integrated Resources Life Companies,Inc. including: Senior Vice President-Chief
Financial Officer, Executive Vice President, and President.
From 1982-1987, Mr. Van Metre was Executive Vice President-Chief Financial
Officer for the Dasake Group, Inc.
Mr. Van Metre held a variety of senior management positions with Household
International (HFC) from 1973-1982. Prior to joining HFC, he was Administrator
of Finance for the Illinois State Toll Highway Authority.
Sophia V. Bilinsky: Vice President, Physician Delivery Systems
Ms. Bilinsky joined the US Servis management team in June 1995. Prior to
joining US Servis, Ms. Bilinsky served as President and Chief Operating Officer
of Healthnet, Inc. (currently a subsidiary of Coastal Healthcare Group,
Inc.), a primary care group practice operating throughout Connecticut, New York
and New Jersey.
In 1991 and 1992, Ms. Bilinsky served as Director of the Direct Investment Group
at Whitehead/Sterling. She served as Assistant Vice President of the Medical
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Markets Group at General Electronic Corporation from 1989 to 1991. From 1986 to
1989, Ms. Bilinsky served as Relationship Associate and Corporate Finance
Associate, World Corporate Group for Citibank, N.A.
ITEM 2: PROPERTIES
The Company leases one facility in Somerset, New Jersey and one facility in
suburban Chicago, Illinois.
The Somerset facility contains approximately 35,000 square feet.
The Elmhurst, Illinois facility serves as the primary location for the Company's
midwest hospital-based physician activities. It includes approximately 13,000
square feet and is occupied under a lease that expires in fiscal 1999.
The following table sets forth the minimum future lease payments on Somerset,
New Jersey and Elmhurst, Illinois facilities:
Year Ending March 31, Minimum Lease Payments
--------------------- ----------------------
1998 $743,000
1999 680,000
2000 593,000
2001 601,000
2002 602,000
2003 610,000
2004 457,000
----------
Total $4,286,000
==========
Net rental expenses for office space were $877,000 in Fiscal 1997.
ITEM 3: LEGAL PROCEEDINGS
Effective December 21, 1995, the Company entered into a contract (the "MetroPlus
Contract") with New York Health and Hospitals Corporation ("HHC") through its
MetroPlus Health Plan, a Public Health Law Article 44 health maintenance
organization ("MetroPlus") under which the Company was to provide certain
administrative and claims processing services to MetroPlus. Concurrently, the
Company entered into contracts with UniHealth Ventures ("UniHealth") and
CarePLUS Network, doing business as VertiHealth ("VertiHealth") under which
UniHealth and VertiHealth were to provide certain support services to the
Company in connection with its provision of services to MetroPlus.
The MetroPlus Contract called for MetroPlus to pay the Company a minimum of
$449,000 per month, making MetroPlus the Company's largest client. The initial
term of the MetroPlus Contract was three years from the commencement of services
(February 26, 1996).
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On July 17, 1996, the Company received a letter from MetroPlus (the "July 17,
1996 Letter") alleging that the Company was failing to fulfill its obligations
under the MetroPlus Contract and indicating that the letter was intended as a
notice of default. It purported to give the Company 90 days to cure all alleged
breaches. The Company vigorously rejected the allegation that it was in default
under the MetroPlus Contract and that the July 17, 1996 Letter was a valid
notice of default under such contract. Nevertheless, the Company aggressively
worked with MetroPlus to correct any alleged deficiencies in its services.
On November 15, 1996, MetroPlus rescinded the July 17, 1996 Letter and the
Company, HHC and MetroPlus executed an amendment to the MetroPlus Contract (the
"November 15, 1996 Amendment"). The November 15, 1996 Amendment describes itself
as a "full settlement with respect to the breach letter of July 17, 1996." Under
the November 15, 1996 Amendment, certain prior billed amounts and certain future
minimum payments under the MetroPlus Contract were reduced. In addition, until
February 28, 1998, MetroPlus was specifically entitled to terminate the
MetroPlus Contract only upon a material breach by the Company; thereafter, the
MetroPlus Contract is terminable by either party. The November 15, 1996
Amendment further provided that MetroPlus was to pay certain prior billed
amounts upon the performance by the Company of certain specified actions. The
Company performed such actions and MetroPlus made all requisite payments.
On February 14, 1997, MetroPlus delivered another letter (the "February 14
Letter) alleging multiple acts of breach by the Company and again purporting to
be a notice of default giving the Company 90 days to cure all events of breach
under the MetroPlus Contract. This deadline was later extended to May 30, 1997.
Again, the Company vigorously denied that it was in breach of the MetroPlus
Contract and sought to resolve any issues with regard to the level of its
service.
Having failed to reach any accord with MetroPlus, on May 22, 1997, the Company
filed suit against MetroPlus and HHC in the Supreme Court of the State of New
York, County of New York (the "Court"). The suit seeks a permanent injunction
prohibiting MetroPlus and HHC from terminating the MetroPlus Contract pursuant
to the February 14 letter and seeks the payment of unpaid fees under the
MetroPlus Contract in the amount of $447,593 and damages resulting from the
actions of MetroPlus and HHC.
On May 30, 1997, the Court issued a temporary restraining order prohibiting
MetroPlus and HHC from terminating the MetroPlus Contract and set a hearing for
July 2, 1997 at which time the Court is scheduled to determine whether to issue
a temporary injunction. The Company intends to vigorously pursue both injunctive
relief and damages in this case. In the event that the Court were to refuse to
issue a temporary injunction and MetroPlus were to immediately terminate the
MetroPlus Contract, such events would have a material adverse effect on the
financial condition of the Company.
Since the commencement of the lawsuit, the Company has continued to provide
services to MetroPlus pursuant to the MetroPlus Contract. During this period,
MetroPlus has made no payments to the Company. As of June 20, 1997,
approximately $900,000 in fees were unpaid and past due (over 60 days old). A
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<PAGE>
continued refusal by MetroPlus to make payments under the MetroPlus Contract
would also have a material adverse impact on the financial condition of the
Company.
In a related matter, on May 7, 1997, VertiHealth filed a suit against the
Company in the United States District Court for the District of New Jersey. In
this suit, VertiHealth seeks damages in the amount of $533,831, such amount
being the amount that the Company allegedly withheld from payment under the
VertiHealth Contract in connection with its dispute with HHC and MetroPlus over
services rendered under the MetroPlus Contract. This case is in its early stages
and the Company cannot assess at this time the likelihood of success by
VertiHealth or whether the Company will seek damages or indemnification from
VertiHealth in connection with services rendered to the Company.
In an unrelated matter, the Company filed suite on June 28, 1996 in the Superior
Court of New Jersey against Saint Barnabas Medical Center ("Saint Barnabas"), a
former client of the Company. The suit alleges that Saint Barnabas failed to pay
certain fees and bonuses due to the Company in the amount of $727,493 that were
payable under the terms of a now expired service and equipment agreement between
the Company and Saint Barnabas (the "Saint Barnabas Contract"). The Company
seeks payment of such amount, together with certain related damages. Saint
Barnabas has filed a counterclaim seeking an unspecified amount of damages
alleged to have resulted from the Company's alleged failure to properly perform
certain services under its agreement. The Company has recently added a third
party claim against Medical Technology Data, Inc. ("MDT") an independent
supplier of outsourced information systems and services to Saint Barnabas during
the term of the Saint Barnabas Contract, seeking contribution from MDT to the
extent that the Company is found to be responsible for any claims against it
made by Saint Barnabas. Discovery is underway in this lawsuit; the Company
intends to vigorously press its claims for payment.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1997.
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company is authorized to issue: (i) 30,000,000 shares of Common Stock, $0.01
par value per share, of which 6,367,000 shares were issued and 6,351,000 shares
were outstanding as of June 20, 1997; and (ii) 10,000,000 shares of Preferred
Stock, $0.01 par value per share, of which 1,500,000 shares of a class
designated as "Series A Convertible Preferred Stock" and 1,000,000 shares of a
class designated as "Series B Convertible Preferred Stock" were issued and
outstanding as of June 20, 1997.
The Common Stock of the Company is listed on the NASDAQ National Market System
under the symbol USRV. There is no public market for the Company's Series A or
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Series B Convertible Preferred Stock, which is convertible by holders thereof
into Common Stock on a share for share basis (subject to adjustment).
On June 20, 1997, the Company's Common Stock was held by approximately 400
holders of record, the Company's Series A Convertible Preferred Stock was held
by three holders of record, and the Company's Series B Convertible Preferred
Stock was held by two holders of record.
The following table sets forth actual high and low sales prices for the
Company's Common Stock as reported on NASDAQ national market system for the
periods indicated.
Closing Sales Prices
--------------------
High Low
----- ------
Year Ended March 31, 1996
1st Quarter $4.375 $3.000
2nd Quarter 4.500 3.250
3rd Quarter 5.750 3.125
4th Quarter 4.875 3.625
Year Ended March 31, 1997
1st Quarter 5.516 3.875
2nd Quarter 5.000 2.875
3rd Quarter 4.250 2.313
4th Quarter 5.000 2.250
Year Ended March 31, 1998
1st Quarter (1) 3.125 1.750
(1) Through June 20, 1997
RECENT SALES OF UNREGISTERED SECURITIES As of January 10, 1997, the Company
issued 54,546 shares of the Common Stock of the Company ("UPA Stock") to United
Physician Associates ("UPA") in connection with the execution of a Services
Agreement between the Company and UPA dated of even date ("UPA Agreement"). The
UPA Stock (i) is unregistered, (ii) was issued in connection with the UPA
Agreement, under which the Company is to provide certain business management
services to UPA, and without additional consideration, and (iii) is subject to
certain forfeiture provisions set forth in the UPA Agreement. The Company
believes that the issuance of the UPA Stock was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6: SELECTED FINANCIAL DATA (In thousands, except per share data)
The following selected financial data for the five years ending March 31, 1997
have been derived from the financial statements, as retroactively restated for
the change in revenue recognition described in Note 8 to the consolidated
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financial statements of the Company, which have been audited by Wiss & Company,
LLP, independent auditors, except for the financial statements for Applied
Computer Technology for Patient Care (ACT/PC) prior to its acquisition by the
Company on August 31, 1993. The ACT/PC acquisition was accounted for using the
pooling of interest method. The financial statements for ACT/PC through March
31, 1993 were audited by Ernst & Young, Madison, Wisconsin.
<TABLE>
<CAPTION>
OPERATION STATEMENT DATA (1)
FOR THE YEAR ENDED MARCH 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Revenue $22,009 $16,245 $15,953 $21,262 $24,142
Net Income (Loss) (3,039) (3,906) (8,052) (2) (1,192) 2,900
Net Income (Loss) per
share of common stock ($.59) ($.66) ($1.34) ($.21) $.56
Adjusted Weighted
Average Shares
Outstanding 6,308 6,282 6,023 5,813 5,193
</TABLE>
(1) In thousands except per share data
(2) Includes $6.8 million of pre-tax expenses associated with 1995 restructuring
The Company has never paid dividends on its Common Stock. The Company's
payment of cash dividends in the future will be at the discretion of the
Company's Board of Directors and will depend, among other things, on the
Company's future earnings, operations, capital requirements and financial
condition. Management presently anticipates that no cash dividends will be
declared on the Company's Common Stock in the foreseeable future.
<TABLE>
<CAPTION>
BALANCE SHEET DATA (1)
FOR THE YEAR ENDED MARCH 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Total Assets $20,739 $19,053 $16,906 $21,878 $22,778
Working Capital 9,512 9,447 7,151 11,358 11,171
Long-Term Liabilities 369 1,172 1,770 976 62
Redeemable Preferred Stock 0 6,110 0 0 0
(1) In thousands
</TABLE>
23
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION OF FINANCIAL RESULTS
General
During Fiscal 1997, the Company focused on securing and implementing contracts
to provide accounts receivable business and management information systems
services to physicians, physician networks, managed care organizations and
hospitals. The implementation of business management services contracts,
obtained during Fiscal 1996, provided $5.7 million of Fiscal 1997 incremental
service fee revenues, resulting in a 37.0% increase over the service fee revenue
amounts reported in Fiscal 1996. The remainder of the revenue increase,
approximately $88,000, resulted from increases in software license fees,
interest and other income, partially offset by a decrease in revenues from sales
of equipment. Revenue increases in excess of increases in cost resulted in a
$2.15 million decrease in the loss before income taxes. The net loss decreased
by approximately $867,000. During Fiscal 1996 the Company used all of its
available carry forward tax credits. As a result, Fiscal 1997 losses before and
after income tax effect are identical.
Total Shareholder Equity, as reflected in the financial statements included
herein, was $15.2 million on March 31, 1997 and $7.5 million on March 31, 1996.
The Fiscal 1996 year end balance includes the effect of the Company's change in
revenue recognition to include work in process ($794,000). Total Shareholder
Equity increased $7.6 million during Fiscal 1997. Elements of this increase
included an increase of $6.1 million associated with the deletion of the
mandatory redemption feature of the Company's Series A Convertible Preferred
Stock, an increase of $4.0 million resulting from the sale of the Company's
Series B Convertible Preferred Stock and an increase of $.1 million resulting
from the issuance of common stock. These increases were partially offset by a
net decrease of $2.6 million resulting from the Company's Fiscal 1997 loss of
$3.0 million reduced by the $.4 million loan impairment charge.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
<S> <C> <C>
1997 1996
----------- -----------
Current Assets $14,721,000 $13,739,000
Current Liabilities 5,209,000 4,262,000
Working Capital 9,512,000 9,477,000
Working Capital Ratio to 1 2.8 3.2
</TABLE>
For the year ended March 31, 1997, the Company's Working Capital increased
$35,000 and Cash and Cash Equivalents increased $1,517,000. Working Capital was
provided by $3,965,000 of net proceeds from the sale of the Company's Series B
Convertible Preferred Stock. The major uses of Working Capital included
approximately $1,500,000 used to fund operating losses, net purchases of
property, equipment and software of $1,065,000, a net reduction of long-term
liabilities of $803,000 and a $600,000 security deposit on the Company's new
office space. The net increase in Cash and Cash Equivalents of $1,517,000
24
<PAGE>
consisted of the $35,000 increase in Working Capital described above together
with $2,302,000 of net income tax refunds received and a $947,000 increase in
current liabilities, partially offset by a $1,768,000 increase in accounts
receivable billed and unbilled. The increase in accounts receivable includes
approximately $800,000 relating to new business, $300,000 relating to disputed
charges due from a former client, and $340,000 due from another former client
that was collected in May 1997.
Management expects that available cash and cash flow will be sufficient to meet
the Company's operating and capital requirements during Fiscal 1998. The Company
does not expect to be profitable for the year ending March 31, 1998.
RESULTS OF OPERATIONS The following table sets for the dollar amounts and
percentage of total revenues represented by various components of the Company's
statement of operations (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Percent of Percent of Percent of
1997 Revenues 1996 Revenues 1995 Revenues
------- ---------- -------- ---------- -------- ----------
Revenues:
Service fees $21,001 95.4% $15,325 94.3% $14,565 91.3%
Sales of equipment 169 .8 306 1.9 358 2.2
Software license fees 470 2.1 409 2.5 420 2.6
Minimum guarantee and
contract termination
revenue - - - - 453 2.8
Interest and other 369 1.7 205 1.3 157 1.1
------- ----- ------ ----- ------ -----
Total revenues 22,009 100.0 16,245 100.0 15,953 100.0
------- ----- ------- ----- ------ -----
Expenses:
Cost of services 15,232 69.2 11,116 68.4 10,477 65.7
Cost of equipment sales 96 .4 166 1.0 238 1.5
Research and development 1,872 8.5 2,466 15.2 3,180 20.0
Selling, general and
administrative 7,246 32.9 8,159 50.2 6,844 42.9
Interest 166 .8 114 0.7 54 0.3
Restructuring charges - - (590) -3.6 6,800 42.6
Loan Impairment Charge 436 2.0
------- ----- ------ ----- ------ -----
Total expenses 25,048 113.8 21,431 131.9 27,593 173.0
------- ----- ------ ----- ------- -----
Loss before income taxes (3,039) -13.8 (5,186) -31.9 (11,640) -73.0
Income tax benefit - - 1,280 -7.9 3,588 -22.5
------- ------ ------ ------ ------- ------
Net loss (3,039) -13.8% (3,906) -24.0% (8,052) -50.5%
======= ====== ====== ====== ======= ======
</TABLE>
25
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
REVENUE During 1997, total revenues increased approximately $5.8 million or
35.5% over 1996 levels to $22.0 million. Service fees, which represented
approximately 95% of the Company's 1997 revenues, increased $5.7 million (37.4%)
to $21.0 million. This increase resulted from $4.1 million of additional
revenues associated with the Company's contract to provide third party
administrative services to MetroPlus (see Item 3: Legal Proceedings), together
with increases in service fee revenue associated with physicians of $1.0 million
and hospital accounts of $.6 million
Other revenues, including sales of equipment, software licenses, and interest
and other increased $88,000 or 9.6%.
EXPENSES Fiscal 1997 total expenses increased $3.6 million or 16.9%. Excluding
the restructuring gain recorded in Fiscal 1996 and the loan impairment charge
recorded in Fiscal 1997, expense increases totaled $2.6 million or 11.8%. The
increase in Cost of Services of $4.1 million was directly related to the
addition of new business. This increase was partially offset by decreases of
$594,000 (24.1%) in research and development, and $913,000 (11.2%) in selling,
general and administrative expense. Decreases in research and development
expense related to the phase-out of the clinical information systems business.
The decrease in selling general and administrative expense related to the
restructuring of the Company's sales and marketing organization and lower
corporate costs.
During Fiscal 1997, the Company booked a $436,000 loan impairment charge to
reflect the amount by which the value of 252,557 shares of the Company's common
stock held as security for a loan made in connection with an acquisition in
1991, was less than the outstanding principal balance on such loan. If and to
the extent that the closing stock price at the end of any subsequent quarter is
greater than $3.125, there will be a reversal of this charge.
NET LOSS The Company's $3.0million net loss was $867,000 less than the net loss
reported for 1996. The Company's 1997 loss before income tax benefit of
approximately $3.0 million was $2.15 million less than the $5.2 million loss
before income tax reported in Fiscal 1996.
The decline in the Company's loss before income tax was primarily the result of
the net contribution margin associated with new business.
Fiscal 1996 Compared to Fiscal 1995
REVENUE During 1996, total revenues increased approximately $300,000 or 1.8%
over 1995 levels to $16.2 million. Service Fees, which represented approximately
94% of the Company's 1996 revenues, increased 5.2% to $15.3 million. This
increase was primarily due to the 1996 revenue associated with the Company's
October 1995 contract to provide third party administrative services to
MetroPlus (see Item 3: Legal Proceedings) and increases in revenues associated
with physician business management contracts in Florida and New Jersey.
26
<PAGE>
Other revenues, including sales of equipment, software licenses, minimum
guarantee contracts and contract termination fees decreased 41.9% to $715,000.
Most of these decreases were anticipated and part of the Company's restructuring
efforts to move from a provider of clinical information systems and turnkey
software products to a provider of contract business management services. (See
the Company's 1994 Annual Report on Form 10K, Item 1-Business-Significant
Customers).
EXPENSES Fiscal 1996 total expenses decreased $6.2 million or 22.3%. Total
expenses, net of the 1995 restructuring charge and the 1996 gain on
restructuring, increased $1.2 million or 5.8%. Increases in Cost of Services
were primarily the result of startup costs associated with the Company's
southern Florida processing center that has subsequently been closed. Cost of
Equipment Sales decreased $72,000 or 30.3% and Research and Development Expenses
decreased $714,000 or 22.5%. Both of these decreases were primarily related to
the phase-out of the clinical information systems business.
Selling, General and Administrative Expenses increased $1.3 million or 19.2%.
Major components of this increase related to increases in sales and marketing
expenses of $687,000, $315,000 for the development of a physician business
management unit, a $434,000 increase in the amortization of a stock signing
bonus associated with the recruitment of the Chairman/CEO, increase in the
provision for losses on accounts receivable of $168,000, and increased legal
fees of $85,000. These increases were offset by a decrease in the amortization
of software technology of $419,000 resulting from the write-off of certain
capitalized technology costs as part of the 1995 restructuring charge.
NET LOSS The Company's 1996 net loss of $3.9 million was approximately $4.2
million less than the net loss reported for 1995. This decline was primarily a
result of the $7.4 million difference between the 1996 restructuring credit and
the 1995 restructuring charges, net of the related tax benefits.
ITEM 8: FINANCIAL STATEMENTS AND SCHEDULES
See INDEX TO FINANCIAL STATEMENTS and SCHEDULES on page F-1 of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included under the captions
"Election of Directors" and "Section 16 Filings" in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A for the 1996 Annual
Meeting of Shareholder, and is incorporated herein by reference.
27
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item will be included in the section entitled
"Executive Compensation" in the Company's definitive Proxy Statement, to be
filed pursuant to the Regulation 14A for the 1997 Annual Meeting of
Shareholders, and is hereby incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information under the caption "Voting Securities and Principal Holders Thereof"
will be included in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A for the 1997 Annual Meeting of Shareholders, and is
hereby incorporated herein by reference
ITEM 13: CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Information under the caption "Certain Relationships and Related Transactions"
will be included in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A for the 1997 Annual Meeting of Shareholders, and is
hereby incorporated herein by reference.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: Financial Statements filed as part of this report
are listed on Page F-1.
(a)(2) Financial Statements Schedules: Financial statement schedules filed as
part of this report are listed in the Index on page F-1. All other
schedules are omitted as inapplicable or because the required information
is included in the financial statements or notes thereto.
(a)(3) Exhibits: The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the Exhibit Index that follows the Financial
Statements and immediately precedes the exhibits filed.
The Company, upon request of a registered shareholder,
will provide the exhibits that are listed in this Item 14.
Written requests for such exhibits should be directed to
Stockholder Relations, US Servis, Inc., 220 Davidson
Avenue, Somerset, New Jersey 08873.
(b) Reports on Form 8-K: No report on Form 8K was filed during the final
quarter of the year ended March 31, 1997.
28
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act, of 1934, the registrant has duly caused this report to be signed on behalf
of the undersigned, thereunto duly authorized.
Dated: June 26, 1997 US SERVIS, INC.
By: /s/ Graham O. King
-----------------------------------------
Graham O. King, Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Graham O. King Chairman of the Board June 26, 1997
- ------------------ Chief Executive Officer
Graham O. King
/s/ James A. Pesce President and Director June 26, 1997
- ------------------
James A. Pesce
/s/ S. M. Caravetta Director June 26, 1997
- -------------------
S. M. Caravetta
/s/ Michael B. Loscalzo Principal Accounting Officer June 26, 1997
- ----------------------- and Chief Financial Officer
Michael B. Loscalzo
/s/ Stanford J. Goldblatt Director June 26, 1997
- -------------------------
Stanford J. Goldblatt
/s/ Robert E. King Director June 26, 1997
- -------------------
Robert E. King
/s/ Robert C. Bowers Director June 26, 1997
- --------------------
Robert C. Bowers
/s/ Frederick R. Blume Director June 26, 1997
- ----------------------
Frederick R. Blume
/s/ James E. Cowie Director June 26, 1997
- ------------------
James E. Cowie
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports F-2
Financial Statements:
Consolidated Balance Sheets at March 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended
March 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended March 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-20
Schedules:
VI - Valuation accounts F-21
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
US Servis, Inc.
We have audited the consolidated balance sheets of US Servis, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended March 31, 1997. 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of US Servis, Inc. and subsidiaries at March 31, 1997 and
1996, and the consolidated results of their operations and cash flows for each
of the three years in the period ended March 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the accompanying financial statements for the years
ended March 31, 1996 and 1995 have been retroactively restated for the effects
of a change in income recognition.
/s/Wiss & Company, LLP
WISS & COMPANY, LLP
Livingston, New Jersey
June 6, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
US SERVIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<S> <C> <C>
March 31,
------------------------------
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS:
Cash and equivalents $ 8,063,000 $ 6,546,000
Certificate of deposit 300,000 300,000
Accounts receivable:
Billed, less allowance for doubtful accounts
of $464,000 and $458,000 4,092,000 2,558,000
Unbilled 1,387,000 1,153,000
Current maturities of notes receivable - 190,000
Prepaid and refundable income taxes 41,000 2,343,000
Deferred income taxes - 62,000
Prepaid expenses and other current assets 838,000 587,000
----------- -----------
Total Current Assets 14,721,000 13,739,000
----------- -----------
PROPERTY AND EQUIPMENT 1,763,000 1,529,000
----------- -----------
OTHER ASSETS:
Software technology, purchased and developed, less
accumulated amortization of $421,000 and $292,000 322,000 319,000
Goodwill, less accumulated amortization of
$481,000 and $323,000 3,164,000 3,262,000
Other 769,000 204,000
----------- -----------
Total Other Assets 4,255,000 3,785,000
----------- -----------
$ 20,739,000 $ 19,053,000
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDER EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,414,000 $ 634,000
Accrued payroll and benefits 1,015,000 724,000
Current portion of accrued restructuring charges 696,000 963,000
Accrued expenses for use of trade name 62,000 254,000
Other accrued expenses 995,000 805,000
Current portion of capital lease obligation 263,000 230,000
Deferred income 439,000 242,000
Other current liabilities 325,000 410,000
----------- -----------
Total Current Liabilities 5,209,000 4,262,000
----------- -----------
LONG-TERM LIABILITIES
Accrued restructuring charges - net of current portion 369,000 905,000
Long-term capital lease obligation - net of current portion - 267,000
----------- -----------
Total Long-term Liabilities 369,000 1,172,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK
Convertible redeemable preferred stock $0.01 par value; 10,000,000 shares
authorized; 1,500,000 shares issued
and outstanding (liquidation preference $6,228,000) - 6,110,000
----------- -----------
SHAREHOLDERS' EQUITY
Convertible preferred stock $0.01 par value; 10,000,000 shares authorized;
2,500,000 shares issued (liquidation
preference $10,903,000) 25,000 -
Common stock $0.01 par value; 30,000,000 shares
authorized; 6,367,000 and 6,312,000 shares issued 64,000 63,000
Capital in excess of par value 24,865,000 14,864,000
Retained earnings (deficit) (8,805,000) (5,994,000)
Subscription receivable (140,000) (140,000)
Note receivable - related party (789,000) (1,225,000)
----------- -----------
15,220,000 7,568,000
Less: Treasury stock at cost, 15,700 shares (59,000) (59,000)
----------- -----------
Total Shareholders' Equity 15,161,000 7,509,000
----------- -----------
$ 20,739,000 $ 19,053,000
=========== ===========
See accompanying notes to consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
US SERVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
REVENUES:
Service fees $21,001,000 $15,325,000 $14,565,000
Sales of equipment 169,000 306,000 358,000
Software licence fees 470,000 409,000 420,000
Minimum guarantee and contract
termination revenue - - 453,000
Interest and other 369,000 205,000 157,000
----------- ----------- -----------
22,009,000 16,245,000 15,953,000
----------- ----------- -----------
EXPENSES:
Cost of services 15,232,000 11,116,000 10,477,000
Cost of equipment sales 96,000 166,000 238,000
Research and development 1,872,000 2,466,000 3,180,000
Selling, general and administrative 7,246,000 8,159,000 6,844,000
Interest 166,000 114,000 54,000
Restructuring charges (gains) - (590,000) 6,800,000
Loan impairment charge 436,000 - -
----------- ----------- -----------
25,048,000 21,431,000 27,593,000
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (3,039,000) (5,186,000) (11,640,000)
FEDERAL AND STATE
INCOME TAX BENEFIT - 1,280,000 3,588,000
----------- ----------- -----------
NET LOSS $ (3,039,000) $ (3,906,000) $ (8,052,000)
----------- ----------- -----------
NET LOSS PER SHARE $ (0.59) $ (0.66) $ (1.34)
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENTS OUTSTANDING 6,308,000 6,282,000 6,023,000
============ ============ ============
See accompanying notes to consolidated financial statements
F-4
</TABLE>
<PAGE>
US SERVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Captial in
Preferred Stock Common Stock Excess of
Shares Par Value Shares Par Value Par Value
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994, AS REPORTED - $ - 5,882,000 $ 59,000 $13,618,000
Cummulative effect for change of
income recognition - - - - -
------ --------- ---------- -------- -----------
BALANCE, MARCH 31, 1994, AS RESTATED - - 5,882,000 59,000 13,618,000
YEAR ENDED MARCH 31, 1995:
Purchase of 15,700 shares for
treasury - -
Shares issued for officer
compensation - - 300,000 3,000 1,047,000
Shares issued in accordance with
amended plan of merger - - 75,000 1,000 (1,000)
------ -------- ---------- ------- ----------
Net loss
BALANCE, MARCH 31, 1995 - - 6,257,000 63,000 14,664,000
YEAR ENDED MARCH 31, 1996:
Amortization of officer stock
compensation - - - - -
Shares issued in accordance with
amended plan of merger - - 55,000 - 200,000
Accretion equal to accrued dividends
on redeemable preferred stock
Net loss
------ -------- ---------- ------- ----------
BALANCE, MARCH 31, 1996 - - 6,312,000 63,000 14,864,000
YEAR ENDED MARCH 31, 1997:
Shares issued under contractual
obligation - - 55,000 1,000 149,000
Reclassification of Series A preferred
stock as a result of the elimination
of the redemption provision 1,500,000 15,000 - - 5,891,000
Shares issued for cash, net of costs 1,000,000 10,000 - - 3,961,000
Reversal of accreted dividends - - - - -
Fair market adjustment of collateral - - - - -
Net loss - - - - -
----------- -------- ---------- -------- ------------
BALANCE, MARCH 31, 1997 2,500,000 $ 25,000 6,367,000 $ 64,000 $ 24,865,000
=========== ======== ========== ======== ============
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
US SERVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(CONTINUED)
Retained Note
Unearned Earnings Subscription Receivable Treasury
Compensation (Deficit) Receivable Related Party Stock
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994, AS REPORTED - $ 5,398,000 $ (140,000) $ (1,225,000) $ -
Cummulative effect for change of
income recognition - 794,000 - - -
------------- ----------- --------- ------------- ---------
BALANCE, MARCH 31, 1994, AS RESTATED - 6,192,000 (140,000) (1,225,000) -
YEAR ENDED MARCH 31, 1995:
Purchase of 15,700 shares for
treasury - - - - (59,000)
Shares issued for officer
compensation (742,000) - - - -
Shares issued in accordance with
amended plan of merger - - - - -
Net loss (8,052,000) - -
------------- ----------- --------- ------------- ---------
BALANCE, MARCH 31, 1995 (742,000) (1,860,000) (140,000) (1,225,000) (59,000)
YEAR ENDED MARCH 31, 1996:
Amortization of officer stock
compensation 742,000 - - - -
Shares issued in accordance with
amended plan of merger - - - - -
Accretion equal to accrued dividends-
on redeemable preferred stock - (228,000) - - -
Net loss (3,906,000) - - -
------------- ----------- --------- ------------- ---------
BALANCE, MARCH 31, 1996 - (5,994,000) (140,000) - (1,225,000) (59,000)
YEAR ENDED MARCH 31, 1997:
Shares issued under contractual
obligation - - - - -
Reclassification of Series A preferred
stock as a result of the elimination
of the redemption provision - - - - -
Shares issued for cash, net of costs - - - - -
Reversal of accreted dividends - 228,000 - 436,000 -
Fair market adjustment of collateral - - - - -
Net loss - (3,039,000) - - -
------------- ----------- ---------- ------------- ---------
BALANCE, MARCH 31, 1997 $ - $ (8,805,000) $ (140,000) $ (789,000) $(59,000)
=============== ============= =========== ============== ==========
</TABLE>
F-5a
<PAGE>
<TABLE>
<CAPTION>
US SERVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
---------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,039,000) $ (3,906,000) $ (8,052,000)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Write-off of assets in restructuring - - 2,898,000
Depreciation and amortization of
property and equipment 639,000 521,000 462,000
Amortization of software technology 189,000 129,000 548,000
Amortization of goodwill 98,000 130,000 94,000
Amortization of costs of issuing preferred
stock 30,000 12,000 -
Other - (11,000) (13,000)
Provision for losses on accounts receivable 96,000 320,000 152,000
Deferred income taxes 62,000 1,024,000 (1,755,000)
Compensation earned under employment
agreement - 742,000 308,000
Fair value adjustment of colateral held for
note receivable from related party 436,000 - -
Changes in operating assets and liabilities:
Accounts receivable, billed (1,630,000) (11,000) 2,056,000
Accounts receivable, unbilled (234,000) - -
Notes receivable 190,000 277,000 1,451,000
Prepaid and refundable income taxes 2,302,000 (343,000) (1,247,000)
Prepaid expenses and other current
assets (251,000) (6,000) (247,000)
Other assets (415,000) - 6,000
Accounts payable 780,000 104,000 173,000
Accrued payroll and benefits 291,000 157,000 44,000
Accrued restructuring charges (803,000) (1,566,000) 3,434,000
Other accrued expenses 190,000 207,000 179,000
Acrrued expenses for use of trade name (192,000) - -
Deferred income 197,000 (409,000) (5,000)
Other current liabilities (85,000) 239,000 44,000
Net cash flows from operating ----------- ------------ ----------
activities (1,149,000) (2,390,000) 530,000
----------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (898,000) (346,000) (769,000)
Proceeds from sale of equipment 25,000 - 82,000
Purchase of certificate of deposit - (300,000) -
Increase in goodwill - - (34,000)
Increase in software technology (192,000) (158,000) (50,000)
Net cash flows from investing ----------- ------------ ----------
activities (1,065,000) (804,000) (771,000)
----------- ------------ ----------
F-6
<PAGE>
US SERVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
---------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of preferred stock, less
related expenses $ 3,965,000 $ 5,872,000 $ -
Payments of long-term debt - - (62,000)
Purchase of common stock for treasury - - (59,000)
Principal payment on capital lease obligation (234,000) (253,000) -
----------- ------------ ----------
Net cash flows from financing activities 3,731,000 5,619,000 (121,000)
----------- ------------ ----------
NET CHANGE IN CASH AND EQUIVALENTS 1,517,000 2,425,000 (362,000)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 6,546,000 4,121,000 4,483,000
----------- ------------ ----------
CASH AND EQUIVALENTS, END OF YEAR $ 8,063,000 $ 6,546,000 $ 4,121,000
=========== ============ ==========
SUPPLEMENTAL INFORMATION:
Interest paid $ 166,000 $ 114,000 $ 4,000
Income taxes refunded $ 2,399,000 $ 1,952,000 $ 14,000
Issuance of common stock for compensation $ - $ - $ 1,050,000
Noncash financing activity:
Reclassification of Series A preferred stock
as a result of the elimination of the
redemption provision $ 5,906,000 $ - $ -
Value assigned to goodwill relating to shares of
common stock for prior year business
acquisition $ - $ 200,000 $ -
Accretion (reversal) of dividends on preferred
stock $ (228,000) $ 228,000 $ -
Stock issued to customer under contractual
agreement $ 150,000 $ - $ -
</TABLE>
F-7
<PAGE>
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and Summary of Significant Accounting Policies:
Basis of Presentation - The consolidated financial statements
include all the accounts of US Servis, Inc. and its wholly-owned
subsidiaries (collectively, the "Company"). All significant
intercompany transactions have been eliminated.
Nature of the Business - The Company is a provider of outsourced
business and information management services to physicians,
physician networks, hospitals and ambulatory care centers
associated with Intergrated Delivery Systems The Company's
principal focus is providing billing and accounts receivement
management services. The Company, through strategic alliances,
has expanded its product offerings to include outsourcing of
business management services to a managed care organization and
the implementation of electronic medical records systems. The
Company has also historically been a provider of clinical
information systems products to hospitals. The Company is
phasing out of this activity. (See Note 2)
Revenue Recognition - Revenues are recognized under services and
equipment agreements as follows:
Fees for the Company's services are primarily based on a
percentage of net collections on clients' patient accounts
and revenue is recognized as such services are performed.
Accounts receivable, billed, represents amounts invoiced
to clients. Accounts receivable, unbilled, represents fees
recognized for services rendered, but not yet invoiced and
is based upon the Company's estimate of fees that will be
invoiced when collections on clients' patient accounts are
received.
Revenues from other service agreements and hardware and
software sales are recognized when the services are
rendered or the hardware and software are installed and
accepted. If the agreement provides for installment
payments on the hardware or software, the present value of
the amount to be received is recognized as revenue.
Estimates and Uncertainties - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results, as
determined at a later date, could differ from those estimates.
F-8
<PAGE>
Financial Instruments - Financial instruments include cash and
equivalents, accounts receivable, other assets, accounts
payable, accrued expenses and capital lease obligations. The
amounts reported for financial instruments are considered to be
reasonable approximations of their fair values. The fair value
estimates presented herein were based on market information
available to management. The use of different market assumptions
and/or estimation methodologies could have a material effect on
the estimated fair value amounts.
Concentration of Credit Risks - The Company's accounts and notes
receivable are principally from hospitals located throughout the
U.S. (see Note 12 as to the major customers).
The Company maintains its cash balances in several financial
institutions which in some instances exceed federally insured
limits
Cash Equivalents - The Company considers all highly liquid debt
instruments with an original maturity of three months or less,
when purchased, to be cash equivalents.
Property and Equipment - Property and equipment are stated at
cost. Depreciation expense generally is provided by the
straight-line method over the estimated lives of the assets, 3
to 7 years for computer equipment, 5 to 8 years for furniture
and fixtures, and 7 to 10 years or the lease term, if shorter,
for leasehold improvements.
Software Technology - Costs associated with the development of
software are expensed as incurred. The expenses amounted to
$1,872,000, $2,466,000, and $3,180,000 for the years ended March
31, 1997, 1996 and 1995, respectively. Purchased software
technology is stated at cost, and is amortized over a 3 to 7
year period using the straight-line method.
Goodwill - Goodwill consists of the excess of cost over net
assets of acquired businesses and is being amortized over 40
years on the straight-line method.
Income Taxes - Deferred taxes have been provided for temporary
differences in reporting certain transactions for financial
accounting and tax reporting purposes.
Net Loss Per Share - Net loss per share is based on the weighted
average number of common shares and equivalents outstanding
during each year. The loss was adjusted by accretions equal to
accrued dividends on the Company's preferred stock in the amount
of $675,000, $228,000, and $-0- for the years ended March 31,
1997, 1996 and 1995, respectively. Warrants and options are
included, using the treasury stock method, when exercise prices
are less than the average market prices. No effect is given to
common share equivalents when there is a net loss.
F-9
<PAGE>
Stock Option Compensations - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". This standard measures compensation associated
with stock options based on a specific fair value definition
but, allows companies to continue to measure compensation
associated with employee stock options based on the intrinsic
value approach. The Company has elected to continue to use the
criteria set forth in APB No. 25 to measure compensation
associated with the issuance of employee stock options.
Accordingly, the Company has not recognized any compensation
associated with the issuance of employee stock options during
the years ended March 31, 1997 and 1996. Had compensation cost
been determined pursuant to SFAS No. 123, pro forma net loss for
the years ended March 31, 1997 and 1996 would have increased by
approximately $163,000 and $258,000, respectively.
Defined Contribution Profit Sharing Plan - The Company has a
defined contribution 401(k) plan covering substantially all its
employees. Employees who have one year of service are eligible
to receive matching contributions from the Company. Company
contributions are based on a percentage of employees' annual
deferrals and are charged against income as incurred.
Contributions were approximately $92,000, $71,000 and $52,000 in
fiscal 1997, 1996 and 1995, respectively.
Reclassification - Certain amounts in prior years have been
reclassified for comparability.
Note 2 - Restructuring Charges (Gains):
During 1995, the Company recorded a restructuring charge of
$6,800,000 for costs associated with termination of employment
of the former Chairman of the Board, downsizing of operations,
consolidating facilities, discontinuance of the Company's
in-patient point-of-care systems and refocusing on financial
management services.
During 1996, the Company substantially completed its
restructuring program and the final costs varied from the
original estimates for certain items. As a result the Company
recorded a net credit of $590,000 to reduce its restructuring
accrual. During 1997, the estimate of the Company's
restructuring was reevaluated at which time no charge or gain
was required.
F-10
<PAGE>
<TABLE>
<S> <C> <C>
The individual components of the 1996 credit and the 1995
restructuring charge are summarized as follows:
Year Ended March 31,
1996 1995
Writedown of capitalized software costs $ - $2,127,000
Writedown of inventory and equipment - 714,000
Provision for doubtful accounts receivable on discontinued
products - 200,000
Consolidations and close down of facilities (920,000) 1,189,000
Legal, consulting and related reserves (125,000) 300,000
Termination costs related to the former Chairman (223,000) 1,394,000
Severance payments to employees 678,000 876,000
---------- -----------
$(590,000) $6,800,000
</TABLE>
At March 31, 1997, the non-current portion of accrued
restructuring charges matures as follows:
Year Ending March 31,
1999 $ 177,000
2000 66,000
2001 10,000
2002 10,000
2003 and thereafter 106,000
----------
$ 369,000
Note 3 - Acquisitions - Purchases:
Management-Data Services, Inc. ("MDS") - On March 9, 1993, the
Company acquired through merger Vanco Business Management, Inc.
("VBM") The purchase price consisted of 180,000 shares of the
Company's restricted common stock (valued at $2,059,000),
$1,000,000 in cash plus closing costs of approximately $115,000.
The acquisition was reported using the purchase method of
accounting and, accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed
based on the estimated fair values at the date of acquisition.
The $2,488,000 excess of purchase price over the estimated fair
values of the net assets acquired was recorded as goodwill.
F-11
<PAGE>
In April 1994, the Company amended the plan of merger. Under the
amendment, the Company issued an additional 25,000 shares of its
common stock to the former owner of VBM. The Company was also
required to issue 240,000 additional shares of its common stock
based upon its market value at March 31, 1995 and revenues of
MDS and 55,000 common shares based on revenues attained by MDS
in the fiscal year ended March 31, 1996.
In connection with the amended plan of merger, the Company
issued 190,000 shares of its common stock in 1994, 75,000 shares
in May 1995 and 55, 000 shares in 1996. The value of the shares
issued in May 1995 is reflected in shareholders' equity at March
31, 1995.
AISCorp. - On June 14, 1991, the Company acquired through a
subsidiary substantially all of the assets subject to certain
liabilities of AISCorp. for 108,000 shares of the Company's
restricted common stock valued at $1,500,000. The acquisition is
reported using the purchase method of accounting and
accordingly, the purchase price, closing costs and net
liabilities assumed, have been attributed to software
technology.
As a result of the Company's guarantee of the price of its
common stock in the acquisition of AISCorp., the Company, in
December 1993, issued 221,000 shares of its common stock and
loaned $1,225,000 to the former owner. The loan bears interest
at 5.1%, and was collateralized by 328,000 shares of the
Company's common stock. Principal and interest are payable only
from the proceeds of the sale of the collateral. Accordingly,
the loan is reported as a reduction of the Company's
shareholders' equity. Any unsold common stock at the due date of
the loan will revert to the Company in exchange for cancellation
of the then remaining loan balance and accrued interest. On June
26, 1996, the Company entered into an agreement to change the
due date of the loan to the earlier of December 13, 2000 or
ninety days after the price of the Company's stock reaches a per
share price of $8.50 for five consecutive trading days. Also the
Company agreed to reduce the collateral for the loan by 75,000
shares and an additional 50,000 shares when the per share price
of the Company's Common Stock reaches certain price levels.
Note 4 - Point-of-Care Clinical Information Systems:
On November 14, 1991, Clinical Dimensions, Inc. (Clinical), a
subsidiary of the Company, modified an agreement (the Baxter
Agreement) with Baxter Healthcare Corporation ("Baxter"). Under
the Modified Baxter Agreement, Baxter had the exclusive right to
distribute Med-Take throughout the United States and Canada. The
Company was to receive minimum Med-Take revenues until March 31,
1995.
F-12
<PAGE>
In December 1993, the Company ended the existing agreement with
Baxter and signed a termination agreement whereby Baxter will
continue to serve as the exclusive distributor of the Clinical
product only to hospitals serviced by HCA Information Services,
Inc. The termination agreement was effective through December of
1995. Baxter paid the Company $2,000,000 to satisfy its
obligation which is included in minimum guarantee and contract
termination revenue in the statement of operations for 1994.
Note 5 - Property and Equipment:
Property and equipment consist of:
March 31,
1997 1996
Property and equipment $4,053,000 $3,486,000
Leasehold improvements 313,000 409,000
----------- ------------
4,366,000 3,895,000
Less: Accumulated depreciation
and amortization 2,603,000 2,366,000
----------- -----------
$1,763,000 $1,529,000
========== ==========
Depreciation and amortization expense was $639,000, $521,000 and
$462,000 for the years ended March 31, 1997, 1996 and 1995,
respectively, and are included in selling, general and
administrative expenses.
Note 6 - Capital Lease Obligation:
During September 1995, the Company leased three IBM AS400
computers for three years with semi-annual principal and
interest payments of $150,000 at an interest rate of
approximately 15% per annum. Future principal payments include
$267,000 in fiscal 1998.
Note 7 - Income Taxes:
<TABLE>
<CAPTION>
A summary of current and deferred income taxes included in the statements of operation is as follows:
Year Ended March 31,
<S> <C> <C> <C>
1997 1996 1995
---------------- --------------- ---------
Current:
Federal $ - $(2,349,000) $(1,704,000)
State and local - 45,000 (129,000)
------------------ -------------- ----------
- (2,304,000) (1,833,000)
------------------ ------------ ----------
Deferred:
Federal - 1,024,000 (1,606,000)
State and local - - (149,000)
------------------ ------------------ -------------
- 1,024,000 (1,755,000)
------------------ ------------ ------------
Provision for income taxes $ - $(1,280,000) $(3,588,000)
================= =========== ===========
</TABLE>
F-13
<PAGE>
The total income taxes are different than the amounts computed
by applying the U.S. statutory federal income tax rate of 34%.
The differences are summarized as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended March 31,
1997 1996 1995
Income taxes at statutory rate $(1,033,000) $(1,763,000) $(3,958,000)
Effect of losses without a current year tax
benefit 1,185,000 237,000 592,000
Alternative minimum tax - 156,000 115,000
State and local taxes, net of federal benefit
(210,000) 30,000 (189,000)
Write off and amortization of nondeductible
technology costs and goodwill, net of
realization of deferred tax liability
33,000 44,000 (114,000)
Nondeductible business expenses and other
25,000 16,000 (34,000)
------------ -------------- --------------
Provision for income taxes $ - $(1,280,000) $(3,588,000)
================ =========== ===========
The significant components of the Company's net deferred tax
assets are summarized below:
March 31,
-------------------------------------------------------
1997 1996 1995
-------------- -------------- ---------
Accrued restructuring charges $ 406,000 $ 747,000 $1,384,000
Inventories - - 274,000
Allowance for doubtful accounts 185,000 190,000 76,000
Equity based compensation - - 155,000
Accrued vacation and other 123,000 177,000 86,000
Depreciation 134,000 - -
Writedown of stockholder note receivable
174,000 - -
Unbilled revenue (555,000) (461,000) (461,000)
Alternative minimum tax credit - 271,000 115,000
Net operating loss tax carryforwards
3,684,000 2,814,000 2,571,000
----------- ----------- -----------
4,151,000 3,738,000 4,200,000
Valuation allowance 4,151,000 3,676,000 3,114,000
----------- ----------- -----------
$ - $ 62,000 $1,086,000
================ ============ ==========
</TABLE>
F-14
<PAGE>
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The Company has determined that a full valuation
allowance is appropriate at March 31, 1997 and 1996, except to
the extent of refundable income taxes.
At March 31, 1997, AISCorp. and US Servis, Inc. ("USS") had
Federal net operating loss carryforwards of approximately
$8,085,000 and $740,000, respectively which expire beginning in
fiscal 2001. Of these losses, $5,292,000 is limited by the
provisions of Section 382 of the Internal Revenue Code due to a
more than 50% change in ownership. Following such a change, the
utilization of tax loss carryforwards is limited to the value of
the acquired Company on the date of such change, multiplied by
the Federal long-term tax exempt rate (the "annual limitation").
To the extent amounts available under the annual limitation are
not used, they may be carried forward for the remainder of 15
years from the date the losses were originally incurred. As a
result of the change in ownership, use of net operating losses
will be limited to approximately $225,000 per year for AISCorp.
and $320,000 for USS, subject to certain additional limitations.
Note 8 - Change in Revenue Recognition Method and Restatement:
The accompanying financial statements for the years ended March
31, 1996 and 1995 have been retroactively restated for the
effects of a change in income recognition. The Company changed
its method of accounting for income recognition for business
management services, whereby, revenue is recognized on
collections in process as the services are performed. In prior
years, revenue was recognized based solely on the net
collections by the third party customers. The Company believes
the new method of revenue recognition more accurately reflects
the earnings process and is the method used throughout the
industry.
The effect of the change was a restatement to increase retained
earnings as of April 1, 1994 for $794,000. The statement of
operations for fiscal 1996 and 1995 were not materially effected
by the restatement.
F-15
<PAGE>
Note 9 - Commitments and Contingencies:
Leases - The annual minimum rental commitments under the terms
of the Company's operating leases that have initial or remaining
lease terms in excess of one year at March 31, 1997 are as
follows:
Year Ending March 31,
1998 $ 859,000
1999 729,000
2000 610,000
2001 601,000
2002 602,000
Thereafter 1,067,000
----------
Total future minimum lease payments $4,468,000
Net rental expenses for office space amounted to $877,000,
$671,000 and $776,000 for the years ended March 31, 1997, 1996
and 1995, respectively.
Employment Agreements - The Company has an employment agreement
with an officer through March 31, 1999. Under this agreement,
minimum compensation per annum aggregates $239,000 for the year
ending March 31, 1998.
In the event of the death of one other officer during the term
of employment, the Company will be required to pay $100,000 per
annum for a period of ten years.
Royalties and Other Fees - In February 1995 the Company entered
into a ten year agreement with a provider of managed care
services ("licensor") which grants the Company exclusive rights
to market, license, install and support managed care software to
certain end users. The Company is required to pay the licensor a
$5,000 per month fee to cover software maintenance and customer
support services over the life of the agreement and is required
to pay the licensor royalties for software licenses sold.
Beginning in 1998, in order to retain exclusivity the Company is
also obligated to make minimum payments totaling $195,000
annually.
Commitment and Contingent Liabilities - The Company is
contingently liable for approximately $883,000 payable over nine
years for the continued use of certain trade names.
The Company is subject to certain lawsuits with particular
customers which arose in the course of business. In the opinion
of management, adequate provision has been made for any losses
which may occur in connection with these lawsuits.
F-16
<PAGE>
Note 10 - Convertible Preferred Stock:
On September 30, 1996 the Company issued through a private
placement 1,000,000 shares of Series B Convertible Preferred
Stock, par value $0.01 per share, for a purchase price of
$4,000,000. Concurrent to the issuance of the Series B
Convertible Preferred Stock, the Series A Convertible Preferred
stockholders agreed to eliminate the redemption provision that
was incorporated into the provisions of the Series A Preferred
Stock.
On October 12, 1995, the Company issued, through a private
placement, (i) 1,500,000 shares of Series A Convertible
Preferred Stock, par value $0.01 per share, (ii) warrants to
purchase up to 390,000 shares of the Company's common stock at
an exercise price of $0.10 per share, and (iii) warrants to
purchase up to 198,000 shares of the Company's common stock at
an exercise price of $3.50 per share, for an aggregate purchase
price of $6,000,000.
As of March 31, 1997, the carrying value of the Convertible
Preferred Stock has been reduced by $123,000 of unamortized
stock issue costs. Dividends on the Convertible Preferred Stock
accrue at a rate equal to 8% per annum, compounded quarterly. If
not earlier paid, preferred dividends are payable on i)
conversion or ii) dissolution of the Company.
At any time, the preferred stock is convertible at the option of
the holders into an equal number of common shares and under
certain circumstances the Company may require conversion. In the
event of the Company's liquidation, the holders of the
Convertible Preferred Stock are entitled to $4.00 per share
(aggregating $10,000,000) plus all accumulated and unpaid
dividends.
Note 11 - Shareholders' Equity:
Options - The Company has an incentive stock option plan (the
"1986 Plan") pursuant to which 600,000 shares of common stock of
the Company have been reserved for issuance to key employees
upon exercise of options. Options granted pursuant to the Plan
are nontransferable by the optionees during their lifetimes,
expire if not exercised within ten years from the date of the
grant, and, under certain circumstances set forth in the Plan,
may be exercised within three months following termination of
employment. Options are granted to key employees as determined
by the Board of Directors at not less than the fair market value
of the shares underlying the option on the date the option is
granted.
In 1993, the Board of Directors and the Company's shareholders
approved an incentive stock option plan ( the "1993 Plan") to
grant 500,000 shares of the Company's common stock. The terms of
the 1993 Plan are principally the same as those of the 1986
Plan.
F-17
<PAGE>
In 1994, the Board of Directors and the Company's shareholders
approved an amendment to the Company's 1993 Plan increasing the
number of shares reserved for issuance from 500,000 shares to
1,400,000 shares.
In addition, the Board of Directors and the Company's
shareholders approved a stock option plan (the "1994 Plan") to
grant 350,000 shares of the Company's common stock to
non-employee directors. All new nonemployee directors will
automatically be eligible for a grant of options to purchase
50,000 shares of common stock of the Company at the then fair
market value of the shares underlying the option on the day the
option is granted. All current directors received additional
options to purchase 40,000 shares. The options vest at 10,000
shares per year commencing one year from the date of grant, are
nontransferable by the optionees during their lifetimes, expire
if not exercised within ten years from the date of grant and may
be exercised within one year following termination of service as
an eligible director.
Outstanding options at March 31, 1997 are as follows:
<TABLE>
<S> <C> <C> <C>
Shares Exercise Price Expiration
Issuable Per Share Date
Non Qualified Options Issued to Chairman
of the Board of Directors in October
1994 (1) 1,000,000 $3.50 October 2004
Nonemployee director in October 1994,
options for 45,000 shares vested and
options for 10,000 shares vest in
fiscal 1998 and 1999.
65,000 $3.00-$5.00 October 1999
Nonemployee directors in January 1995, `
options for 40,000 shares vested and
20,000 shares vesting annually through
January 2000 100,000 3.50 January 2005
Former President and Chief Operating
Officer of AISCorp. in June 1991 (2)
75,000 4.00 June 2001
-----------
1,240,000
Incentive options 898,000 $3.00-$5.00 December 1997 -
----------
February 2007
2,138,000
(1) 400,000 shares vested October 1995, the remaining 600,000
vest when the Company's stock has closed at $5.00 or more
per share on at least 30 of the last 40 business days, or
upon a change in control, or on October 12, 2002.
(2) All options are exercisable.
</TABLE>
F-18
<PAGE>
Options under the Incentive Stock Option Plans are summarized as
follows:
<TABLE>
<S> <C> <C> <C>
Year Ended March 31,
1997 1996 1995
Options outstanding at
beginning of year 1,136,000 989,000 321,000
Options granted 285,000 405,000 894,000
Options expired (423,000) (243,000) (226,000)
Options exercised - - -
Options transferred (100,000) (15,000) -
----------- ----------- ----------
Options outstanding at end of year 898,000 1,136,000 989,000
========== ========= ==========
Option price per share
$3.00-$5.00 $3.00-$7.00 $3.00-$7.00
=========== =========== ===========
Options exercisable:
Number of shares 268,000
387,000 185,000
======= ==========
</TABLE>
At March 31, 1997, options to purchase 851,000 shares are
available for grant.
Note 11 - Major Customers:
Revenues from customers in excess of 10% of total revenues were
as follows:
<TABLE>
<S> <C> <C> <C>
Customer Year Ended March 31,
------------------------ --------------------------
1997 1996 1995
-------- -------- ------
University of Medicine & Dentistry, Newark, NJ 11.6% 15.7% 15.5%
MetroPlus Health Plan 21.2 3.6 -
Mount Sinai Practice Group, Elmhurst, NY 7.4 9.2 11.7
</TABLE>
On February 14, 1997, MetroPlus Health Plan, the Company's
largest customer, delivered a letter to the Company purporting
to be a notice of default under the MetroPlus contract and
giving the Company 90 days to cure all alleged events of
default. This deadline was subsequently extended to May 30,
1997. The Company vigorously denies that it is in default under
the MetroPlus contract. On May 22, 1997, the Company filed suit
against MetroPlus Health Plan and the New York Health and
Hospitals Corporation seeking an injunction prohibiting
MetroPlus Health Plan from terminating the MetroPlus contract
and seeking damages. On May 30, 1997, the Supreme Court of the
State of New York, County of New York, issued a temporary
restraining order prohibiting MetroPlus from terminating the
MetroPlus contract and setting a hearing on the issuance of a
temporary injunction for
F-19
<PAGE>
July 2, 1997. In the event that the Court were to refuse to
issue a temporary injunction and MetroPlus were to immediately
terminate the MetroPlus contract, such events would have a
material adverse effect on the financial condition of the
Company.
Note 12 - New Accounting Standard:
Earnings per Share - Statement of Financial Accounting Standards
(SFAS No. 128) "Earnings per Share" was issued in February 1997,
and is effective for financial statements issued for periods
ending after December 31, 1997. SFAS 128 requires that earnings
per share be presented more in line with earnings per share
standards of other countries. The Company expects to adopt SFAS
128 for the year ending March 31, 1998. The adoption is not
expected to have a material effect on the Company's financial
Statements.
F-20
<PAGE>
- ------------------------------------------------------------------------------
Schedule VI
- ------------------------------------------------------------------------------
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
- -------------------------------------------------- ------------------ ------------------- ------------------ -------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------- ------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Additions
Balance at Charged Balance at
Beginning of to Costs End of
Description Period and Expenses Deductions Period
March 31, 1997 -
Allowance for doubtful accounts $458,000 $ 96,000 $ 90,000 $464,000
======== ========= ========= ========
March 31, 1996 -
Allowance for doubtful accounts $206,000 $320,000 $ 68,000 $458,000
======== ======== ========= ========
March 31, 1995 -
Allowance for doubtful accounts $554,000 $152,000 $500,000 $206,000
======== ======== ======== ========
F-21
</TABLE>
<PAGE>
<TABLE>
<S> <C>
EXHIBITS INDEX
Exhibit No. Description Page
3(1) By-Laws. (I) *
3(2) Amended and Restated Certificate of Incorporation of the Registrant. (XVII) *
3(3) Certificate of Designation Relating to the Series A Convertible Preferred Stock of the Registrant.
(XVII) *
3(4) Certificate of Designation Relating to the Series B Convertible Preferred Stock With a Par Value of
$.01 Per Share of US Servis, Inc. (XIX) *
3(5) Amendment to Certificate of Designation Relating to the Series A Convertible Preferred Stock With a
Par Value of $.01 Per Share of US Servis, Inc. (XIX) *
4(1) Form of warrant to purchase in the aggregate up to 390,000 shares of the Registrant's Common Stock
at an exercise price of $0.10 per share, such warrants issued October 12, 1995. (XV)
*
4(2) Form of warrant to purchase in the aggregate up to 198,000 shares of the Registrant's Common Stock
at an exercise price of $3.50 per share, such warrants issued October 12, 1995. (XV)
*
10(1) Lease date March 31, 1986, between Skyline Associates, Inc. And Digital Equipment Corporation
relating to the premises located at 414 Eagle Rock Avenue, West Orange, New Jersey. (I)
*
10(2) 1986 Stock Option Agreement. (I) *
10(3) Service Agreement between the Registrant and Digital Equipment Corporation. (I) *
10(4) Non-qualified Stock Option Agreement between the Registrant and S.M. Caravetta, dated February 10,
1990 and expiring February, 1995. (III) *
10(5) License Agreement between the Registrant and North County Computer Services, Inc. (III) *
10(6) Distribution/Sales Representation Agreement by and between Baxter Healthcare Corporation and
MedTake Corp., dated as of October 1, 1990. (IV) *
10(7) Letter Agreement by and among MedTake Corp., the Registrant, Salvatore M. Caravetta and Baxter
Healthcare Corporation, dated as of October 1, 1990. (IV) *
10(8) Guaranty of the Registrant in favor of Baxter Healthcare
Corporation, dated as of October 1, 1990. (IV) *
10(9) Complimentary Marketing Agreement between International Business Machines Corporation and the
Registrant. (V) *
10(10) Service Agreements between Digital Equipment Corporation and the Registrant. (V) *
10(11) Asset Purchase Agreement and Plan of Reorganization by and among Administrative Information Systems
Corporation, the Registrant and Receivables Management Corp., dated as of June 14, 1991. (VI)
*
10(12) Registration Rights Agreement by and between the Registrant and Administrative Information Systems,
Inc. (Misnamed in said document as "Administrative Information Services Corporation"), dated June
14, 1991. (VI) *
10(13) Employment Agreement among Receivables Management Corp. (Renamed AISCorp.), the Registrant and
Stephen G. Sullivan, dated as of June 14, 1991. (VI) *
10(14) Option Registration Rights Agreement by and Between the Registrant and Stephen G. Sullivan, dated
June 14, 1991. (IV) *
10(15) Employment Contract between the Registrant and S.M. Caravetta. (VII) *
10(16) Employment Contract between the Registrant and James A. Pesce. (VII) *
10(17) Agreement and Plan of Merger with Exhibits by and among the Registrant, Vanco Business Management,
Inc. and David K. Vanco, dated as of December 31, 1992. (VIII) *
10(18) Employment Agreement, dated as of January 1, 1993, between Management-Data Service, Inc., the
Registrant and David K. Vanco. (VIII) *
10(19) Registration Rights Agreement between David K. Vanco and the Registrant, dated as of December 31,
1992. (VIII) *
10(20) Guaranty dated March 5, 1993, given by the Registrant to Harris Bank Roselle relating to loans to
David K. Vanco. (VIII) *
10(21) Letter agreement between David K. Vanco and the Registrant, dated March 5, 1993, relating to the
guaranty of notes, from David K. Vanco to Harris Bank Roselle. (VIII) *
10(22) Agreement of Merger with ACT/PC, dated September 15, 1993, amended November 12, 1993. (X)
*
10(23) Term Loan Agreement, dated as of December 13, 1993, between Stephen G. Sullivan and Registrant. (X)
*
10(24) Guarantee Modification Agreement, dated as of December 13, 1993, between Stephen G. Sullivan and
the Registrant. (X) *
10(25) Escrow Agreement, dated as of December 13, 1993, between Stephen G. Sullivan, Registrant and Crummy
Del Deo Dolan Griffinger & Vecchione. (X) *
10(26) Termination Agreement relating to the Baxter Distribution/Sales Representation Agreement, dated
December 17, 1993. (X) *
10(27) Amendment to Agreement and Plan of Merger between the Registrant and Management-Data Services,
Inc., dated April 8, 1994. (XI) *
10(28) Amendment to Employment Agreement between David K. Vanco and the Registrant, dated April 8, 1994.
(XI) *
10(29) Employment Agreement, dated as of October 12, 1994, between the Registrant and Graham O. King. (XII)
*
10(30) Option Agreement, dated as of October 12, 1994, between the Registrant and Graham O. King. (XII)
*
10(31) Registration Agreement, dated as of October 12, 1994, between the Registrant and Graham O. King.
(XII) *
10(32) Stockholder Agreement, dated as of October 12, 1994, between the Registrant and Graham O. King.
(XII) *
10(33) S.M. Caravetta Termination Agreement between S.M. Caravetta and the Registrant, dated as of October
12, 1994, as amended. (XIII) *
10(34) Letter of Intent, dated June 26, 1995, between the Registrant and Frontenac VI Limited Partnership.
(XIV) *
10(35) Registrant's Amended 1993 Stock Option Plan. (XIV) *
10(36) Registrant's Amended 1994 Stock Option Plan for Non-Employee Directors. (XIV) *
10(37) Series A Convertible Preferred Stock and Warrant Purchase Agreement, dated July 18, 1995, by and
among the Registrant, a trust established for the benefit of descendants of Robert E. King,
Frontenac VI Limited Partnership and Morgan Holland Fund II, L.P. (XV) *
10(38) Promissory Note of Graham O. King, dated June 14, 1995, payable to the Company. (XVI) *
10(39) First and Second Amendments to Series A Convertible Preferred Stock and Warrant Purchase Agreements
dated July 31, 1995 and October 10, 1995, respectively. (XVII) *
10(40) Registration Agreement, dated October 12, 1995, by and among the Registrant, a trust established
for the benefit of the descendants of Robert E. King, Frontenac VI Limited Partnership and Morgan
Holland Fund II, L.P. (XV) *
10(41) Agreement for Administrative Services, dated December 21, 1995, between New York Health and
Hospitals Corporation and the Registrant. (XVIII) *
10(42) Series B Convertible Preferred Stock Purchase Agreement among US Servis, Inc., and the Purchasers
named on Schedule 1 thereto, dated as of September 30, 1996. (XIX) *
10(43) First Amendment to Registration Rights Agreement among US Servis, Inc. and the Purchasers signatory
thereto, dated September 30, 1996. (XIX) *
10(44) Agreement for Services, dated December 31, 1996, between University Physician Associates and the
Registrant. (XX) *
NOTES TO EXHIBIT INDEX
Note No. Description
(I) Incorporated by reference from the Form S-18 Registration
Statement of the Registrant, dated June 10, 1986.
(II) Incorporated by reference from Amendment No. 1, dated September 6, 1986, to the Form
S-18 Registration Statement of the Registration.
(III) Incorporated by reference from the Registrant's Form 10-K, dated
June 18, 1990. (IV) Incorporated by reference from the Registrant's Form
8-K, dated October 1, 1990.
(V) Incorporated by reference from the Registrant's Form S-3, Registration No. 33-39062,
dated April 11, 1991.
(VI) Incorporated by reference from the Registrant's Form 8-K, dated
June 18, 1991. (VII) Incorporated by reference from the Registrant's
Form 10-K, dated June 28, 1991.
(VIII) Incorporated by reference from the Registrant's Form 8-K, dated
March 9, 1993.
(IX) Incorporated by reference from the Registrant's Form
8-K, dated September 15, 1993.
(X) Incorporated by reference from the Registrant's Form 8-K, dated
December 28, 1993.
(XI) Incorporated by reference from the Registrant's
Form 8-K, dated April 15, 1994.
(XII) Incorporated by reference from the
Registrant's Form 8-K, dated November 1, 1994.
(XIII) Incorporated by reference from the Registrant's Form 10-Q, dated
November 11, 1994.
(XIV) Incorporated by reference from the Registrant's
Form 10-K, dated June 26, 1995.
(XV) Incorporated by reference from the
Registrant's Form 10-K/A, dated July 24, 1995.
(XVI) Incorporated by
reference from the Registrant's Form 10-Q, dated August 10, 1995.
(XVII) Incorporated by reference from the Registrant's Form 10-Q, dated
November 10, 1995.
(XVIII) Incorporated by reference from the
Registrant's Form 10-Q, dated August 13, 1996.
(XIX) Incorporated by reference from the Registrant's Form 8-K, dated
September 30, 1996.
(XX) Incorporated by reference from the Registrant's
Form 10-Q, dated February 12, 1997 as amended June 17, 1997.
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