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 major northern New Jersey physician faculty practice plan and its service center in Denver, Colorado, where the Company manages 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.
KEY DEVELOPMENTS IN FISCAL 1998
Key developments during Fiscal 1998 include:
(a) RETURN TO PROFITABILITY For Fiscal 1998, net income was $728,000 as compared to a net loss of $3,039,000 for the prior fiscal year. See "Item 7 - - Management's Discussion of Financial Results" for a more complete discussion of the financial performance of the Company for Fiscal 1998.
(b) RESOLUTION OF ALL ISSUES WITH METROPLUS 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, was the Company's only HMO client. During Fiscal 1998, the Company filed suit to enjoin MetroPlus from terminating its contract in violation of its terms and for payment under the contract. In November, 1997, this lawsuit, together with a related lawsuit by a subcontractor of the Company, was completely resolved. MetroPlus agreed to pay the Company all sums due under the contract and the parties agreed to a termination of the contract between them as of February 28, 1998. Since the date of settlement, all litigation relating to the MetroPlus dispute has been dismissed, the Company has completed all tasks for MetroPlus under its contract and made all necessary payments under its subcontracts, and MetroPlus has made all necessary payments to the Company. During Fiscal 1998, MetroPlus accounted for 19.4% of the Company's revenues.
INDUSTRY OVERVIEW
The United States Healthcare Financing Administration ("HCFA") estimated healthcare expenditures in the United States for 1996 at $1 trillion, representing 14% of the Gross Domestic Product ("GDP"), an increase from $700 billion, or 12% of GDP, in 1990. In 1996, expenditures for hospital care totaled $359 billion and expenditures for physician services were $202 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 the American Hospital Association, between 1980 and 1996, the number of hospital admissions declined by 14% while the number of hospital outpatient visits increased from 263 million to 505 million.
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. 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
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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 362,000 hospital based physicians 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 300,000 primary care physicians practicing in the United States.
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 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 convert their accounts receivables to cash. Management believes that the trend towards more outpatient activity 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 into managing other areas of the business office, such as registration and billing and accounts receivable management for inpatients.
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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.
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 United 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 broad scale proposals by the Clinton Administration to reduce the rate of increase in Federally sponsored healthcare insurance programs were not passed during the
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legislative year, certain legislative changes were made during the 1997 legislative year and additional legislation appears likely. 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. 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 provides billing, accounts receivable management, information systems, and other business management services to approximately 3,400 physicians. The Company's Fiscal 1998 revenues associated with these services were $12.1 million. These services are provided by Company personnel working at business service centers located in central and southern New Jersey, suburban Chicago, Illinois and Denver, Colorado. 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 and expertise in critical areas, such as the use of management information systems, billing, accounts receivable and practice management, 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.
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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 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 Fiscal 1998 revenues attributed to hospital and ambulatory billing and accounts receivable management were $7.5 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 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, 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 1998, the Company's development and management of the CBO activities of the physician networks represented approximately 25.2% ($7.0 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
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of the "old accounts receivable". The Company believes that these implementation services will be an increasingly important part of its revenues.
Company management expects that its strategic alliance with IDX Systems Corporation ("IDX") will be beneficial to the Company in the physician network market. It is the understanding of Company management that IDX software is favored by many 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 1998, billing and accounts receivable services provided to hospital based physicians represented 12.7% ($3.5 million) of the Company's revenues.
The Company also provides outsourced billing and accounts receivable management services to hospitals. This service represented 27.0% ($7.5 million) of the Company's Fiscal 1998 revenues. Outsourced billing and accounts receivable 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, Infinity and Infinity X. During Fiscal 1998, these activities including related equipment sales and licenses, represented approximately $4.0 million of the Company's revenues.
Following the Company's dispute with MetroPlus, it has discontinued pursuing business from HMOs and other prepaid health programs. In Fiscal 1998, revenues from the Company's contract with MetroPlus were $5.4 million, 19.4% of total 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
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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 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 systems, known as Infinity and Infinity X, or practice management systems developed by others.
The Company's "Infinity" 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, a goal of the Company is to become an "expert user" of certain IDX practice management systems. IDX offers several comprehensive practice management systems. IDX systems are installed in nearly 1,000 locations.
Hospital business management services are provided using either the Company's proprietary billing and accounts receivable system known as OPMS or Alliant or the legacy systems installed at hospital client's location.
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OPMS/Alliant 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. OPMS/Alliant 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. System 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 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.
Infinity and Infinity X are not currently year 2000 compliant. Management has estimated that the costs associated with making them year 2000 compliant are approximately $350,000. OPMS/Alliant is also not year 2000 compliant. The Company has no present plans for making OPMS/Alliant year 2000 compliant. It is currently considering alternatives for OPMS/Alliant which will be year 2000 compliant.
FISCAL 1998 FINANCIAL INFORMATION
During Fiscal 1998, business management services provided to hospitals, physicians and managed care organizations represented approximately 84.8% ($23.4 million) of revenues. Approximately $10.5 million of these revenues were derived from physicians; $7.5 million were attributed to the Company's hospital client base and $5.4 million related to the Company's managed care client.
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. During Fiscal 1998, the Company had seven major physician group clients.
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 1998, the Company had five major hospital clients.
During Fiscal 1998, revenues associated with remote computing services represented approximately 6.4% ($1.8 million) of the Company's revenues. The Company has two major hospital remote computing service clients with contracts through July 31, 1998 and June 30, 1999, respectively. Remote computing services to these two clients represented substantially all of the Company's Fiscal 1998 remote computing service revenue.
Approximately 2.2% ($0.6 million) of the Company's Fiscal 1998 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.
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The remaining 6.5% of revenues ($1.8 million) in Fiscal 1998 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 19.4% of the Company's total Fiscal 1998 revenues. The contract with MetroPlus has been terminated as of February 28, 1998. As a result, there will be no revenue from MetroPlus in Fiscal 1999. The University of Medicine and Dentistry of New Jersey ("UMD"), represented 9.4% of Fiscal 1998 revenues and University Physician Associates, the faculty practice plan associated with UMD, located in Newark, New Jersey, represented 9.6% of Fiscal 1998 revenues. Other clients, the Hospital for Special Surgery, located in New York City, and the Mount Sinai Medical Practice Group, Elmhurst, New York, represented 7.0% and 6.4%, respectively, of the Company's 1998 revenues. No other single customer represented more than 5.0% of 1998 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 internal sales efforts that build on the Company's strategic business alliances to create a network of regional client service centers from which high quality, cost effective, business management services can be 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
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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 southern and 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 practices 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. National Data Corporation, a company headquartered in Atlanta, Georgia, 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, 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 primarily competes with the "in-house alternative" 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
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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, National Data Corporation 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 has historically stressed 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 organization, most of the activities associated with the hospital contract management business and parts of the physician business management business services business. In June, 1998, the Company leased an additional 5,725 square feet of office space at its main facility to accommodate new client business. Approximately 57% of the Company's employees are located at the Somerset facility. The remaining 43% 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 15, 1998, the Company employed 381 persons.
The Company's employees are not represented by any labor organization and management believes that its relationships with its employees are generally good.
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ITEM 2
ITEM 2 -- PROPERTIES
The Company leases one facility in Somerset, New Jersey and one facility in suburban Chicago, Illinois.
The Somerset facility contains approximately 36,000 square feet and is occupied under a lease that expires December 31, 2003. The Elmhurst, Illinois facility serves as the primary location for the Company's hospital-based physician activities. It includes approximately 13,000 square feet and is occupied under leases that expire September 30, 1998 and July 31, 1999.
The following table sets forth the minimum future lease payments on Somerset, New Jersey and Elmhurst, Illinois facilities as of March 31, 1998:
Net rental expenses for office space were $787,000 in Fiscal 1998.
ITEM 3
ITEM 3 -- LEGAL PROCEEDINGS
The Company filed suit 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 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 has been completed in this lawsuit and the Company expects this case to come to trial in Fiscal 1999. The Company intends to vigorously press its claims for payment.
ITEM 4
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 1998.
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PART II
ITEM 5
ITEM 5 -- MARKET FOR THE COMPANY'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 6,371,383 shares were issued and 6,355,683 shares were outstanding as of June 19, 1998; 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", all of which were issued and outstanding as of June 19, 1998.
The Common Stock is listed on the NASDAQ National Market System under the symbol USRV. There is no public market for the Company's Series A or 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 19, 1998, the 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 seven holders of record.
The following table sets forth actual high and low sales prices for the Common Stock as reported on NASDAQ national market system for the periods indicated.
(1) Through June 19, 1998
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The Company has never paid dividends on the 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 Common Stock in the foreseeable future.
ITEM 6
ITEM 6 -- SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
The following selected financial data for the five years ending March 31, 1998 have been derived from the financial statements which have been audited by Wiss & Company, LLP, independent auditors. The following information should be read in conjunction with the Financial Statements of the Company, and the related notes thereto, and "Item 7
ITEM 7 -- MANAGEMENT'S DISCUSSION OF FINANCIAL RESULTS
GENERAL
For the year ended March 31, 1998, the Company reported net income of $728,000. This represents the first time since the year ended March 31, 1993 that the Company's net income has been positive for the year. This improvement was primarily the result of net contribution margin associated with new business and the $1.3 million reduction in selling, general and administrative expenses. However, as a result of the settlement of the litigation with MetroPlus, the MetroPlus contract was terminated February 28, 1998 and the Company will derive no revenue from MetroPlus for Fiscal 1999. In 1998, the Company's MetroPlus contract represented $5.4 million or 19.4% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 1998, the Company's Working Capital increased $993,000. The major components of this increase were net income of $728,000 and the loan impairment charge of $394,000, which were partially offset by the reduction in long-term accrued restructuring charges of $173,000.
For the year ended March 31, 1998, the Company's Cash and Cash Equivalents decreased $3,211,000. The major components of this decrease were increases in net accounts receivable of $1,853,000 (billed) and $770,000 (unbilled), decreases in Accounts Payable, Accrued Payroll and Benefits, and the current portion of Accrued Restructuring Charges of $666,000, $177,000 and $407,000, respectively, and a net decrease of $291,000 resulting from the net change in all other current assets and liabilities except Cash and Cash Equivalents. Partially, offsetting these items was the $993,000 increase in Working Capital described above. All of the increase in accounts receivable billed and unbilled related to increases at University Physician Associates and other new clients acquired during Fiscal 1998. A majority of the decrease in Accounts Payable resulted from the payment and/or settlement of the amount due to MetroPlus subcontractors at March 31, 1997.
Management expects that available cash and cash flow will be sufficient to meet the Company's operating and capital requirements during Fiscal 1999.
YEAR 2000 COMPLIANCE
The principal information systems used by the Company to support its business management services are Infinity and Infinity X and OPMS/Alliant. Infinity and Infinity X are not currently year 2000 compliant. Management has estimated that the costs associated with making them year 2000
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compliant are approximately $350,000. This work is presently under way. OPMS/Alliant is not year 2000 compliant. Rather than make OPMS/Alliant Year 2000 compliant, the Company is currently examining alternatives for OPMS/Alliant. Although the Company believes that year 2000 compliance will not have a material adverse effect, the Company is uncertain as to the extent its customers and suppliers may be affected by year 2000 issues.
RESULTS OF OPERATIONS
The following table sets forth the dollar amounts and percentage of total revenues represented by various components of the Company's statement of operations (in thousands):
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUE. During 1998, total revenues increased approximately $5.6 million or 25.4% over 1997 levels to $27.6 million. In 1998, the Company's MetroPlus contract represented $5.4 million or 19.4% of total revenues. As part of the litigation settlement with MetroPlus, the contract was terminated February 28, 1998. Service fees, which represented over 96% of the Company's 1998 revenues, increased $5.6 million (26.9%) to $26.6 million. This increase resulted from $3.8 million
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of additional services associated with physicians (including $2.5 million from University Physician Associates ("UPA"), $1.4 million of additional service fee revenue from hospital accounts, $0.7 million of increased revenue associated with the Company's contract to provide third party and administrative services to MetroPlus and a decrease of $0.3 million in service fees associated with discontinued products.
Other revenues, including software licenses, sales of equipment, and interest and other decreased $46,000 or 4.6%.
EXPENSES. Fiscal 1998 total expenses increased $1.8 million or 7.1%. The increase in Cost of Services of $3.7 million was directly related to the addition of new business. This increase was partially offset by decreases from Fiscal 1997 of $394,000 or 21.0% in research and development, and $1,361,000 or 18.8% in selling, general and administrative expense and other net decreases of $194,000 or 27.8%. Decreases in research and development expense related to the phase-out of the clinical information systems business and a decision not to continue making enhancements to the Company's proprietary hospital billing and accounts receivable system. The decrease in selling general and administrative expense related to the restructuring of the Company's sales and marketing organization and lower corporate overhead costs.
During Fiscal 1998, the Company recorded a $394,000 loan impairment charge to reflect the amount by which the value of 252,557 shares of Common Stock held as security for a loan made in connection with an acquisition in 1991, declined between March 31, 1997 and March 31, 1998. If and to the extent that the closing stock price at the end of any subsequent quarter is greater than $1.562, there will be a reversal of this charge and charges made in the prior fiscal year.
NET INCOME. The Company's $728,000 net income in Fiscal 1998 was compared to the net loss reported for Fiscal 1997 of $3.0 million. This improvement was primarily the result of the net contribution margin associated with new business and the $1.3 million reduction in selling, general and administrative expenses.
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 (37.3%) 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, 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
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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 recorded a $436,000 loan impairment charge to reflect the amount by which the value of 252,557 shares of 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 $3.0 million 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.
ITEM 8
ITEM 8 -- FINANCIAL STATEMENTS AND SCHEDULES
Information required by this Item is set forth at the pages indicated in Item 14(a) below.
ITEM 9
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 10
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table and summary below sets forth certain information with respect to the directors and executive officers of the Company. Executive officers of the Company, for purposes of Section 16 of the Securities Exchange Act of 1934, are marked with an asterisk. A Board of Directors consisting of eight individuals was elected at the August 20, 1997 Annual Meeting to serve until the next annual meeting or until successors are elected and qualified. Mr. Cowie has been nominated and elected by the holders of a majority of the Series A Convertible Preferred Shares ("Series A Shares") pursuant to the terms of the Certificate of Designation for the Series A Shares. The Certificate of Designation authorizing the Series B Convertible Preferred Shares ("Series B Shares") provides that so long as (i) at least 200,000 Series B Shares are outstanding and Frontenac VI Limited Partnership ("Frontenac VI") owns not less than a majority of such shares and (ii) the holders of the Series A Shares are not eligible to elect a director pursuant to the Certificate of Designation authorizing the Series A Shares, the holders of the Series B Shares shall have the right to elect one director of the Company. The remaining directors are elected by a plurality of the votes cast in any election.
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
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director for ADAC Laboratories, Inc. and Optika Imaging, Inc. Mr. King and Mr. Robert E. King, another director of the Company, are brothers.
JAMES A. PESCE has served as the President of the Company and been a director of the Company since 1982. Mr. Pesce has 32 years of experience in the healthcare information systems industry. Currently, Mr. Pesce is responsible for all of the Company's hospital operations, development, data center and customer support activities. 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.
DEREK A. PICKELL has served as Vice President, Business Development since joining the US Servis Management Team in March 1995. Mr. Pickell has 15 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, a provider of electronic data interchange to the healthcare industry. 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, a healthcare information services company.
ROBERT E. VAN METRE has served as Secretary and Vice President, Accounting and Finance since 1995 and Treasurer since August, 1997. Mr. Van Metre has over 22 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.
S. M. CARAVETTA was the Chairman of the Board of Directors and Chief Executive Officer of the Company 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 is co-founder and manager of CB Health Ventures, a medically-focused venture capital fund. Prior to forming CB Health Ventures, he was the founder and managing partner of Capital Health Venture Partners, also a medically-focused VC fund. Mr. Blume is an adjunct Professor at the Boston College Carroll School of Management.
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).
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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 Winston & Strawn, counsel to the Company, since August 1997. Prior to joining Winston & Strawn, Mr. Goldblatt had been a partner with the law firm of Hopkins & Sutter since 1979.
ROBERT E. KING has been a director of the Company since April 20, 1995. Since 1994, he has been Chairman of Salt Creek Ventures, a private equity firm. From 1983 through 1994, Mr. King was Chairman and Chief Executive Officer of The Newtrend Group, a software company and computer services company. He was President and Chief Executive Officer of DELTAK, inc., a video publisher, from 1971 to 1982. He is also a Director of DeVry, Inc., COLLEGIS, Inc., American Floral Services, Inc., and Premier Systems Integrators, Inc. Mr. King and Mr. Graham O. King are brothers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own beneficially more than ten percent of a registered class of the Company's equity securities to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of such securities of the Company. Directors, executive officers and greater than ten percent stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required, except as set forth in the following sentence, all Section 16(a) filing requirements applicable to its directors, executive officers and greater than ten percent beneficial owners were complied with during Fiscal 1998.
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ITEM 11
ITEM 11 -- EXECUTIVE COMPENSATION
The following table summarizes the annual and long-term compensation of certain of the Company's executive officers for Fiscal 1998, 1997 and 1996.
(1) Includes amounts paid in subsequent fiscal year applicable to previous fiscal year.
(2) On July 23, 1997, the Board of Directors of the Company completed a restructuring of the management compensation program of the Company in order to retain key employees and to provide appropriate employee incentives. As part of the compensation adjustment, all outstanding options for present employees were repriced to the then current market price ($1.3125) and certain senior level management and other key employees were granted additional options, not in excess of normal grants. To induce the Board of Directors of the Company to approve the restructuring plan, Mr. King voluntarily agreed to cancel options to purchase 200,000 shares of the Company's Common Stock under his non-qualified option agreement. On October 30, 1997, to correct an alleged technical difficulty in the July 23, 1997 repricing of stock options, all present employee options issued under the 1986 and 1993 plans were canceled and reissued under the 1993 plan with no changes in any provisions. On July 23, 1997, Messrs. King, Pesce and Van Metre had options for 800,000, 150,000 and 50,000 shares, respectively, repriced at $1.3125 and on October 30, 1997, the options issued to Messrs. Pesce and Van Metre were canceled and reissued at $1.3125 for the same number of shares.
(3) See "-- Discussion of 1998 Executive Officer Compensation and Employment Contracts."
(4) Represents the premium on term life and disability insurance maintained for Mr. King by the Company.
(5) $9,600 represents an automobile allowance for 1997 and 1996, with the balance representing premiums on term life insurance maintained by the Company. The Company has agreed that if Mr. Pesce dies while employed by the Company, the Company shall pay to his irrevocably designated beneficiary $100,000 per annum for a period of ten (10) years thereafter, payable in equal monthly installments, commencing on the first day of the month following death. The Company maintains a term life policy in the face amount of $500,000 on the life of Mr. Pesce, which the Company believes when considering tax effects will be sufficient to cover this plan.
(6) Mr. Loscalzo joined the Company in 1995 and resigned in August 1997. From 1993 to 1995, Mr. Loscalzo was a Senior Vice President of Cain Brothers & Company, a New York based health care investment banking firm. Mr. Loscalzo was a co-founder
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and, from 1988 to 1992, Managing Director of The Hunter Group, a health care workout firm. Between 1988 and 1991, he served as either CEO or CFO for workout clients in Seattle, Washington; St. Paul, Minnesota; Miami, Florida; and San Francisco, California. Prior to the formation of The Hunter Group, Mr. Loscalzo served as Senior Vice President of Finance for a Philadelphia teaching hospital. From 1978 to 1985, he was a manager in Arthur Andersen & Co.'s Philadelphia health care audit practice.
(7) Represents payment for accrued vacation.
(8) Mr. Van Metre was elected Treasurer following the departure of Mr. Loscalzo.
DISCUSSION OF 1998 EXECUTIVE OFFICER COMPENSATION AND EMPLOYMENT CONTRACTS
Mr. Graham O. King joined the Company as Chief Executive Officer on October 12, 1994. He became Chairman of the Board of Directors effective October 28, 1994. Mr. King is a party to an employment agreement with the Company that has been extended through March 31, 1999. Unless either party elects not to extend the agreement, it automatically extends for one year terms thereafter. Under the agreement, Mr. King's salary can be increased at the discretion of the Board of Directors. Effective October 1, 1997, Mr. King's salary was increased to $288,000 per year and his right to receive a bonus was eliminated for the remainder of Fiscal 1998. The agreement provides for one year severance unless there is termination for cause or a voluntary resignation without good reason as defined in his employment agreement. Mr. King was issued 300,000 shares of Common Stock in lieu of a cash signing bonus. Mr. King has agreed with the Company not to sell more than 33,333 of these shares plus any shortfall from previous fiscal quarters in any fiscal quarter during Mr. King's employment. Mr. King was granted stock options to acquire 1,000,000 shares of Common Stock at the market price ($3.50/share) on the date of the commencement of his employment. However, on June 23, 1997, Mr. King agreed to exchange this option for stock options to acquire 800,000 shares of Common Stock having an exercise price of $1.3125 per share. Of these options, 400,000 are currently vested, 133,333 vest on each of July 23, 1998 and July 23, 1998 and the entire 800,000 is vested on July 23, 2000. Alternatively, these stock options vest whenever the stock has traded at or above $5.00 on at least 30 of the 40 prior business days, or upon a change of control. Consummation of the Merger will immediately vest this option. These options contain anti-dilution provisions authorizing adjustments under certain circumstances. Mr. King's shares, including those underlying options, are subject to a registration rights agreement. The Company has also agreed to reimburse Mr. King for the cost of a term life insurance policy for $1,000,000 on Mr. King's life for his benefit.
On June 14, 1995, the Company agreed to loan Mr. Graham King $157,800 in order to allow Mr. King to pay the income taxes due in connection with a portion of the restricted stock he received. The terms of the note evidencing the loan provide that the loan is interest-free until 120 days after the Company registers Mr. King's restricted stock for sale, that the loan bears interest at a rate equal to the rate of return achieved by the Company on its cash reserves plus 1% after such date, and that the Company may demand repayment at any time after the note begins to accrue interest. As of March 31, 1998, the balance of this loan was $40,000.
Mr. Pesce entered into an employment agreement with the Company effective August 1, 1993 which was amended October 9, 1996. Mr. Pesce's employment agreement currently provides for a month to month term and an annual salary of $189,000 plus a bonus, if earned, up to $40,000. The employment agreement also provides for a severance payment of sixteen (16) months salary upon termination. The Company has agreed that if Mr. Pesce dies while employed by the Company, the Company shall pay to his irrevocably designated beneficiary $100,000 per annum for a period
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of ten (10) years thereafter, payable in equal monthly installments, commencing on the first day of the month following death. The Company maintains a term life policy in the face amount of $500,000 on the life of Mr. Pesce, which the Company believes when considering tax effects will be sufficient to cover this plan.
All officers hold office until their successors are duly elected or appointed and qualified, or until their earlier resignation or removal.
OPTION GRANTS IN FISCAL 1998
The following table sets forth certain information with respect to options granted in Fiscal 1998 to each named executive officer of the Company.
(1) On July 23, 1997, the Board of Directors of the Company completed a restructuring of the management compensation program of the Company in order to retain key employees and to provide appropriate employee incentives. As part of the compensation adjustment, all outstanding options for present employees were repriced to the then current market price ($1.3125) and certain senior level management and other key employees were granted additional options, not in excess of normal grants. To induce the Board of Directors of the Company to approve the restructuring plan, Mr. King voluntarily agreed to cancel options to purchase 200,000 shares of the Company's Common Stock under his non-qualified option agreement. On October 30, 1997, to correct an alleged technical difficulty in the July 23, 1997 repricing of stock options, all present employee options issued under the 1986 and 1993 plans were canceled and reissued under the 1993 plan with no changes in any provisions. On July 23, 1997, Messrs. King, Pesce and Van Metre had options for 800,000, 150,000 and 50,000 shares, respectively, repriced at $1.3125 and on October 30, 1997, the options issued to Messrs. Pesce and Van Metre were canceled and reissued at $1.3125 for the same number of shares.
(2) Options vest as determined at the time of the grant and expire after ten years from the date of grant. Vesting is contingent on continuing employment with the Company.
(3) Amounts reported in these columns represent amounts that may be realized upon exercise of the options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) of the Common Stock over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price increases. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the timing of such exercise and the future performance of the Common Stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the individuals.
(4) Issued pursuant to an employment agreement entered into between Mr. King and the Company. See "-- Discussion of 1998 Executive Officer Compensation and Employment Contracts."
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AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to options exercised by the named executive officers in Fiscal 1998 and the number of options held by each of the named executive officers as of March 31, 1998:
(1) The value of options reflects the increase in market value of the Company's Common Stock from the date of grant through March 31, 1998 (when the closing price of the Common Stock was $1.5625 per share). The table includes both options that are vested and options that are not vested. Value actually realized by the executive officers will depend on the value of the Common Stock at the time of exercise.
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ITEM 12
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as provided by the holders to the Company, concerning beneficial ownership of Common Stock as of June 19, 1998, by (i) all persons known by the Company to be the beneficial owners of five percent or more of the issued and outstanding Common Stock, (ii) each of the directors and named executive officers and (iii) the directors and executive officers of the Company as a group. Except as noted, all addresses are 220 Davidson Avenue, 2nd Floor, Somerset, New Jersey 08873.
(1) The Company believes that David Vanco, 4 South Piermont Drive, North Barrington, IL 60010, owns in excess of 5% (but less than 8%) of the outstanding shares of the Common Stock, however, the Company has been unable to verify the exact holdings of Mr. Vanco either by filings with the SEC or from Mr. Vanco directly.
(2) Includes 116,000 shares of Common Stock owned by the children of Mr. Caravetta. Mr. Caravetta disclaims beneficial ownership of such shares. Includes 198,028 shares of Common Stock owned by trusts, of which the children of Mr. Caravetta are the beneficiaries and Mr. Stephen J. Feinberg and the wife of Mr. Caravetta are trustees. Mr. Caravetta disclaims beneficial ownership of such shares. Mr. Caravetta may be deemed to be the promoter or founder of the Company as such term is defined under the federal securities laws.
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(3) Includes 45,000 shares issuable upon exercise of vested stock options and 125,000 shares issuable upon conversion of Series B Convertible Preferred Shares. Mr. Blume's "Percentage of Ownership" is calculated assuming that the 125,000 shares of common stock issuable upon conversion of the Series B Convertible Preferred Stock are issued and outstanding. Does not include options to purchase 20,000 shares which might be issued upon exercise of stock options which have not yet vested.
(4) Includes 400,000 shares issuable upon exercise of vested stock options. Does not include 400,000 shares issuable upon exercise of stock options which are not currently exercisable. (See "Discussion of 1996 Executive Officer Compensation and Employment Agreements.")
(5) Includes 136,400 shares issuable upon exercise of vested stock options. Does not include 138,600 shares which might be issued upon exercise of a stock option which has not yet vested.
(6) Includes 33,333 shares issuable upon exercise of vested stock options. Does not include 116,667 shares which might be issued upon exercise of a stock option which has not yet vested.
(7) Includes 20,500 shares owned by Mr. King's wife and 73,000 shares held in trust for the benefit of Mr. King's children. Mr. King disclaims beneficial ownership of all such shares. Also includes 18,000 shares issued, and 49,000 shares issuable upon exercise of warrants, and 125,000 shares issuable upon conversion of Series A Convertible Preferred Shares, all held in trust for the benefit of Mr. King's children. Mr. King disclaims beneficial ownership of all such shares. Mr. King's "Percentage of Ownership" is calculated assuming that the 174,000 shares of Common Stock issuable upon exercise of the warrants and conversion of the Series A Convertible Preferred Stock are issued and outstanding.
(8) Includes 30,000 shares issuable upon exercise of vested stock options. Does not include 20,000 shares which might be issued upon exercise of a stock option which has not yet vested.
(9) Shares owned by Frontenac VI Limited Partnership. Mr. Cowie disclaims beneficial ownership of such shares. Includes 490,000 shares issuable upon exercise of warrants, 1,250,000 shares issuable upon conversion of Series A Convertible Preferred Shares and 817,500 shares issuable upon conversion of Series B Convertible Preferred Shares. Mr. Cowie's "Percentage of Ownership" is calculated assuming that the 2,557.500 shares of Common Stock issuable upon exercise of the warrant, conversion of the Series A Convertible Preferred Stock and conversion of the Series B Convertible Preferred Stock are issued and outstanding.
(10) Includes 75,000 shares issuable upon exercise of vested stock options, and 559 shares held by Mr. Sullivan's wife.
(11) Amount represents less than 1%.
ITEM 13
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has agreed to provide for medical insurance coverage for the remainder of Mr. Caravetta's and his wife's life (at her expense following his death).
Mr. Goldblatt, a director of the Company, is a partner in the law firm of Winston & Strawn, which has provided, and continues to provide, legal services to the Company. Mr. Goldblatt is also a member of the healthcare advisory committee of Frontenac Company, a Delaware general partnership that is the general partner of Frontenac VI. Frontenac VI holds equity representing approximately 28.7% of the Company. In addition, Mr. Goldblatt is a trustee of a trust established for the benefit of members of Mr. Goldblatt's family, which trust is a limited partner in Frontenac VI. Winston & Strawn provides legal services to Frontenac VI, Frontenac Company and Robert E. King on a regular basis, although it has not provided legal services to Frontenac VI, Frontenac Company or Mr. King with regard to any transactions with the Company.
Mr. Cowie, a director of the Company, is a general partner of Frontenac Company, which is the general partner of Frontenac VI.
The Company maintains a directors and officers liability insurance policy covering all directors of the Company.
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PART IV
ITEM 14
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.
(a)(2) Financial Statements Schedules: Financial statement schedules filed as part of this report are listed in the Index on page. 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, 1998.
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 29, 1998 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.
/s/ Graham O. King Chairman of the Board June 29, 1998 - ----------------------- Graham O. King
/s/ James A. Pesce President and Director June 29, 1998 - ----------------------- James A. Pesce
/s/ S. M. Caravetta Director June 29, 1998 - ----------------------- S. M. Caravetta
/s/ Robert E. Van Metre Principal Accounting Officer June 29, 1998 - ----------------------- Robert E. Van Metre
/s/ Stanford J. Goldblatt Director June 29, 1998 - ------------------------- Stanford J. Goldblatt
/s/ Robert E. King Director June 29, 1998 - ----------------------- Robert E. King
/s/ Robert C. Bowers Director June 29, 1998 - ----------------------- Robert C. Bowers
/s/ Frederick R. Blume Director June 29, 1998 - ----------------------- Frederick R. Blume
/s/ James E. Cowie Director June 29, 1998 - ----------------------- James E. Cowie
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, 1998 and 1997, 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, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles.
/s/ Wiss & Company ----------------------------- WISS & COMPANY, LLP
Livingston, New Jersey June 2, 1998
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
A
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The consolidated financial statements include all of 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 integrated delivery systems. The Company's principal focus is providing billing and accounts receivement management services. The Company, through a strategic alliance, has expanded its product offerings to include the implementation of electronic medical records systems. The Company has also historically been a provider of certain third party administrative services to a managed care organization and of clinical information systems products to hospitals. The Company is phasing out of these activities. (See Notes 2 and 9).
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.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS - Financial instruments include cash and equivalents, certificates of deposit, 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 receivable are principally from hospitals and physician networks located throughout the U.S. (see Note 9 as to its 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 $1,478,000, $1,872,000, and $2,466,000 for the years ended March 31, 1998, 1997 and 1996, 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 an acquired business and is being amortized over 40 years on the straight-line method.
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 adopted SFAS 128 for the year ended March 31, 1998. SFAS 128 replaces the presentation of primary and fully diluted earnings per share. Basic earnings per share is calculated based on the weighted average number of common
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares outstanding during the period and excludes all dilution. Diluted earnings per share is calculated by using the weighted average number of common shares outstanding, while also giving effect to all dilutive potential common shares that were outstanding during the period. Prior period amounts have been restated to conform to the requirements of SFAS 128.
Net income (loss) is adjusted by accretions equal to accrued dividends on the Company's preferred stock.
STOCK-BASED COMPENSATION - The Company has elected to follow Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED COMPENSATION.
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 $113,000, $92,000 and $71,000 in fiscal 1998, 1997 and 1996, 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 1998 and 1997, the estimate of the Company's restructuring was reevaluated, and no additional charge or credit was required.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The individual components of the 1996 credit are summarized as follows:
At March 31, 1998, the non-current portion of accrued restructuring charges matures as follows:
NOTE 3 - NOTE RECEIVABLE- RELATED PARTY:
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. The Company also 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.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment consist of:
Depreciation and amortization expense was $640,000, $639,000 and $521,000 for the years ended March 31, 1998, 1997, and 1996, respectively, and are included in selling, general and administrative expenses.
NOTE 5 - INCOME TAXES:
A summary of current and deferred income taxes included in the statements of operation is as follows:
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997, except to the extent of refundable income taxes.
At March 31, 1998, 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 6 - 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, 1998 are as follows:
Net rental expenses for office space amounted to $787,000, $877,000 and $671,000 for the years ended March 31, 1998, 1997, and 1996, respectively.
EMPLOYMENT AGREEMENTS - The Company has an employment agreement with an officer through March 31, 1999. Under this agreement, minimum compensation payable is $239,000 for 1999.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
CONTINGENCIES - 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 a certain lawsuit with a customer 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 this lawsuit.
As part of the acquisition of a subsidiary, the Company has guaranteed up to $661,000 of certain bank debt of the former president of the subsidiary.
NOTE 7 - 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 with 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.
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.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHAREHOLDERS' EQUITY:
OPTIONS - The Company has an incentive stock option plan (the "1986 Plan") pursuant to which 10,000 options remain outstanding at March 31, 1998. 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, as amended in 1994, the Board of Directors and the Company's shareholders approved an incentive stock option plan (the "1993 Plan") to grant 1,400,000 shares of the Company's common stock. The terms of the 1993 Plan are principally the same as those of the 1986 Plan.
Outstanding options at March 31, 1998 are as follows:
(1) 400,000 options vested October 1995, the remaining 400,000 options vest, 133,333 on July 23, 1998 and July 23, 1999 and 133,334 on July 23, 2000 or 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.
(2) All options are exercisable.
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options under the Incentive Stock Option Plans are summarized as follows:
At March 31, 1998, options to purchase 429,000 shares were available for grant.
On July 23, 1997, the Board of Directors completed a restructuring of the management compensation program of the Company in order to retain key employees and to provide appropriate employee incentives. As part of the compensation adjustment, all outstanding options for present employees were repriced to the then current market price ($1.3125) and certain senior level management and other key employees were granted additional options, not in excess of normal grants. To induce the Board of Directors to approve the restructuring plan, the Chairman of the Board of Directors voluntarily agreed to cancel options to purchase 200,000 shares of Common Stock under his non-qualified option agreement.
On October 30, 1997, to correct an alleged technical difficulty in the July 23, 1997 repricing of stock options, all present employee options issued under the 1986 and 1993 plans were canceled and reissued under the 1993 plan with no changes in any provisions.
NOTE 9 - MAJOR CUSTOMERS:
Revenues from customers in excess of 10% of total revenues were as follows:
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 1997, the Company experienced material difficulties at its largest client, MetroPlus, a public Health Maintenance Organization ("HMO") serving the New York City Medicaid population, which was the Company's only HMO. During fiscal 1998, the Company filed suit to enjoin MetroPlus from terminating its contract in violation of its terms and for payment under the contract. In November 1997, this lawsuit, together with a related lawsuit by a subcontractor of the Company, was completely resolved. MetroPlus agreed to pay the Company all sums due under the contract and the parties agreed to a termination of the contract as of February 28, 1998. Since the date of settlement, all litigation relating to the MetroPlus dispute has been dismissed, the Company has completed all tasks for MetroPlus under its contract and made all necessary payments under its subcontracts, and MetroPlus has made all necessary payments to the Company.
NOTE 10 - STOCK BASED COMPENSATION:
As required by SFAS 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of SFAS 123. The Black Scholes option pricing model was used with the following weighted-average assumptions; risk-free rate of 5%; expected common stock market price volatility factor of 1.03, .56 and .56 in March 31, 1998, 1997 and 1996, respectively; and an expected life of the options of five years. The fair value of options granted ranged from $1.325 to $5.00. The pro forma effect on net loss and net loss per share would have been as follows:
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF LOSS PER SHARE:
NOTE 12 - NEW ACCOUNTING STANDARD:
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related Information", was issued in July 1997, and is effective for periods beginning after December 15, 1997. SFAS 131 introduces a new model for segment reporting, called the "management approach." The management approach is based on the way the chief operating decision maker organizes segments and are based on product and services, geography, legal structure, management structure - any manner in which management desegregates a company. The management approach replaces the notion of industry and geographic segments in current Financial Accounting Standards Board standards. The Company intends to adopt SFAS 131 in its fiscal 1999 financial statements.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE - In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE", which is effective for years beginning after December 15, 1998. SOP 98-1 requires certain costs related to the creation and acquisition of software be capitalized. The Company intends to adopt SOP 98-1 in its fiscal 2000 financial statements. The Company does not expect the adoption of SOP 98-1 to have a material effect on the Company's financial statements.
SCHEDULE VI
US SERVIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VALUATION ACCOUNTS
EXHIBITS INDEX
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.