-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXLV/0B3+fEoAwVZTZFsuitgEfAbK1qTGylwZnOZXWvzt2E/aLxds1hB5BACwGFZ rypWHyV0rHYbuTKgUZ82jw== 0000950147-96-000118.txt : 19960402 0000950147-96-000118.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950147-96-000118 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYCARE SYSTEMS INC CENTRAL INDEX KEY: 0000354888 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 910842322 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09815 FILM NUMBER: 96542237 BUSINESS ADDRESS: STREET 1: 7001 NORTH SCOTTSDALE RD. CITY: SCOTTSDALE STATE: AZ ZIP: 85253 BUSINESS PHONE: 6025964300 MAIL ADDRESS: STREET 1: 7001 N SCOTTSDALE RD STREET 2: STE 1000 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission File No. 1-9815 ----------------------- CYCARE SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 91-0842322 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7001 North Scottsdale Road Suite 1000 Scottsdale, Arizona 85253-3644 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 596-4300 Securities registered pursuant to Section 12(b)of the Act: Title of Class Name of Exchange on Which Registered -------------- ------------------------------------ Common Stock, Par Value $.01 Per Share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 22, 1996: Common Stock, $.01 par value: $125,115,658. The number of shares outstanding of the Registrant's Common Stock as of March 22, 1996: Common Stock, $.01 par value: 5,058,170 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report for the year ended December 31, 1995 (the "Annual Report"), are incorporated by reference into Part II. Portions of the Company's Proxy Statement for the Annual Shareholders' Meeting to be held on May 21, 1996 (the "Proxy Statement") are incorporated by reference into Part III. ================================================================================ PART 1 ITEM 1. BUSINESS CyCare Systems, Inc. (the "Company"), founded in 1967 and incorporated in 1969, is a leading provider of information systems, related support services and electronic data interchange (EDI) services to the health care industry, including physicians, medical group practices, academic practice centers and integrated delivery networks. The Company's services and systems are based primarily on open-systems architecture using software developed or acquired by the Company to improve the productivity and profitability of its customers. Applications include appointment scheduling, patient and member registration information, business office management, electronic claims processing, patient care and patient accounting. INDUSTRY BACKGROUND The Company estimates that there are over 570,000 physicians in private practice and approximately 148,000 medical practices in the United States. The economic pressures and informational demands upon physicians and medical practices have increased significantly during the past decade. At the same time, the increased power and decreased cost of computers have made computers an effective information processing solution for a broader range of medical practices. Approximately 70% of physician practices now use computers or computer services for at least some of their information processing requirements. The demand for more comprehensive and accurate information processing solutions is expected to continue. Health care cost containment efforts have greatly increased the amount and complexity of required information. At the same time, increased competition has resulted in a greater focus on demonstrating the quality of care delivered to patients. Practice management systems help providers reduce the costs and improve the quality of delivering health care services by automating patient care and administrative processes, ensuring timely access to relevant information, streamlining the storage and retrieval of information, and matching patient needs with available resources. The ongoing pressure to contain health care costs is also changing the structure of health care providers and their practice management system requirements. Over the next several years, the majority of practicing physicians are expected to be channeled into ever enlarging networks, group practices, HMOs, and integrated delivery systems (IDS). In addition, the number of third-party payer organizations has increased. At the same time, federal and state governments, which are estimated to be responsible for approximately 30% of physician claims for patient charges as a result of Medicare, Medicaid and other programs, have imposed pricing and reimbursement regulations that significantly complicate billing procedures and increase the information a medical practice must maintain with respect to its patients. Furthermore, health care payers are increasingly transferring the economic risk of health care delivery to providers by shifting from the traditional fee-for-service reimbursement model to managed care reimbursement models, such as payment based on capitation. Under capitation, providers are paid an annual fixed fee per individual to deliver all health care services required by that individual. This reimbursement model encourages health care providers to modify their emphasis from not only treating illness, but also to maintaining wellness. The expansion in the number of managed care and third-party payer organizations, as well as additional governmental regulation and the change in reimbursement models, has greatly increased the complexity of pricing practices, billing procedures and reimbursement policies impacting medical practices. These trends are prompting dramatic change in, and ultimately major expenditures for, physician practice management information systems. Other factors also are increasing the demand for more comprehensive and accurate information systems. The growing administrative burdens placed on medical practices have caused physicians to join together in group practices to share administrative costs and achieve economies of scale. The Company believes the movement toward group practices has accelerated the trend toward automation as group practices require the greater efficiency and productivity of an automated system. Not only has there been a movement toward group practices, more recently group practices have been coming together to form larger group practices. In addition, hospitals and insurance companies are buying and/or managing physician practices and networking them into one common system. The general increase in the size and complexity of medical practices has resulted in a greater need for analysis of data and production of timely management information reports which allow physicians and other health care providers to reach informed conclusions regarding the quality and appropriateness of various procedures and practices. Technological advances have made more comprehensive, cost-effective computer solutions available to physician practices. While early systems concentrated principally on patient billing and collection activities, systems are now available which record and store clinical information, automate the processing of insurance and third-party payer claims, and integrate the operations of physician practices with larger health care organizations such as hospitals, HMOs and management service organizations (MSO). The Company believes that these various factors will cause medical practices to seek additional and more comprehensive computer-based solutions for their information processing needs. STRATEGY The Company's goal is to be the leading provider of physician practice management systems and services. The Company's strategy includes the following key elements: * Provide a Strong and Integrated Product Line. In 1993, the Company upgraded its large-group product, the CS3000, the first client/server system in this market segment. In 1994, the Company introduced a new small-group product, the Windows(TM)-based SpectraMED(TM). In 1995, the Company began shipping its comprehensive medical records product, CS-CIS, that has a complete data repository, drug interaction reporting, imaging and outcomes reporting capabilities. The Company will continue to enhance these products and to develop new applications that address the rapidly changing requirements of today's health care environment. * Provide a Full Range of Transaction Processing Services. The Company currently offers electronic transactions (EDI) such as claims processing, remittance advices, eligibility checking and encounter data. Additional capabilities include statement processing and paper claims for those insurance carriers without electronic submission capabilities. * Provide Systems Integration Services. The Company's strategy is to provide the core practice management system solution using its open-system architecture, then use its integration expertise to build state-of-the-art communication networks to tie in ancillary systems such as pharmacies, labs, radiology departments, etc. and in today's IDS environment, hospitals. * Expand National Direct Sales Organization. The Company plans to expand its direct sales organization to market to a larger number of medical practices, MSOs, IDSs, and practice management consultants. * Strategic Acquisitions. The Company continually evaluates the acquisition of products, services and businesses that are similar or complementary to those offered by the Company. Many of these potential acquisitions would allow the Company to expand its customer base or provide new technologies to existing and future customers. Consistent with this strategy, in December 1995, the Company acquired Richard D. Jugel and Company. This acquisition provided the Company with the ability to process UB-92 (hospital-based) claims electronically. PRODUCTS AND SERVICES The Company's strategy is implemented through two primary business units: Group Practice and CyData, Inc. Group Practice The Company's Group Practice business unit has served physician groups and other ambulatory care organizations for over 28 years, and it maintains a 20 percent market share in group practices with 25 or more physicians. This business unit is uniquely positioned with a comprehensive range of software applications and services that meet the information processing requirements of smaller practices that are consolidating into larger groups, and for groups that are affiliating with each other to form IDSs. Business solutions offered are in the areas of patient information and registration, business office management, third-party management, electronic claims clearing, prepaid managed care, appointment scheduling and clinical information. In addition to systems, support services such as account management, systems integration and networking, education and training, installation and documentation are also offered. In 1995, this business unit had revenues of $47.7 million versus $40.5 million and $36.5 million in 1994 and 1993, respectively. In 1995, 71% of these revenues were recurring. The Company developed its Group Practice products, with the exception of SpectraMED, using client/server based technology to eliminate the dependence on proprietary technology and enable the Company to add and refine applications as technology changes. The hardware platform chosen to run the Company's products is Hewlett Packard's HP 9000, Series 800 business server. This RISC-based platform provides excellent scalability and has one of the best price/performance ratios in the industry. CyCare System 3000(TM) (CS3000) . The CS3000 was introduced in late 1993 and is designed for group practices with 12 or more physicians. The CS3000 is a UNIX-based client/server system that features point and click interface technology and optimum flexibility through open-systems architecture which allows integrated access to data from a variety of sources throughout the organization. The CS3000 is designed to improve physician/provider productivity and personnel utilization of its customers. Modules included are patient information and registration, managed care, scheduling and business office management. The patient information and registration module gives instant access to patient, guarantor and insurance coverage information that can be used throughout the product. The system's managed care module is designed to support capitated contracting from both the provider and the payer perspectives and the scheduling module is designed to maximize productivity by automating test schedules, examinations, and procedures. Business office management features are designed to maximize revenue and minimize staffing requirements. Clinical Information System (CS-CIS). In August 1995, the Company signed a relicensing agreement with Wang Laboratories, Inc. to market Wang's fully functional electronic medical records systems. CS-CIS is a client/server system that will run on any industry standard 486 or Pentium PC. Its relational database can share data with every database that is compliant with open-systems standards. Because CS-CIS was implemented for open-systems, it interfaces smoothly with multiple UNIX platforms running Novell Netware. CS-CIS fully integrates the entire practice from the front desk to the examining room, regardless of medical specialty, and stores all patient data in a clinical information repository. CS-CIS doesn't replace the CS3000, or any other practice management system; instead, the systems work in tandem to form a sophisticated information network for the ambulatory environment. CS-CIS is designed for the way physicians work intuitively. During an encounter, the physician can check test results or enter information with a pen on digital forms that look like familiar paper forms. Referrals, prescriptions and other ancillary services can be ordered electronically in one easy step. The practice realizes the increased efficiencies as lower overhead and increased profits in a managed care environment. Enterprise-wide Scheduling (CS-ES). The Company is currently developing an enterprise-wide scheduling product known as CS-ES. CS-ES is a state-of-the-art achievement based on a sophisticated SQL database for easy access to information. On-line help and user-friendly graphical interface employing Microsoft(R) Windows(TM) cut training time and enable the user to move easily throughout the system. As physician groups combine to form integrated delivery networks, the ability to schedule patient appointments for numerous resources becomes extremely critical to both the cost and quality of care. The CS-ES will allow the physician practice to schedule and coordinate appointments for multiple resources, specialties or departments. Additional features include: daily patient lists, resource usage and no-show reports, patient reminder letters, identification of credit risks, copays, referring physicians, and preauthorization. SpectraMED. In February 1994, the Company began shipments of SpectraMED, the first full spectrum practice management and patient care solution designed to use the Microsoft(R) Windows(TM) operating system. This state-of-the-art software solution addresses the practice management needs of individual providers and groups of up to 12 physicians. This product offers features such as electronic medical records, live audio and video records that can be stored in the SpectraMED patient file, patient names/alerts, the ability to maintain multiple fee schedules and simplified ad-hoc reporting. SpectraMED is designed to take full advantage of all the EDI and statement processing capabilities of the Company's CyData subsidiary. CyData, Inc. In 1992, the Company formed a wholly-owned subsidiary named CyData, Inc., that provides solutions to accelerate cash flow, maximize productivity, reduce administrative costs and improve profitability. More than 25 percent of the nation's traditional group practices have streamlined operations through CyData's electronic data interchange (EDI) services, including on-line and roster eligibility, claims, encounters, remittance advice and statement processing. CyData's revenues, including intercompany transaction processing revenues, were $19.0 million, $17.0 million and $13.6 million in 1995, 1994 and 1993, respectively. Intercompany transaction processing revenues were $5.7 million, $5.5 million and $5.1 million in 1995, 1994 and 1993, respectively. These revenues were 100% recurring in 1995. CyData has also initiated a special marketing effort called the Participating Payer Program. Insurance payers that join the Participating Payer Program have agreed to absorb most if not all of the physician's costs to process claims electronically. In return, the payers enjoy a cost savings from reduced paper claims processing. Currently, the clearinghouse formats, edits and processes over four million claims per month. Electronic Data Interchange. CyData provides a complete financial processing solution. From the moment a patient walks in the door, health care providers can confirm if a patient is eligible for treatment (on-line or roster eligibility). After providing treatment, the physician or hospital can submit insurance claims or encounter information daily to CyData where it will be edited, formatted to the payer's unique specifications and transmitted to one of the over 500 insurance carriers that accept electronic claims from CyData. The amount the insurer will pay (remittance advice) can be electronically transmitted back to the provider for updating of accounts receivable, without rekeying of data. Physicians and hospitals can then collect the final amount owed by sending a statement to the patient using CyData's statement processing capabilities, as described below. Statement Processing. CyData also provides a statement processing service to medical groups to assist with patient billing. Groups submit, via electronic transmission or computer tape, billing information to the Corporate Information Center in Dubuque, Iowa. CyData then prints and mails statements. Processing five million statements each month, the Company has the facilities to process statements more inexpensively and efficiently than the groups can do themselves. SOFTWARE LICENSING, DEVELOPMENT AND PROTECTION The Company does not sell its software to customers. The Company licenses its software to all distributed and in-house/turnkey customers. The standard license agreement provides that, for a specified fee, a customer is granted the non-transferable right to use the Company's software products. Distributed customers are charged lower license fees than non-distributed customers. The Company's initial software licenses are associated with related hardware and all sales are accounted for as systems sales. The Company has implemented an innovative software pricing philosophy, Living Software, in the Group Practice business unit. The Company licenses software to customers at a flat rate, including all services and future upgrades. Because of this structure and because "living software" minimizes customer's initial cash flow, brand loyalty is enhanced. This pricing philosophy shifts a portion of the initial software license fee into recurring revenue over the life of the contract and allows customers to protect their investment in software. A portion (usually 10%) of the Company's initial license fee is payable upon execution of a license agreement, with the remainder payable upon delivery and testing of the software. License agreements contain provisions designed to prevent disclosure and unauthorized use of the Company's products. Clients sign license agreements for continuing software use, support and enhancements, generally for a period of three to five years. Computer software is subject to rapid changes as a result of internal and external forces, particularly in the rapidly-changing health care market. Internally, changing needs of the customer require software to be flexible, easily modified or completely revised to meet the customer's needs. External factors, such as technological changes in hardware and changing requirements of outside parties (like insurance carriers) may necessitate software enhancements or modifications. To meet these needs, the Company maintains a staff of systems analysts and programmers in Dubuque, Iowa; Omaha, Nebraska; and Scottsdale, Arizona to develop and enhance its products. The Company has also contracted programming from outside sources from time to time. The Company has a number of significant projects currently in development, including: enterprise-wide scheduling, new EDI processes, and various upgrades to CS3000 and CS-CIS. The Company capitalizes certain software development costs, primarily coding and testing, which meet recoverability tests. The capitalized costs are then amortized over future periods or written down to their net realizable value, if recoverability tests are not met. Once a software package is developed, the expenses associated with its licensing generally are limited to marketing, installation, support, product updates and administration. Net research and development expenses were $4.3 million (7% of revenues) in 1995, $4.1 million (8% of revenues) in 1994, and $4.2 million (9% of revenues) in 1993. The Company anticipates that these expenditures will continue to be approximately 8% of revenues. Application software generally cannot be patented. Instead, the Company relies upon contract, trade secret and copyright laws to protect its proprietary knowledge. Customers sign agreements restricting use to their own operations and prohibiting disclosure to third parties. Furthermore, customers generally are not provided with the Company's software source code. Company-prepared manuals are marked as protected under copyright laws. In addition, employees are notified of the confidential nature of the Company's proprietary information and trade secrets and are required to sign non-disclosure agreements. Regardless of these restrictions, it may be possible for competitors to obtain the Company's trade secrets. The Company will seek to protect its rights and to enforce the non-disclosure provisions of its agreements. The names "CyCare" and "CyData" and their associated logos are trademarks of the Company. EQUIPMENT SALES AND RENTALS AND SOURCES OF SUPPLY Through agreements with equipment manufacturers, the Company sells and leases various minicomputers, personal computers, video display terminals and peripheral equipment used in the Company's systems. While customers could purchase or lease identical equipment from other sources, they have not generally done so. Most components of CyCare's distributed processing and in-house/turnkey systems, such as IBM mainframes and personal computers, Hewlett-Packard minicomputers and personal computers, Bull Worldwide Information Systems, Inc. minicomputers, Link and Wyse video display terminals and Cincom Systems, Inc. database management software, are purchased from single sources. While alternative sources of minicomputers, video display terminals and software are available to the Company, additional time would be required to adapt the equipment to the Company's requirements. In addition, the use of alternative sources might necessitate redesign or recoding of the Company's application software and could result in some interruption of the delivery of systems. The Company believes its relationships with its suppliers are good. Periodically, the Company reevaluates the equipment and software purchased from suppliers. The Company has entered into a value-added agreement with Hewlett Packard to purchase equipment for resale to its customers. INSTALLATION, SUPPORT AND TRAINING The Company maintains an extensive customer service organization. Specialists assist customers in installation or conversion and provide ongoing support. Services performed by such specialists include planning system options and determining software required, assisting file conversion, implementing operating procedures, training, planning the equipment environment and coordinating with other departments. Other personnel handle the day-to-day contact with the customer concerning such items as requests for supplies, special processing runs, additional services and problem determination. Technical support personnel provide continuing enhancements and improvements to the Company's software and assist customers in communicating with equipment manufacturers. They also furnish custom programming to customers, usually charged on a time and material basis. Installation of a system normally commences upon execution of a contract, with installation completed in two to three weeks for SpectraMED clients, and two to six months for CS3000 clients. The equipment supplier installs the hardware used by distributed and in-house/turnkey customers. Installation of software may occur in phases, but initial processing usually begins within two months. Initial training on the use of the system is generally included in the cost of the system. In addition, the customer is provided with a user manual describing the features of the system and how to use it effectively. The Company also provides continuing classes to update and train the customer personnel at regional training facilities. The Company periodically schedules state and national user meetings and executive forums, which allow an exchange of ideas and techniques among customers and provide the Company with ideas for future enhancements and products. CLIENTS, MARKETING AND BACKLOG The Company markets its Group Practice products for large physician groups and CyData products and services through sales representatives located in nine offices throughout the country. The Company currently has 24 direct sales people, plus 17 sales support personnel with specific product expertise and 5 telemarketing individuals. The Company's sales representatives are experienced in the computer service field and knowledgeable about the Company's products and services, and are supported by a marketing and technical staff. The Company's SpectraMED product is marketed through a nationwide network of over 150 independent dealers that is supported by the Company's marketing and technical support staffs. The Company's customers are principally located throughout the United States. Revenues generated in Canada represent less than 1% of total revenues and are considered insignificant. In 1995, the Company's Canadian subsidiary was dissolved and financial transaction reporting and operational activities were assumed by the Company. The Company's services and systems are directed at different health care markets as categorized by its strategic business units. Services and systems have been designed to meet the specific requirements for each of these markets. The Company's backlog for equipment sales and software licenses was $1,355,000 at March 22, 1996 and $4,890,000 at March 17, 1995. All of the March 22, 1996 backlog is expected to be filled in the current fiscal year. COMPETITION Competition is intense in the market served by the Company. The industry is highly fragmented and includes numerous competitors. The Company believes that the most important factors in a potential customer's evaluation of its services and systems are reliability, functional/technical capabilities, price, future flexibility, data security, support services and cost effectiveness. The Company continues to focus on increasing customer satisfaction as a method of improving potential customers' perceptions and adding value to its products. Improvement has been seen based on the increased number of customer reference sites and customer retention. The Company believes it is one of the largest providers of computer information processing services and systems to physicians and medical group practices. Competitors include other computer service companies, equipment manufacturers and consulting firms, some of which are substantially larger and have greater financial, marketing and personnel resources than the Company. Neither the Company nor any competitor is believed by the Company to have a 10% or greater share of the current market. COMMUNICATION NETWORK AND DATA SECURITY The Company supplies its services through a nationwide data communications network consisting of leased and WATS telephone lines. Data stations or video display terminals located on customer premises are connected through one of these networks to the Company's computer facility. Computer accessibility is critical to the success of an on-line system, such as the Company's shared system. In 1995, the Company's computer facility was operational for over 99% of the Company's customers' normal working hours. CyCare has a diagnostic system which monitors its leased telephone lines to detect sources of degradation in data received. The Company maintains a remote diagnostic system for problem solving and training customer personnel. This system allows the Company's technical personnel to immediately communicate with a customer's computer rather than having to visit the customer's location. The Company maintains confidentiality and security due to the nature of the information it processes. The Company restricts data access for shared customers, restricts physical access to its computer facility and requires its employees to sign agreements acknowledging the confidentiality of information processed. Customer information is duplicated and transferred to an off-site location on a daily basis. EMPLOYEES As of March 8, 1996, the Company employed approximately 486 persons, including 46 sales representatives, 144 employees engaged in providing installation services and continuing support and 106 systems analysts and programmers involved in research and development and continuing maintenance of CyCare's systems and programs, the balance being administrative, operations and clerical employees. Systems analysts and programmers are in short supply and, consequently, competition for such personnel is intense. The Company believes that its future success will be dependent in part upon recruiting and retaining qualified technical personnel as well as other employees. CyCare considers its employee relations to be good. GOVERNMENT REGULATION The health care industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of health care facilities. During the past several years, the health care industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates and certain capital expenditures. Many lawmakers have announced that they intend to propose programs to reform the U.S. health care system. These programs may contain proposals to increase governmental involvement in health care, lower reimbursement rates or otherwise change the operating environment for the Company's customers. Health care providers may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's products and related services. Cost containment measures instituted by health care providers as a result of regulatory reform or otherwise could result in greater selectivity in the allocation of capital funds. Such selectivity could have an adverse effect on the Company's ability to sell its products and related services. The Company cannot predict with any certainty what impact, if any, such proposals or health care reforms might have on its business, financial condition and results of operations. ITEM 2. PROPERTIES The Company's principal processing and development operation is located in approximately 114,000 square feet of a nine-story commercial office building in Dubuque, Iowa, purchased by the Company in September 1986. In 1994, the Company refinanced the building and it is currently subject to a mortgage being amortized over five years with payments ending in April 1999. The building has approximately 215,000 leasable square feet. Space not needed by CyCare will continue to be leased to other tenants. The Company leases approximately 33,000 square feet for its corporate headquarters in Scottsdale, Arizona. The Company also leases office space in various United States cities for terms generally not exceeding five years. Offices are located in Atlanta, Chicago, Dallas, Minneapolis, Omaha, San Diego and Bedminster, New Jersey and are equipped to service all aspects of the Company's business. The Company considers these facilities to be adequate for its present and anticipated needs. ITEM 3. LEGAL PROCEEDINGS As of the date hereof, there are no legal proceedings pending against or involving the Company that in the opinion of management could result in a materially adverse change in the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position with the Company - ---- --- ------------------------- Jim H. Houtz 60 Chairman of the Board of Directors, President and Chief Executive Officer David H. Koeller 48 President of Group Practice Mark R. Schonau 39 Chief Financial Officer, Secretary/Treasurer Bill W. Childs 56 Senior Vice President Randy L. Skemp 39 Senior Vice President Carolyn S. Haupert 52 Senior Vice President Mr. Houtz has been Chief Executive Officer since founding the Company in 1967, and has served as a director since its incorporation in 1969. In January 1994, he was also named President of the Company. Mr. Koeller joined the Company in 1970 and has held various positions in operations and client services. He was named Vice President - Operations in 1979, Senior Vice President - Operations, Corporate Information Center in 1986, and Executive Vice President - Group Practice Systems in 1989. In October 1990, he was named Executive Vice President - Technical Services and Development. In January 1994, he was named President of Group Practice. Mr. Schonau joined the Company in May 1988, as Corporate Controller. In November 1988, he was appointed Secretary/Treasurer. In 1989, he was appointed Chief Financial Officer. Prior to joining the Company, he was a Senior Manager with Ernst & Whinney (currently Ernst & Young LLP). Mr. Childs joined the Company in April 1995 as Senior Vice President. From 1984 until his employment by the Company in 1995, Mr. Childs was President and Chief Executive Officer of Health Data Analysis, Inc., a health care publishing and consulting organization. Mr. Skemp joined the Company in January 1983, as an Operations Supervisor. In 1985, Mr. Skemp was named to Manager of Credit Union Sales and Telemarketing. In 1988, he assumed the position of Director of Commercial and Distribution Services in Data Clearing and in 1990 was named Director of Account Management for the central and eastern regions of the United States. In January 1993, Mr. Skemp was named Vice President and then Senior Vice President in May 1994. Ms. Haupert joined the Company in August 1974 and has held various management positions. She was named Manager of Clinical Development in 1983; Director-Application Support in May 1985; Director of Product Development in January 1988, and Director of Data Clearing Products and Services in June 1991. Ms. Haupert was named Vice President in January 1993 and subsequently named Senior Vice President in January 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Certain information in response to this item is incorporated herein by reference from "Shareholder Information" on page 27 of the Annual Shareholders' Report. ITEM 6. SELECTED FINANCIAL DATA Information in response to this item is incorporated herein by reference from "Eleven - Year Comparison of Selected Financial Data" on page 26 of the Annual Shareholders' Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information in response to this item is incorporated herein by reference from "Management's Discussion and Analysis" on pages 12 and 13 of the Annual Shareholders' Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information in response to this item is incorporated herein by reference from the "Consolidated Financial Statements" on pages 14 through 24 of the Annual Shareholders' Report. "Quarterly Results" on page 24 of the Annual Shareholders' Report is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information in response to this item is incorporated herein by reference from "Election of Directors" on pages 1 and 2 and "Compliance with Section 16(a) under the Securities Exchange Act of 1934" on page 15 of the Proxy Statement and from "Executive Officers of the Registrant" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Certain information in response to this item is incorporated herein by reference from "Board Compensation Committee Report on Executive Compensation," "Performance Graph," "Summary Compensation Table," "Director Compensation," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values," and "Employment Contracts and Termination of Employment and Change-in-Control Arrangements" on pages 8 through 14 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this item is incorporated herein by reference from "Security Ownership of Certain Beneficial Owners and Management" on page 7 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this item is incorporated herein by reference from "Certain Relationships and Related Transactions" on pages 14 and 15 of the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements
Page in Annual Shareholders' Report --------------------------- Incorporated by reference in Part II, Item 8 of this report: Report of Ernst & Young LLP, Independent Auditors 25 Consolidated Balance Sheets at December 31, 1995 and 1994 14 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 15
Page in Annual Shareholders' Report --------------------------- Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 16 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 17 Notes to Consolidated Financial Statements 18 through 24 (2) Financial Statement Schedules Page in Form 10-K --------- Included in Part IV of this report: Consent of Independent Auditors on Consolidated Financial Statements 18 Schedule II - Valuation and Qualifying Accounts 19 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.
(3)Information with respect to this item is contained in Item 14(c) hereof and is incorporated herein by reference. (b) Reports on Form 8-K None (c) Exhibits
Page in Sequential Numbering Where Exhibit Appears Exhibit Number Description or Manner of Filing -------------- ----------- ------------------- 3-A Restated Certificate of Incorporation i 3-B By-Laws i 4 The Shareholder Rights Agreement dated ii May 15, 1989 10-A(a) Long-Term Incentive Plan of the Company dated Page __ March 1, 1995, as amended 10-B(a) Employee Stock Purchase Plan of the Company, Page __ dated November 25, 1987, as amended
Page in Sequential Numbering Where Exhibit Appears Exhibit Number Description or Manner of Filing -------------- ----------- ------------------- 10-C(a) Director Stock Plan of the Company, Page ____ dated October 14, 1994 10-D(b) Proprietary Systems, License and Services Agreement iii dated June 30, 1984 between Cincom Systems, Inc. and the Company, as amended 10-E(b) Form of OEM Agreement between Honeywell iv Information Systems, Inc. and the Company 10-F(a) The Company's 401(k) Savings Plan, as amended iii 10-G(a) Retirement Plan of the Company dated May 1, 1974, iii as amended 10-H(b) Amendment to Value Added Reseller Agreement for v Equipment, Products and Services dated October 9, 1991, between Bull HN Information Systems and the Company. (This is an amendment to the Form of OEM Agreement between Honeywell Information Systems, Inc. and the Company) 10-I(b) Reseller Start-Up Purchase Agreement for Equipment, v software and services dated September 27, 1991 between Hewlett-Packard and the Company 10-J Marketing Agreement dated September 30, 1986, i between Computer Associates International, Inc. and the Company, as amended 10-K(b) Renewal of Remarketer Agreements for IBM Products vi dated September 15, 1992, between IBM and the Company 10-L(b) Addendum to Reseller Start-Up Purchase Agreement for vi Equipment, Software and Services dated August 25, 1992, between Hewlett-Packard and the Company 10-M(b) Private Label Reseller Agreement for Software and v Services dated October 22, 1991, between Vision Software, Inc. and the Company
Page in Sequential Numbering Where Exhibit Appears Exhibit Number Description or Manner of Filing -------------- ----------- ------------------- 10-N(a) Consulting Agreement between Jim H. Houtz, vi Chairman of the Board and Chief Executive Officer, and the Company dated January 2, 1993 10-O(a) Employment Agreement between Mark R. Schonau, Page ____ Chief Financial Officer, Secretary and Treasurer, and the Company dated November 3, 1995 10-P(a) Executive Severance Agreement between Mark R. Schonau, vi Chief Financial Officer, Secretary and Treasurer, and the Company dated October 20, 1992 10-Q(a) Supplemental Retirement Agreement between Jim H. vii Houtz, Chairman of Board, Chief Executive and President and the Company dated December 28, 1993 10-R(b) Exchange of Business Agreement dated June 22, 1993, vii between Datamedic Corporation and the Company 10-S(b) Software Purchase Agreement dated June 7, 1993, vii between Health Software, Inc. and the Company 10-T(b) Software Program License Agreement executed vii January 4, 1993, between Resource Information Management Systems, Inc. and the Company 10-U(c) Reseller Agreement between Wang Laboratories, Inc. Page ____ and the Company dated August 31, 1995 13 Annual Report to Security Holders for the fiscal Page ____ year ended December 31, 1995 21 Subsidiaries of the Registrant Page ____ 23 Consent of Ernst & Young LLP Page ____ 27 Financial Data Schedule Page ____
(a) Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) Confidential treatment granted as to portions thereof. (c) Confidential treatment requested as to portions thereof. i Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. ii Incorporated by reference to the Company's Report on Form 8-K dated May 9, 1989. iii Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. iv Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1985. v Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. vi Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. vii Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CYCARE SYSTEMS, INC. DATE: March 26, 1996 /s/ Mark R. Schonau ------------------- Mark R. Schonau Chief Financial Officer, Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 1996 by the following persons on behalf of the Registrant and in the capacities indicated. Signature Capacity /s/ Jim H. Houtz Director, Chairman of the Board of ------------------------------- Directors, President and Chief Jim H. Houtz Executive Officer /s/ Mark R. Schonau Chief Financial Officer, ------------------------------- Secretary and Treasurer Mark R. Schonau /s/ Frank H. Bertsch Director ------------------------------- Frank H. Bertsch /s/ Richard J. Burgmeier Director ------------------------------- Richard J. Burgmeier ------------------------------- Director A. Theodore Engkvist /s/ James L. Schamadan, M.D. Director ------------------------------- James L. Schamadan, M.D. Schedule II CYCARE SYSTEMS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at charged to Balance Allowance for beginning costs and at end doubtful accounts of period expenses Deductions of period ----------------- --------- -------- ---------- --------- Year ended December 31, 1993 $ 884,000 $ 1,353,000 $ (1,189,000) (a)(d) $ 1,048,000 Year ended December 31, 1994 $ 1,048,000 $ 544,000 $ (837,000) (a) $ 755,000 Year ended December 31, 1995 $ 755,000 $ 389,000 $ (324,000) $ 820,000 Additions Balance at charged to Balance beginning costs and at end Reserve for lease loss of period expenses Deductions of period - ---------------------- --------- -------- ---------- --------- Year ended December 31, 1993 $ 140,000 $ (140,000) (c) $ 0 Year ended December 31, 1994 $ 0 $ 0 $ 0 Year ended December 31, 1995 $ 0 $ 0 $ 0 Additions Balance at charged to Balance Amortization of beginning costs and at end software products of period expenses Deductions of period ----------------- --------- -------- ---------- --------- Year ended December 31, 1993 $ 8,350,000 $ 5,953,000 $ (5,387,000) (b)(d) $ 8,916,000 Year ended December 31, 1994 $ 8,916,000 $ 2,168,000 $ (7,170,000) (e) $ 3,914,000 Year ended December 31, 1995 $ 3,914,000 $ 5,801,000 $ (4,600,000) (b)(e) $ 5,115,000 Additions Balance at charged to Balance Amortization of beginning costs and at end goodwill of period expenses Deductions of period -------- --------- -------- ---------- --------- Year ended December 31, 1993 $ 2,618,000 $ 4,004,000 $ (6,455,000) (b)(d) $ 167,000 Year ended December 31, 1994 $ 167,000 $ 18,000 $ 185,000 Year ended December 31, 1995 $ 185,000 $ 19,000 $ 204,000 Additions Balance at charged to Balance Amortization of beginning costs and at end other intangibles of period expenses Deductions of period ----------------- --------- -------- ---------- --------- Year ended December 31, 1993 $ 5,344,000 $ 796,000 $ (4,063,000) (b)(d) $ 2,077,000 Year ended December 31, 1994 $ 2,077,000 $ 65,000 $ 2,142,000 Year ended December 31, 1995 $ 2,142,000 $ 97,000 $ 2,239,000
- ---------- (a) Uncollectible accounts written off, net of recoveries. (b) Software product capitalization, goodwill, and intangibles written off in connection with the Company's strategic redirection. (c) Deductions relating to payments on lease. (d) Software product capitalization, goodwill, intangibles and accounts receivable written off in connection with the sale of the Company's Practice Management business unit. (e) Remove fully amortized accounts. EX-10.A(A) 2 LONG TERM INCENTIVE PLAN CYCARE SYSTEMS, INC. 1995 LONG-TERM INCENTIVE PLAN ARTICLE 1. PURPOSE AND EFFECTIVE DATE 1.1 General. The purpose of the CyCare Systems, Inc. 1995 Long-Term Incentive Plan (the "Plan") is to promote the success, and enhance the value, of CyCare Systems, Inc. (the "Company") by linking the personal interests of its key employees to those of Company stockholders and by providing its key employees with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to selected officers and key employees. It is also intended that the Plan replace the CyCare Systems, Inc. Stock Option Plan (the "Prior Plan"); provided, however, that options granted under the Prior Plan shall continue to be subject to the terms and conditions set forth in the agreement evidencing the option grant. 1.2 Effective Date. The Plan is effective as of March 1, 1995 (the "Effective Date"). Within one year after the Effective Date, the Plan shall be submitted to the shareholders of the Company for their approval. The Plan will be deemed to be approved by the stockholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present, or represented, and entitled to vote at a meeting duly held (or by the written consent of the holders of a majority of the shares of stock of the Company entitled to vote) in accordance with the applicable provisions of Delaware law and the Company's Bylaws and Restated Certificate of Incorporation. Any Awards granted under the Plan prior to stockholder approval are effective when made (unless the Committee specifies otherwise at the time of grant), but no Award may be exercised or settled and no restrictions relating to any Award may lapse before stockholder approval. If the stockholders fail to approve the Plan, any Award previously made shall be automatically canceled without any further act. ARTICLE 2. DEFINITIONS AND CONSTRUCTION 2.1 Definitions. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Sections 1.1 or 1.2 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share Award, Dividend Equivalent Award, or Other Stock-Based Award, or any other right or interest relating to Stock or cash, granted to a Participant under the Plan. (b) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means and includes each of the following: (1) A change of control of the Company through a transaction or series of transactions, such that any person (as that term is used in Section 13 and 14(d)(2) of the 1934 Act), excluding affiliates of the Company as of the Effective Date, is or becomes the beneficial owner (as that term is used in Section 13(d) of the 1934 Act) directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; (2) Upon the first purchase under a tender offer or exchange offer for 20% or more of the outstanding shares of Stock (or securities convertible into Stock), other than an offer by the Company or any Subsidiary or any employee benefit plan sponsored by the Company or any Subsidiary; (3) Any merger or consolidation of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Shares would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Shares immediately before the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger; (4) Substantially all of the assets of the Company are sold or otherwise transferred to parties that are not within a "controlled group of corporations" (as defined in Section 1563 of the Code) in which the Company is a member; or (5) If, at any time after March 1, 1995, there shall cease to be a majority of the Board comprised as follows: individuals who as of March 1, 1995, constitute the Board and any new director(s) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of the majority of the directors still in office who either were directors as of March 1, 1995, or whose election or nomination for election was previously so approved. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee of the Board described in Article 3. (g) "Disability" shall mean any illness or other physical or mental condition of a Participant which renders the Participant incapable of performing his full-time duties for the Company for six consecutive months and within 30 days after notice by the Committee to the Participant, the Participant does not return to the full-time performance of his duties. (h) "Dividend Equivalent" means a right granted to a Participant under Article 10. (i) "Fair Market Value" means with respect to Stock or any other property, the fair market value of such Stock or other property determined by such methods or procedures as may be established from time to time by the Committee. Unless otherwise determined by the Commttee, the Fair Market Value of Stock as of any date shall be the closing price for the Stock as reported in The Wall Street Journal for that date or, if no closing price is so reported for that date, the closing price on the next preceding date for which a closing price was reported. (j) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (k) "Non-Qualified Stock Option" means an Option that is not intended to be an Incentive Stock Option. (l) "Option" means a right granted to a Participant under Article 6 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. (m) "Other Stock-Based Award" means a right, granted to a Participant under Article 11, that relates to or is valued by reference to Stock or other Awards relating to Stock. (n) "Participant" means a person who, as an officer or key employee of the Company or any Subsidiary, has been granted an Award under the Plan. (o) "Performance Share" means a right granted to a Participant under Article 8, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain performance goals established by the Committee. (p) "Plan" means the CyCare Systems, Inc. 1995 Long-Term Incentive Plan, as amended from time to time. (q) "Restricted Stock Award" means Stock granted to a Participant under Article 9 that is subject to certain restrictions and to risk of forfeiture. (r) "Stock" means the Common Stock of the Company and such other securities of the Company that may be substituted for Stock pursuant to Article 12. (s) "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 7 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 7. (t) "Subsidiary" means any corporation of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. ARTICLE 3. ADMINISTRATION 3.1 Committee. The Plan shall be administered by a Committee that is appointed by, and shall serve at the discretion of, the Board. The Committee shall consist of at least two individuals who are members of the Board who are "disinterested persons," as such term is defined in Rule 16b3 promulgated under Section 16 of the Securities Exchange Act of 1934 (the "1934 Act") or any successor provision, except as may be otherwise permitted under Section 16 of the 1934 Act and the regulations and rules promulgated thereunder. 3.2 Action By The Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present and acts approved in writing by a majority of the Committee in lieu of a meeting shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. 3.3 Authority of Committee. The Committee has the exclusive power, authority and discretion to: (a) Designate Participants; (b) Determine the type or types of Awards to be granted to each Participant; (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; (d) Determine the terms and conditions of any Award granted under the Plan including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; (e) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered; (f) Prescribe the form of each Award Agreement, which need not be identical for each Participant; (g) Decide all other matters that must be determined in connection with an Award; (h) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and (i) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan. 3.4 Decisions Binding. The Committee's interpretation of the Plan, any Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to adjustment provided in Section 13.1, the aggregate number of shares of Stock reserved and available for Awards or which may be used to provide a basis of measurement for or to determine the value of an Award (such as with a Stock Appreciation Right or Performance Share Award) shall be 1,120,000. 4.2 Lapsed Awards. To the extent that an Award terminates, expires or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of an Award under the Plan and shares subject to SARs or other Awards settled in cash will be available for the grant of an Award under the Plan, in each case to the full extent available pursuant to the rules and interpretations of the Securities and Exchange Commission under Section 16 of the 1934 Act, as amended. 4.3 Stock Distributed. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. 4.4 Limitation On Number of Shares Subject To Awards. Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Stock with respect to one or more Awards that may be granted to any one Participant over the term of the Plan shall be 600,000. ARTICLE 5. ELIGIBILITY 5.1 General. Awards may be granted only to individuals who are officers or other key employees (including employees who also are directors or officers) of the Company or a Subsidiary, as determined by the Committee. ARTICLE 6. STOCK OPTIONS 6.1 General. The Committee is authorized to grant Options to Participants on the following terms and conditions: (a) Exercise Price. The exercise price per share of Stock under an Option shall be determined by the Committee, provided that the exercise price for any Option shall not be less than the Fair Market Value as of the date of grant. (b) Time And Conditions Of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, provided that no Option may be exercisable prior to six months following the date of the grant of such Option. The Committee also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. (c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. Without limiting the power and discretion conferred on the Committee pursuant to the preceding sentence, the Committee may, in the exercise of its discretion, but need not, allow a Participant to pay the Option price by directing the Company to withhold from the shares of Stock that would otherwise be issued upon exercise of the Option that number of shares having a Fair Market Value on the exercise date equal to the Option price, all as determined pursuant to rules and procedures established by the Committee. (d) Evidence of Grant. All Options shall be evidenced by a written Award Agreement between the Company and the Participant. The Award Agreement shall include such provisions as may be specified by the Committee. 6.2 Incentive Stock Options. The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules: (a) Exercise Price. The exercise price per share of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock Option may not be less than the Fair Market Value as of the date of the grant. (b) Exercise. In no event, may any Incentive Stock Option be exercisable for more than ten years from the date of its grant. (c) Lapse of Option. An Incentive Stock Option shall lapse under the following circumstances: (1) The Incentive Stock Option shall lapse ten years after it is granted, unless an earlier time is set in the Award Agreement. The Incentive Stock Option shall lapse twelve months after the Participant's termination of employment, if the termination of employment employment was attributable to Disability. (2) If the Participant separates from employment other than as provided in paragraph (2), the Incentive Stock Option shall lapse three months after the Participant's termination of employment. (3) If the Participant dies before the Option lapses pursuant to paragraph (1), (2) or (3), above, the Incentive Stock Option shall lapse, unless it is previously exercised, on the earlier of (i) the date on which the Option would have lapsed had the Participant lived and had his employment status (i.e., whether the Participant was employed by the Company on the date of his death or had previously terminated employment) remained unchanged; or (ii) 15 months after the date of the Participant's death. Upon the Participant's death, any exercisable Incentive Stock Options may be exercised by the Participant's legal representative or representatives, by the person or persons entitled to do so under the Participant's last will and testament, or, if the Participant shall fail to make testamentary disposition of such Incentive Stock Option or shall die intestate, by the person or persons entitled to receive said Incentive Stock Option under the applicable laws of descent and distribution. (d) Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00. (e) Ten-Percent Owners. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of Stock of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant. (f) Expiration of Incentive Stock Options. No Award of an Incentive Stock Option may be made pursuant to this Plan after 2005. (g) Right To Exercise. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 Grant of SARs. The Committee is authorized to grant SARs to Participants on the following terms and conditions: (a) Right of Payment. Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of: (1) The Fair Market Value of one share of Stock on the date of exercise; over (2) The grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of one share of Stock on the date of grant in the case of any SAR related to any Incentive Stock Option. (b) Other Terms. All awards of Stock Appreciation Rights shall be evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Agreement. ARTICLE 8. PERFORMANCE SHARES 8.1 Grant of Performance Shares. The Committee is authorized to grant Performance Shares to Participants on such terms and conditions as may be selected by the Committee. The Committee shall have the complete discretion to determine the number of Performance Shares granted t each Participant. All Awards of Performance Shares shall be evidenced by an Award Agreement. 8.2 Right To Payment. A grant of Performance Shares gives the Participant rights, valued as determined by the Committee, and payable to, or exercisable by, the Participant to whom the Performance Shares are granted, in whole or in part, as the Committee shall establish at grant or thereafter. The Committee shall set performance goals and other terms or conditions to payment of the Performance Shares in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Shares that will be paid to the Participant, provided that the time period during which the performance goals must be met shall, in all cases, exceed six months. 8.3 Other Terms. Performance Shares may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Committee and reflected in the Award Agreement. ARTICLE 9. RESTRICTED STOCK AWARDS 9.1 Grant of Restricted Stock. The Committee is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as may be selected by the Committee. All Awards of Restricted Stock shall be evidenced by an Award Agreement. 9.2 Issuance And Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. 9.3 Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company, provided, however, that the Committee may provide in any Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock. 9.4 Certificates For Restricted Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate until such time as all applicable restrictions lapse. ARTICLE 10. DIVIDEND EQUIVALENTS 10.1 Grant Of Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to Participants subject to such terms and conditions as may be selected by the Committee. Dividend Equivalents shall entitle the Participant to receive payments equal to dividends with respect to all or a portion of the number of shares of Stock subject to an Option Award or SAR Award, as determined by the Committee. The Committee may provide that Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Stock, or otherwise reinvested. ARTICLE 11. OTHER STOCK-BASED AWARDS 11.1 Grant Of Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including without limitation shares of Stock awarded purely as a "bonus" and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Stock, and Awards valued by reference to book value of shares of Stock or the value of securities of or the performance of specified Subsidiaries. The Committee shall determine the terms and conditions of such Awards. ARTICLE 12. PROVISIONS APPLICABLE TO AWARDS 12.1 Stand-Alone, Tandem, And Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan. If an Award is granted in substitution for another Award, the Committee may require the surrender of such other Award in consideration of the grant of the new Award. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards. 12.2 Exchange Provisions. The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Stock, or another Award (subject to Section 12.1), based on the terms and conditions the Committee determines and communicates to the Participant at the time the offer is made. 12.3 Term Of Award. The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant. 12.4 Form Of Payment For Awards. Subject to the terms of the Plan and any applicable law or Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the grant or exercise of an Award may be made in such forms as the Committee determines at or after the time of grant, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee. 12.5 Limits Of Transfer. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided below, no Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, except in the case of an Incentive Stock Option, pursuant to a court order that would otherwise satisfy the requirements to be a domestic relations order as defined in Section 414(p)(1)(B) of the Code, if the order satisfies Section 414(p)(1)(A) of the Code notwithstanding that such an order relates to the transfer of a stock option rather than an interest in an employee benefit pension plan. In the Award Agreement for any Award other than an Award that includes an Incentive Stock Option, the Committee may allow a Participant to assign or otherwise transfer all or a portion of the rights represented by the Award to specified individuals or classes of individuals, or to a trust benefiting such individuals or classes of individuals, subject to such restrictions, limitations, or conditions as the Committee deems to be appropriate. 12.6 Beneficiaries. Notwithstanding Section 12.5, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married, a designation of a person other than the Participant's spouse as his beneficiary with respect to more than 50 percent of the Participant's interest in the Award shall not be effective without the written consent of the Participant's spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto under the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee. 12.7 Stock Certificates. All Stock certificates delivered under the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock. 12.8 Acceleration Upon A Change Of Control. If a Change of Control occurs, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 6.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. Notwithstanding any provision in this Plan to the contrary, if a Change of Control of the Company has occurred and the Participant's employment is terminated for any reason except those "excepted causes" detailed below, the Participant shall be entitled for a seven-month period following such termination, to exercise all Options and other Awards that were exercisable as of the date of such termination (taking into account the acceleration provision of this Section 12.8). For this purpose, excepted cause shall mean termination of employment due to (i) the death of the Participant, (ii) the disability of the Participant, or (iii) cause (which shall deem to occur if the Participant willfully engages in conduct that is demonstrably and materially injurious to the Company, monetarily, or otherwise; and in making such determination, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that the act or omission was in the best interest of the Company. ARTICLE 13. CHANGES IN CAPITAL STRUCTURE 13.1 General. In the event a stock dividend is declared upon the Stock, the shares of Stock then subject to each Award (and the number of shares subject thereto) shall be increased proportionately without any change in the aggregate purchase price therefor. In the event the Stock shall be changed into or exchanged for a different number or class of shares of Stock or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger or consolidation, there shall be substituted for each such share of Stock then subject to each Award (and for each share of Stock then subject thereto) the number and class of shares of Stock into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate purchase price for the shares then subject to each Award. ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION 14.1 Amendment, Modification and Termination. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan. However, without approval of the stockholders of the Company or other conditions (as may be required by the Code, by the insider trading rules of Section 16 of the 1934 Act, by any national securities exchange or system on which the Stock is listed or reported, or by a regulatory body having jurisdiction), no such termination, amendment, or modification may: (a) Materially increase the total number of shares of Stock that may be issued under the Plan, except as provided in Section 13.1; (b) Materially modify the eligibility requirements for participation in the Plan; or (c) Materially increase the benefits accruing to Participants under the Plan. 14.2 Awards Previously Granted. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant. ARTICLE 15. GENERAL PROVISIONS 15.1 No Rights To Awards. No Participant or employee shall have any claim to be ganted any Award under the Plan, and neither the Company nor the Committee is obligated to treat Participants and employees uniformly. 15.2 No Stockholders Rights. No Award gives the Participant any of the rights of a shareholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award. 15.3 Withholding. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of this Plan. With respect to withholding required upon any taxable event under the Plan, Participants may elect, subject to the Committee's approval, to satisfy the withholding requirement, in whole or in part, by having the Company or any Subsidiary withhold shares of Stock having a Fair Market Value on the date of withholding equal to the amount to be withheld for tax purposes in accordance with such procedures as the Committee establishes. The Committee may, at the time any Award is granted, require that any and all applicable tax withholding requirements be satisfied by the withholding of shares of Stock as set forth above. 15.4 No Right To Employment. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 15.5 Unfunded Status Of Awards. The Plan is intended to be an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary. 15.6 Indemnification. To the extent allowable under applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Bylaws or Restated Certificate of Incorporation, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 15.7 Relationship To Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary. 15.8 Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. 15.9 Titles And Headings. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 15.10 Fractional Shares. No fractional shares of stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up. 15.11 Securities And Compliance. With respect to any person who is, on the relevant date, obligated to file reports under Section 16 of the 1934 Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee. 15.12 Government And Other Regulations. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended (the "1933 Act"), any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under the 1933 Act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. 15.13 Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Arizona. EX-10.B.(A) 3 EMPLOYEE STOCK PURCHASE PLAN EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. The purpose of the CyCare Systems, Inc. Employee Stock Purchase Plan (hereinafter called the "Plan"), is to provide employees of CyCare Systems, Inc., a Delaware corporation , or any successor corporation, (hereinafter called the "Company"), and its affiliated companies with an opportunity to acquire a proprietary interest in the Company through the purchase of Common Stock of the Company, with a par value of $.01 per share (the "stock"). It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986 (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that Section of the Code. 2. Definitions. (a) "Base pay" means all compensation paid by the Company to the employee, (before withholding or other deductions), including regular straight time earnings plus payments for overtime, commissions, incentive compensation, bonuses, and other special payments. (b) "Employee" means any person, including an officer, who is customarily employed for more than 20 hours per week and more than five months in a calendar year by (1) the Company, or (2) any affiliated company, 50% or more of whose voting shares are owned directly or indirectly by the Company. 3. Eligibility. (a) Any employee as defined in Paragraph 2 who shall be employed by the Company on the date his participation in the Plan is to become effective shall be eligible to participate in the Plan, subject to the limitations imposed by Section 423 (b) of the Code. (b) Any provision of the Plan to the contrary notwithstanding, no employee shall be granted an option: (1) If, immediately after the grant, such employee would own shares, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of shares of the Company or of any subsidiary of the Company, as defined by Section 424(f) of the Code, taking into account in determining stock ownership, any stock owned by the brothers, sisters, spouse, ancestors or descendants of such employee and stock owned by corporations, partnerships, estates or trusts of which such employee is a shareholder, partner or beneficiary, as the case may be, as required by Section 424(d) of the Code; or (2) Which permits his rights to purchase shares under all employee stock purchase plans of the Company and its subsidiaries, as defined by Section 424(f) of the Code, to accrue at a rate which exceeds $25,000.00 determined by the fair market value of the shares (determined at the time such option is granted) for each calendar year in which such stock option is outstanding at any time, all determined in the manner provided by Section 423 (b) (8) of the Code. 4. Offering Dates. The Plan will be implemented by means of one or more offerings, each offering being one year in length. The first offering shall commence on a date determined by the Board, if a majority of the Directors then in office are ineligible to participate in the Plan, or a committee of Directors not eligible to participate in the Plan (the "Committee") designated by the Board to administer the Plan, on which date the Board shall allocate stock to the Plan; provided, however, that such date shall not be more than six months after the date on which stock of the Company is first offered for sale to the public and further provided that in no event shall the Plan become effective unless within twelve months of the date of its adoption by the Board, it has been approved at a duly called meeting of the stockholders of the Company. Subsequent offerings may be made by the Board at one year intervals after the date on which the first offering commences, and any such subsequent offering shall be one year in length as well. On or prior to the date on which any offering commences, the Board shall determine the number of shares allocated to the Plan which shall be available for purchase under said offering. Any of such shares which are not purchased under any such offering may be available for purchase in subsequent offerings if the Board so determines. 5. Participation. (a) An eligible employee may become a participant by completing an authorization for a payroll deduction on the form provided by the Company and filing it with the payroll office during the thirty day period before the date the offering commences. An authorization shall become effective on the date that it is filed with the payroll office. (b) Payroll deductions for a participant shall commence on the date when the authorization for a payroll deduction becomes effective and shall end on the termination date of the offering to which such authorization is applicable unless sooner terminated as provided in Paragraph 10. (c) Participation in any offering under the Plan shall neither limit, nor require, participation in any other offering except that no employee may have more than one authorization for a payroll deduction in effect simultaneously. 6. Payroll deductions. (a) At the time a participant files an authorization for a payroll deduction, the participant shall elect to have deductions made from his pay on each payday during the time he is a participant in an offering at a rate not to exceed 10% of the base pay, as defined in Paragraph 2, which the participant is entitled to receive on such payday. (b) All payroll deductions made for a participant shall be credited to the participant's account under the Plan. A participant may not make any separate cash payment into such account. (c) A participant may discontinue his participation in the Plan as provided in Paragraph 10, but no other change can be made by a participant during an offering. 7. Granting of Option. (a) On the offering date following the date when a participant's authorization for a payroll deduction becomes effective, he shall be granted an option for as many full shares as he will be able to purchase with the payroll deductions credited to his account during his participation in that offering. (b) The option price of shares purchased with payroll deductions made for a participant therein shall be the lower of: (1) 85% of the fair market value of the stock on the date the option is granted (which is the date on which the respective offering commences), or (2) 85% of the fair market value of the stock on the date the option is exercised (which is the date the respective offering ends), but in no event shall the purchase price be less than the par value of the stock. 8. Exercise of Option. (a) Unless a participant gives written notice to the company as hereinafter provided, his option for the purchase of shares with payroll deductions made during the applicable offering will be exercised automatically for him on the date on which said offering ends, if the participant is an employee on that date, for the purchase of the number of full shares which the accumulated payroll deductions in his account at that time will purchase at the applicable option price, subject to the provisions of Paragraph 12. The balance in the account with interest thereon shall be paid to the participant. (b) By written notice to the Company during the 60 day period preceding the date on which an offering ends, a participant may elect, effective at the termination of said offering, to: (1) Withdraw all the accumulated payroll deductions in his or her account on the date the offering ends, with interest thereon; or (2) Exercise the option for a specified number of full shares less than the number of full shares which the accumulated payroll deductions in this account will purchase at the applicable option price and withdraw the balance of the accumulated payroll deductions in the account at that time, with interest thereon. 9. Delivery. As promptly as practicable after the termination of each offering, the Company will deliver to each participant, as appropriate, either the shares purchased upon the exercise of the option together with a cash payment equal to the balance credited to his account during such offering which was not used for the purchase of shares, with interest thereon, or a cash payment equal to the total of the payroll deductions credited to his account during such offering, with interest thereon. 10. Withdrawal. (a) A participant may withdraw payroll deductions credited to his account under the Plan at any time by giving written notice to the Company. All of the participant's payroll deductions credited to his account, with interest thereon, will be paid to him promptly after receipt of his notice of withdrawal, and no further payroll deductions will be made from his pay except in accordance with an authorization for a new payroll deduction filed in accordance with Paragraph 5, for subsequent years. (b) A participant's withdrawal will not have any effect upon his eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. (c) Upon termination of the participant's employment for any reason, including retirement, the payroll deductions credited to his account with interest thereon will be returned to him, or, in the case of his death, to the person or persons entitled thereto under Paragraph 14. 11. Interest. In any situation where the Plan specifically provides for the payment of interest on a participant's payroll deductions, such interest paid shall be simple interest, calculated at the rate of 6% per annum, computed on the balance in the participant's account at the end of each month. 12. Stock. (a) The shares to be sold to participants under the Plan may, at the election of the Company, be either treasury shares or shares originally issued for such purpose. The maximum number of shares which shall be made available for sale under the Plan during the offerings under the Plan shall be 1,320,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Paragraph 17. If the total number of shares for which options are to be granted on any date in accordance with Paragraph 7 exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. (b) The participant will have no interest in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs, by written notice to the Company prior to the termination date of the pertinent offering, in the names of the participant and one such other person as may be designated by the participant, as joint tenants with rights of survivorship, to the extent permitted by applicable law. 13. Administration of the Plan. The Plan shall be administered so as to ensure that all participants have the same rights and privileges as are provided by Section 423(b)(5) of the Code. Members of the Committee may be appointed from time to time by the Board and shall be subject to removal by the Board. The decision of a majority in number of the members of the Committee in office at the time shall be deemed to be the decision of the Committee. The Board or the Committee, from time to time, may approve the forms of any documents or writings provided for in the Plan, and may adopt, amend and rescind rules and regulations not inconsistent with the Plan for carrying out the Plan and may construe the Plan. The Board or the Committee may delegate the responsibility for maintaining all or a portion of the records pertaining to participants' accounts to persons not affiliated with the Participating Companies. All expenses of administering the Plan shall be paid by the Participating Companies. 14. Designation of Beneficiary. A participant may file a written designation of a beneficiary who is to receive any shares and cash to the participant's credit under the Plan in the event of such participant's death prior to delivery to him of such shares and cash. Such designation of beneficiary may be changed by the participant at any time by written notice. Upon the death of a participant and upon receipt by the Company of proof of the identity and existence at the participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such shares and cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company) the Company, in its discretion, may deliver such shares and cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent, or relative is known to the Company, then to such other person as the Company may designate. No designated beneficiary shall prior to the death of the participant by whom he has been designated, acquire any interest in the shares or cash credited to the participant under the Plan. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant. Any such attempted assignment, transfer, pledge, or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Paragraph 10. 16. Changes in Capitalization. If any option under this Plan is exercised subsequent to any stock dividend, split-up, spin-off, recapitalization, merger, consolidation, exchange of shares, or the like, occurring after such option was granted, as a result of which shares of any class shall be issued in respect of the outstanding shares, or shares shall be changed into the same class or classes, the number of shares to which such option shall be applicable and the option price for such shares shall be appropriately adjusted by the Company. 17. Amendment or termination. The Board of Directors of the Company may at any time terminate or amend the Plan, provided however, that amendments to the Plan relating to the amount, price, or timing of grants shall not be made more than once in any six month period, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. Notwithstanding the foregoing, no such termination can affect options previously granted, nor may an amendment make any change in any option theretofore granted which would adversely affect the rights of any participant nor may an amendment be made without prior approval of the shareholders of the Company if such amendment would materially increase the benefits accruing to participants under the Plan or materially modify the requirements as to eligibility for participation in the Plan. Without limiting the generality of the foregoing, an amendment may not be made without prior stockholder approval if it would: (a) Require the sale of more shares than are authorized under Paragraph 12 of the Plan; or (b) Permit payroll deductions at a rate in excess of 10% of a participant's base pay; or (c) Decrease the purchase price of the stock for any purchase period below the lower of 85% of the fair market value of the stock on te date the option is granted or 85% of the fair market value of the stock on the date the option is exercised. The Plan shall terminate in any event on such date as all of the shares allocated to the Plan shall have been purchased pursuant to the provisions of the Plan. 18. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the Treasurer of the Company, or when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 19.Miscellaneous. Except as otherwise expressly provided herein, any authorization, election, or notice of document under the Plan from an eligible employee or participant shall be delivered to his employer corporation and, subject to any limitations specified in the Plan, shall be effective when so delivered. The term "business day" shall mean any day other than Saturday, Sunday or a legal holiday in Iowa. The masculine pronoun shall include the feminine. The Plan, and the Company's obligation to sell and deliver shares of Stock hereunder, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approval by any regulatory or governmental agency as may, in the opinion of counsel for the Company, be required. EX-10.C(A) 4 DIRECTOR STOCK PLAN Exhibit C CYCARE SYSTEMS, INC. DIRECTOR STOCK PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 Establishment of the Plan. CyCare Systems, Inc., a Delaware corporation, hereby establishes the CyCare Systems, Inc. Director Stock Plan (the "Plan") for the benefit of its Non-employee Directors. The Plan sets forth the terms of an initial, one-time grant of Non-Qualified Stock Options and subsequent annual grants of Restricted Stock to Non-employee Directors. All such grants are subject to the terms and provisions set forth in this Plan. 1.2 Purpose of the Plan. The purpose of the Plan is to encourage ownership in the Company by Non-employee Directors, to strengthen the ability of the Company to attract and retain the services of experienced and knowledgeable individuals as Non-employee Directors of the Company, and to provide Non-employee Directors with a further incentive to work for the best interests of the Company and its stockholders. 1.3 Effective Date. The Plan is effective as of October 18, 1994 (the "Effective Date"). Within one year after the Effective Date, the Plan shall be submitted to the stockholders of the Company for their approval. The Plan will be deemed to be approved by the stockholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable provisions of the Delaware Law and the Company's Bylaws and Restated Certificate of Incorporation. Any Awards granted under the Plan prior to stockholder approval are effective when made, but no Award may be exercised or settled and no restrictions relating to any Award may lapse before stockholder approval. If the stockholders fail to approve the Plan, any Award previously made shall be automatically canceled without any further act. 1.4 Duration of the Plan. The Plan shall remain in effect until such time as the Plan is terminated by the Board of Directors pursuant to Article 9 or Section 10.4. ARTICLE 2. DEFINITIONS AND CONSTRUCTION 2.1. Definitions. For purposes of the Plan, the following terms will have the meanings set forth below: (a) "Award" means a grant of Non-Qualified Stock Options or Restricted Stock under the Plan. (b) "Board" or "Board of Directors" means the Board of Directors of the Company, and includes any committee of the Board of Directors designated by the Board to administer this Plan. (c) "Change in Control" of the Company means and includes each of the following: (1) a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of the Exchange Act regardless of whether the Company is subject to such reporting requirements; (2) a change of control of the Company through a transaction or series of transactions, such that any person (as that term is used in Section 13 and 14(d)(2) of the Exchange Act), excluding affiliates of the Company as of the Effective Date, is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; (3) any consolidation or liquidation of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Shares would be con- verted into cash, securities, or other property, other than a merger of the Company in which the holders of the Shares immediately before the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger; (4) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or (5) substantially all of the assets of the Company are sold or otherwise transferred to parties that are not within a "controlled group of corporations" (as defined in Section 1563 of the Code) in which the Company is a member. The foregoing events shall not be deemed to be a Change in Control if the transaction or transactions causing such change shall have been approved by the affirmative vote of at least a majority of the members of the Board in office as of the Effective Date ("Incumbents"), those serving on the Board pursuant to nomination or appointment thereto by a majority of Incumbents ("Successors"), and those serving on the Board pursuant to nomination or appointment thereto by a majority of a Board composed of Incumbents and/or Successors. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means the committee appointed by the Board to administer the Plan. (f) "Company" means CyCare Systems, Inc., a Delaware corporation, or any successor as provided in Section 10.3. (g) "Director" means any individual who is a member of the Board of Directors of the Company. (h) "Disability" means a permanent and total disability, within the meaning of Section 22(e)(3) of the Code. To the extent permitted pursuant to Section 16 of the Exchange Act, Disability shall be determined by the Board in good faith, upon receipt of sufficient competent medical advice from one or more individuals, selected by the Board, who are qualified to give professional medical advice. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor provision. (j) "Fair Market Value" means the average of the highest and lowest quoted selling prices for Shares on the relevant date, or (if there were no sales on such date) the average of the highest and lowest quoted selling prices on the immediately preceding date on which such sales occurred, as reported in The Wall Street Journal or a similar publication selected by the Committee. (k) "Grant Date" means July 1, 1995 and each anniversary of that date. (l) "Non-employee Director" means any individual who is a member of the Board of Directors of the Company, but who is not otherwise an employee of the Company. (m) "Non-Qualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article 6, that is not intended to be an incentive stock option qualifying under Section 422 of the Code. (n) "Option" means a Non-Qualified Stock Option granted under the Plan. (o) "Participant" means a Non-employee Director of the Company who has been granted an Award under the Plan. (p) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way, and the Shares are subject to a substantial risk of forfeiture, as provided in Article 7. (q) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, and shall include a "group," as that term is defined in Section 13(d). (r) "Restricted Stock" means an Award granted to a Non-employee Director pursuant to Article 7 that is subject to a Period of Restriction. (s) "Shares" means the shares of the Company's Common Stock, $.01 par value. 2.2 Gender and Number. Except as indicated by the context, any masculine term also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3. Severability of Provisions. With respect to persons subject to Section 16 of the Exchange Act, transactions under this plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the plan administrators fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the plan administrators, and the remaining provisions of the Plan or actions by plan administrators shall be construed and enforced as if the invalid provision or action had not been included or undertaken. 2.4. Incorporation by Reference. In the event this Plan does not include a provision required by Rule 16b-3 to be stated herein, such provision (other than one relating to eligibility requirements or the price and amount of Awards) shall be deemed automatically to be incorporated by reference herein, insofar as Participants subject to Section 16 of the Exchange Act are concerned. ARTICLE 3. ADMINISTRATION 3.1 The Committee. The Plan will be administered by the Committee, subject to the restrictions set forth in the Plan. 3.2 Administration by the Committee. The Committee has the full power, discretion, and authority to interpret and administer the Plan in a manner that is consistent with the Plan's provisions. However, the Committee does not have the power to (i) determine Plan eligibility, or to determine the number, the price, the vesting period, or the timing of Awards to be made under the Plan to any Participant or (ii) take any action that would result in the Awards not being treated as "formula awards" within the meaning of Rule 16b-3(c)(ii) or any successor provision, promulgated pursuant to the Exchange Act. 3.3 Decisions Binding. The Committee's determinations and decisions under the Plan, and all related orders or resolutions of the Board shall be final, conclusive, and binding on all persons, including the Company, its stockholders, employees, Participants, and their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 Number of Shares. The total number of Shares available for grant under the Plan may not exceed 50,000, subject to adjustment as provided in Section 4.3. The Shares issued pursuant to the exercise of Options granted under the Plan and the Shares issued as Restricted Stock may be authorized and unissued Shares or Shares reacquired by the Company, as determined by the Committee. 4.2 Lapsed Awards. If any Option or Share of Restricted Stock granted under the Plan terminates, expires, or lapses for any reason, any Shares subject to purchase pursuant to such Option and any such Shares of Restricted Stock again will be available for grant under the Plan. 4.3 Adjustments in Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, the number and/or type of Shares subject to any outstanding Award, and the Option exercise price per Share under any outstanding Option will be automatically adjusted so that the proportionate interests of the Participants will be maintained as before the occurrence of such event. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1. Eligibility. Eligibility to participate in the Plan is limited to Non-employee Directors. 5.2 Actual Participation. All eligible Non-employee Directors will receive a grant of Options pursuant to Article 6 and annual grants of Restricted Stock pursuant to Article 7. ARTICLE 6. ONE-TIME GRANT OF OPTIONS 6.1. One-Time Grant of Options. Each individual who is a Non-employee Director on October 18, 1994 will be granted Options on that date, the exercise of which will entitle the Non-employee Director to purchase 2,500 Shares. The specific terms of the Options are subject to the provisions of this Article 6 and the Option Agreement executed pursuant to Section 6.2. 6.2. Option Agreement. The grant of Options will be evidenced by an Option Agreement that will not include any terms or conditions that are inconsistent with the terms and conditions of this Plan. 6.3 Option Exercise Price Per Share. The Option exercise price per Share under any outstanding Option granted pursuant to this Article 6 shall be $12.375 (the "Exercise Price"). 6.4. Duration of Options. Each Option granted to a Participant under this Article 6 shall expire on October 18, 1999, the fifth (5th) anniversary date of its grant, unless the Option is earlier terminated, forfeited, or surrendered pursuant to a provision of this Plan. 6.5. Vesting of Options Subject to Exercise. Subject to Section 1.3, the Options granted to the Participants under this Article 6 shall vest and become subject to exercise during the four-year period (the "Exercise Period") beginning on the Effective Date and ending on October 18, 1998; provided, however, that only one-quarter of the total number of Options granted to a Participant pursuant to this Article 6 shall vest during each of the four one-year periods during the Exercise Period that begin on the Effective Date and each subsequent October 18 thereafter until October 18, 1998. 6.6. Exercise or Disposition of Options. Participants shall be entitled to exercise any Option that has vested at any time within the period beginning with the Effective Date and ending five (5) years after the Effective Date; provided, however, that the disposition by a Participant of any Shares acquired pursuant to the exercise of an Option shall occur only after the end of the six (6) month period beginning on the date that Company's stockholders approve the Plan. 6.7. Payment. Options are exercised by delivering a written notice of exercise to the Secretary of the Company, setting forth the number of Options to be exercised and accompanied by a payment equivalent to the product of the number of Options exercised multiplied by the Exercise Price (the "Total Exercise Price"). The Total Exercise Price is payable: (a) in cash or its equivalent; (b) by tendering previously acquired Shares having a Fair Market Value at the time of exercise equal to the Total Exercise Price; (c) by directing the Company to withhold from the shares of Stock that would otherwise be issued upon exercise of the Options that number of Shares having a Fair Market Value on the exercise date equal to the Total Exercise Price; or (d) by a combination of (a), (b), and (c). A Participant may elect to use the payment method described in clause (c) of this Section 6.7 only with the consent of, and at the time and in the manner prescribed by, the Committee. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased pursuant to the exercise of the Options. 6.8. Restrictions on Share Transferability. To the extent necessary to ensure that Options granted under this Article 6 comply with applicable law, the Board shall impose restrictions on the transferability of any Shares acquired pursuant to the exercise of an Option under this Article 6, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any Stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 6.9. Termination of Service on Board of Directors Due to Death or Disability. If a Participant's service on the Board is terminated by reason of death or Disability, any outstanding Options held by the Participant that are not fully vested are immediately forfeited and returned to the Company. Any outstanding options held by the Participant that are fully vested will remain fully vested and subject to exercise. To the extent an Option is fully vested and exercisable as of the date of death or Disability, it will remain exercisable for sixty (60) days after the date of death or Disability by the Participant or such person or persons as shall have been named as the Participant's legal representative or beneficiary, or by such persons as shall have acquired the Participant's Options by will or by the laws of descent and distribution. Any Option that is fully vested but not exercised during this sixty (60) day period after death or Disability will be immediately forfeited to the Company. 6.10. Termination of Service on Board of Directors for Other Reasons. If the Participant's service on the Board is terminated for any reason other than for death or Disability, any outstanding Options held by the Participant that are not fully vested as of the date of termination are immediately forfeited to the Company. To the extent an Option is fully vested and exercisable as of such date, it will remain exercisable for sixty (60) days after the date the Participant's service on the Board terminates. Any Option that is fully vested but not exercised during this sixty (60) day period after termination of service will be immediately forfeited to the Company. 6.11. Limitations on the Transferability of Options. No Option granted under this Article 6 may be sold, transferred, pledged, assigned, or otherwise alienated, other than by will, the laws of descent and distribution, or under any other circumstances allowed by the Committee that would not violate the transferability restrictions contained in Rule 16b-3(a)(2) or any successor provision. ARTICLE 7. ANNUAL RESTRICTED STOCK GRANTS 7.1. Initial Grant of Restricted Stock. Each individual who is a Non-employee Director on July 1, 1995 will be granted One Thousand (1,000) Shares of Restricted Stock on that date. The specific terms of the Restricted Stock grant are subject to the provisions of this Article 7 and the Restricted Stock Agreement executed pursuant to Section 7.3. 7.2. Annual Grant of Restricted Stock. Each individual who is a Non-employee Director on the relevant Grant Date after July 1, 1995 will be granted One Thousand (1,000) Shares of Restricted Stock on such Grant Date, subject to the limitation on the number of Shares that may be awarded under the Plan. 7.3. Restricted Stock Agreement. Each Restricted Stock grant shall be evidenced by a Restricted Stock Agreement that will not include any terms or conditions that are inconsistent with the terms and conditions of the Plan. 7.4. Nontransferability of Restricted Stock. The Shares of Restricted Stock granted may not be sold, transferred, pledged, assigned, or otherwise alienated until the end of the applicable Period of Restriction. 7.5. Period of Restriction. The Period of Restriction for each grant of Shares of Restricted Stock awarded pursuant to this Article 7 shall expire at the end of the one (1) year period following the applicable Grant Date. 7.6. Certificate Legend. Any certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the CyCare Systems, Inc. Director Stock Plan, and the corresponding Restricted Stock Agreement. A copy of the Plan and the Restricted Stock Agreement may be obtained from the Secretary of CyCare Systems, Inc." 7.7. Removal of Restrictions. Except as otherwise provided in the Plan, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Non-employee Director after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Non-employee Director shall be entitled to have the legend required by Section 7.6 removed from his or her Share certificates. All rights with respect to the Restricted Stock granted to a Non-employee Director under the Plan shall be available during his or her lifetime only to such Non-employee Director. 7.8. Voting Rights. During the Period of Restriction, Non-employee Directors holding Shares of Restricted Stock granted hereunder will have voting rights with respect to those Shares. 7.9. Dividends and Other Distributions. During the Period of Restriction, cash and stock dividends on Shares of Restricted Stock may be either currently paid or withheld by the Company for the Participant's account. At the discretion of the Committee, interest may be paid on the amount of cash dividends withheld, including cash dividends on stock dividends, at a rate and subject to such terms as will be determined by the Committee. 7.10. Termination of Service on Board. If a Participant's service on the Board terminates for any reason before the end of a Period of Restriction relating to any grant of Restricted Stock, the Restricted Stock that is subject to a Period of Restriction shall be forfeited to the Company and will be again available for grant under the Plan. ARTICLE 8. CHANGE IN CONTROL In the event of a Change in Control of the Company, all Awards granted under the Plan that are still outstanding and not yet vested or are subject to restrictions, shall become immediately one hundred percent (100%) vested in each Participant or shall be free of any restrictions, as of the first date that a Change in Control occurs, and shall be exercisable for the remaining duration of the Award. All Options that are exercisable as of the effective date of the Change in Control will remain exercisable for the remaining duration of the Options. ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION 9.1 Amendment, Modification, and Termination. Subject to the terms set forth in this Section 9.1, the Committee may terminate, amend, or modify the Plan at any time; provided, however, that stockholder approval is required for any Plan amendment that would materially increase the benefits to Participants or the number of securities that may be issued, or materially modify the eligibility requirements in the Plan. Further, Plan provisions relating to the amount, price, and timing of securities to be awarded under the Plan may not be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. 9.2. Awards Previously Granted. Unless required by law, no termination, amendment, or modification of the Plan shall in any manner adversely affect any Award previously granted under the Plan, without the written consent of the Participant holding the Award. ARTICLE 10. MISCELLANEOUS 10.1. Indemnification. Each individual who is or shall have been a member of the Board or the Committee shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to assume and defend the same before he or she undertakes to defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such individuals may be entitled under the Company's Restated Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 10.2. Beneficiary Designation. Each Participant under the Plan may name any beneficiary or beneficiaries to whom any benefit under the Plan is to be paid in the event of his or her death. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his or her lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 10.3. Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 10.4. Requirements of Law. The granting of Awards under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any other provision of the Plan, the Committee may, in its sole discretion, terminate, amend, or modify the Plan in any way necessary to comply with the applicable requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission as interpreted pursuant to no-action letters and interpretive releases. 10.5. Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. EX-10.O.(A) 5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT by and between CYCARE SYSTEMS, INC. and MARK R. SCHONAU November 3, 1995 TABLE OF CONTENTS ARTICLE I DUTIES AND TERM..............................-1- 1.1 Employment.................................................-1- 1.2 Position and Responsibilities..............................-1- 1.3 Term.......................................................-1- 1.4 Location...................................................-2- ARTICLE II COMPENSATION.................................-2- 2.1 Base Salary................................................-2- 2.2 Bonus Payments.............................................-2- 2.3 Stock Options..............................................-2- 2.4 Additional Benefits........................................-3- ARTICLE III TERMINATION OF EMPLOYMENT....................-4- 3.1 Death or Retirement of Executive...........................-4- 3.2 By Executive...............................................-4- 3.3 By Company.................................................-4- ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT............-4- 4.1 Upon Termination for Death or Disability...................-5- 4.2 Upon Termination by Company for Cause or by Executive Without Good Reason..............................-5- 4.3 Upon Termination by the Company Without Cause or by Executive for Good Reason...............................-6- ARTICLE V RESTRICTIVE COVENANTS........................-7- 5.1 Confidentiality............................................-7- 5.2 Competition................................................-8- 5.3 Non-Disparagement..........................................-9- 5.4 Remedies..................................................-10- -i- ARTICLE VI MISCELLANEOUS...............................-10- 6.1 Definitions...............................................-10- 6.2 Key Man Insurance.........................................-13- 6.3 Mitigation of Damages; No Set-Off; Dispute Resolution................................................-13- 6.4 Successors; Binding Agreement.............................-14- 6.5 Modification; No Waiver...................................-14- 6.6 Severability..............................................-15- 6.7 Notices...................................................-15- 6.8 Assignment................................................-15- 6.9 Entire Understanding......................................-15- 6.10 Executive's Representations...............................-15- 6.11 Liability of Company with Respect to Insurance Policy..........................................-16- 6.12 Governing Law.............................................-16- EXHIBIT A DISPUTE RESOLUTION PROCEDURES...............-17- -ii- EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement") made and entered into as of November 3, 1995, by and between CYCARE SYSTEMS, INC., a Delaware corporation (the "Company"), and MARK R. SCHONAU ("Executive"). This Agreement shall supersede and replace in its entirety the Employment Agreement between Company and Executive dated August 1, 1994. ARTICLE I DUTIES AND TERM 1.1 Employment. In consideration of their mutual covenants and other good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the Company agrees to hire Executive, and Executive agrees to remain in the employ of the Company, upon the terms and conditions herein provided. 1.2 Position and Responsibilities. (a) Executive shall serve as Chief Financial Officer, Secretary and Treasurer of the Company (or in a capacity and with a title of at least substantially equivalent quality) reporting directly to the Chief Executive Officer of the Company. Executive agrees to perform services not inconsistent with his position as shall from time to time be assigned to him by the Chief Executive Officer. (b) Executive further agrees to serve, if elected, as a director of the Company and as an officer or director of any subsidiary or affiliate of the Company. (c) During the period of his employment hereunder, Executive shall devote substantially all of his business time, attention, skill and efforts to the faithful performance of his duties hereunder. 1.3 Term. The term of Executive's employment under this Agreement shall commence on the date first above written and shall continue, unless sooner terminated, until October 31, 1997; provided, however, that commencing on May 1, 1996 and on each subsequent day thereafter, the Executive's term of employment shall automatically be extended without further action by the Company or Executive for the eighteen (18) month period commencing on each such day. The initial term of this Agreement and the cumulative extensions of the term of this Agreement are subject to the terms of Article III and IV hereof. 1.4 Location. During the period of his employment under this Agreement, Executive shall not be required, except with his prior written consent, to relocate his principal place of employment outside Maricopa County, Arizona. Required travel on the Company's business shall not be deemed a relocation so long as Executive is not required to provide his services hereunder outside of Maricopa County, Arizona, for more than thirty (30%) percent of his working days during any consecutive six (6) month period. ARTICLE II COMPENSATION For all services rendered by Executive in any capacity during his employment under this Agreement, including, without limitation, services as a director, officer or member of any committee of the Board of the Company or of the board of directors of any subsidiary or affiliate of the Company, the Company shall compensate Executive as follows: 2.1 Base Salary. The Company shall pay to Executive an annual base salary of not less that $154,000 (the "Base Salary") during the term hereof; provided, however, that in the event the Company institutes a salary reduction program which affects all exempt employees (as defined by standard Company policies in compliance with the Fair Labor Standards Act) by the same percentage, then Executive's Base Salary may be reduced by such percentage (and the term "Base Salary" as used in this Agreement shall refer to Base Salary as so adjusted). Executive's Base Salary shall be paid in equal semi-monthly installments. The Base Salary shall be reviewed annually by the Board or a committee designated by the Board and the Board or such committee may, in its discretion, increase the Base Salary. 2.2 Bonus Payments. During the period of Executive's employment under this Agreement, Executive shall be entitled to bonus payments, if any shall be due, pursuant to the executive bonus plan which has been established by resolution of the Board for each fiscal year. The Company shall use all reasonable efforts to cause the Board or a committee thereof to establish in each fiscal year during the term hereof an executive bonus plan. Any bonus under an executive bonus plan is referred to herein as the "Annual Incentive Bonus". 2.3 Stock Options. The Company shall use all reasonable efforts to establish and maintain one or more stock option plans in which Executive shall be entitled to participate to the same extent as other Senior Executives (as such term is defined in Section 6.1 hereof). The terms and conditions of such plan(s) shall be determined and administered by the Board or a committee thereof. -2- 2.4 Additional Benefits. Executive shall be entitled to participate in all employee benefit and welfare programs, plans and arrangements (including, without limitation, pension, profit-sharing, supplemental pension and other retirement plans, insurance, hospitalization, medical and group disability benefits, travel or accident insurance plans) and to receive fringe benefits, such as dues and fees of professional organizations and associations, which are from time to time available to the Company's executive personnel; provided, however, there shall be no duplication of termination or severance benefits, and to the extent that such benefits are specifically provided by the Company to Executive under other provisions of this Agreement, the benefits available under the foregoing plans and programs shall be reduced by any benefit amounts paid under such other provisions. Executive shall during the period of his employment hereunder continue to be provided with benefits at a level which shall in no event be less in any material respect than the benefits made available to Executive by the Company as of the date of this Agreement. Notwithstanding the foregoing, the Company may terminate or reduce benefits under any benefit plans and programs to the extent such reductions apply uniformly to all Senior Executives entitled to participate therein, and Executive's benefits shall be reduced or terminated accordingly. Specifically, without limitation, Executive shall receive the following benefits: (a) Death Benefit. The Company shall maintain a $1,000,000 insurance policy on Executive's life through a split-dollar arrangement. Executive shall designate the beneficiary of such policy. (b) Short-Term Disability Benefits. In the event of Executive's failure substantially to perform his duties hereunder on a full-time basis for a period not exceeding 180 consecutive days or for periods aggregating not more than 180 days during any twelve-month period as a result of incapacity due to physical or mental illness, the Company shall continue to pay the Base Salary to Executive during the period of such incapacity, but only in the amounts and to the extent that disability benefits payable to Executive under Company-sponsored insurance policies are less than Executive's Base Salary. (c) Relocation Expenses. In the event Executive's principal place of employment is relocated by mutual consent of the parties outside Maricopa County, Arizona, the Company shall reimburse Executive for all usual relocation expenses incurred by Executive and his household in moving to the new location, including, without limitation, moving expenses and rental payments for temporary living quarters in the area of relocation for a period not to exceed six months. (d) Reimbursement of Business Expenses. The Company shall, in accordance with standard Company policies, pay, or reimburse Executive for, all reasonable travel and other expenses incurred by Executive in performing his obligations under this Agreement. -3- (e) Vacations. Executive shall be entitled to the number of business days, excluding Company holidays, of paid vacation during each year of employment hereunder in accordance with the terms of the Company's employee handbook. Executive may accrue and carry forward unused vacation days from any particular year of his employment under this Agreement to the next. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 Death or Retirement of Executive. Executive's employment under this Agreement shall automatically terminate upon the death or Retirement (as defined in Section 6.1) of Executive. 3.2 By Executive. Executive shall be entitled to terminate his employment under this Agreement by giving Notice of Termination (as defined in Section 6.1) to the Company: (a) for Good Reason (as defined in Section 6.1); and (b) at any time without Good Reason. 3.3 By Company. The Company shall be entitled to terminate Executive's employment under this Agreement by giving Notice of Termination to Executive: (a) in the event of Executive's Total Disability (as defined in Section 6.1); (b) for Cause (as defined in Section 6.1); and (c) at any time without Cause. ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If Executive's employment hereunder is terminated in accordance with the provisions of Article III hereof, except for any other rights or benefits specifically provided for herein following his period of employment, the Company shall be obligated to provide compensation and benefits to Executive only as follows, subject to the provisions of Section 5.4 hereof: -4- 4.1 Upon Termination for Death or Disability. If Executive's employment hereunder is terminated by reason of his death or Total Disability, the Company shall: (a) pay Executive (or his estate) or beneficiaries any Base Salary which has accrued but not been paid as of the termination date (the "Accrued Base Salary"); (b) pay Executive (or his estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to his Base Salary multiplied by a fraction the numerator of which is the number of accrued unused vacation days and the denominator of which is 360 (the "Accrued Vacation Payment"); (c) reimburse Executive (or his estate) or beneficiaries for expenses incurred by him prior to the date of termination which are subject to reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses"); (d) provide to Executive (or his estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of Executive's death or Total Disability under applicable law; (e) pay Executive (or his estate) or beneficiaries any Annual Incentive Bonus with respect to a prior fiscal year which has accrued but has not been paid; and in addition, (f) Executive (or his estate) or beneficiaries shall have the right to exercise all vested unexercised stock options and warrants outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. 4.2 Upon Termination by Company for Cause or by Executive Without Good Reason. If Executive's employment is terminated by the Company for Cause, or if Executive terminates his employment with the Company other than (x) upon Executive's death or Total Disability or (y) for Good Reason, the Company shall: (a) pay Executive the Accrued Base Salary; (b) pay Executive the Accrued Vacation Payment; (c) pay Executive the Accrued Reimbursable Expenses; (d) pay Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; -5- (e) pay Executive any accrued Annual Incentive Bonus with respect to a prior year which has accrued but has not been paid; and in addition (f) Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). 4.3 Upon Termination by the Company Without Cause or by Executive for Good Reason. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason, the Company shall: (a) pay Executive the Accrued Base Salary; (b) pay Executive the Accrued Vacation Payment; (c) pay Executive the Accrued Reimbursable Expenses; (d) pay Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay Executive the Accrued Annual Bonus Payments; (f) pay Executive commencing on the thirtieth day following the termination date twelve (12) monthly payments equal to one-twelfth of the sum of (1) Executive's Base Salary in effect immediately prior to the time such termination occurs, plus (2) the average of the Annual Incentive Bonuses paid to Executive for the two (2) fiscal years immediately preceding the fiscal year in which the termination occurs and then six (6) monthly payments equal to one-twelfth of the Executive's Base Salary in effect immediately prior to the time such termination occurs; provided, however, should Executive attain alternative employment during the last six (6) months of the eighteen (18) month payment period, the Company's obligations under this Section 4.3(f) will be reduced by the amount of Executive's compensation from his new employer during this six (6) month period. For example, if Executive were entitled to receive $18,000 per month for twelve (12) months and $12,800 per month for six (6) months under this Section 4.3(f), and seven (7) months following his termination date he finds alternative employment that pays him $15,000 per month, the Company would be obligated to pay Executive twelve (12) monthly payments of $18,000 and no monthly payments for the final six (6) month period. (g) maintain in full force and effect, for Executive's and his eligible beneficiaries' continued benefit, until the first to occur of (x) his attainment of alternative employment or (y) eighteen (18) months following the termination date of his employment hereunder the employee benefits provided pursuant to Company-sponsored benefit plans, programs or other arrangements in which Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance -6- with Section 2.4 hereof, subject to the terms and conditions of such plans and programs (the "Continued Benefits"). If Executive's continued participation is not permitted under the general terms and provisions of such plans, programs and arrangements, the Company shall arrange to provide Executive with Continued Benefits substantially similar to those which Executive would have been entitled to receive under such plans, programs and arrangements; and in addition (h) Executive shall have the right to exercise all vested unexercised stock options and warrants in accordance with Section 4.1(f) and shall have the right to vest and exercise any unvested, unexercised stock options and warrants that vest within six (6) months following the termination date. The unvested options or warrants will vest in accordance with their terms, as if Executive was an employee of the Company during the six (6) month period following the termination date. In consideration for this extension of the vesting period, Executive agrees that he shall make himself available to be a consultant of the Company at the Board's request during the six (6) month period, and perform services for up to thirty (30) hours per month. ARTICLE V RESTRICTIVE COVENANTS 5.1 Confidentiality. (a) Executive covenants and agrees to hold in strictest confidence, and not disclose to any person without the express written consent of the Company, any and all of the Company's Proprietary Information, as defined in subparagraph (c) below, except as such disclosure may be required in connection with his employment hereunder. This covenant and agreement shall survive this Agreement and continue to be binding upon Executive after the expiration or termination of this Agreement, whether by passage of time or otherwise, so long as such information and data shall remain proprietary information. (b) Upon expiration or termination of this Agreement for any reason, Executive shall immediately turn over to the Company any "Proprietary Information." Executive shall have no right to retain any copies of any material qualifying as Proprietary Information for any reason whatsoever after expiration or termination of his employment hereunder without the express written consent of the Company. (c) For purposes of this Agreement, "Proprietary Information" means and includes the following: the identity of clients or customers or potential clients or customers of the Company or its affiliates; any written, typed or printed lists, or other materials identifying the clients or customers of the Company or its affiliates; any financial or other information supplied by clients or customers of the Company or its -7- affiliates; any and all data or information involving the Company, its affiliates, programs, methods, or contacts employed by the Company or its affiliates in the conduct of their business; any lists, documents, manuals, records, forms, or other materials used by the Company or its affiliates in the conduct of their business; any descriptive materials describing the methods and procedures employed by the Company or its affiliates in the conduct of their business; and any other secret or confidential information concerning the Company's or its affiliates' business or affairs. The terms "list," "document" or their equivalents, as used in this subparagraph (c), are not limited to a physical writing or compilation but also include any and all information whatsoever regarding the subject matter of the "list" or "document," whether or not such compilation has been reduced to writing. "Proprietary Information" shall not include any information which: (i) is or becomes publicly available through no act or failure of Executive; (ii) was or is rightfully learned by Executive from a source other than the Company before being received from the Company; or (iii) becomes independently available to Executive as a matter of right from a third party. If only a portion of the Proprietary Information is or becomes publicly available, then only that portion shall not be Proprietary Information hereunder. (d) Executive acknowledges that he is Chief Financial Officer, Secretary and Treasurer of the Company and in such capacity he will be a representative of the Company with respect to clients and potential clients of the Company. Executive also acknowledges that he has had and will continue to have access to confidential information about the Company, its affiliates, and their clients and that "Proprietary Information" acquired by him at the expense of the Company is for use in its business. Executive has substantial experience in the information technology products and services marketing and distribution industry and possesses special, unique, extraordinary skills, and knowledge in this field. Executive's management and financial services to the Company are special, unique, and extraordinary and the success or failure of the Company is dependent upon his discharge of his duties and obligations. Accordingly, by execution of this Agreement, and subject to subparagraph (c) hereof, Executive agrees that during his employment with the Company and for a period of twelve (12) months following the date of expiration or termination of his employment hereunder (the "Non-Competition Period") for any reason (whether such termination shall be voluntary or involuntary), he shall not violate the provisions of Section 5.2. Executive agrees that the twelve (12) month period referred to in the preceding sentence shall be extended by the number of days included in any period of time during which he is or was engaged in activities constituting a breach of Section 5.2. 5.2 Competition. (a) During the Non-Competition Period specified in Section 5.1(d), Executive shall not: (i) except as a passive investor in publicly-held companies, and except for investments held as of the date hereof, directly or indirectly own, -8- operate, manage, consult with, control, participate in the management or control of, be employed by, maintain or continue any interest whatsoever in any company that directly competes with the Company in the United States; or (ii) directly or indirectly solicit any business of a nature that is directly competitive with the business of the Company from any individual or entity that obtained such products or services from the Company or its affiliates at any time during his employment with the Company; or (iii) directly or indirectly solicit any business of a nature that is directly competitive with the business of the Company from any individual or entity solicited by him on behalf of the Company or its affiliates; or (iv) employ, or directly or indirectly solicit, or cause the solicitation of, any employees of the Company who are in the employ of the Company on the termination date of his employment hereunder for employment by others. (b) Executive expressly agrees and acknowledges that: (i) it will require at least twelve (12) months for the Company to locate, hire and train an appropriate individual to perform the functions and duties that Executive is performing hereunder; (ii) the Company has protected business interests throughout the United States of America and that competition with and against such business interests would be harmful to the Company; (iii) this covenant not to compete is reasonable as to time and geographical area and does not place any unreasonable burden upon him; (iv) the general public will not be harmed as a result of enforcement of this covenant not to compete; (v) his personal legal counsel has reviewed this covenant not to compete; and (vi) he understands and hereby agrees to each and every term and condition of this covenant not to compete (including, without limitation, the provisions of Section 5.4). 5.3 Non-Disparagement. During the term of this Agreement and the Non-Competition Period, neither Executive nor the Company shall disparage the other, and neither shall disclose to any third party the conditions of Executive's employment with the Company except as may be required (i) pursuant to applicable law or -9- regulations, including the rules and regulations of the Securities and Exchange Commission, (ii) to effectuate the provisions of employee plans or programs and insurance policies, or (iii) as may be otherwise contemplated herein or unless such information becomes publicly available without fault of the party making such disclosure. 5.4 Remedies. Executive expressly agrees and acknowledges that this covenant not to compete is necessary for the protection of the Company and its affiliates because of the nature and scope of their business and his position with the Company. Further, Executive acknowledges that any breach of this covenant not to compete would result in irreparable damage to the Company, and in the event of his breach of this covenant not to compete, money damages will not sufficiently compensate the Company for its injury caused thereby, and that the remedy at law for any breach or threatened breach of Sections 5.1, 5.2 and 5.3 will be inadequate and, accordingly agrees, that the Company shall, in addition to all other available remedies (including without limitation, seeking such damages as it can show it has sustained by reason of such breach), be entitled to injunctive relief or specific performance and that in addition to such money damages he may be restrained and enjoined from any continuing breach of this covenant not to compete without any bond or other security being required of any court. Executive further acknowledges and agrees that if the covenant not to compete herein is deemed to be unenforceable and/or the Executive fails to comply with this Article V, the Company has no obligation to provide any compensation or other benefits described in Article IV hereof. ARTICLE VI MISCELLANEOUS 6.1 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (c) "Accrued Base Salary" - as defined in Section 4.1(a); (d) "Accrued Benefits" - as defined in Section 4.1(d); (e) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c); (f) "Accrued Vacation Payment" - as defined in Section 4.1(b); (g) "Annual Incentive Bonus" - as defined in Section 2.2(a); (h) "Base Salary" - as defined in Section 2.1; -10- (i) "Board" - shall mean the Board of Directors of the Company; (j) "Cause" shall mean the occurrence of any of the following: (i) Executive's gross and willful misconduct which is injurious to the Company; (ii) Executive's engaging in fraudulent conduct with respect to the Company's business or in conduct of a criminal nature that may have an adverse impact on the Company's standing and reputation; (iii) the continued and unjustified failure or refusal by Executive to perform the duties required of him by this Agreement which failure or refusal shall not be cured within fifteen (15) days following (A) receipt by Executive of written notice from the Board specifying the factors or events constituting such failure or refusal, and (B) a reasonable opportunity for Executive to correct such deficiencies; (iv) Executive's use of drugs and/or alcohol in violation of then current Company policy; (v) Executive's breach of his obligation under Section 1.2(c) hereof which shall not be cured within fifteen (15) days after written notice thereof to Executive; or (vi) Executive's direct or indirect provision of financial or other Company information (whether written or oral) ("Company Information") to any Person with a potential interest in acquiring all or part of the Company's capital stock or assets, unless Executive provides the Company Information to such Person pursuant to the prior written approval of the Company's Chief Executive Officer or pursuant to Board authorization. The indirect provision of Company Information shall include Executive providing Company Information to any officer, employee, or agent of the Company who Executive knows or should know is having written or oral discussions with any Person with a potential interest in acquiring all or part of the Company's capital stock or assets. (k) "Common Stock" - shall mean shares of the common stock, par value $.01 per share, of the Company; (l) "Continued Benefits" - as defined in Section 4.3(g); (m) "Expiration" shall mean the expiration of Executive's employment hereunder in accordance with Section 1.3; -11- (n) "Good Reason" shall mean the occurrence of any of the following: (i) The Company's failure to elect or reelect or to appoint or reappoint Executive to offices, titles or positions carrying comparable authority, responsibilities, dignity and importance to that of Executive's offices and positions as of October 1, 1995; (ii) Material change by the Company in Executive's function, duties or responsibilities (including reporting responsibilities) which would cause Executive's position with the Company to become of less dignity, responsibility and importance than those associated with his functions, duties or responsibilities as of October 1, 1995; (iii) Executive's Base Salary is reduced by the Company (unless such reduction is pursuant to a salary reduction program as described in Section 2.1 hereof) or there is a material reduction in the benefits that are in effect for the Executive on October 1, 1995 in accordance with Section 2.4 (unless such reduction is pursuant to a uniform reduction in benefits for all Senior Executives); (iv) Except with Executive's prior written consent, relocation of Executive's principal place of employment to a location outside of Maricopa County, Arizona, or requiring Executive to travel on the Company's business more than is required by Section 1.4 hereof; (v) The failure by the Company to obtain the assumption by operation of law or otherwise of this Agreement by any entity which is the surviving entity in any merger or other form of corporate reorganization involving the Company or by any entity which acquires all or substantially all of the Company's assets; or (vi) Other material breach of this Agreement by the Company, which breach is not cured within fifteen (15) days after written notice thereof is received by the Company. (o) "Non-Competition Period" - as defined in Section 5.1(d); (p) "Notice of Termination" shall mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. Each Notice of Termination shall be delivered at least 30 days prior to the effective date of termination; (q) "Person" shall mean an individual, corporation, partnership, joint venture or other entity; -12- (r) "Proprietary Information" - as defined in Section 5.1(c); (s) "Retirement" shall mean normal retirement at age 65; (t) "Senior Executives" shall mean the chief executive officer and the four most highly compensated executive officers of the Company determined in accordance with the rules and regulations of the Securities and Exchange Commission under the Exchange Act; (u) "Termination" shall mean the termination of Executive's employment hereunder other than upon expiration of the term of such employment in accordance with Section 1.3; (v) "Total Disability" shall mean Executive's failure substantially to perform his duties hereunder on a full-time basis for a period exceeding 180 consecutive days or for periods aggregating more than 180 days during any twelve-month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether Executive is or was physically or mentally unable to perform his duties under this Agreement, such dispute shall be submitted for resolution to a licensed physician agreed upon by the Board and Executive, or if an agreement cannot be promptly reached, the Board and Executive shall promptly select a physician, and if these physicians cannot agree, the physicians shall promptly select a third physician whose decision shall be binding on all parties. If such a dispute arises, Executive shall submit to such examinations and shall provide such information as such physician(s) may request, and the determination of the physician(s) as to Executive's physical or mental condition shall be binding and conclusive. Notwithstanding the foregoing, if Executive participates in any group disability plan provided by the Company which offers long-term disability benefits, "Total Disability" shall mean total disability as defined therein. 6.2 Key Man Insurance. The Company shall have the right, in its sole discretion, to purchase "key man" insurance on the life of Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, Executive shall take such physical examinations and supply such information as may be reasonably requested by the insurer. 6.3 Mitigation of Damages; No Set-Off; Dispute Resolution. (a) Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement, except as provided in Sections 4.3(f) and (g) hereof, be reduced by any compensation earned by Executive as the result of employment by another employer after the date of termination of his employment hereunder or otherwise. The Company's obligation to make the payments provided for in this Agreement shall not be affected by any set-off, counterclaim, -13- recoupment, defense or other claim or action which the Company may have against Executive. (b) If there shall be any dispute between the Company and Executive (i) in the event of any termination of Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by Executive, whether Good Reason existed, or (iii) otherwise, the dispute shall be resolved in accordance with the dispute resolution procedures set forth in Exhibit A hereto, the provisions of which are incorporated as a part hereof, and the parties hereto hereby agree that such dispute resolution procedures shall be the exclusive method for resolution of disputes under this Agreement. In the event of a dispute hereunder as to whether a termination by the Company was for Cause or by the Executive for Good Reason, until there is a resolution and award as provided in Exhibit A, the Company shall pay all amounts, and provide all benefits, to Executive and/or Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide hereunder as though such termination were by the Company without Cause or by Executive for Good Reason and shall pay the reasonable legal fees and expenses of counsel for Executive in connection with such dispute resolution; provided, however, that the Company shall not be required to pay any disputed amounts or any legal fees and expenses pursuant to this subparagraph (b) except upon receipt of a written undertaking by or on behalf of Executive (and/or Executive's family or other beneficiaries, as the case may be) to repay, without interest or penalty, as soon as practicable after completion of the dispute resolution (A) all such amounts to which Executive (or Executive's family or other beneficiaries, as the case may be) is ultimately adjudged not be entitled with respect to the payment of such disputed amount(s) and (B) in addition, in the case of legal fees and expenses, a proportionate amount of legal fees and expenses attributable to any of Executive's claim(s) (or any of Executive's defenses or counter-claims(s)), if any, which shall have been found by the dispute resolver to have been frivolous or without merit. 6.4 Successors; Binding Agreement. This Agreement shall be binding upon any successor to the Company and shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.5 Modification; No Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any other term or condition. -14- 6.6 Severability. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Agreement, shall not affect the validity or enforceability of any other covenant or agreement contained herein. If, in any judicial proceeding, a court shall refuse to enforce one or more of the covenants or agreements contained herein because the duration thereof is too long, or the scope thereof is too broad, it is expressly agreed between the parties hereto that such duration or scope shall be deemed reduced to the extent necessary to permit the enforcement of such covenants or agreements. 6.7 Notices. All the notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, to the parties hereto at the following addresses: If to the Company, to it at: Cycare Systems, Inc. 7001 North Scottsdale Road, Suite 1000 Scottsdale, Arizona 85253 Attn: Chief Executive Officer If Executive, to him at: Mark R. Schonau 2028 East Freeport Lane Gilbert, Arizona 85254 6.8 Assignment. This Agreement and any rights hereunder shall not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.9 Entire Understanding. This Agreement (together with the Exhibit incorporated as a part hereof) constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. 6.10 Executive's Representations. Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of his duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. -15- 6.11 Liability of Company with Respect to Insurance Policy. Executive has selected the insurer and policy referred to in Section 2.4(a) hereof, and the Company shall not have any liability to Executive (or his beneficiaries) should the insurance company which issues the policy referred to therein fail or refuse to pay (whether voluntarily or by reason of any order, injunction or otherwise) thereunder or if any rights or elections otherwise available to Executive thereunder are restricted or eliminated. 6.12 Governing Law. This Agreement shall be construed in accordance with and governed for all purposes by the laws of the State of Arizona applicable to contracts executed and wholly performed within such state. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Company: CYCARE SYSTEMS, INC. By:___________________________________ Name:________________________________ Title:__________________________________ Executive: MARK R. SCHONAU ------------------------------------- -16- EXHIBIT A DISPUTE RESOLUTION PROCEDURES A. If a controversy should arise which is covered by Section 6.3 of Article VI, then not later than twelve (12) months from the date of the event which is the subject of dispute either party may serve on the other a written notice specifying the existence of such controversy and setting forth in reasonably specific detail the grounds thereof ("Notice of Controversy"); provided that, in any event, the other party shall have at least thirty (30) days from and after the date of the Notice of Controversy to serve a written notice of any counterclaim ("Notice of Counterclaim"). The Notice of Counterclaim shall specify the claim or claims in reasonably specific detail. If the Notice of Controversy or the Notice of Counterclaim, as the case may be, is not served within the applicable period, the claim set forth therein will be deemed to have been waived, abandoned and rendered unenforceable. B. Following receipt of the Notice of Controversy (or the Notice of Counterclaim, as the case may be), there shall be a three week period during which the parties will make a good faith effort to resolve the dispute through negotiation ("Period of Negotiation"). Neither party shall take any action during the Period of Negotiation to initiate arbitration proceedings. C. If the parties should agree during the Period of Negotiation to mediate the dispute, then the Period of Negotiation shall be extended by an amount of time to be agreed upon by the parties to permit such mediation. In no event, however, may the Period of Negotiation be extended by more than five weeks or, stated differently, in no event may the Period of Negotiation be extended to encompass more than a total of eight weeks. D. If the parties agree to mediate the dispute but are thereafter unable to agree within a week on the format and procedures for the mediation, then the effort to mediate shall cease, and the Period of Negotiation shall terminate four weeks from the Notice of Controversy (or the Notice of Counterclaim, as the case may be). E. Following the termination of the Period of Negotiation, the dispute (including the main claim and counterclaim, if any) shall be settled by arbitration, and judgment upon the award may be entered in any court having jurisdiction thereof. The format and procedures of the arbitration are set forth below (referred to below as the "Arbitration Agreement"). F. A notice of intention to arbitrate ("Notice of Arbitration") shall be served within 45 days of the termination of the Period of Negotiation. If the Notice of Arbitration is not served within this period, the claim set forth in the Notice of Controversy (or the Notice of Counterclaim, as the case may be) will be deemed to have been waived, abandoned and rendered unenforceable. G. The arbitration, including the Notice of Arbitration, will be governed by the Commercial Rules of the American Arbitration Association except that the terms of this Arbitration Agreement shall control in the event of any difference or conflict between such Rules and the terms of this Arbitration Agreement. H. The dispute revolver shall reach a decision on the merits on the basis of applicable legal principles as embodied in the law of the State of Arizona. I. There shall be one dispute resolver, regardless of the amount in controversy. The dispute resolver will be empowered to render an award and interim decisions and shall be a member of the bar of any of the fifty States of the United States or of the District of Columbia. The dispute resolver shall be promptly appointed pursuant to Rule 13 of the Commercial Rules of the American Arbitration Association ("AAA"). If the dispute resolver has not been appointed within forty-five days of the AAA's initial transmission of lists of potential arbitrators, then the AAA shall unilaterally designate the dispute resolver. J. At the time of appointment and as a condition thereto, the dispute resolver will be apprised of the time limitations and other provisions of this Arbitration Agreement and shall indicate such dispute resolver's agreement to the Tribunal Administrator to comply with such provisions and time limitations. K. During the 30-day period following appointment of the dispute resolver, either party may serve on the other a request for limited numbers of documents directly related to the dispute. Such documents will be produced within seven days of the request. L. Following the thirty-day period of document production, there will be a forty-five day period during which limited depositions will be permissible. Neither party will take more than five depositions, and no deposition will exceed three hours of direct testimony. M. Disputes as to discovery or prehearing matters of a procedural nature shall be promptly submitted to the dispute resolver pursuant to telephone conference call or otherwise. The dispute resolver shall make every effort to render a ruling on such interim matters at the time of the hearing (or conference call) or within five business days thereafter. N. Following the period of depositions, the arbitration hearing shall promptly commence. The dispute resolver will make every effort to commence the hearing within thirty days of the conclusion of the deposition period and, in addition, will make every effort to conduct the hearing on consecutive business days to conclusion. O. An award will be rendered, at the latest, within nine months of the date of the Notice of Arbitration and within thirty days of the close of the arbitration hearing. The award shall set forth the grounds for the decision in reasonably specific detail and shall also specify whether any claim (or defense or counter-claim) of Executive is found to be frivolous or without merit and what proportion, if any, of his legal fees and expenses which have been paid by the Company Executive shall be required to repay to the Company in accordance with Section 6.3(b). The award shall be final and nonappealable except as provided in Arizona Revised Statutes ss.ss. 12-1512 and 12-2101-01. EX-10.U(C) 6 RESELLER AGREEMENT FILE COPY TABLE OF CONTENTS Page No. 1. Definitions ........................................................ 1 2. Term and Termination .............................................. 3 3. License Grant ...................................................... 4 4. Title, Right and Restrictions....................................... 7 5. Installation and Training .......................................... 8 6. Software Support ................................................... 8 7. Publicity .......................................................... 9 8. License Prices and Payment ......................................... 10 9. Product Evaluation ................................................. 12 10. Marketing Activities ............................................... 12 11. Warranties Representations and Disclaimers ......................... 12 12. Trademarks and Trade Names ......................................... 13 13. Confidentiality .................................................... 14 14. No Solicitation of Employees ....................................... 15 15. Disclosure ......................................................... 15 16. Survival............................................................ 15 17. No Assignment ...................................................... 15 1 18. Escrow Agreement ................................................... 16 19. Relationship of the Parties ........................................ 16 20. Notices ............................................................ 16 21. No Waiver .......................................................... 16 22. Amendments ......................................................... 17 23. Severability ....................................................... 17 24. Attorney's Fees .................................................... 17 25. Dispute Resolution ................................................. 17 26. Governing Law ...................................................... 18 27. Headings ........................................................... 18 28. Entire Agreement ................................................... 18 List of Exhibits Exhibit A CyCare "Living Software" price model for the CyCare Medical Records application. Exhibit B WANG NON-DISCLOSURE AGREEMENT Source Code Exhibit C-1 CyCare Golden Installed Base Customer List Exhibit C-2 CyCare Initial Installation Sites Customer List Exhibit D Product Third Parties Tools or Utilities List Exhibit E Wang Reciprocal Non-Disclosure Agreement 2 Exhibit F Monthly Payment/Remittance Report (Sample) Exhibit G Physician Workstation Functional Specification 3 CyCare RESELLER AGREEMENT This reseller agreement (hereafter "Agreement") is entered into as of this 30th day of August, 1995 by and between Wang Laboratories, Inc. (hereafter "Wang") a Delaware corporation with its corporate offices at 600 Technology Park Drive, Billerica, Massachusetts 01821 and CyCare Systems, Inc. (hereafter "CyCare") a Delaware corporation with its corporate offices at 7001 North Scottsdale Road, Suite 1000, Scottsdale, Arizona 85253-3644. WHEREAS, Wang develops and distributes software for the healthcare marketplace to its customers; and WHEREAS, Wang desires to license its Physician Workstation software to CyCare for the expressed purpose of having CyCare sublicense the Physician Workstation software to its customers; and WHEREAS, CyCare desires to sublicense, distribute and provide First Line and Second Line Support for the Physician Workstation software under the CyCare name to its customers; and WHEREAS, both parties desire to work together to actively market the Physician Workstation software in the Group Practice and Hospital marketplaces with the appropriate benefits as set forth in this agreement to flow to the respective parties; and WHEREAS, Wang agrees to grant CyCare an exclusive license to the Physician Workstation software with respect to a certain contract customer base; and WHEREAS, CyCare agrees to exclusively sublicense Wang's Physician Workstation software within a certain contract customer base and other entities as defined in Exhibits C-1 and C-2. NOW THEREFORE, in consideration of their mutual promises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Wang and CyCare agree as follows: 1. Definitions. The following definitions will apply as used throughout this agreement. "Effective Date" means August 30,1995. "End User" means a third party to whom CyCare provides Product for the End User's own internal business use. "Enhancement" means a modification or replacement of the Product or a portion thereof, which customizes an existing feature or function of the Product or provides improvement for an original feature or function of the Product. "Error" means a condition in the Product that causes its operation to deviate in a material way from its then current functional specification. "First Line Support" means services required to install the Product at the End User's site; training End Users on the operation of the Product in conjunction with any CyCare-supplied applications; receiving all calls from End Users concerning the Product; providing on-site End User support, when necessary; and providing documentation to Wang's Physician Workstation Support Group of any problems that are caused by or occurring in the Product. "Golden Sample" means a copy of the latest release of the Product, in object code, which Wang will provide to CyCare and from which CyCare will make duplications and distribute copies to End Users. "Group Practice" means all physician groups, including independent physician associations (IPAs), managed service organizations (MSOs) free standing clinics, and other service providers of ambulatory care giving organizations. "Material Non-performance" means failure of CyCare to: (1) pay any moneys due Wang in a timely manner; or (2) copy or distribute any Wang product in accordance with the sublicense and distribution rights granted to CyCare in Section 3 "License Grant", or failure of Wang to provide Third Line Support. "Minimum Target" shall be, for the initial period and each subsequent year of the agreement, the target revenue (not revenue guarantees) total dollars Wang expects to receive from CyCare and CyCare expects to pay to Wang in accordance with the Living Software price model attached as Exhibit A (inclusive of the initial and monthly payments) for the CyCare Medical Records application sublicensed by CyCare to CyCare's End Users in accordance with Subsection 8.2 herein. "New Product" means a new software module which contains new capabilities not included in the current release of the Product. A New Product will be offered at a new commercial list price and orderable under a unique model number. "Product" means the current release of the Physician Workstation software, including Updates, provided by Wang to CyCare pursuant to the Agreement. CyCare is solely responsible to provide the database software ("SUPRA") which is not part of the Product. CyCare and Wang are jointly responsible for the integration of the Product with the "SUPRA" database software, 2 "Patch" means a revision of Product object code or operating information that is intended to correct an Error in the Product and which is typically provided to those End Users reporting the Error. "Request" means a request to modify the Product to include features or functionality not part of the current release delivered by Wang. "Second Line Support" consists of CyCare providing problem diagnosis, duplication, and source isolation analysis for problems CyCare reports to Wang's Physician Workstation Support Group. "Territory" means the geographic area in which CyCare is authorized to distribute the Product, which is defined as the United States only, except for the U.S. Government and Agencies, Departments, Bureaus and Divisions thereof. "Third Line Support" consists of developing a Patch in the current or most recent Product release that materially affects the End User's or CyCare's use of the Product. "Update" means a release of Product in which Wang has incorporated accumulated Patches. 2. Term and Termination. 2.1 Term. The term of the Agreement ("Contract Term") will be [confidential portion omitted and filed separately] months from the Effective Date of the Agreement. The Agreement shall automatically renew for successive twelve (12) month periods unless either party provides the other party with thirty (30) days advance written notice of its intent not to renew the Agreement. 2.2 Termination: Transition Period. In the event that the parties fail to agree to extend or renew the Contract Term beyond the initial [confidential portion omitted and filed separately] months, the Agreement will be extended automatically for an additional eighteen (18) months for the purposes of winding down the parties' relationship (the "Transition Period"). During the first twelve (12) months of the Transition Period the terms and conditions of the Agreement as they exist on the date of termination will continue and remain enforceable, except that CyCare's exclusive right to grant sublicenses (as set forth in Sections 3.2 (a) and (b) herein), CyCare's license to the Source Code (as set forth in Section 3.5 herein) will terminate, and CyCare's commitment to sublicense exclusively the Product for its Medical Records application during the Contract Term will no longer apply. Thereafter, for the remaining six (6) months of the Transition Period the Agreement will continue, except that CyCare's right to sublicense the Product to any third party will terminate. Upon the conclusion of the Transition Period, the Agreement will 3 terminate (except as set forth in Section 16. "Survival" herein); however, Wang will continue to make Third Line Support available to Cycare and its End Users at the Monthly Fee rates set forth in Subsection 8.2 herein. 2.3 Early Termination. Wang or CyCare may terminate the Agreement upon reasonable written notice if: (i) the other party has committed a "Material Non-performance" or (ii) the other party commits a material breach of the Agreement, and such breach continues for more than thirty (30) days after written notice thereof; or (iii) CyCare fails to fulfill its annual "Minimum Target" for the initial eighteen (18) months of the Contract Term or any subsequent year of the Agreement. 2.4 Effect of Termination: Continuation of Payments. CyCare and Wang agree that CyCare's obligation to pay Wang any payments owing hereunder will extend and survive the termination or expiration of the Agreement. 3. License Grant. 3.1 Grant: Internal Use. Wang grants to CyCare a nonexclusive, nontransferable license for installation and use of the Product for its own internal business use only, including training, demonstration systems, and support. Cycare agrees it shall not copy (other than for archival purposes), modify, distribute, transfer to another party, or use the Product, in whole or in part, or reverse engineer or decompile the Product to derive source code or to allow any other party to use the Product, except as expressly provided for in the Agreement. 3.2 Sublicenses. (a) Wang grants to CyCare a sole and exclusive, nontransferable right to sublicense, copy, embed and distribute the Product (Wang will not directly license or indirectly sublicense the Product), within the Territory to the entities set forth in Exhibit C-1 and the Initial Installation site customers listed in Exhibit C-2 from a Golden Sample that Wang will deliver to CyCare. Wang and CyCare agree that on a quarterly basis CyCare has the option of adding accounts to Exhibit C-1 as follows; up to 100 new accounts per year to a maximum of 750 at the end of the Contract Term; accounts with more than one location will be identified by location unless CyCare has a corporate agreement with the entity or Wang and CyCare agree to put the entity in its entirety on Exhibit C-1. Wang and CyCare agree that any other major companies will be discussed by the parties. Wang recognizes that CyCare intends to continue to market its Medical Records application to all Group Practice accounts. Wang has indicated potential issues with twelve (12) existing CyCare accounts. In the event CyCare is denied 4 exclusivity for any of twelve (12) accounts, CyCare will continue to compete and if Products are sold by Wang to such accounts, for a period of six (6) months, CyCare will receive full credit (in accordance with Subsection 8.2 herein) towards its Minimum Target for the initial eighteen (18) months of the Contract Term. (b) Wang grants to CyCare an exclusive, nontransferable right to sublicense, copy, embed and distribute the Product (Wang will not indirectly sublicense the Product), within the Territory to Teaching Hospitals and University Medical Centers End Users from a Golden Sample that Wang will deliver to CyCare. (c) Wang grants CyCare a non-exclusive, non-transferable right to sublicense the Product to End Users within the Territory from a Golden Sample that Wang will deliver to CyCare. (d) An individual End User sublicense granted by CyCare pursuant to subsection (a), (b) or (c) above shall be in effect for as long as such CyCare End User continues to pay CyCare and CyCare pays the amounts due to Wang as set forth in Section 8. herein. (e) CyCare agrees to sublicense to End Users the Product under terms and conditions which include, but are not limited to, the following provisions: CyCare grants End User a non-exclusive, non-transferable license for the Product to install and use the Product for the End User's internal business use only for as long as the End User continues to pay CyCare monthly support fees in accordance with CyCare's "Living Software" price model. CyCare's End User shall not copy (other than for archival purposes), distribute, modify, transfer to another entity, or use the Product, in whole or in part, or reverse engineer or decompile the Product to derive source code or to allow any other party to use the Product. (f) With regard to requests to sublicense the Product outside the Territory, CyCare shall not set up branch offices for the sublicense of the Product outside the Territory, directly or indirectly seek or solicit customers for the sublicense of the Product outside of the Territory nor sublicense the Product outside the Territory. CyCare shall immediately notify Wang in writing if CyCare wishes to pursue an order or receives an order or inquiry (i) from any customer located outside of the Territory, or (ii) from any customer located inside the Territory for the Product to be used outside the Territory. Wang will advise CyCare within five (5) business days whether or not Wang consents to each request, such consent shall not be unreasonably withheld. Reasonableness shall be based upon among other things the applicable International law and other agreements, if any, which may effect Wang's decision to give its consent to CyCare in response to each such request. 5 3.3 Installation Instructions. Wang will provide CyCare with installation instructions for the Product which CyCare may copy and incorporate into CyCare's Medical Records product installation instructions. Wang will also provide CyCare with an "on-line-help" facility for the Product in PC readable electronic form for incorporation into CyCare's Medical Records product "on-line-help" text. CyCare agrees that such instructions are the property of Wang and shall be protected as copyrighted materials as set forth in Section 4.2 herein 3.4 Sales and Marketing Materials. Any sales and marketing materials provided by Wang may be copied and used by CyCare in its sales and marketing materials provided that CyCare accurately replicates the Wang provided information and exactly depicts the Wang name and logo as provided by Wang. Wang will allow CyCare the right to make a reasonable number of demonstration copies of the Physician Workstation software for use in CyCare's sales and marketing activities so long as all such copies are clearly marked "For Demonstration Use Only" and with Wang's copyright notices and other legends that appear on the Golden Sample. 3.5 Source Code. Wang grants to CyCare a nonexclusive, nontransferable license for use of the Product source code (subject to the terms of Subsection 4.4 herein) and limited to specific modules of the Product, but exclusive of the software set forth in Exhibit D (the "Source Code"). Wang's grant of such license of Source Code is solely for the development by CyCare of modifications of the Product in response to specific Requests and will be subject to the provisions of the WANG NON-DISCLOSURE AGREEMENT Source Code substantially provided in the form of Exhibit B. CyCare will only receive and utilize such Source Code to modify the Product to create unique customer modifications in response to Requests in such instances where Wang has declined to create such modifications of the Product as set forth in Subsection 4.4 herein. 3.6 Requests. Modifications to the Product developed by CyCare in response to Requests will be the exclusive property of CyCare; however, CyCare hereby grants to Wang a perpetual, royalty free, fully paid license to use and sublicense to Wang customers each modification that CyCare develops from the Wang Source Code. Patches, Updates, and Enhancements of the Product developed by Wang will remain the exclusive property of Wang and Wang hereby grants to CyCare a royalty free, fully paid license only for the Contract Term to use and sublicense each such Patch, Update and Enhancement to the Product to End Users. Sublicenses of the Product granted by CyCare to each End User shall survive the termination of the Agreement for as long as a valid End User customer sublicense remains in effect for such End User. 3.7 New Products. The parties agree to negotiate the rights to any New Products which Wang or CyCare may develop or acquire after the Effective Date pursuant 6 to terms and conditions the parties may agree to in the future and be consistent with the Agreement. 4. Title. Rights and Restrictions. 4.1 Proprietary Product. CyCare agrees that no title to or ownership of the Product, and Enhancements will pass to CyCare at any time, but shall remain exclusively with Wang, except modifications developed by CyCare based on End User Requests pursuant to Subsection 3.6 herein to which CyCare will retain title and ownership. CyCare agrees to exclusively sublicense subject to Section 3.2 Wang's Physician Workstation software within its certain contract customer base as defined in Exhibits C-1 and C-2. during the Contract Term, and any extensions thereof, of the Agreement. 4.2 Copyrights. CyCare agrees that the Product and Enhancements, including any documentation enclosed in the Product's packaging and any materials distributed during the course of Product Sales and Technical Support training, are the property of Wang, are protected by copyright law against unauthorized copying, and that no title to or ownership of the Product or Enhancements or such materials is hereby transferred. Notwithstanding any copyright notice, the Product, documentation and all training materials marked as "Confidential" or "Proprietary" contain proprietary and confidential information of Wang and CyCare shall not disclose or distribute them except as expressly provided for herein. CyCare shall not reverse compile or disassemble the Product, in whole or in part, or otherwise attempt to derive source code from the Product. CyCare shall safeguard the confidentiality of the Product, documentation and training materials and shall not use them to develop competitive or derivative products. 4.3 Unauthorized Use. CyCare shall notify Wang promptly in the event that it becomes aware of or suspects any unauthorized use of the Product or documentation and to cooperate fully with Wang in taking any reasonable action that Wang may request to protect Wang's proprietary interests in the Product and documentation. 4.4 Product Modifications. In the event CyCare becomes aware of a Request, CyCare agrees to contact Wang and notify Wang of any such Request which may be considered beneficial for future Product releases. Wang will evaluate each such Request for possible incorporation into future Product releases. If such Requests are consistent with Wang's Product development plans, Wang will agree to implement the modification. If CyCare is willing to pay to have such modifications required by such Request implemented, Wang will agree to implement the modification. If the requested modification is not consistent with 7 Wang's Product development plans or CyCare is not willing to fund the modification, Wang will not be obligated to implement the modification. In the event Wang declines to develop such modification, Wang will make available, subject to Subsections 3.1, 4.2 and substantially under the terms and conditions of Exhibit B herein, to Cycare the Product Source Code (not including the software listed in Exhibit D) which Wang deems necessary for CyCare to develop the modification arising from such Request. In connection with the above Source Code access, CyCare agrees to provide technical resources who will review the Product Source Code at Wang's development headquarters. Wang will make Source Code and printouts available to CyCare during the process at Wang's corporate headquarters and subject to the nondisclosure agreement set forth in Exhibit B for review at a mutually agreeable time by the designated CyCare technical resources. 4.5 Product Reviews. At a minimum Wang and CyCare will convene technical product reviews once each quarter to discuss the future direction of the development plans for the Product and to discuss End User feedback relative to use of the Product. 5. Installation and Training. 5.1 Installation. Wang will provide installation services for minimally the first two (2) Provider Workstation installations on a Time-and-Materials basis, plus reasonable out-of-pocket travel and living expenses as incurred. Thereafter, CyCare will provide all of the installation and training services for its End Users, unless otherwise requested of Wang for other than the first two installations. All installation services will be on a Time-and-Materials basis, plus reasonable out-of-pocket travel and living expenses as incurred. 5.2 Training. Wang will provide CyCare with training services for End Users upon CyCare request at Wang's then current rates. Wang will provide initial Sales and Technical Support "train-the-trainer" training to CyCare personnel subject to mutually agreeable schedules and locations. For the initial training CyCare will reimburse Wang for reasonable out-of-pocket travel and living expenses incurred by Wang in delivering this initial training. CyCare agrees to timely assign the appropriate personnel to attend such initial Technical Support and Sales training provided by Wang. Such initial Technical Support training will not exceed one (1), five (5) day course and will include training relative to proper installation of the Product at an End User location. Such initial Sales training will not exceed one (1), three (3) day course. 6. Software Support. 8 6.1 Support. CyCare will provide its customers with First and Second Line Support. Wang will provide Third Line Support to CyCare only. In connection with the Third Line Support and subject to Subsections 3.1 and 4.2 herein, Wang will provide CyCare with a full database layout down to the data element level, detailed documentation to the program function level, and a trace code function that enables CyCare to debug the Product. As part of Third Line Support Wang agrees to provide CyCare with a minimum of two (2) Updates per twelve (12) month period. As part of Third Line Support, at the request of CyCare, Wang will assist with trouble shooting and support of End User problems, which cannot be resolved by CyCare. If the problem is diagnosed to be other than a Product problem such assistance will be billable to CyCare at Wang's then current Time-and-Material rates, plus reasonable out-of-pocket travel and living expenses as incurred. CyCare agrees to provide Wang with prompt notice of any Product problem it encounters and cannot resolve and CyCare will document each such oral request within twenty-four (24) hours of placing the initial call with Wang. Wang agrees to notify CyCare of any known Errors. Wang agrees to provide CyCare Third Line Support on a seven (7) day by twenty-four (24) hour basis with a one (1) hour response time. Wang agrees to respond on a best-effort basis to critical End User Errors reported by CyCare to immediately provide a resolution to the critical End User reported Error. 6.2 Sales and Support Staff. CyCare shall maintain at all times a Sales and Technical Support staff, knowledgeable of the Product and trained in accordance with Wang standards in the use, maintenance and support of the Product. 6.3 Warranty Support. Wang's limited warranty, described in Section 11.2 herein, extends only to CyCare. CyCare agrees that it is responsible for providing warranty services to its End Users. CyCare may provide Updates only to those End Users for whom CyCare pays the applicable monthly support fees to Wang in accordance with the Living Software price model as set forth in Exhibit A. 7. Publicity. 7.1 Press Release. Wang and CyCare agree to a a joint press release announcing this relationship subject to the prior mutual agreement of the nature of the press release by both parties. 7.2 Joint Marketing. Wang intends to proactively launch a marketing campaign for the healthcare marketplace. CyCare and Wang will also agree to cooperate in other marketing activities which the parties mutually agree would be beneficial in promoting this relationship and the Product in the most favorable light, inclusive of industry trade shows, conferences, symposiums, interviews for national 9 publications, industry consultants, speaking engagements and marketing materials. CyCare grants Wang, the right to use its name in Wang marketing materials, provided CyCare has reviewed the materials prior to release. 7.3 Customer Accounts. Cycare agrees that Wang may, subject to CyCare's and CyCare's End User's prior approval, which will not be unreasonably withheld, use CyCare customer accounts as reference accounts for future OPEN software sales opportunities. 8. License Prices and Payment. 8.1 Initial License Fee. CyCare agrees to pay Wang an initial license fee of [confidential portion omitted and filed separately] (to be paid at contract signing and the remaining [confidential portion omitted and filed separately] to be paid within ninety (90) days thereafter) for the shipment by Wang to CyCare of the "Golden Sample" of the Product, which includes licenses granted for demonstration, training and support and sublicenses for the initial installation sites. Wang agrees that the Initial License Fee will be applied to the Minimum Target for the first eighteen (18) month period. 8.2 Continuing Fees. The CyCare Living Software price model for the Medical Records application will be the basis on which fees are to be paid to Wang by CyCare at a rate of [confidential portion omitted and filed separately] of the Initial License Fee and Monthly Fee charged by CyCare to its End Users in accordance with the Living Software price model set forth in Exhibit A, dated April, 1995, (which may only be modified to reflect a decrease in the list price of the CyCare Living Software price model by mutual agreement of the parties). CyCare may increase its list price of the Living Software price model without Wang's consent and CyCare will forward Wang a copy of the increased prices for its records. Wang agrees to license the Product (excluding any data base product, "SUPRA" or otherwise, and all third party tools and utilities listed on Exhibit D, which CyCare must acquire directly) to CyCare for CyCare's use in sublicensing its Medical Records application based on the CyCare net price of the Medical Records application sublicensed to the CyCare End User utilizing the CyCare "Living Software" price model set forth in Exhibit A. The CyCare net price for the Medical Records application will be discounted no more than [confidential portion omitted and filed separately] off of the Living Software price model set forth in Exhibit A, unless otherwise agreed in advance by Wang. Any increase in the CyCare Medical Records application "Living Software" price model will be paid to Wang at the [confidential portion omitted and filed separately] fee percentage rate of revenue due Wang. Initial Installation site prices will be as set forth in Exhibit C-1. 8.3 Minimum Target. The parties agree that the "Minimum Target" payments Wang expects to receive from CyCare and CyCare expects to pay to Wang for the first eighteen (18) months of the term of the Agreement will be [confidential portion omitted and filed separately] for Wang's Product that CyCare sublicenses to its End Users in accordance with the Living 10 Software price model and at the [confidential portion omitted and filed separately] fee payment percentage rate. For the subsequent twelve (12) months of the Agreement, the parties agree that the "Minimum Target" payments Wang expects to receive from CyCare and CyCare expects to pay to Wang will be [confidential portion omitted and filed separately] for its sublicensing of Wang's Product. For the remaining twelve (12) months of the Agreement, the parties agree that the "Minimum Target" payments Wang expects to receive from CyCare and CyCare expects to pay to Wang will be [confidential portion omitted and filed separately] for its sublicensing of Wang's Product. For the initial eighteen (18) months of the Agreement or any of the successive twelve (12) month periods, Wang agrees to allow CyCare to roll-over any payments made to Wang which are in excess of the Minimum Target for that period into the Minimum Target for the next successive twelve (12) month period. 8.4 Records: Payments. (a) Records. CyCare will notify Wang weekly upon shipment of the Medical Records software that the End User has been invoiced for the Initial License Fee. CyCare agrees to keep accurate records of their Product sublicenses and provide Wang with a detailed monthly report of the number of sublicenses it has granted during the preceding month within thirty (30) days following the end of the month for which the report is being generated. Cycare's monthly payment report to Wang will be substantially similar to the form set forth in Exhibit F and will also detail the fees being paid to Wang (both initial fees and monthly fees) for that month. Wang reserves the right to audit CyCare's applicable End User agreements, books and records with thirty (30) days written notice for accurate compliance with this reporting and remittance requirement. (b) Payments. Payments to Wang will be made monthly for the Products sublicensed and installed during the term of the Agreement in accordance with the "Living Software" Price Model set forth in Exhibit A. All payments will be due immediately and are payable within sixty (60) days from the end of the month for which the initial sublicense fee is reported in (a) above as being invoiced to each End User or thirty (30) days after the end of each month for the monthly fees due for each End User in accordance with the Living Software price model provided in Exhibit A. Wang may impose, and CyCare agrees to pay, a late payment charge of one percent (1 %) per month for any late payment of the fees specified above. In the event an End User fails to make timely payments to CyCare, a cure notice may be provided to the End User from CyCare, requesting that the non-payment be remedied within thirty (30) days from the date of the written notice. If payment is not received within the thirty (30) day cure period, CyCare, at its sole option, may rescind the End User's sublicense of the Product and no further payments will be due from CyCare to Wang for the canceled End User sublicense monthly fees. Any subsequent successful efforts of CyCare to collect any outstanding payments due CyCare by the End User prior to the sublicense being rescinded, 11 will likewise flow to Wang in accordance with the fee percentage rates specified in Subsection 8.2 herein. 8.5 Service Rate. Wang's hourly rate used to calculate Time-and-Materials (as such term is used herein) is [confidential portion omitted and filed separately] per hour and is valid for the initial 18 months from the Effective Date. For each subsequent 12 month period the hourly rate will increase by 5% compounded annually during the Contract Term. All reasonable out-of-pocket travel and living expenses incurred by Wang in providing the services required pursuant to the Agreement will be billed at actual cost of the expenses incurred. 9. Product Evaluation. CyCare agrees to use reasonable efforts to evaluate Wang's image and workflow products in CyCare's current application product set as it exists on the Effective Date and in future CyCare products, except where such implementation would be cost prohibitive when compared to other competitive products in the marketplace. 10. Marketing Activities. 10.1 Sales Forecasts. During the term of the Agreement, Cycare will provide to Wang quarterly revenue forecasts for the Product for the upcoming six (6) month period. Each quarterly revenue forecast will detail the anticipated payments to be due Wang resulting from CyCare's sublicensing of the Product, but will exclude any CyCare End User customer names. 10.2 Costs. Each party will bear all of its own costs and expenses in pursuing any activities under this Section 10. 11. Warranties. Representations and Disclaimers. 11.1 Indemnification. Wang, at its own expense, will defend and indemnify CyCare against claims that the Product furnished under the Agreement infringes a United States patent, trademark, copyright or trade secrets provided that CyCare (i) gives Wang prompt written notice of such claims, (ii) gives Wang sole authority to defend and settle such claims, and (iii) provides all reasonable assistance to Wang in defending or settling such claims and if any such claim or action is pending or if Wang determines that the Product may become the subject of a claim of infringement, Wang, at its option and expense, will either procure for CyCare the right to continue using the Product, replace or modify the Product so that it becomes non-infringing or grant CyCare. Wang will not defend or indemnify CyCare if any claim of infringement (i) is asserted by a parent, subsidiary or affiliate of CyCare, (ii) results from the alteration of the Product by CyCare or its End User, or (iii) results from the use of the Product in combination with any non-Wang product or in practicing any process. This states the entire 12 liability of Wang and CyCare's sole and exclusive remedies for patent, trademark, trade secrets, or copyright infringement. 11.2 Warranty. Wang warrants to CyCare for the Contract Term that the Product will perform in accordance with its then functional specification. Wang does not warrant that the Product will operate in all combinations that are selected for use by an End User or CyCare or that the operation of the Product will be uninterrupted or error-free. If CyCare during the Contract Term notifies Wang in writing after the Product is installed that the Product did not conform to this limited warranty, Wang will correct any Product defect it finds in conformance with its Third Line support obligation. THE WARRANTIES STATED HEREIN ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, STATUTORY, EXPRESS AND IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. In no event shall Wang be liable to CyCare or its End User for any special, incidental, indirect, punitive or consequential damages based upon breach of warranty, breach of contract, strict tort or any other legal theory, even if Wang has been notified of the possibility of such potential loss or damage. Such damages for which Wang shall not be liable include, but are not limited to, the loss of profits, the loss of savings or revenue, the loss of employee time, the loss of use of the Product or any associated equipment, the cost of capital, the cost of any substitute equipment or products, facilities or services, downtime, the loss of software or data, injury to property and the claims of third parties. IN NO EVENT SHALL WANG'S LIABILITY IN CONNECTION WITH THE PRODUCT ACQUIRED OR SERVICE PROVIDED HEREUNDER EXCEED THE PRICE PAID FOR THE PRODUCT OR SERVICE BY THE END USER. Except for an action brought to recover payments due hereunder, any action must be commenced within twenty four (24) months after CyCare has knowledge of the claim. The Agreement allocates the risks of the Product selection and failure between Wang and CyCare. This allocation is recognized by both parties and is reflected in the price of the Product. 11.3 Representations. Wang owns all right, title and interest to the Product (other than the third party software set forth in Exhibit D) and all related intellectual property. To the best of Wang's knowledge there are no current claims, proceedings, or litigation pending against Wang involving the Product. 13 12. Trademarks and Trade Names. During the term of the Agreement, CyCare is authorized to use the trademark "Wang", Wang's distinctive logo, and the Wang trademarks associated with the Product in connection with the marketing of the Product. However, such use shall give CyCare no interest in any trademarks logo or trade names of Wang. The registered trademark "Wang" may be used only to identify the Product that is licensed to CyCare by Wang. CyCare agrees that the Wang logo will appear on the initial screen. CyCare may not use any Wang trademark or trade name in a way that implies that it is a Wang agent, legal partner, representative, employee, franchisee or joint venturer. CyCare may not include Wang trademarks or trade names in any name under which it does business but may use the following legend in signs, advertising, correspondence, proposals and other materials, in type that is smaller and less prominent that CyCare's own name: "Authorized Reseller for Wang's Product" Upon the expiration or termination of this Agreement, CyCare shall immediately discontinue all use of Wang's trademarks, trade names and service marks and shall not use any mark or any part of any mark that is similar to any Wang mark. During the term of the Agreement, Wang is authorized to use the trademark "CyCare", CyCare's distinctive logo, and the Cycare trademarks associated with the CyCare products in connection with the marketing of the CyCare products. However, such use shall give Wang no interest in any trademarks, logo or trade names of CyCare. The registered trademark "CyCare" may be used only to identify the CyCare products that are licensed to Wang by CyCare. Wang may not use any CyCare trademark or trade name in a way that implies that it is a CyCare agent, legal partner, representative, employee, franchisee or joint venturer. Wang may not include CyCare trademarks or trade names in any name under which it does business, but may use the following legend in signs, advertising, correspondence, proposals and other materials, in type that is smaller and less prominent that Wang's own name: "Authorized Reseller for CyCare's Product" Upon the expiration or termination of the Agreement, Wang shall immediately discontinue all use of CyCare's trademarks, trade names and service marks and shall not use any mark or any part of any mark that is similar to any CyCare mark. 13. Confidentiality. The Agreement, the Product, Enhancements, including related documentation, materials distributed and information conveyed at Sales and Technical Support training, any other materials marked as "Confidential" or "Proprietary" and any information conveyed by Wang at meetings relating to Wang's unpublished marketing and Product strategies or R & D plans are the confidential and proprietary property of Wang or its suppliers (hereinafter 14 "Confidential Information"). CyCare, on behalf of itself and its employees as well as itself, agrees to receive and maintain all Confidential Information in confidence, to use it only for its intended purpose, and, except as provided herein, not to disclose it to third parties without the prior written consent of Wang. CyCare shall limit its disclosure of Confidential Information to only those of its employees who need such information for the purposes of this Agreement. Notwithstanding the above, CyCare shall have no obligation to Wang with respect to any Confidential Information that is already known to it, free of any obligations of confidentiality, or becomes generally publicly available through no wrongful act of CyCare. Exhibits C-1 and C-2 and any other materials marked as "Confidential" or "Proprietary" and any information conveyed by CyCare at meetings relating to CyCare's unpublished marketing and product strategies or R & D plans are the confidential and proprietary property of CyCare or its suppliers (hereinafter "Confidential Information"). Wang, on behalf of itself and its employees as well as itself, agrees to receive and maintain all Confidential Information in confidence, to use it only for its intended purpose, and, except as provided herein, not to disclose it to third parties without the prior written consent of CyCare. Wang shall limit its disclosure of Confidential Information to only those of its employees who need such information for the purposes of the Agreement. Notwithstanding the above, Wang shall have no obligation to CyCare with respect to any Confidential Information that is already known to it, free of any obligations of confidentiality, or becomes generally publicly available through no wrongful act of Wang. 14. No Solicitation of Employees. For the term of the Agreement and any renewal thereof, and for one (1) year after termination, each party agrees not to solicit any employees of the other party or an end-user of the other party without the prior written consent of the other party or the end-user, respectively, except through advertisements and solicitations directed to the market generally. 15. Disclosure. CyCare hereby discloses to Wang that it is a developer of software and that CyCare may have comparable software products to the Product and materials in existence or in development, or may decide to develop similar software in the future, or may decide to purchase similar software from a third party. CyCare agrees that disclosure of such development does not in any way reduce or modify its obligations under this Agreement or its Exhibits (as executed if necessary), particularly those contained in Sections 3.5, 3.6 and 4. The parties agree that such disclosure is made solely for informational purposes. Wang does not hereby waive any of its rights with respect to the enforcement of the provisions of the Agreement or any other right it may have with respect to the source code of the Product or the related intellectual property. 16. Survival. The rights and obligations of the parties which by their nature survive, shall survive the expiration or termination of this Agreement, including, but not 15 limited to, those set forth in, Sections 2.2, 2.4, 3.2, 4.1, 4.2, 4.3, 6.1, 8.2, 8.4, 8.5, 10., 11.1,11.2,12., 13., and 14. 17. No Assignment. No assignment of the fully executed contract will be allowed unless authorized in advance in writing by the other party, with such approval by the other party not being unreasonably withheld. The exceptions to the above prohibition are assignments to wholly owned subsidiaries or assignments in connection with the sale or transfer of the parties entire business as related to the Product. 18. Escrow Agreement. Wang agrees to allow CyCare to become a beneficiary of Wang's source code escrow account established with a third party escrow agent at the then current fees. CyCare shall have the right to receive a copy of the documented source code for the Product (deposited in the account) upon the occurrence of one or more of the following events and provided that CyCare is not in breach of the Agreement or has filed or had filed against it a petition in bankruptcy or had a receiver appointed: (a) Wang ceases doing business or is finally adjudicated as bankrupt (not including reorganizations under Chapter 11 or any similar successor provision); (b) Wang fails in a material manner to provide support or maintenance for the Product required by the Agreement and such material failure continues unabated for more than forty-five (45) days after written notice from CyCare. The source code which is subject to this Section 18 shall be deemed to be Confidential Information. Release of the source code to CyCare upon the occurrence of any of these events will not in any way diminish CyCare's obligations hereunder with respect to Confidential Information. CyCare shall be responsible for all costs associated with becoming and continuing as a beneficiary of the source code escrow account. 19. Relationship of the Parties. The parties agree that in all matters relating to this Agreement, CyCare shall act as an independent contractor and shall not expressly or impliedly represent that it has any authority to assume or create any obligation on behalf of Wang. Neither party shall hold itself out to be a joint venturer, partner, employee, representative, franchisee, servant or agent of the other. 20. Notices. All notices required or permitted herein shall be effective only if in writing and either hand delivered or sent by certified or registered mail, return receipt 16 requested, to the undersigned signatories or their successors at the addresses set forth on the first page hereof. If mailed, notices shall be deemed effective five (5) business days after mailing. 21. No Waiver. The waiver or failure to enforce any breach or default hereunder shall not constitute the waiver of any other or subsequent breach or default. 22. Amendments. The Agreement can only be modified by a writing that specifically references the Agreement and is duly signed by a duly authorized representative of each party. The Agreement may not be supplemented or modified by any course of dealing or trade usage. 23. Severability. If any provision of the Agreement is held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not be affected and the parties shall negotiate, in good faith, a legal and enforceable substitute provision that most nearly effects the parties' intent of the provision. 24. Attorney's Fees. The parties agree if either one commences a lawsuit against the other, that each party shall be responsible for its own attorney's fees and litigation costs. 25. Dispute Resolution. The following procedures apply to all disputes. However, compliance with each procedure in this section is subject in each case to the prior approval of either party's insurance carrier whose liability may be affected. (a) Either party may serve a written request upon the other that designated senior managers of each party attempt to resolve. The designated senior managers (John Pollock for Wang and Bill Childs for CyCare or their respective designee) will meet within fourteen (14) days of the request, alternating the place of meeting, beginning at CyCare's corporate offices. After thirty (30) days from receipt of the request, either party may serve a written request for binding arbitration. (b) The parties agree that any dispute that remains unresolved upon the completion of (a) above will be submitted to binding arbitration in the city of Boston in accordance with the rules and procedures of the American Arbitration Association before a single arbitrator who will be appointed from a panel of qualified persons supplied by the American Arbitration Association (AAA) and reasonably familiar with the computer software industry. The Commercial Arbitration Rules of the AAA will apply. The parties may engage in reasonable discovery permitted by the Federal Rules of Civil Procedure subject to supervision and time limits of the arbitrator. The decision on the arbitrator will be governed by and will not rewrite, invalidate or expand upon the terms and conditions of the Agreement. The 17 decision will be final and may be enforced as a judgment in any court of competent jurisdiction. Judgment upon any award made in such arbitration may be entered and enforced in any court of competent jurisdiction in the State of Massachusetts. Notwithstanding anything to the contrary contained herein, if Wang or CyCare will require immediate injunctive relief or other equitable relief, then the party requiring such relief will have the power to invoke the jurisdiction of any court having jurisdiction and, if such party so elects, the other party hereby consents to the jurisdiction of the state and federal courts in the State of Massachusetts and to the applicable service of process. Each party will pay its own legal fees and expenses, and the cost of the arbitrator will be shared equally by the parties. Any statements made in the course of any negotiation will not be used for any purpose except to interpret a resulting agreement. 26. Governing Law. All matters, including, without limitation, matters of construction, procedure, remedies, interpretation, validity and the rights and duties of the parties shall be governed by the laws of the Commonwealth of Massachusetts, and all disputes between the parties shall be adjudicated only in a court within Massachusetts that has jurisdiction and venue at Wang's corporate headquarters. 27. Headings. Section headings are provided for convenient reference only and shall not be construed otherwise. 28. Entire Agreement. The parties acknowledge that they each have read the Agreement, including the Exhibits, and agree to be bound by its terms and conditions. The parties further agree that the Agreement is the complete and exclusive statement of the mutual understanding of the parties and that it supersedes and cancels all previous and contemporaneous written and oral agreements and communications relating to the subject matter of the Agreement. BOTH PARTIES ACKNOWLEDGE HAVING READ THE AGREEMENT AND UNDERSTANDS AND AGREES TO BE BOUND BY ITS TERMS, CONDITIONS, AND PRICES. BOTH PARTIES FURTHER AGREE THAT THE AGREEMENT IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE MUTUAL UNDERSTANDINGS OF THE PARTIES AND THAT THE AGREEMENT SUPERSEDES AND CANCELS ALL PREVIOUS AND CONTEMPORANEOUS WRITTEN AND ORAL AGREEMENTS AND COMMUNICATIONS RELATING TO THE SUBJECT MATTER OF THE AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be executed as a sealed instrument in their names by the properly and duly authorized officers or representatives as of the date first above written. 18 CyCare Systems, Inc. Wang Laboratories, Inc. Signature: Mark R. Schonau Signature: Bruce Ryan --------------------------- --------------------------- Name: Mark R. Schnau Name: Bruce Ryan --------------------------- --------------------------- Title: CFO Title: President --------------------------- --------------------------- Date: 8/30/95 Date: 8/30/95 --------------------------- --------------------------- 19 Exhibit A CyCare Medical Records Application Living Software Price Model (To Be Provided By CyCare) [confidential portion omitted and filed separately] 20 Exhibit B Wang NON-DISCLOSURE AGREEMENT Source Code Wang Laboratories, Inc., a Delaware Corporation ("Wang") and CyCare Systems, Inc., a Delaware corporation ("CyCare") of 7001 North Scottsdale Road, Suite 1000, Scottsdale, Arizona 85253-3644 ("Recipient") agree to enter into a confidential business relationship, whereby under specific circumstances, and subject to certain terms and conditions, as set forth in the Reseller Agreement by and between CyCare and Wang dated as of August 30, 1995 (the "Reseller Agreement"). Recipient may need access to specific modules of the Physician Workstation software ("Software") and to associated documentation and other information relating to the Software as described in the Reseller Agreement (hereinafter collectively referred to as "Source Code"). Such Source Code will be provided in accordance with the Reseller Agreement. In consideration of the foregoing, it is hereby agreed that: 1. Recipient acknowledges and agrees that notwithstanding any copyright notice on or in the Source Code, the Source Code comprises highly valuable trade secrets and other confidential information of Wang and that any unauthorized use or disclosure of the Source Code would cause serious and irreparable harm to Wang. 2. Recipient agrees to use the Source Code only for the purpose described above and shall make no other use of the Source Code whatsoever, including, without limitation, the development or sale of competing products or services or any other use that would deprive Wang of any revenue or business opportunity. 3. Recipient agrees to maintain all Source Code that it receives in the strictest confidence using the utmost care and shall not directly or indirectly disclose it, reveal it or otherwise make it available, in whole or in part, to any third party without the prior written consent of Wang. 4. Recipient shall limit access to the Source Code within its organization to only those of its employees who have been advised in writing of Wang's rights in the Source Code and who need such information to fulfill the purpose of this Agreement. Upon request, Recipient shall promptly supply Wang with the names of each employee who has or has had access to all or any part of the Source Code. 5. At the completion of each development effort, Recipient shall immediately return to Wang all tangible materials containing Source Code made available or supplied to Recipient by Wang, including, but not limited to, drawings, documents, hardware, disks and tapes without retaining any copies, notes or extracts. Upon request, Recipient shall also deliver to Wang a certificate of an officer of Recipient certifying that all copies of the Source Code in any form (except executable object code) have been returned. 21 Page 2 of 2 6. Recipient acknowledges and agrees that money damages alone will not be an adequate remedy for any breach of this Agreement or Recipient's obligation of confidentiality with respect to the Source Code. Accordingly, Recipient agrees that Wang shall be entitled to equitable relief to restrain or redress any breach or threatened breach of this Agreement or Recipient's obligation of confidentiality with respect to the Source Code in addition to any other remedies Wang may have at law or equity. 7. Nothing in this Agreement shall be construed to authorize Recipient to use the Software in source or in object form on any unlicensed system. Recipient acknowledges and agrees that Wang shall have no responsibility or obligation to support or maintain any modifications to any Wang product made by Recipient unless and until Wang incorporates such modifications into the Product. 8. Except as set forth elsewhere in this Agreement Wang shall not be obligated to disclose any information or Source Code to Recipient or enter into any other agreement or arrangement with Recipient nor shall it be construed as granting any rights, by license or otherwise, in any information, software or inventions of Wang. Recipient's obligations under this Agreement shall survive the termination of its association with Wang regardless of the manner of such termination and shall be binding upon Recipient's heirs, successors and assigns. This Agreement is entered into under the laws of the Commonwealth of Massachusetts as a sealed instrument and shall be construed thereunder and any cause of action arising between the parties relating to the Source Code, whether under this Agreement or otherwise, may be brought in a court having jurisdiction and venue at the home office of Wang and Recipient hereby consents to such jurisdiction and venue. Wang Laboratories, Inc. CyCare Systems, Inc. By By ----------------------------------- -------------------------------- Title Title -------------------------------- ----------------------------- Date Date --------------------------------- ------------------------------ 22 Exhibit C-1 CyCare Installed Base Customer List (To Be Provided By CyCare) [confidential portion omitted and filed separately] 23 Exhibit D Product Software Wang OPEN/image Server Wang OPEN/image Custom Controls (Doc MGR, Display, Scan, Print VBX's) Microhelp (Animation VBX, Gauge VBX, Tip Help VBX) Farpoint (Spread (VBX and C++), Tabpro VBX) QE Runtime Library Visual Basic Runtime 25 Exhibit E RECIPROCAL NON-DISCLOSURE AGREEMENT Wang Laboratories, Inc., a Delaware Corporation ("Wang") and CyCare Systems, Inc., a Delaware corporation ("CyCare") of 7001 North Scottsdale Road, Suite 1000, Scottsdale, Arizona 85253-3644. agree to enter into a confidential business relationship for the purpose of as set forth in the Agreement. In order to achieve this purpose, either party may disclose information that it deems confidential and/or proprietary. Therefore, it is hereby agreed that: 1. For a period of three (3) years from the date of the disclosure of the information, the receiving party will consider as Confidential Information any information it receives in tangible form from the disclosing party that is marked as Confidential or Proprietary. Information which is disclosed orally will be considered Confidential Information if it is identified as confidential at the time of disclosure and reduced to writing and sent to the receiving party within ten (10) days of the disclosure. 2. Each party agrees to receive and maintain all Confidential Information in strictest confidence using at least reasonable care and, except as provided herein, shall not use Confidential Information for its own benefit or disclose it to third parties without the written consent of the disclosing party. 3. Upon request, the receiving party shall immediately return all tangible materials made available or supplied by the disclosing party including, but not limited to, drawings, documents, hardware, disks and tapes without retaining any copies, notes or extracts. 4. Neither party shall have any obligations under this Agreement with respect to information which: (a) is already known to the receiving party or is publicly available at the time of disclosure; (b) is disclosed to the receiving party by a third party who is not in breach of an obligation of confidentiality; (c) becomes publicly available after disclosure through no act of the receiving party; or (d) is developed by the receiving party without breach of this Agreement. 26 5. This Agreement does not obligate either party to disclose any information to the other or enter into any other agreement or arrangement nor shall it be construed as granting any rights by license or otherwise in any software or inventions of either party. The parties' obligations under this Agreement shall survive the termination of their association regardless of the manner of such termination. This Agreement shall be governed as a sealed instrument under Massachusetts law. Wang Laboratories, Inc. CyCare Systems, Inc. By: By -------------------------------- ----------------------------------- Title: Title: ----------------------------- ------------------------------- Date: Date: ------------------------------ -------------------------------- 27 Exhibit F Monthly Payment/Remittance Report (To Be Inserted By Wang) 28 Exhibit G Physician Workstation Functional Specification (To Be Inserted By Wang) 29 EXHIBIT G Physicians' Workstation Product Functionality Specification Introduction Physician's Workstation (PWS) is a scaleable, point of care application designed by physicians for use in the ambulatory environment. PWS operates effectively across existing health information systems to capture and build an extensive patient record. Information is automatically obtained from existing systems, received via fax, scanned in at the point of care, or updated by the physician directly during the encounter. Information is stored and catalogued in a clinical information database. This patient specific information will furnish the physician and health care organization with the information that is essential in a capitated or managed care environment. PWS is a client server operating environment with a focus on open systems. Developed around the Microsoft Windows Graphical front end, PWS provides a scaleable operating environment to satisfy the growing needs of the healthcare industry. PWS will run on any industry standard 486 or Pentium PC, uses Oracle as the relational database but can be ported to any ANSI-SQL ODBC compliant database. Multiple UNIX server platforms can be used along with Novell Netware. PWS also includes an interface server to facilitate data exchange between PWS and existing systems. Specific Functionality PWS provides the following major components: Workspace-- Graphical Desktop for the Clinical User The Workspace is the central controlling point for the application environment. It provides a graphical container holding all the major objects listed below. It provides an intuitive desktop metaphor that is customizable by the user. The Workspace allows each individual to control size, positioning and activation of the major components. Appointment List-- Display of appointments past, present, and future The Appointment window provides a view of the user's appointment list for scheduled and walk-in patients. The appointment list allows the user to display a list of past, present, and future scheduled appointments. The appointment list can be populated through an interface to the organizations appointment scheduling and registration system or directly through PWS. Patient Summary -- Discreet elements representing categories like: Acute Illnesses, Chronic Illnesses, Habits, Family History, Medications, Hospitalization, Health Maintenance, Allergies, Immunizations, Occupation, Optometrics. The Patient Summary window provides the user with a tab-folder view of the details of each category: Acute Illnesses, Chronic Illnesses, Habits, Family History, Medications, Hospitalization, Health Maintenance, Allergies, Immunizations, Occupation, Optometrics. There is a separate tab for each of the listed categories. In order to facilitate easy and quick viewing of the data, one additional tab is provided that is a customizable report for each individual user. Each user has the ability to easily format the report and select items from the individual categories by date or by sequence. Population of these tabs can occur through automatic feed from the encounter note and or direct data entry. Patient Records--Image based patient chart Based on Wang's core imaging technology, the Patient Record window provides a view of the historical chart of the patient. Images can be scanned in via the Scan Utility or are created through the Encounter documentation window. Each document is indexed and identified by author, date, and document type so they are easy to find and identify. Capabilities to page through a chart or search an index to find a specific document are available. Encounter Documentation -- includes ICD-9, CPT4 coding, clipart annotation, disposition, referral to another provider, suspension of encounter The Encounter window allows the user to perform the documentation of the clinical note. The user has the ability to call up forms that mimic the paper forms used in the practice today. The user can type into the form using the keyboard, the user can write on the form with a pen and tablet which provides the look and feel of handwriting on paper, or the user can use customizable templates that allow for faster more accurate documentation. Templating can be implemented in a interactive manner so the variables for each visit can be prompted for with quick responses provided by the user. The user can also append medical clipart to the note and annotate it with the pen and tablet providing a more accurate picture of the problem which in turn facilitates better patient communications. In addition, the Encounter window provides customizable pick lists of diagnosis and procedure coding, as well as input of the encounter disposition, electronic signature, generation of a referral note, and suspension of the encounter. The suspension capability allows the user to save an in-process note in it's interim state for completion at a later date or time. Order Entry--Medication, Laboratory and Radiology The Order Entry window provides the user with a graphical order entry screen where laboratory, radiology and pharmacy orders may be generated. It provides customized lists of the user's favorite or most used lists of medications, lab and radiology tests. The user can order individually or via sets which are dynamic and customizable on-the-fly. Sets can be made up of any or all of the three order entry categories. Creation of a set can be accomplished dynamically as the user generates their order. Results Retrieval-- Laboratory and Radiology Text reports The Results window provides by patient a view of all the results of both laboratory and radiology results that have been delivered electronically to the system. Through the use of the interface server the PWS can gather up results in a textual format and present them to the user for review. This helps to eliminate the need to search for missing results; they are there when you need them. Each result is indexed by date and description for easy access. Any part of the result can be copied into the encounter note. In-Basket--To do list with simple e-mail capability The In-Basket window is a listing of things the user needs to respond to. This can take three forms, ticklers which are notes to yourself, mail which are messages between users like phone messages, and phone consults which are follow-ups the user needs to perform relating to a particular patient. In addition, the In-Basket can also receive messages related to lab and radiology results with links to the actual results. The system can be implemented so results are returned to the In-Basket of the ordering provider to facilitate faster notification and review of results. Encounter Summary -- Complete and In-process encounters, Referrals sent and Received The Encounter Summary window provides a list of all encounters the patient has had with the PWS system. By selecting one of the entries the user can see details about the visit including, diagnosis, procedures, tests and medications ordered, assigned provider and vitals for the visit. The user also is provided a list of all In-Process (suspended) encounters, as well as any referrals that were sent and any referrals that were received. Demographics-- Patient Demographics with Insurance, Employers and Emergency Contact Information The Demographics window allows the user to see pertinent information related to the patient. Detailed demographics, Insurance carrier and policy numbers, Emergency Contact Information, and Primary provider information is available. Vital Signs-- Customizable Vitals A Vital Signs Entry window is available for the user to enter the vitals for the visit. The vitals displayed are customizable to the user so vitals that are important to your clinic or specialty can be captured. Setup-- Customization of the desktop to suit individual users The Setup window allows the user to control the attributes of the workspace. The user can customize the workspace appearance, appointment display time slices, patient summary report display format, and appointment list and in-basket refresh timers. Utilities PWS comes with the following utilities to assist in the installation, setup and historical record scanning. Install Utility--Installation of PWS Scan Utility--Scanning application to support scanned input of patient information Administration Utility--Application/database setup including customizable pick lists and creating users Form Builder Utility-- Design environment to create forms Checklist of Functions - -------------------------------------------------------------------------------- Summary Sheet x - -------------------------------------------------------------------------------- Problems x - -------------------------------------------------------------------------------- Immunizations x - -------------------------------------------------------------------------------- Allergies x - -------------------------------------------------------------------------------- Medications x - -------------------------------------------------------------------------------- Drug-drug interaction checking x - -------------------------------------------------------------------------------- Drug-allergy interaction checking x - -------------------------------------------------------------------------------- Past Visits x - -------------------------------------------------------------------------------- Vital Signs x - -------------------------------------------------------------------------------- Past History x - -------------------------------------------------------------------------------- Family History x - -------------------------------------------------------------------------------- Habits x - -------------------------------------------------------------------------------- Hospitalizations x - -------------------------------------------------------------------------------- Occupation x - -------------------------------------------------------------------------------- Optometry x - -------------------------------------------------------------------------------- Acute Illnesses x - -------------------------------------------------------------------------------- Chronic Illnesses x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Encounter Window - -------------------------------------------------------------------------------- Open/New Encounter Form/Document x - -------------------------------------------------------------------------------- Hold/Suspend Encounter Form/Document x - -------------------------------------------------------------------------------- Close Encounter x - -------------------------------------------------------------------------------- Able to append changes to encounter x - -------------------------------------------------------------------------------- Annotate with Medical Clipart x - -------------------------------------------------------------------------------- Save Form/Document x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Order Entry - -------------------------------------------------------------------------------- Able to define order sets x - -------------------------------------------------------------------------------- Able to order lab tests x - -------------------------------------------------------------------------------- Able to order radiology tests x - -------------------------------------------------------------------------------- Able to order medications x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Appointment Window - -------------------------------------------------------------------------------- Display of Physician Schedule x - -------------------------------------------------------------------------------- Past Appointments x - -------------------------------------------------------------------------------- Current Appointments x - -------------------------------------------------------------------------------- Future Appointments x - -------------------------------------------------------------------------------- Manual appointment logging within Medical Records x - -------------------------------------------------------------------------------- General Features - -------------------------------------------------------------------------------- Supports electronic signature x - -------------------------------------------------------------------------------- Supports electronic transfer of Med. Rec. x to another location - -------------------------------------------------------------------------------- Supports FAX of Medical Records documents x - -------------------------------------------------------------------------------- Supports ticklers/reminder system x - -------------------------------------------------------------------------------- Supports document/forms building x - -------------------------------------------------------------------------------- Supports multiple printers to send forms x - -------------------------------------------------------------------------------- Supports referral notices x - -------------------------------------------------------------------------------- Supports use of 3rd party report/query tool x - -------------------------------------------------------------------------------- Supports patient education/index listing of topics x to print and provide patients about illness/conditions - -------------------------------------------------------------------------------- Patient Search/Lookup within Medical Records x - -------------------------------------------------------------------------------- Able to creat an encounter without an appointment x - -------------------------------------------------------------------------------- Flow Sheet display x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Interface Capabilities - -------------------------------------------------------------------------------- Bi-Directional information flow of the following: x - -------------------------------------------------------------------------------- Patient Demographics x - -------------------------------------------------------------------------------- Insurance x - -------------------------------------------------------------------------------- Contact-Emergency x - -------------------------------------------------------------------------------- Providers Info x - -------------------------------------------------------------------------------- Lab Results x - -------------------------------------------------------------------------------- Text file results x - -------------------------------------------------------------------------------- Abnormal range indicators x - -------------------------------------------------------------------------------- Radiology x - -------------------------------------------------------------------------------- Imaging x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Security - -------------------------------------------------------------------------------- User login verification x - -------------------------------------------------------------------------------- Audit Trail x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Customization - -------------------------------------------------------------------------------- Able to create customized destop display x - -------------------------------------------------------------------------------- Able to customize forms x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ??? - -------------------------------------------------------------------------------- Able to build dictionary entries for picklists x - -------------------------------------------------------------------------------- - --Global x - -------------------------------------------------------------------------------- - --Clinic/Department x - -------------------------------------------------------------------------------- - --Physician x - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- General Windows Feature - -------------------------------------------------------------------------------- User of color palette x - -------------------------------------------------------------------------------- Able to size windows x - -------------------------------------------------------------------------------- Multi-support of various input devices x - -------------------------------------------------------------------------------- - --pen x - -------------------------------------------------------------------------------- - --tablet x - -------------------------------------------------------------------------------- - --mouse x - -------------------------------------------------------------------------------- - --keyboard x - -------------------------------------------------------------------------------- - --voice--Via third party COTS product x - -------------------------------------------------------------------------------- - --Windows '95 compatibility x - -------------------------------------------------------------------------------- - --On-line Help x - -------------------------------------------------------------------------------- EX-13 7 ANNUAL REPORT TO SECURITY HOLDERS Management's Discussion and Analysis CyCare Systems, Inc. and Subsidiaries Discussion and Analysis of Financial Condition and Results of Operations General The Company continues to focus its product line on the physician and group practice marketplace. As these markets continue to evolve toward managed care, electronic medical records and integrated delivery networks, the demand for sophisticated information technology is increasing. The Company responded to these demands by introducing innovative products and services throughout the year. With the introduction of these new products, the Company took a $3.8 million technology charge in the fourth quarter of 1995 to eliminate certain products which the Company now regards as obsolete. This charge is discussed further in Note 3 to the Consolidated Financial Statements. 1995 Compared to 1994 The Company's net income for the year ended December 31, 1995 was $2.0 million which includes a $3.8 million technology charge. Net income for the year, excluding the technology charge, was $4.3 million versus $3.0 million for the year ended December 31, 1994, an increase of 43%. Total revenue in 1995 increased to $62.9 million from $53.8 million in 1994, or 17%. Comparable year-to-year services revenue increased to $47.6 million, up 10%, while systems revenue increased to $13.7 million, or 50%. Services revenue increased due to additional monthly license fees and transaction volume growth within CyData, the Company's wholly owned EDI subsidiary. The growth in systems sales is attributable to the continuing success of the CS3000, one of the few client/server-based systems in the market today. The Company anticipates further success of the product which has been complemented by the roll-out of its electronic medical records product, CS-CIS, which began shipping in late 1995. Services margins in 1995 were 61% as compared to 62% from the prior year. Systems margins increased to 34%, up from 30% in 1994. This increase is primarily attributable to new account sales in 1995 that have more software and higher margins than sales to existing customers. Selling and administrative costs as a percentage of revenues were 35% in 1995, versus 36% in 1994. Overall these costs increased $2.4 million which was mainly due to the expansion in the Company's sales and marketing teams. Research and development expenses increased approximately $278,000, or 7%, from 1994. As a percentage of revenues, research and development costs were 7% in 1995 and 8% in 1994. The Company is committed to funding future development of its core group practice product line which includes the CS3000, the CS-CIS medical records product and the enterprise-wide scheduling product, slated for release in 1996. Additional dollars are also being spent on the Company's Windows-based system, SpectraMED, and on expanding the electronic transaction processing capabilities of its CyData subsidiary. Interest expense continues to decrease as the Company continues to reduce its average outstanding debt. The Company's effective income tax rate for 1995 was 37% versus 40% in 1994. This reduction was mainly attributable to changes in certain state income tax laws that had a beneficial impact on the Company's income tax expense. 1994 Compared to 1993 The Company's net income for the year ended December 31, 1994 was $3.0 million, versus $1.2 million for the year ended December 31, 1993, an increase of 150%. (The net income of $1.2 million for 1993 excludes the $3.7 million gain [loss after tax] on the sale of the Company's Practice Management business unit and the $11.9 million restructuring charge incurred in the fourth quarter of 1993. Any further references to 1993 financial results will also exclude these items.) Total revenue from 1993 to 1994 declined 20% due to the sale of the Practice Management business unit. Excluding 1993 Practice Management revenue of $20.8 million, the Company's total revenue increased 15% from 1993 to 1994. Comparable year-to-year services revenue increased 10%, while systems sales increased 45%. The systems revenue growth was attributable to the continued market acceptance of the Company's CS3000 system and successful introduction of its Windows-based SpectraMED product. Services revenue grew due to increases in monthly license fees and services, primarily for new CS3000 and SpectraMED clients, and an increase in transactions processed by the Company's wholly owned CyData subsidiary. Services margins increased to 62% in 1994, from 49% the prior year. This increase was primarily due to the fourth quarter 1993 sale of Practice Management, a business unit that had lower operating margins than the Company's remaining business units. Systems sales were 70% hardware and 30% software in 1994, versus 75% and 25%, respectively, in 1993. Software sales increased 5% as a percentage of systems sales, but this increase in high-margin software was offset by a decrease in hardware margins due to customer demand for less profitable personal computers. Selling and administrative costs as a percentage of revenue were 36% in 1994 versus 34% in 1993. While selling and administrative costs from continuing operations decreased due to the sold division, sales and administrative costs as a percentage of revenue increased 2%. The 2% increase in 1994 was due to the Company more than doubling its sales and marketing staffs as a result of the success of its core business products. Research and development expenses decreased 3% from 1993 to l994. As a percentage of revenue, research and development costs were 8% in 1994 and 9% in 1993, excluding Practice Management revenues. The Company continued to spend its research and development dollars enhancing its CS3000 and SpectraMED products, developing its electronic medical records and enterprise-wide scheduling products and adding additional capabilities to its EDI products and services. Interest expense decreased 45% year-to-year due primarily to a reduction in average debt outstanding. The Company's effective income tax rate in 1994 was 40% versus 44% in 1993, excluding the sale of Practice Management and the restructuring charge. The decrease is primarily due to the increase in income before taxes, which had the effect of reducing the relative impact of non-deductible expenses on the income tax rate. Financial Position The Company had working capital of $17.6 million at December 31, 1995, including $13.6 million in cash. The Company's cash flow from operations in 1995 was $6.6 million. During 1995, the Company used funds to reduce debt, purchase treasury stock and for additional investments in software products and capital expenditures. The Company's long-term debt at December 31, 1995 was $2.9 million versus $4.2 million at December 31, 1994. Under the 1.5 million share repurchase program authorized by its Board of Directors, the Company purchased 80,227 shares for $1.9 million in 1995 and 812,800 shares for $7.6 million in 1994. The Company will continue to purchase shares as considered necessary and as authorized under the share repurchase program. The Company has a $3.5 million revolving line of credit that expires in April 1997. The Company anticipates that its current cash position, together with funds generated from operations and available from its line of credit, will be sufficient to meet its working capital requirements, debt obligations and to finance any capital expenditures. On a long-term basis, the Company plans to generate cash through operations, bank borrowings and/or raise capital through private or public offerings to meet future capital needs. CONSOLIDATED BALANCE SHEETS CyCare Systems, Inc. and Subsidiaries
(In Thousands Except Share Data) December 31 1995 1994 ----------------------- Assets: Current assets: Cash and cash equivalents $13,570 $13,760 Accounts receivable, less $820 allowance for doubtful accounts in 1995, $755 in 1994 6,975 4,184 Unbilled work at estimated realizable value 1,922 1,868 Supply and equipment inventories 1,000 723 Prepaid and other assets 3,378 3,223 Deferred income taxes 42 414 ----------------------- Total Current Assets 26,887 24,172 Property and equipment at cost, less accumulated depreciation and amortization 9,806 9,778 Software products, less $5,115 accumulated amortization in 1995, $3,914 in 1994 7,587 9,353 Goodwill, less $204 accumulated amortization in 1995, $185,000 in 1994 938 545 Other intangibles, less $2,239 accumulated amortization in 1995, $2,142 in 1994 754 252 Other assets 301 296 ======================= Total Assets $46,273 $44,396 ======================= Liabilities And Shareholders' Equity: Current liabilities: Current portion of long-term debt $1,300 $1,546 Accounts payable 2,563 1,989 Accrued expenses 3,270 2,753 Accrued payroll 1,021 1,208 Client deposits and unearned income 824 1,225 Income taxes payable 302 196 ----------------------- Total Current Liabilities 9,280 8,917 Long-term debt, less current portion 2,853 4,153 Other long-term liabilities 1,674 2,671 Deferred income taxes 2,381 3,432 Shareholders' equity: Preferred stock, par value $1.00, 1,000,000 shares authorized, none issued Common stock, par value $.01,10,000,000 shares authorized; 6,097,957 issued 61 61 in 1995 and 1994 Capital in excess of par value 31,436 29,505 Retained earnings 8,110 7,114 Less treasury stock, 1,003,037 and 1,280,569 shares at cost in 1995 and 1994, (9,522) (11,457) respectively ----------------------- Total Shareholders' Equity 30,085 25,223 ----------------------- Commitments Total Liabilities And Shareholders' Equity $46,273 $44,396 =======================
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF INCOME Cycare Systems, Inc. and Subsidiaries (In Thousands Except Per Share Data)
Years Ended December 31 1995 1994 1993 ---------------------------------- Revenues: Services $ 47,627 $ 43,329 $ 60,138 Systems 13,724 9,132 6,310 Interest and dividends 881 608 183 Other income 690 743 4,431 ---------------------------------- 62,922 53,812 71,062 ---------------------------------- Costs and Expenses: Services 18,452 16,349 31,312 Systems 9,006 6,379 4,771 Software product amortization 5,801 2,168 5,953 Research and development 4,347 4,069 4,203 Selling and administrative 21,778 19,334 30,083 Interest 450 464 844 ---------------------------------- 59,834 48,763 77,166 ---------------------------------- Income (loss) before income taxes 3,088 5,049 (6,104) Income taxes 1,135 2,029 1,657 ---------------------------------- Net Income (Loss) $ 1,953 $ 3,020 ($ 7,761) ================================== Earnings (loss) per share $ 0.38 $ 0.60 ($ 1.39) Common and common equivalent shares used in the calculation of earnings (loss) per share 5,183 5,018 5,579
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS CyCare Systems, Inc. and Subsidiaries
(In Thousands) Period Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Operating Activities Net Income (Loss) $ 1,953 $ 3,020 ($ 7,761) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of goodwill and intangibles 116 83 943 Depreciation and amortization 1,669 1,743 2,265 Software product amortization 2,223 2,168 2,188 Write off of intangible assets -- -- 7,623 Technology Charge 3,759 -- -- Gain on sale of business unit -- -- (3,675) Provision for losses on accounts receivable 389 544 907 Provision for deferred income taxes (679) 2,095 (2,392) (Gain) loss on sale of equipment 2 (22) (31) Changes in operating assets and liabilities: Acounts receivable and unbilled work (3,059) (839) 2,544 Other assets (438) 1,382 444 Accounts payable and accrued expenses (184) 313 (2,335) Contract reserve -- (25) 11 Income taxes payable 1,823 (3,168) 3,875 Other long-term liabilities (997) 509 1,276 -------------------------------------- Net cash provided by operating activities 6,577 7,803 5,882 Investing Activities: Purchase of property and equipment (1,692) (1,615) (1,241) Proceeds from sale of equipment 9 155 142 Proceeds from sale of business unit -- -- 24,093 Capitalized software products (4,034) (3,257) (4,872) Increase in intangible assets (100) (140) -------------------------------------- Net cash provided by (used in) investing activities (5,817) (4,857) 18,122 Financing activities: Proceeds from revolving line of credit and long-term borrowings -- 4,100 3,128 Principal payments on revolving line of credit, long-term borrowings and capital lease obligations (1,546) (5,408) (7,925) Translation adjustment (29) (4) (2) Net Proceeds from sale of common stock, warrants, options and treasury stock 2,550 1,457 623 Purchase of treasury stock (1,925) (7,576) (2,484) -------------------------------------- Net cash used in financing activities (950) (7,431) (6,660) -------------------------------------- Increase (decrease) in cash and cash equivalents (190) (4,485) 17,344 Cash and cash equivalents at beginning of year 13,760 18,245 901 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 13,570 $ 13,760 $ 18,245 ======================================================================================================================
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CyCare Systems, Inc. and Subsidiaries Years Ended December 31, 1993, 1994 and 1995
(In Thousands Except Share Data) =========================================================================================================================== Common Stock ---------------------- Capital In Par Excess of Retained Treasury Shares Value Par Value Earnings Stock Total =========================================================================================================================== Balance at December 31, 1992 5,592,782 $61 $29,125 $11,861 ($3,309) $37,738 Net loss (7,761) (7,761) Translation adjustment (2) (2) Purchase of treasury stock (281,300) (2,484) (2,484) Proceeds from employee stock purchase plan offering 71,590 (11) 429 418 Exercise of stock options 35,000 (5) 210 205 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 5,418,072 61 29,109 4,098 (5,154) 28,114 Net income 3,020 3,020 Translation adjustment (4) (4) Purchase of treasury stock (812,800) (7,576) (7,576) Proceeds from employee stock purchase plan offering 54,741 55 329 384 Tax benefit of stock options 212 212 Exercise of stock options 157,375 129 944 1,073 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 4,817,388 61 29,505 7,114 (11,457) 25,223 Net income 1,953 1,953 Translation adjustment (29) (29) Purchase of treasury stock (80,227) (1,925) (1,925) Proceeds from employee/director stock plan offerings 42,204 134 349 483 Issuance of common stock 21,430 106 490 596 Tax benefit of stock options 1,718 1,718 Exercise of stock options 294,125 (27) (928) 3,021 2,066 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 5,094,920 $61 $31,436 $8,110 ($9,522) $30,085 -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CyCare Systems, Inc. and Subsidiaries 1. Summary of Significant Accounting Principles Basis of preparation: The consolidated financial statements include the Company (a Delaware corporation) and its subsidiaries. Operations in Canada which were insignificant and made up less than 1% of revenues were discontinued in the first quarter of 1995. All intercompany transactions and accounts have been eliminated. Nature of operations: CyCare's principal line of business is in providing systems and services to the physician group marketplace, and electronic data interchange to the health care industry. The principal markets for the Company's products and services are geographically disbursed throughout the United States. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenues: The Company provides information processing services and systems, primarily to medical group practices, faculty practice plans and medical enterprises throughout the United States. Initial software license fee revenues are recognized for financial statement purposes when the contract is signed, and upon shipment of systems and, if applicable, upon compliance with certain other conditions. Software maintenance revenues are recognized when billed, a majority of which are billed monthly. Supply and equipment inventories: Inventories are stated at the lower of cost (first-in, first-out) or market. Property and equipment: Depreciation is computed by the straight-line method over the estimated useful lives of such assets. Leasehold improvements are amortized over the remaining life of the lease. Property and equipment are summarized below: Property and equipment are summarized below: Estimated useful life 1995 1994 in years ------- ------- ------------ (In Thousands) Land $ 500 $ 500 Buildings and improvements 10,090 9,921 5 - 23 Computers and equipment 19,351 18,806 3 - 8 Furniture and fixtures 2,503 2,335 8 - 10 Leasehold improvements 56 56 Lease term ------- ------- 32,500 31,618 Less accumulated depreciation and amortization 22,694 21,840 ------- ------- Property and equipment, net $ 9,806 $ 9,778 Research and development: Research and development costs, principally the design and development (exclusive of certain costs capitalized as software products) of proprietary systems, and programming, are expensed as incurred. Routine maintenance of proprietary software is also expensed as incurred. Software products: Certain internal software development costs, primarily coding and testing and meeting recoverability tests, are capitalized as software products. The cost of software capitalized is amortized over the greater of its life of three to five years, or the ratio of current revenues to current and anticipated revenues from such software. Income taxes: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes. Goodwill and intangibles: Goodwill represents the excess of cost over the fair value of assets at the date of acquisition of businesses acquired. The goodwill is being amortized over 40 years. The allocated costs of certain contracts and customer lists acquired in conjunction with the acquisition of businesses are included in intangibles. The intangibles are being amortized over the related lives ranging from two to twelve years. The Company assesses the recoverability of goodwill and intangibles based upon expected future, undiscounted cash flows and other relevant information. Earnings per share: Earnings per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Fully diluted earnings per share are not presented since such amounts would not have a material dilutive effect. Cash and cash equivalents: Cash and cash equivalents include demand deposits, bank money market accounts and repurchase agreements since they represent highly liquid investments with remaining maturities of less than three months when purchased. Concentration of credit risk: Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of accounts receivable and unbilled work. A majority of the Company's accounts receivable and unbilled work are derived from sales in various geographic areas to customers in the health care industry. The Company performs ongoing credit risk evaluations of its customer's financial condition and generally does not require collateral. The Company's significant customers are major, well-known businesses in the health care industry. Credit losses have been provided for in the financial statements and have been within management's expectations. Accounting for stock-based compensation: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation issued to employees. The Statement allows for a fair value based method of accounting for employee stock options and similar equity instruments. However, for companies that continue to account for stock-based arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the pro forma effect on net income and earnings per share of its fair value based accounting for those arrangements. These disclosure requirements are effective for fiscal years beginning after December 15, 1995, or upon initial adoption of the statement, if earlier. The Company continues to evaluate the provisions of Statement No. 123 and has not determined whether it will adopt the recognition and measurement provisions of that Statement, which the Company expects would result in increased compensation expense in future periods. Reclassifications: Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform with 1995 financial statement presentation. 2. Acquisitions and Dispositions During December 1995, the Company acquired all of the outstanding stock of Richard D. Jugel & Company (Jugel), a provider of electronic data interchange services, for 21,430 shares of CyCare common stock which was valued at $600,000. This transaction was accounted for as a purchase. In addition, the Company executed covenants not to compete with two former officers of Jugel for $100,000 cash and a $500,000 note payable. In connection with the acquisition, the Company acquired assets with a fair value of $196,000 and assumed liabilities of $8,000. The results of operations of Jugel are not considered significant. Therefore, pro forma information has not been included. During 1993, the Company sold substantially all of the assets and certain liabilities of its Practice Management business unit for $24.1 million in cash. This business unit provided processing and collection services for hospital-based physicians throughout the United States. Assets sold approximated $18.8 million and liabilities assumed by the purchaser were $588,000. In addition, the Company recorded charges for liabilities related to the disposition of the business. These charges, which totaled $2.2 million, were for facilities and workforce adjustments as a result of the sale, as well as certain transaction related fees. The sale resulted in a profit before tax of approximately $3.7 million which is included in other income. The Company had taxable income related to the gain of $10.9 million due primarily to nondeductible goodwill included in the assets sold. 3. Corporate Charges During the fourth quarter of 1995, the Company recorded charges of approximately $3.8 million, primarily related to previously developed software technology which the Company will replace with more advanced products. The charges related primarily to the Company's previously developed medical records technology, which will be replaced by a more advanced product licensed from Wang Laboratories, and a mainframe version of the CyCare System 3000, which the Company has determined would not be viable in a client/server environment. During the fourth quarter of 1993, the Company wrote down assets and established reserves totaling $11.9 million, primarily related to its decision to focus efforts on those products and services perceived to be the most attractive to the health care marketplace. These adjustments included the discontinuance of certain products and services formerly offered by the Company, which resulted in the elimination of the related capitalized software, intangibles and goodwill associated with these products and services. In addition, the Company's Board of Directors authorized the repurchase of an additional one million shares of its common stock from time to time in the open market at prevailing market prices. As a result of the sale of the Practice Management business unit, the Company operates fewer offices and has reduced corporate overhead. The write-downs and reserves related principally to product lines eliminated or de-emphasized and are as follows: - -------------------------------------------------------------------------------- (In Thousands) Capitalized software $ 3,765 Goodwill and intangibles 3,858 Office consolidations, relocation and severance reserves 753 Retirement benefit 1,612 Other 1,933 ------- $11,921 ------- The impact on the income statement is as follows: - -------------------------------------------------------------------------------- (In Thousands) Cost of services 390 Cost of systems sold 350 Software product amortization 3,765 Selling and administrative expenses 7,416 ------- $11,921 ------- 4. Long-Term Debt and Line of Credit Long-term debt consisted of the following at December 31: 1995 1994 - -------------------------------------------------------------------------------- (In Thousands) First mortgage payable to a bank, at prime rate plus .25% monthly principal payments of $68,334 to April 1999, collateralized by a building $2,733 $3,553 Term loan payable to a bank, at prime rate, monthly principal payments of $37,778 to April 1999, collateralized by all assets 1,378 1,831 Other 42 315 ------ ------ $4,153 $5,699 ------ ------ Less current portion 1,300 1,556 ----- ----- Long-term portion $2,853 $4,153 ====== ====== Maturities of long-term debt due in each of the next four years is $1,300,000 in 1996, $1,280,000 in 1997, $1,282,000 in 1998 and $291,000 in 1999. The Company estimates that the fair market value of the above long-term debt approximates its recorded value since the interest rates vary with prime. The Company's borrowing agreements contain covenants which place various restrictions on financial ratios, levels of net worth and working capital, and prohibits the payment of dividends. During the years ended December 31, 1995, 1994 and 1993, the Company made interest payments which totaled approximately $450,000, $456,000, and $844,000, respectively. The Company has a $3,500,000 line of credit with a bank expiring in April 1997. At December 31, 1995 and 1994, the unused portion totaled $3,500,000. Borrowings under the line of credit bear interest at the bank's prime rate less .25%. Information with respect to the line of credit is as follows:
Maximum Average Weighted amount amount average Balance of Weighted outstanding outstanding interest rate end of average during the during the during the period interest rate period period period Line of Credit - -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 $ ---- ---- ---- ---- ---- Year Ended December 31, 1994 $ ---- ---- ---- ---- ---- Year Ended December 31, 1993 $ ---- 6.5% $4,671,000 $2,647,000 5.5%
The average amount outstanding during the period was computed by dividing the total of month-end outstanding principal balance by the number of months the borrowings were outstanding. The weighted average interest rate during the period was computed by dividing the actual interest expense by the average short-term debt outstanding. Note 5. Benefit Plans The Company has a stock option plan for key employees. Shareholders amended the plan in 1995 to provide an additional 300,000 shares of common stock for future grants, bringing the total shares reserved for common stock options to 1,120,000. The plan qualifies as an incentive stock option plan. Non-qualified stock options can also be issued under the plan. Options are granted at the fair market value at date of grant. Incentive stock options expire on the fifth anniversary of the date of grant. The non-qualified options are exercisable based on terms established by the Board of Directors. All options expire upon termination of employment. In addition, under certain circumstances all options may become immediately exercisable. Transactions involving the plan are summarized as follows:
Option price Benefit Plans Available Unexercised Exercisable per share - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 126,647 589,000 343,000 $ 4.88 - 10.00 Granted (40,500) 40,500 7.00 - 7.00 Becoming exercisable 142,250 4.88 - 10.00 Exercised (35,000) (35,000) 4.88 - 7.63 Cancelled 30,000 (30,000) (30,000) 6.00 - 9.63 --------------------------------------------------- Balance at December 31, 1993 116,147 564,500 420,250 4.88 - 10.00 Granted (127,500) 127,500 8.25 - 12.75 Becoming exercisable 99,375 4.88 - 7.25 Exercised (157,375) (157,375) 4.88 - 9.00 Cancelled 82,000 (82,000) (82,000) 6.00 - 10.00 --------------------------------------------------- Balance at December 31, 1994 70,647 452,625 280,250 4.88 - 12.75 Amended Plan 300,000 Granted (315,500) 315,500 14.88 - 32.50 Becoming exercisable 92,750 4.88 - 12.75 Exercised (293,500) (293,500) 4.88 - 12.75 Cancelled 39,250 (39,250) (39,250) 4.88 - 19.00 --------------------------------------------------- Balance at December 31, 1995 94,397 435,375 40,250 $ 4.88 - 32.50 ---------------------------------------------------
In 1995, shareholders approved the issuance of 50,000 shares of common stock under a stock plan for non-employee directors of the Company. Under the plan, non-employee directors received a one-time non-qualified stock option grant of 2,500 shares that vests at a rate of 25% per year and expires five years from the date of grant. Additionally, any non-employee director serving in such capacity as of July 1st of each year is granted 1,000 restricted shares. The term of the restriction is one year from date of grant. However, under certain circumstances the non-qualified stock option will become immediately exercisable and all restrictions will be removed from the restricted stock grant. In 1995, non-qualified stock options were granted for 7,500 shares (at a price of $12.38) and restricted stock grants were issued for 3,000 shares, leaving 39,500 shares available for future issuance. The Company also has an Employee Stock Purchase Plan. In 1995, shareholders amended the plan to provide an additional 300,000 shares under the plan, increasing the total authorized to 1,320,000. The purchase price is the lesser of 85% of the fair market value of the stock at either the beginning or end of the plan year. Employees may designate up to 10% of their compensation for the purchase of stock. The number of shares purchased by employees was 39,204 in 1995, 54,741 in 1994 and 71,590 in 1993. At December 31, 1995, 302,701 shares remained unissued under the plan and will be made available for employee purchase during the plan year commencing January 1, 1996. The number of shares of treasury stock the Company purchased was 80,227 in 1995, 812,800 in 1994 and 281,300 in 1993. The average price per share based on the fair market value on date of purchase was $23.99 in 1995, $9.32 in 1994 and $8.83 in 1993. Included in the 1994 purchases were 412,800 shares purchased, at $9.00 per share, from an entity that was owned by a former director of the Company. The Company utilized 357,759 in 1995, 212,116 in 1994 , and 106,590 in 1993 of treasury shares to fund the Stock Option, Director Stock and Employee Stock Purchase Plans and for an acquisition as discussed in Note 2. The Company's 401(k) Savings Plan was established for the benefit of all of its employees. Participants may contribute an amount not exceeding 15% of pre-tax compensation, or 10% of after-tax compensation, or a combination of pre-tax and after-tax contributions not to exceed 19% of compensation, received during the period of participation in the Plan. The Company's matching contribution to the Plan is 15% of the employee's first 10% of compensation contributed. The Company's expense under the Plan, including administrative costs, amounted to $145,000 in 1995, $204,000 in 1994 and $286,000 in 1993. Effective December 28, 1993, the Company entered into a retirement benefit and post-employment benefit program with its Chairman and Chief Executive Officer in recognition of past services and the additional responsibilities assumed upon the restructuring of the Company during the fourth quarter of 1993. Under the retirement benefit element, he is to receive 60% of his average wages during his last two years of service subject to certain reductions. The Company accounts for these benefits under the provisions of Statement of Financial Accounting Standard No. 87 and is to fund the benefits from corporate assets at the time the payments are required between the ages of 65 and 70. The projected benefit obligation was $650,000 and $550,000 at December 31, 1995 and 1994, respectively. The expense recorded was $222,000 in 1995, $210,000 in 1994 and none in 1993 given the effective date at year end. Any unrecognized prior service costs are being amortized over a three-year period. In accordance with the retirement benefit arrangement above, during 1993 the Company also modified its split-dollar life insurance arrangement with its Chairman and Chief Executive Officer whereby premiums paid and to be paid under the policies are not required to be returned to the Company should he reach age 70. Accordingly, the Company expensed the existing premiums recorded as assets in the fiscal year ended December 31, 1993 and recorded a $692,000 liability for the present value of the future payments, which are required through 2003. The total expense of this arrangement recorded during 1993 was $1.6 million and was reflected in the fourth quarter 1993 corporate restructuring. The expense recorded, representing interest costs, was $44,000 in 1995 and $23,000 in 1994. Should the Chairman and Chief Executive Officer not attain age 70, the Company would receive a return of all prior premiums paid from the policy proceeds. NOTE 6. INCOME TAXES Significant components of the federal and state income tax expense for the years ended December 31 are: 1995 1994 1993 - -------------------------------------------------------------------------------- (In Thousands) Current: Federal $ 1,687 $ (57) $ 3,271 State 127 (9) 778 ---------------------------------------------- Total Current $ 1,814 $ (66) $ 4,049 Deferred: Federal (631) 1,823 (2,081) State (48) 272 (311) ---------------------------------------------- Total Deferred: (679) 2,095 (2,392) $ 1,135 $ 2,029 $ 1,657 ============================================== Total income tax payments, net of refunds received, were approximately ($116,000) in 1995, $3,134,000 in 1994 and $223,000 in 1993. The following table reconciles the differences between the effective income tax rate and the federal statutory income tax rate for the years ended December 31: 1995 1994 1993 - -------------------------------------------------------------------------------- Federal statutory rate 34% 34% (34%) Goodwill - - 55 State taxes net of federal benefit 2 4 5 Other 1 2 1 ---------------------------------------------- 37% 40% 27% ============================================== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows: 1995 1994 1993 - -------------------------------------------------------------------------------- (In Thousands) Deferred tax liabilities: $ 599 $ 732 $ 637 Tax versus financial reporting depreciation Capitalizing versus expensing certain software develop- ment costs 2,784 3,678 3,230 Prepaid expenses and other 435 885 861 ------------------------------------------ Total deferred tax liabilities 3,818 5,295 4,728 Deferred tax assets: Tax versus financial reporting liabilities 1,384 2,157 3,248 Prepaid software licenses 95 120 557 ------------------------------------------ Total deferred tax assets 1,479 2,277 3,805 ------------------------------------------ Net deferred tax liabilities $ 2,339 $ 3,018 $ 923 ========================================== NOTE 7. Commitments The Company leases premises and equipment under non-cancelable operating leases at various dates through 2003. Certain of these leases contain renewal and purchase option clauses under various terms. Rental expense charged to operations was approximately $4,714,000 in 1995, $4,704,000 in 1994 and $6,284,000 in 1993. The approximate annual rental commitments in each of the next five years and thereafter is approximately $2,100,000 in 1996, $1,714,000 in 1997, $1,396,000 in 1998, $635,000 in 1999, $370,000 in 2000 and $638,000 thereafter. The Company also acts as lessor for portions of its building and computer equipment with a cost of $8,549,000, accumulated depreciation of $5,235,000 and a net carrying value of $3,314,000. At December 31, 1995, future minimum lease receivables under the lease agreements are approximately $832,000 in 1996, $752,000 in 1997, $563,000 in 1998, $298,000 in 1999, $110,000 in 2000, and $20,000 thereafter. NOTE 8. Quarterly Results (Unaudited) Quarterly financial results for the years ended December 31, 1995 and 1994 are summarized below. Note 8 - Quarterly Results 1995 1994 - -------------------------------------------------------------------------------- (In Thousands Except Per Share Data) Revenues 1st Quarter $ 15,761 $ 12,996 2nd Quarter 16,463 13,163 3rd Quarter 16,184 13,423 4th Quarter 14,514 14,230 Gross profit: 1st Quarter $ 8,206 $ 6,938 2nd Quarter 8,707 7,208 3rd Quarter 8,231 7,276 4th Quarter 4,519 7,494 Net income (loss): 1st Quarter $ 1,013 $ 608 2nd Quarter 1,113 680 3rd Quarter 1,142 776 4th Quarter (1,315) 956 Earnings (loss) per share 1st Quarter $ 0.20 $ 0.12 2nd Quarter 0.21 0.14 3rd Quarter 0.22 0.16 4th Quarter (0.25) 0.19 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Board of Directors CyCare Systems, Inc. We have audited the accompanying consolidated balance sheets of CyCare Systems, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CyCare Systems, Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Phoenix, Arizona February 14, 1996 REPORT OF CYCARE MANAGEMENT To the Shareholders of CyCare Systems, Inc. February 14, 1996 Management recognizes that it is primarily responsible for the integrity and fairness of all information and representations contained in the consolidated financial statements and notes thereto, as well as other sections of the annual report. In preparing the consolidated financial statements, we have made informed judgments and estimates in accounting for transactions and events and given due consideration to materiality. The Company's internal accounting controls are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and produce adequate records for preparation of financial information. There are limits inherent in all systems of internal accounting control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our systems provide the appropriate balance. Management has cooperated in providing information and full access to records to the Company's independent auditors, Ernst & Young LLP, during the course of their audit of the consolidated financial statements. Ernst & Young LLP meets annually with the Board of Directors, which includes members who are not employees of the Company, to review internal accounting control, auditing and financial reporting matters. /s/ Jim H. Houtz /s/ Mark R. Schonau Jim H. Houtz Mark R. Schonau Chairman of the Board, President Chief Financial Officer, Secretary and Chief Executive Officer and Treasurer ELEVEN - YEAR COMPARISON OF SELECTED FINANCIAL DATA CyCare Systems, Inc. and Subsidiaries
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 Revenues $ 62,922 $ 53,812 $ 71,062 $ 75,635 $ 75,444 $ 79,429 $ 86,215 $ 83,734 $ 67,718 $ 57,186 $ 48,585 Net income(loss) $ 1,953 $ 3,020 $ (7,761) $ 1,499 $ 612 $(11,657) $ 3,079 $ 486 $ 3,762 $ 2,866 $ 3,116 Capital additions $ 1,692 $ 1,615 $ 1,241 $ 772 $ 1,416 $ 1,958 $ 2,482 $ 6,368 $ 10,340 $ 10,350 $ 6,509 Working capital $ 17,607 $ 15,255 $ 18,287 $ 9,867 $ 8,712 $ 8,028 $ 12,145 $ 12,624 $ 19,057 $ 18,546 $ 16,451 Total assets $ 46,273 $ 44,396 $ 48,730 $ 60,843 $ 64,558 $ 70,229 $ 87,469 $ 92,670 $ 75,276 $ 64,906 $ 53,273 Long-term debt $ 2,853 $ 4,153 $ 5,690 $ 7,200 $ 8,305 $ 12,072 $ 15,948 $ 20,215 $ 10,263 $ 5,717 $ 1,014 Financial Ratios: Percent recurring service revenue to total 76% 81% 85% 85% 87% 82% 79% 80% 71% 61% 51% Return on revenues- Before tax 4.9% 9.4% (8.6%) 3.3% 1.8% (21.0%) 5.7% 1.1% 5.7% 8.9% 11.2% After tax 3.1% 5.6% (10.9%) 2.0% .8% (14.7%) 3.6% .6% 5.6% 5.0% 6.4% Return on common shareholders' equity 7.1% 11.3% (23.6%) 4.0% 1.7% (27.8%) 6.6% 1.1% 9.1% 7.7% 11.5% Total debt to total capitalization .54 .76 .73 .61 .74 .94 .83 1.05 .71 .67 .52 Current ratio 2.9:1 2.7:1 2.7:1 1.8:1 1.6:1 1.4:1 1.7:1 1.6:1 2.4:1 2.5:1 2.1:1 Per Share Data: Earnings (loss) Per share $ 0.38 $ 0.60 $ (1.39) $ 0.27 $ 0.11 $ (2.10) $ 0.54 $ 0.09 $ 0.70 $ 0.55 $ 0.67 Book value per common share $ 5.90 $ 5.24 $ 5.19 $ 6.75 $ 6.54 $ 6.44 $ 8.56 $ 7.95 $ 7.92 $ 7.28 $ 6.72 Dividends per share(2) Employees (December 31) 493 464 450 1,069 1,131 1,188 1,257 1,445 976 1,018 677 States and provinces covered 53 53 53 53 53 53 52 53 53 53 53
Securities Information The common stock of CyCare Systems, Inc. is listed on the New York Stock Exchange under the symbol CYS. The high, low and closing transaction prices as reported by the NYSE are set forth in the following tables. 1995 High Low Close - -------------------------------------------------------------------------------- 4th Quarter 34 1/2 22 5/8 25 5/8 3rd Quarter 39 1/2 27 1/4 33 1/4 2nd Quarter 27 1/2 22 1/8 27 1/4 1st Quarter 23 3/8 14 1/2 21 7/8 1994 High Low Close - -------------------------------------------------------------------------------- 4th Quarter 15 7/8 10 3/4 14 7/8 3rd Quarter 13 3/4 11 1/2 12 5/8 2nd Quarter 12 1/2 9 5/8 12 1/4 1st Quarter 11 1/8 7 3/4 10 3/8 EX-21 8 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT Percentage Jurisdiction of Voting of Securities Name of Subsidiaries Incorporation Owned - -------------------- ------------- ---------- CyData, Inc. Delaware 100% The financial statements of this subsidiary, along with those of Registrant, are included in the Consolidated Financial Statements filed herewith. EX-23 9 CONSENTS OF INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders CyCare Systems, Inc. We consent to the incorporation by reference in this Annual Report (Form 10-K) of CyCare Systems, Inc. of our report dated February 14, 1996, included in the 1995 Annual Report to Shareholders of CyCare Systems, Inc. Our audits also included the financial statement schedules of CyCare Systems, Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement No. 2-83933 on Form S-8 dated May 19, 1986, Registration Statement No. 33-5201 on Form S-8 dated May 19, 1986, Registration Statement No. 33-18845 on Form S-8 dated November 25, 1987, Registration Statement No. 33-31677 on Form S-8 dated October 27, 1989, Registration Statement No. 33-34913 on Form S-8 dated May 15, 1990, Registration Statement No. 33-44487 on Form S-8 dated December 13, 1991, Registration Statement No. 33-44488 on Form S-8 dated December 13, 1991, Registration Statement No. 33-60217 on Form S-8 dated June 14, 1995, Registration Statement No. 33-60219 on Form S-8 dated June 14, 1995, Registration Statement No. 33-60221 on Form S-8 dated June 14, 1995 and Registration Statement No. 33-65465 on Form S-3 dated December 29, 1995 of CyCare Systems, Inc. of our report dated February 14, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of CyCare Systems, Inc. Ernst & Young LLP Phoenix, Arizona March 26, 1996 EX-27 10 FDS FOR 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 13,570 0 6,975 0 1,000 26,887 9,806 0 46,273 9,280 2,853 0 0 61 30,024 46,273 13,724 62,922 9,006 18,452 31,926 0 450 3,088 1,135 1,953 0 0 0 1,953 .38 .38
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