UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 1997
--------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------- ----------------------
MEDICUS SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4056769
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
of incorporation of organization)
One Rotary Center, Suite 1111, Evanston, Illinois 60201 (847) 570-7500
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Commission File Number 0-27614
-----------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
There were 5,523,169 shares of common stock outstanding as of January 12, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
November 30, May 31,
ASSETS 1997 1997
--------------- --------------
Current assets (Unaudited)
Cash and cash equivalents $ 244,217 $ 1,205,135
Accounts receivable and unbilled
services, net of allowance for
doubtful accounts of $1,290,459
and 1,713,008 13,224,602 10,500,676
Inventories 181,572 214,264
Prepaid expenses and other 235,616 258,725
Prepaid and deferred income taxes 1,756,163 2,147,416
Net assets of discontinued operation - 111,381
--------------- --------------
15,642,170 14,437,597
--------------- --------------
Property and equipment, net of
accumulated depreciation of
$5,578,254 and $5,080,110 1,977,827 2,335,175
Internally developed software,
net of accumulated amortization of
$2,648,322 and $2,110,378 2,673,710 3,087,849
Installment accounts receivable due
after one year, net of unearned
interest of $117,309 and $154,647 431,345 533,488
Deferred income taxes 3,414,474 2,454,563
--------------- --------------
$ 24,139,526 $ 22,848,672
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 251,608 $ 597,787
Accrued compensation 554,716 453,035
Accrued restructuring charge 1,627,616 2,247,416
Other accrued liabilities 1,475,901 1,138,226
Deferred revenue 9,872,854 6,910,599
Notes payable 1,000,000 1,000,000
--------------- --------------
14,782,695 12,347,063
--------------- --------------
Notes payable 1,000,000 1,000,000
--------------- --------------
Stockholders' equity
Preferred stock $1,000 par, 500
shares authorized and issued 500,000 500,000
Common stock $.01 par:
Authorized - 10,000,000 shares
Issued - 6,492,803 and 6,487,159
shares, respectively 64,928 64,872
Capital in excess of par value 22,310,767 22,063,715
Capital in excess of par
value - warrant 944,000 944,000
Less treasury stock:
Preferred stock, at cost - 500 shares (500,000) (500,000)
Common stock, at cost -
1,007,002 shares (5,687,418) (5,687,418)
Accumulated deficit (9,275,446) (7,883,560)
--------------- --------------
8,356,831 9,501,609
--------------- --------------
$ 24,139,526 $ 22,848,672
=============== ==============
The accompanying notes are an integral part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
------------------------------------------
November 30, November 30,
1997 1996
------------------- -----------------
Revenues
Software products and services $ 1,384,083 $ 2,286,033
Maintenance and support services 2,384,357 2,876,744
------------------- -----------------
3,768,440 5,162,777
Costs and expenses
Software products and services 528,763 724,747
Maintenance and support services 1,387,933 1,397,150
------------------- -----------------
1,916,696 2,121,897
Marketing, general and administrative 2,662,236 2,232,201
Research and development 522,375 698,774
------------------- -----------------
5,101,307 5,052,872
------------------- -----------------
Operating income (loss) (1,332,867) 109,905
Interest and other income, net 6,023 155,303
------------------- -----------------
Income (Loss) from continuing
operations before income taxes (1,326,844) 265,208
Provision for (benefit from)
income taxes (510,835) 98,876
------------------- -----------------
Income(Loss)from continuing operations (816,009) 166,332
Discontinued operation, net of taxes (69,068) 45,242
------------------- -----------------
Net income (loss) $ (885,077) $ 211,574
=================== =================
Earnings (loss) per common and
common equivalent share
Continuing operations $ (0.15) $ 0.02
Discontinued operation (0.01) 0.01
------------------- -----------------
$ (0.16) $ 0.03
=================== =================
Weighted average common and
common equivalent shares outstanding 5,500,536 6,496,990
=================== =================
The accompanying notes are an integral part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
----------------------------------------
November 30, November 30,
1997 1996
---------------- -----------------
Revenues
Software products and services $ 3,627,943 $ 4,101,769
Maintenance and support services 4,760,407 5,257,787
---------------- -----------------
8,388,350 9,359,556
Costs and expenses
Software products and services 1,247,031 1,238,540
Maintenance and support services 2,515,083 2,262,337
---------------- -----------------
3,762,114 3,500,877
Marketing, general and
administrative 5,385,899 4,263,893
Research and development 1,503,434 1,204,214
---------------- -----------------
10,651,447 8,968,984
---------------- -----------------
Operating income (loss) (2,263,097) 390,572
Interest and other income, net 8,872 275,397
---------------- -----------------
Income (Loss) from continuing
operations before income taxes (2,254,225) 665,969
Provision for (benefit from)
income taxes (867,876) 258,419
---------------- -----------------
Income(Loss)from continuing operations (1,386,349) 407,550
Discontinued operation, net of taxes (5,537) 96,240
---------------- -----------------
Net income (loss) $ (1,391,886) $ 503,790
================ =================
Earnings (loss) per common and
common equivalent share
Continuing operations $ (0.25) $ 0.06
Discontinued operation 0.00 0.02
---------------- -----------------
$ (0.25) $ 0.08
================ =================
Weighted average common and
common equivalent shares outstanding 5,501,233 6,485,121
================ =================
The accompanying notes are an integral part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-----------------------------------------
November 30, November 30,
1997 1996
----------------- ----------------
Cash flows from operating activities
Income (Loss) from continuing operations $ (1,386,349) $ 407,550
Adjustments to reconcile to net cash
from operating activities:
Depreciation of property and equipment 498,144 557,087
Amortization of internally
developed software 537,944 151,588
Deferred income taxes (468,832) 119,507
Accrued restructuring charge (540,153) (646,281)
Allowance for doubtful accounts 150,000 -
Changes in certain current assets and
current liabilities:
Accounts receivable and unbilled
services (2,953,573) (3,032,605)
Due from Managed Care Solutions, Inc. - 515,361
Inventories 32,692 15,962
Prepaid expenses and other current assets (76,717) 719,239
Accounts payable (346,179) 1,371,842
Accrued compensation 101,681 (1,358,114)
Deferred revenue 2,962,255 (531,386)
Other, net 421,971 91,466
----------------- ----------------
(1,067,116) (1,618,784)
----------------- ----------------
Cash flows from investing activities
Additions to property and equipment (140,796) (312,695)
Additions to internally developed software (123,805) (946,749)
Proceeds from maturity of short-term
investments - 3,594,793
Proceeds from sale of short-term
investments - 58,588,023
Purchases of short-term investments - (59,896,661)
----------------- ----------------
(264,601) 1,026,711
----------------- ----------------
Cash flows from financing activities
Sale of common stock 247,108 79,476
----------------- ----------------
247,108 79,476
----------------- ----------------
Net decrease in cash
and cash equivalents (1,084,609) (512,597)
Cash and cash equivalents,
beginning of period 1,205,135 765,312
Net cash activity from
discontinued operation 123,691 571,994
----------------- ----------------
Cash and cash equivalents,
end of period $ 244,217 $ 824,709
================= ================
The accompanying notes are an integral part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the financial statements of Medicus Systems
Corporation (the "Company" or "Medicus") reflect all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the operating results for the quarters and six months ended
November 30, 1997 and 1996. Certain reclassifications have been made in the
prior period financial statements to conform to the current period presentation.
These reclassifications had no effect on previously reported total assets, total
liabilities, equity or results of operations.
Operating results for the interim periods are not necessarily indicative of
the results to be expected for the full year. The financial information included
herein should be read in conjunction with the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
May 31, 1997.
During the quarter and six months ended November 30, 1996, Medicus performed
certain administrative services for Managed Care Solutions, Inc. ("MCS") under a
services agreement resulting from the spin off of the Company from MCS on March
1, 1996. During the quarter and six months ended November 30, 1996, the Company
received $175,000 and $350,000, respectively, in consideration for these
services, and reduced marketing, general and administrative expenses by this
amount.
NOTE 2 - QUADRAMED ACQUISITION
On November 9, 1997, QuadraMed Corporation, a Delaware corporation
("QuadraMed") acquired (the "Acquisition") 56.7% of the outstanding capital
stock of the Company. The Acquisition was completed by means of Stock Purchase
Agreements, dated as of November 9, 1997, with certain stockholders of the
Company (the "Selling Stockholders"). Pursuant to the terms of the Stock
Purchase Agreements, the Selling Stockholders agreed to sell an aggregate of
3,111,105 shares of Medicus Common Stock to QuadraMed. In consideration for the
transfer of these shares to QuadraMed, QuadraMed paid to the Selling
Stockholders $7.50 per share, in cash, without interest, or approximately $23.3
million, together with warrants (the "Warrants") entitling the Selling
Stockholders to acquire 0.3125 shares of QuadraMed Common Stock for each share
of the Medicus Common Stock sold (subject to adjustment in accordance with the
Agreement). The Warrants entitle the Selling Stockholders to purchase QuadraMed
Common Stock at a price of $24.00 per share, on the terms set forth in the
Warrants.
Simultaneously with the execution of the Stock Purchase Agreements, QuadraMed
and the Company entered into an Agreement and Plan of Reorganization dated as of
November 9, 1997 (the "Agreement") pursuant to which a wholly-owned subsidiary
of QuadraMed will be merged, subject to the approval of the stockholders of
QuadraMed, with and into the Company (the "Merger"). At the effective time of
the Merger, the stockholders of the Company participating in the Merger will
exchange all outstanding shares of Medicus Common Stock for any of (i) a cash
payment of $7.50 per share of Medicus Common Stock, (ii) 0.3125 shares of
QuadraMed Common Stock per share of Medicus Common Stock sold (subject to
adjustment in accordance with the Agreement), or (iii) a combination of
QuadraMed Common Stock and cash. In addition, all stock options previously
issued by Medicus and outstanding at the time of the Merger will be assumed by
QuadraMed at an exchange ratio of 0.3565 shares of QuadraMed Common Stock for
each share of Medicus Common Stock subject to such options. The Acquisition is
intended to qualify as a tax-free reorganization within the meaning of Section
368 (a) of the Internal Revenue Code of 1986 and will be accounted for as a
purchase transaction.
The acquisition is subject to approval of the Company's stockholders at a
Special Meeting of Stockholders. The terms of the acquisition are set forth in
the Agreement filed with the Securities and Exchange Commission by QuadraMed on
November 21, 1997.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
NOTE 3 - RESTRUCTURING CHARGES
During February, 1996, the Company commenced a process to evaluate its
current strategic position, including the markets it expects to pursue and its
product offerings in those chosen markets. As a result of decisions made as part
of this evaluation process, the Company recorded $4.7 million in restructuring
charges, representing costs and expenses to exit certain product lines, to
abandon certain product development efforts and to provide for liabilities
resulting from the strategic redirection of the Company, including severance
costs. Specifically, the Company decided to exit the Clinical Case Management
Systems ("CCM") and the Executive Information Systems product lines.
Additionally, product development efforts for the Clinical Data Systems Wincoder
V2 project and portions of the MACH 1 project, which will no longer be utilized
in the Medicus product line, were abandoned and their associated development
costs, which had been previously capitalized, were expensed. Severance costs
associated with an officer and several employees, in addition to the write-off
of a portion of the Contract Management System, were also included in the
restructuring charge.
As part of an ongoing evaluation, the Company refined its strategic planning
process during fiscal 1997, and assessed continuing obligations associated with
the implementation of the plan. The Company continued the process of
implementing its plans during 1997 and, following the stock repurchase from its
founder in the quarter ended February 28, 1997, recorded $2.8 million in charges
to complete its plan, including accruing certain costs to reorganize the
Company's business units, to abandon certain development efforts, and to
increase the allowance for doubtful accounts. Specifically, the Company decided
to relocate operations for its Clinical Data Systems ("CDS") division, based in
Alameda, CA, to the Company's Evanston, IL corporate offices. Costs accrued
associated with the relocation included costs to cancel existing lease
agreements, to terminate employees and to write down abandoned assets. In
addition, the Company increased its reserves for product line exit costs and
severance costs that relate to the remaining customer of the previously
discontinued CCM product line. Also, certain product development efforts for the
Company's Patient Focused Systems ("PFS") products were abandoned, and the
associated development costs, which had been previously capitalized, along with
other related product line exit costs were expensed. The Company also increased
its allowance for doubtful accounts due to the potential for certain additional
billed and unbilled accounts to become uncollectible as a result of the
decisions discussed above.
The components of the restructuring reserve, which the Company expects will
be utilized during the next six months, are as follows:
November 30, May 31,
1997 1997
----------------- -------------------
Product line exit costs $ 671,978 $ 774,425
Business unit reorganization costs 418,550 674,597
Employee termination and severance
costs 537,088 798,394
----------------- -------------------
$ 1,627,616 $ 2,247,416
================= ===================
During the quarter ended November 30, 1997, the Company paid $161,436 in
business unit reorganization costs related to the relocation of the CDS division
and $86,857 in severance benefits and employee termination costs. During the six
months ended November 30, 1997, the Company incurred $79,647 in write-downs of
accounts receivable and $22,800 in product line exit costs related to the
remaining customer of the previously discontinued CCM product line. The Company
also paid $256,047 in business unit reorganization costs related to the
relocation of the CDS division and $261,306 in severance benefits and employee
termination costs.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
NOTE 4 - DISCONTINUED OPERATION
Effective May 31, 1997 the Company adopted a plan to discontinue its contract
services line of business. This separate line of business consisted of
information systems management contracts with Bethesda, Inc. As a result of this
decision, the net assets of the contract services line of business, principally
accounts receivable and unbilled services, property and equipment, and accounts
payable and other accrued liabilities have been reclassified in the Balance
Sheets at November 30, 1997 and May 31, 1997. In addition, the results of
operations of the contract services business have been reclassified in the
Statements of Operations for the quarters and six months ended November 30, 1997
and 1996 and in the Statements of Cash Flows for the six months ended November
30, 1997 and 1996.
The following table summarizes unaudited selected financial data of the
contract services business for the quarters and six months ended November 30,
1997 and 1996:
Three Months Ended Six Months Ended
-------------------------------- -----------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
-------------- ---------------- -------------- -------------
Revenues $2,501,000 $2,539,000 $5,002,000 $5,036,000
Operating
income (loss) (112,000) 73,000 (9,000) 156,000
In December 1997, following meetings with representatives from both Medicus
and Bethesda, Inc., the contracts to manage the information systems functions
were terminated, effective December 31, 1997. As a result, the Company recorded
$150,000 in related settlement costs for the quarter and six months ended
November 30, 1997.
NOTE 5 - EARNINGS PER SHARE
Earnings (Loss) per common share have been computed by dividing net income
(loss) by the weighted average of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
on the exercise of stock options and the warrant (when dilutive), using the
treasury method from the date of grant. Common stock equivalents are not
included in the calculation of loss per share because they are antidilutive.
NOTE 6 - NOTE PAYABLE AND LINE OF CREDIT
On December 5, 1996, the Company reached an agreement in principle with its
founder, Richard C. Jelinek, to purchase from Mr. Jelinek, and a trust of which
he is a beneficiary (the "Trust"), one million shares of Medicus Common Stock
and 500 shares of Medicus Voting Preferred Stock. In exchange, the Company
agreed to pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0 million in
8% two-year promissory notes, and issued to Mr. Jelinek and the Trust 400,000
five-year warrants to purchase Medicus Common Stock at $8.00 per share. Interest
costs incurred and paid on the promissory notes totaled $40,040 and $79,705 for
the quarter and six months ended November 30, 1997. In December 1997, the notes
and related interest were redeemed in their entirety by QuadraMed.
In April 1997, the Company entered into an agreement with a bank that
provides for a secured, revolving line of credit up to a maximum of $2.5
million. The credit facility, which has an initial maturity date of October
1998, bears interest at the bank's prime rate and provides the bank with a first
security interest in all assets of the Company. Certain financial covenants and
reporting requirements are also included in the agreement. As of November 30,
1997, the Company had not utilized the line of credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS
This report contains statements that may be considered forward-looking, such
as the discussion of the Company's strategic goals, new products and cash flows.
These statements speak of the Company's plans, goals or expectations, refer to
estimates, or use similar terms. Actual results could differ materially from the
results indicated by these statements because the realization of those results
is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed in
more detail below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward-looking statements included in
this document are based upon information presently available, and the Company
assumes no obligation to update any forward-looking statement.
The Company's quarterly operating results historically have varied depending
upon such factors as the timing of significant sales and the timing of new
product introductions. Consequently, the results for any one quarter may not be
indicative of future operating results.
The following table sets forth for the periods indicated (i) the percent of
revenues represented by certain line items in the Company's Statements of
Operations and (ii) the percentage change in each line item from the prior year
period.
<TABLE>
<CAPTION>
Percent of Revenues Percentage Percent of Revenues Percentage
Three Months Ended Increase Six Months Ended Increase
Nov. 30, Nov. 30, (Decrease) Nov. 30, Nov. 30, (Decrease)
1997 1996 1996 to 1997 1997 1996 1996 to 1997
---- ---- ------------ ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Software products and services 37% 44% (39)% 43% 44% (12)%
Maintenance and support services 63 56 (17) 57 56 (9)
---- ---- ---- ---- ---- ----
100 100 (27) 100 100 (10)
---- ---- ---- ---- ---- ----
Costs and expenses
Software products and services <F1> 38 32 (27) 34 30 1
Maintenance and support services <F1> 58 49 (1) 53 43 11
---- ---- ---- ---- ---- ----
51 41 (10) 45 37 7
Marketing, general and administrative 70 43 19 64 46 26
Research and development 14 14 (25) 18 13 25
---- ---- ---- ---- ---- ----
135 98 1 127 96 19
---- ---- ---- ---- ---- ----
Operating income (loss) (35) 2 N/M (27) 4 N/M
Interest and other income, net - 3 (96) - 3 (97)
---- ---- ---- ---- ---- ----
Income (Loss) from continuing
operations before income taxes (35) 5 N/M (27) 7 N/M
Provision for (benefit from) income taxes (14) 2 N/M (10) 3 N/M
---- ---- ---- ---- ----
Income (Loss) from continuing
operations (21) 3 N/M (17) 4 N/M
Discontinued operation, net of taxes (2) 1 N/M - 1 N/M
---- ---- ---- ---- ----
Net income (loss) (23)% 4% N/M (17)% 5% N/M
==== ==== ==== ==== ====
<FN>
<F1> Shown as a percent of related revenues.
</FN>
</TABLE>
Operating revenues are derived from two sources: (1) license fees and the
related services for licensing the Company's proprietary software products; and
(2) maintenance and support services related to such software products.
<PAGE>
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
SOFTWARE PRODUCTS AND SERVICES
Revenues decreased 39% to $1.4 million for the quarter and 12% to $3.6
million for the six months, primarily due to sales force turnover and continued
weakness in the Company's primary markets and product lines. Also contributing
to the decline for the six months were delays in the release of certain Windows
based products from the Clinical Data Systems and Decision Support Systems
divisions. Costs and expenses decreased 27% for the quarter but increased 1% for
the six months, compared to the corresponding prior year period, and as a
percentage of related revenues, increased to 38% from 32% for the quarter and to
34% from 30% for the six months. The decrease for the quarter and six months
resulted primarily from lower personnel and service-related expenses, partially
offset by increased amortization of capitalized software for the newly released
products. In addition, costs and expenses for the six months ended November 30,
1996 included the effect of the Company's decision to reduce its reserve for
continuing obligations on product line exit costs by $200,000, as a result of
favorable negotiations with its customers.
MAINTENANCE AND SUPPORT SERVICES
Revenues decreased 17% to $2.4 million for the quarter and 9% to $4.8 million
for the six months, primarily due to modest increases associated with customer
migrations being more than offset by discontinued support services on individual
modules from the Company's PFS customers as well as slightly higher
cancellations overall. Costs and expenses for the quarter decreased 1% but
increased 11% for the six months compared to the corresponding prior year
periods, and as a percentage of related revenues, increased to 58% from 49% for
the quarter and to 53% from 43% for the six months. The increase for the six
months is primarily due to additional labor costs incurred to support new
product releases from the Clinical Data Systems and Decision Support Systems
divisions and higher labor costs resulting from shifts to maintenance and
support activities from development activities.
MARKETING, GENERAL AND ADMINISTRATIVE
Expenses increased 19% to $2.7 million for the quarter and 26% to $5.4
million for the six months. The increase was primarily due to $162,000 and
$301,000 in costs and expenses, for the quarter and six months, respectively,
related to the move of the Alameda office. Additionally, costs and expenses for
the quarter and six months ended November 30, 1996 include the effect of
$175,000 and $350,000, respectively, in administrative fees the Company received
as a result of the services agreement with MCS. Costs and expenses for the
quarter ended November 30, 1996 also include the effect of the Company's
decision to reduce its reserve for future severance obligations by $100,000, due
to favorable settlements with two of its employees.
RESEARCH AND DEVELOPMENT
Actual research and development expenses decreased 52% to $576,000 for the
quarter and 29% to $1,627,000 for the six months. Research and development costs
presented in the accompanying financial statements were $522,000 and $1,503,000
for the quarter and six months, respectively, compared to $699,000 and
$1,204,000 in the corresponding prior year periods. The Company also capitalized
software development costs of $54,000 and $124,000 during the quarter and six
months, respectively, compared to $476,000 and $947,000 in the corresponding
prior year periods, reflecting the release of new products in the quarter ended
August 31, 1997 and the resulting cessation of software cost capitalization.
Actual research and development expenditures were 42% and 45% of software
products and services revenues for the quarter and six months ended November 30,
1997, respectively, compared to 52% and 56% in the corresponding prior year
periods.
During the first six months of fiscal 1998, the Company's development efforts
were focused on the Decision Support Systems product line and the Clinical Data
Systems product line. During the first six months of fiscal 1997, the Company
was engaged in several development projects, including the Resource Case
Management System, and the Decision Support Systems and Clinical Data Systems
product lines.
<PAGE>
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
INTEREST AND OTHER INCOME, NET
Interest and other income, net decreased 96% to $6,000 for the quarter and
97% to $9,000 for the six months, primarily due to lower average cash balances
and interest expense incurred relating to the promissory notes.
INCOME TAXES
The Company's effective tax rate was 38.5% for the quarter and six months
ended November 30, 1997, compared to 37.3% and 38.8% in the corresponding prior
periods.
FINANCIAL CONDITION
As a result of the Company's commitment to expand its software products and
services, funds are required to support its ongoing product research and
development activities and the infrastructure required to serve its customer
base. Historically, cash generated from its operations has been an important
contributor to these needs. As a result of the market factors adversely
affecting fiscal 1997 results, as well as the stock repurchase transaction, the
Company was required to use a significant portion of its cash reserves. It is
expected that, following the restructuring efforts begun in prior periods, the
Company will return to a situation where cash from operations will provide an
important source of liquidity to support its normal capital needs, although
numerous factors, including any reductions in revenues from currently
anticipated amounts, could affect the amount of such cash available.
At November 30, 1997, the Company had available cash reserves of $244,000. In
addition, the Company had a $2.5 million standby credit facility as well as
funds from QuadraMed available. The Company anticipates cash outlays of
approximately $1.7 million in the next six months, resulting primarily from its
decision to reorganize its business units and to exit certain product lines.
However, cash outlays related to the Company's 8% promissory notes no longer
exist since the notes were redeemed in their entirety by QuadraMed in December,
1997.
While the Company has experienced negative cash flows from operating
activities during the past two fiscal years, management believes that, as a
result of significant reductions in expenses, its cash flows will improve. While
there can be no assurance that this will occur, the Company currently believes
that it will have adequate financial resources available from operations and the
available credit facility and intercompany (QuadraMed) sources to provide
sufficient liquidity to meet its ordinary capital requirements for the
foreseeable future, including cash outlays related to the Company's
restructuring plan.
During its second fiscal quarter, the Company billed its clients in advance
for the next calendar year's maintenance and support services provided on its
software products. This generated an increase in the Company's accounts
receivable and deferred revenue balances, and will increase cash balances in
subsequent months as the related accounts receivable are collected.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," issued in February 1997, changes the method of calculating earnings per
share and will be effective for the Company's financial statements for the year
ending May 31, 1998. Earlier application is not permitted. However, the Company
is permitted to disclose pro forma earnings per share amounts computed using
SFAS 128 in periods prior to adoption. Upon adoption, all prior period earnings
per share data presented shall be restated to conform to SFAS 128. The
calculation of earnings per share under SFAS 128 is simpler than prior methods
and more consistent with international accounting standards. Because a majority
of the Company's common stock equivalents have exercise prices in excess of the
Company's Common Stock price, the Company does not believe that the adoption of
SFAS 128 will have a significant impact on amounts reported as net income (loss)
per common share.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of security holders during the
Medicus Systems Corporation Annual Meeting of Stockholders held November 17,
1997:
Votes Cast Authority
Description of Matter For Withheld
------------ ------------
1. Election of Directors:
William G. Brown 5,157,437 18,877
Dorsey R. Gardner 5,157,623 18,691
Jon E. M. Jacoby 5,157,623 18,691
Richard C. Jelinek 5,151,778 24,536
John P. Kunz 5,157,323 18,991
Risa Lavizzo-Mourey 5,157,623 18,691
Patrick C. Sommers 5,157,578 18,736
Gail L. Warden 5,157,623 18,691
Votes Cast Votes Cast Broker
For Against Abstentions Non-Votes
------------ ------------ ------------ ----------
2. Proposal to approve the
Company's 1997 Directors'
Stock Option Plan 5,102,927 48,794 10,604 13,989
Item 5. Other Information.
On November 9, 1997, QuadraMed Corporation, a Delaware corporation
("QuadraMed") acquired (the "Acquisition") 56.7% of the outstanding capital
stock of the Company. The Acquisition was completed by means of Stock Purchase
Agreements, dated as of November 9, 1997, with certain stockholders of the
Company (the "Selling Stockholders"). Pursuant to the terms of the Stock
Purchase Agreements, the Selling Stockholders agreed to sell an aggregate of
3,111,105 shares of Medicus Common Stock to QuadraMed. In consideration for the
transfer of these shares to QuadraMed, QuadraMed paid to the Selling
Stockholders $7.50 per share, in cash, without interest, or approximately $23.3
million, together with warrants (the "Warrants") entitling the Selling
Stockholders to acquire 0.3125 shares of QuadraMed Common Stock for each share
of the Medicus Common Stock sold (subject to adjustment in accordance with the
Agreement). The Warrants entitle the Selling Stockholders to purchase QuadraMed
Common Stock at a price of $24.00 per share, on the terms set forth in the
Warrants.
Simultaneously with the execution of the Stock Purchase Agreements, QuadraMed
and the Company entered into an Agreement and Plan of Reorganization dated as of
November 9, 1997 (the "Agreement") pursuant to which a wholly-owned subsidiary
of QuadraMed will be merged, subject to the approval of the stockholders of
QuadraMed, with and into the Company (the "Merger"). At the effective time of
the Merger, the stockholders of the Company participating in the Merger will
exchange all outstanding shares of Medicus Common Stock for any of (i) a cash
payment of $7.50 per share of Medicus Common Stock, (ii) 0.3125 shares of
QuadraMed Common Stock per share of Medicus Common Stock sold (subject to
adjustment in accordance with the Agreement), or (iii) a combination of
QuadraMed Common Stock and cash. In addition, all stock options previously
issued by Medicus and outstanding at the time of the Merger will be assumed by
QuadraMed at an exchange ratio of 0.3565 shares of QuadraMed Common Stock for
each share of Medicus Common Stock subject to such options. The Acquisition is
intended to qualify as a tax-free reorganization within the meaning of Section
368 (a) of the Internal Revenue Code of 1986 and will be accounted for as a
purchase transaction.
<PAGE>
PART II - OTHER INFORMATION, Continued
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K (dated November 9, 1997) with the
Securities and Exchange Commission on November 10, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MEDICUS SYSTEMS CORPORATION
---------------------------
(Registrant)
January 14, 1998 /s/ Patrick C. Sommers
- ------------------------------------- --------------------------------------
Patrick C. Sommers
President
(Chief Executive Officer)
January 14, 1998 /s/ Bernie J. Murphy
- ------------------------------------- --------------------------------------
Bernie J. Murphy
Vice President
(Chief Financial Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-Q for the quarterly period ended November 30, 1997, and is
qualified in its entirety by reference to such document.
</LEGEND>
ITEM DESCRIPTION
<CURRENCY> U.S. Dollars
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> May-31-1998
<PERIOD-START> Sep-01-1997
<PERIOD-END> Nov-30-1997
<EXCHANGE-RATE> 1
<CASH> 244,217
<SECURITIES> 0
<RECEIVABLES> 14,515,061
<ALLOWANCES> 1,290,459
<INVENTORY> 181,572
<CURRENT-ASSETS> 15,642,170
<PP&E> 7,556,081
<DEPRECIATION> 5,578,254
<TOTAL-ASSETS> 24,139,256
<CURRENT-LIABILITIES> 14,782,695
<BONDS> 1,000,000
0
500,000
<COMMON> 64,928
<OTHER-SE> 7,791,903
<TOTAL-LIABILITY-AND-EQUITY> 24,139,256
<SALES> 3,768,440
<TOTAL-REVENUES> 3,768,440
<CGS> 1,916,696
<TOTAL-COSTS> 1,916,696
<OTHER-EXPENSES> 522,375
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,040
<INCOME-PRETAX> (1,326,844)
<INCOME-TAX> (510,835)
<INCOME-CONTINUING> (816,009)
<DISCONTINUED> (69,068)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (885,077)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
