<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
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)
<TABLE>
<S> <C>
DELAWARE 36-4056769
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE ROTARY CENTER, SUITE 1111
EVANSTON, ILLINOIS 60201 (847)570-7500
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER)
</TABLE>
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 5,528,194 shares of common stock outstanding as of April 15,
1998.
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1998 1997
------------ -------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 629 $ 1,205
Accounts receivable and unbilled services, net............ 10,207 10,501
Inventories............................................... 204 214
Prepaid expenses and other................................ 426 259
Prepaid and deferred income taxes......................... -- 2,148
Net assets of discontinued operation...................... -- 111
-------- -------
11,466 14,438
-------- -------
PROPERTY AND EQUIPMENT, NET................................. 1,574 2,335
INTERNALLY DEVELOPED SOFTWARE, NET.......................... 2,356 3,088
INSTALLMENT ACCOUNTS RECEIVABLE DUE AFTER ONE YEAR, NET..... 379 533
DEFERRED INCOME TAXES....................................... -- 2,455
-------- -------
$ 15,775 $22,849
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Payable to QuadraMed Corporation.......................... $ 2,079 $ --
Accounts payable.......................................... 375 598
Accrued compensation...................................... 552 453
Accrued restructuring charge.............................. 1,056 2,247
Other accrued liabilities................................. 1,310 1,138
Deferred revenue.......................................... 8,633 6,911
Notes payable............................................. -- 1,000
-------- -------
14,005 12,347
-------- -------
Notes payable............................................... -- 1,000
-------- -------
Stockholders' equity
Preferred stock........................................... 500 500
Common stock.............................................. 65 65
Capital in excess of par value............................ 22,342 22,064
Capital in excess of par value -- warrant................. 944 944
Less treasury stock:
Preferred stock, at cost............................... (500) (500)
Common stock, at cost.................................. (5,687) (5,687)
Accumulated deficit....................................... (15,894) (7,884)
-------- -------
1,770 9,502
-------- -------
$ 15,775 $22,849
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Software products and services............................ $ 1,222 $ 1,688
Maintenance and support services.......................... 1,959 2,376
------- -------
3,181 4,064
Costs and expenses
Software products and services............................ 481 801
Maintenance and support services.......................... 1,114 1,623
------- -------
1,595 2,424
Marketing, general and administrative..................... 2,598 3,149
Research and development.................................. 300 385
Restructuring charges..................................... -- 2,800
Stock repurchase.......................................... -- 1,690
------- -------
4,493 10,448
------- -------
Operating loss.............................................. (1,312) (6,384)
Interest and other income, net............................ -- 79
------- -------
Loss from continuing operations before income taxes......... (1,312) (6,305)
Provision for (benefit from) income taxes................. 5,306 (2,267)
------- -------
Loss from continuing operations............................. (6,618) (4,038)
Discontinued operation, net of taxes........................ -- 108
------- -------
Net loss.................................................... $(6,618) $(3,930)
======= =======
Basic and Diluted loss per share
Continuing operations..................................... $ (1.20) $ (0.62)
Discontinued operation.................................... -- 0.02
------- -------
$ (1.20) $ (0.60)
======= =======
Basic and Diluted weighted average shares outstanding...... 5,510 6,503
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Software products and services............................ $ 4,850 $ 5,723
Maintenance and support services.......................... 6,719 7,623
------- -------
11,569 13,346
Costs and expenses
Software products and services............................ 1,728 1,981
Maintenance and support services.......................... 3,629 3,864
------- -------
5,357 5,845
Marketing, general and administrative..................... 7,984 7,402
Research and development.................................. 1,803 1,766
Restructuring charges..................................... -- 2,800
Stock repurchase.......................................... -- 1,690
------- -------
15,144 19,503
------- -------
Operating loss.............................................. (3,575) (6,157)
Interest and other income, net............................ 9 355
------- -------
Loss from continuing operations before income taxes......... (3,566) (5,802)
Provision for (benefit from) income taxes................. 4,438 (1,948)
------- -------
Loss from continuing operations............................. (8,004) (3,854)
Discontinued operation, net of taxes........................ (6) 428
------- -------
Net loss.................................................... $(8,010) $(3,426)
======= =======
Basic and Diluted loss per share
Continuing operations..................................... $ (1.45) $ (0.59)
Discontinued operation.................................... -- 0.06
------- -------
$ (1.45) $ (0.53)
======= =======
Basic and Diluted weighted average shares outstanding....... 5,508 6,491
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations........................... $(8,010) $ (3,426)
Adjustments to reconcile to net cash from operating
activities:
Depreciation of property and equipment................. 596 528
Amortization of internally developed software.......... 738 514
Accrued restructuring charges.......................... 860 1,694
Stock repurchase....................................... -- 1,690
Provision for doubtful accounts........................ 1,000 368
Changes in current assets and current liabilities:
Accounts receivable and unbilled services............ (706) (4,982)
Due from Managed Care Solutions, Inc................. -- 647
Inventories.......................................... 10 --
Prepaid expenses and other current assets............ (167) 597
Deferred income taxes................................ 2,758 (1,948)
Accounts payable and other accrued liabilities....... 728 514
Payable to QuadraMed Corporation..................... 2,079 --
Accrued compensation................................. 99 (642)
Deferred revenue..................................... 1,722 3,768
Other, net........................................... (277) 415
------- --------
1,430 (263)
------- --------
Cash flows from investing activities:
Additions to property and equipment....................... (377) (538)
Additions to internally developed software................ -- (1,809)
Proceeds from maturity of short-term investments.......... -- 4,784
Proceeds from sale of short-term investments.............. -- 79,688
Purchases of short-term investments....................... -- (81,778)
------- --------
(377) 347
------- --------
Cash flows from financing activities:
Repayment of notes payable................................ (2,000) --
Sale of common stock...................................... 247 126
------- --------
(1,753) 126
------- --------
Net increase (decrease) in cash and cash equivalents........ (700) 210
Cash and cash equivalents, beginning of period.............. 1,205 765
Net cash activity from discontinued operation............... 124 --
------- --------
Cash and cash equivalents, end of period.................... $ 629 $ 975
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
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") a majority subsidiary of QuadraMed
Corporation reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of the operating
results for the quarters and nine months ended February 28, 1998 and 1997,
respectively. 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.
NOTE 2 -- QUADRAMED ACQUISITION OF MAJORITY INTEREST
In November 1997, QuadraMed Corporation, a Delaware corporation
("QuadraMed") acquired 3,111,105 shares of Common Stock of Medicus Systems
Corporation ("Medicus") or 56.7 percent of the then issued and outstanding
shares of Medicus Common Stock from certain selling stockholders. Pursuant to
individual stock purchase agreements (the "Stock Purchase Agreements"),
QuadraMed agreed to pay the selling stockholders $7.50 per share, in cash and a
note payable, together with a warrant ("Warrant") entitling the selling
stockholders to acquire 0.3125 shares of QuadraMed Common Stock for each share
of Medicus Common Stock sold to QuadraMed. The exercise price of the Warrants is
$24 per share of QuadraMed Common Stock subject to adjustments and certain
limitations. The consideration paid by QuadraMed to selling stockholders was
approximately $23,300,000 in cash, plus Warrants to purchase an aggregate of
972,220 shares of QuadraMed Common Stock at $24 per share.
In conjunction with the Stock Purchase Agreements discussed above,
QuadraMed entered into an Agreement and Plan of Reorganization in November 1997
(the "Merger Agreement"), by and among QuadraMed and Medicus to purchase the
remaining 43.3 percent of outstanding Common Stock held by Medicus stockholders.
The consummation of the merger between both companies will result in the
extinguishment and conversion of all the outstanding shares of Common Stock of
Medicus into the right to receive any of (i) a cash payment of $7.50 per share
of Medicus Common Stock, (ii) .3125 shares of Common Stock of QuadraMed for each
share of Medicus Common Stock, subject to adjustment and certain limitations as
provided in the Merger Agreement, or (iii) a combination of cash and QuadraMed
Common Stock.
In connection with the agreements discussed above, QuadraMed purchased its
56.7 percent interest in Medicus for a purchase price of approximately
$26,300,000, which was comprised of a cash payment of $23,300,000, and the value
of options and warrants issued of $700,000 and transaction costs of $2,300,000.
QuadraMed also assumed two-year promissory notes aggregating $2,000,000 which
were bearing interest at 8 percent and were repaid by QuadraMed in December
1997. QuadraMed is expected to complete the acquisition of Medicus in its
quarter ending June 30, 1998.
5
<PAGE> 7
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:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1998 1997
------------ ----------
<S> <C> <C>
Product line exit costs..................................... $ 502,000 $ 774,000
Business unit reorganization costs.......................... 274,000 675,000
Employee termination and severance costs.................... 280,000 798,000
---------- ----------
$1,056,000 $2,247,000
========== ==========
</TABLE>
During the quarter ended February 28, 1998, the Company paid $145,000 in
business unit reorganization costs related to the relocation of the CDS
division, $257,000 in severance benefits and employee termination costs and
wrote-off $170,000 of accounts receivable associated with its CDS division.
During the nine months ended February 28, 1998, the Company incurred $250,000 in
write- downs of accounts receivable and $22,000 in product line exit costs
related to the remaining customer of the previously discontinued CCM product
line. The Company also paid $401,000 in business unit reorganization costs
related to the relocation of the CDS division and $518,000 in severance benefits
and employee termination costs.
6
<PAGE> 8
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 to Net Assets of
Discontinued Operation in the Balance Sheets at February 28, 1998 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 nine
months ended February 28, 1998 and 1997 and in the Statements of Cash Flows for
the nine months ended February 28, 1998 and 1997.
The following table summarizes unaudited selected financial data of the
contract services business for the quarters and nine months ended February 28,
1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues............................. $-- $2,506,000 $5,002,000 $7,542,000
Operating income (loss).............. -- 44,000 (9,000) 140,000
</TABLE>
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 in November 1997.
NOTE 5 -- EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share" effective for its quarter ended
February 28, 1998. SFAS 128 requires a dual presentation of basic and diluted
earnings per share. Basic earnings per share is based on the weighted average
number of common shares outstanding during the periods.
Diluted earnings per common share is 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 warrants (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.
All prior period earnings numbers have been restated to conform to SFAS 128.
Due to the Company's net loss position in all periods, weighted shares used for
both basic and diluted earnings per share are equivalent.
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 nine months ended February 28, 1998. In December 1997, the notes
and related interest were repaid 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. The line of credit was
terminated by QuadraMed in January 1998.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS
Except for the historical financial information contained herein, the
matters discussed in this Quarterly Report on Form 10-Q may be considered
"forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include declarations regarding the
intent, belief or current expectations of the Company and its management.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve a number of risks and
uncertainties and that actual results could differ materially from those
indicated by such forward-looking statements.
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.
In November 1997, QuadraMed Corporation acquired a 56.7% majority interest
in the Company and executed an agreement to merge with the Company. It is
anticipated that the merger will be completed in May or June 1998. Since
November 1997, QuadraMed has controlled the day-to-day operations of the
Company, and the business of the Company has been integrated into QuadraMed's
business and the Company's financial results are included in QuadraMed's
consolidated financial statements. Investors are advised to consider the
Company's performance in conjunction with the business and financial
performance of QuadraMed.
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.
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.
SOFTWARE PRODUCTS AND SERVICES
Revenues decreased 28% to $1.2 million for the quarter and 15% to $4.9
million for the nine 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 nine 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 40% for the quarter and 13% for the nine
months, compared to the corresponding prior year period, and as increased a
percentage of related revenues, decreased to 39% from 47% for the quarter and
increased to 36% from 35% for the nine months ended February 28, 1998. The
decrease in cost of software products and services is primarily due to fewer
personnel associated with the installation of products. As a percentage of
software products and services, costs decreased primarily due to continued
weaknesses in the Company's primary markets and product lines during the quarter
ended February 28, 1998.
MAINTENANCE AND SUPPORT SERVICES
Revenues decreased 18% to $2.0 million for the quarter and 12% to $6.7
million for the nine months, primarily due to modest increases associated with
customer migrations being more than offset by higher cancellations overall
during the quarter and nine months ended February 28, 1998. Costs and expenses
for the quarter decreased 31% and 6% for the quarter and nine months compared to
the corresponding prior year periods, and as a percentage of related revenues,
decreased to 57% from 68% for the quarter and increased slightly to 54% from 51%
for the nine months. Costs and expenses decreased during the quarter primarily
due to fewer personnel associated with such revenue along with a slight shift in
personnel from customer support to research and development.
MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses decreased 17% to $2.6
million for the quarter and increased 8% to $8.0 million for the nine months.
The decrease in the quarter ended February 28, 1998 is primarily attributed to
significant reductions in general and administrative personnel in the Company's
headquarters in Evanston, Illinois, including personnel in the finance and
accounting departments, which responsibilities have been transferred to
QuadraMed and the elimination of certain senior management of the Company. This
was offset by an increase in the Company's accounts receivable allowance for
doubtful of approximately $1,000,000 and the writedown of certain equipment for
approximately $400,000 as Management of QuadraMed determined such equipment had
no future realizeable value.
8
<PAGE> 10
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 22% to $300,000 for the
quarter and increased to 2% to $1.8 million for the nine months. The Company
capitalized software development costs of zero and $124,000 in the quarter and
nine months ended February 28, 1998. Research and development expenditures as a
percentage of software products and services revenue were 25% and 37% for the
quarter and nine months ended February 28, 1998, respectively, compared to 23%
and 31% in the corresponding prior year periods. The increase in research and
development expenditures as a percentage of software products and services
revenue for the quarter and the nine months ended February 28, 1998 is primarily
attributed to the decrease in software products and services revenue.
During the first nine 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 nine 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.
RESTRUCTURING CHARGES
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. As a result of decisions made in
the quarter ended February 28, 1997, and following the stock repurchase from its
founder, $2.8 million in charges were recorded for future costs to reorganize
the Company's business units, to provide for additional costs, to exit
discontinued product lines, 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 division, based in Alameda,
CA, to the Company's Evanston, IL corporate offices. Costs associated with the
relocation, which is expected to be completed during the next twelve months,
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 discontinued Clinical Case Management Systems product line.
Also, certain product development efforts for the Company's Patient Focused
Systems products were abandoned, and the associated development costs, which had
been previously capitalized, along with other related product line exit costs
were expensed.
STOCK REPURCHASE
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek
one million shares of Common Stock and 500 shares of Voting Preferred Stock.
Also, Mr. Jelinek agreed to resign as Chairman and agreed not to attempt to seek
voting control of the Company for a period of five years. In exchange, the
Company agreed to pay Mr. Jelinek $4.5 million in cash and $2.0 million in 8%
two-year promissory notes, and will issue to Mr. Jelinek 400,000 warrants to
purchase Common Stock at $8.00 per share. The promissory notes were repaid by
QuadraMed in December 1997.
The Company's results of operations for the quarter and nine months ended
February 28, 1997 include $1,690,042 in related costs and expenses, as a result
of the Agreement. Amounts in excess of the fair value of the Common Stock and
the exercise price of the Voting Preferred Stock aggregating $1,319,000, have
been expensed as these amounts are attributable to the control represented by
the stock being acquired and are not expected to benefit the Company's future
operations. Also included are $371,042 in outside professional fees incurred to
consummate the Agreement. The Company recorded the charge in the quarter ended
February 28, 1997, even though consummation did not occur until March 19, 1997,
because, prior to February 28, 1997, it controlled enough votes through the
Board of Directors and the receipt of irrevocable proxies to ensure approval of
the Agreement at the Annual Meeting of Stockholders.
9
<PAGE> 11
INTEREST INCOME
Interest and other income, net decreased to zero and $9,000 for the quarter
and nine months ended February 28, 1998, compared to $79,000 and $355,000 in the
corresponding period last year. The decreases were primarily due to a decrease
in the cash and investment balances.
INCOME TAXES
Based on current and planned operations, the Company has established a
full valuation allowance of approximately $5.3 million against its deferred tax
assets, as it believes that it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
FINANCIAL CONDITION AND LIQUIDITY
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 and
funding available from QuadraMed, 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 February 28, 1998, the Company had available cash reserves of $629,000.
In addition, the Company has available funding from QuadraMed. 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 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.
Cash flow from operations to $1.4 of positive cash flow in the three
months ended February 28, 1998 as compared to a cash outflow of $263,000 for
the three months ended February 28, 1998. This increase is primarily
attributable to a decrease in the Company's net loss after factoring out
non-cash income tax expenses during the quarter ended February 28, 1998. Cash
flows from financing activities included $2.0 million if repayments of notes
payable during the quarter ended February 28, 1998.
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 became effective for the Company's quarter ended February 28, 1998.
All prior period earnings per share data have been restated to conform to SFAS
128.
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
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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)
April 23, 1998 /s/ BERNIE J. MURPHY
--------------------------------------
Bernie J. Murphy
Vice President
(Chief Financial Officer)
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