<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-36189
PROSPECTUS
3,300,000 SHARES
LOGO
COMMON STOCK
------------------------
Of the shares of common stock, $0.01 par value (the "Common Stock"),
offered hereby, 2,972,198 shares are being sold by QuadraMed Corporation, a
Delaware corporation ("QuadraMed" or the "Company"), and 327,802 shares are
being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. The Company's Common Stock is listed on the
Nasdaq National Market under the symbol "QMDC." On October 20, 1997 the last
sale price of the Common Stock as reported on the Nasdaq National Market was
$18.00 per share. See "Price Range of Common Stock."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share..................... $17.625 $0.92 $16.705 $16.705
Total(3)...................... $58,162,500 $3,036,000 $49,650,568 $5,475,932
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several underwriters identified elsewhere herein (the "Underwriters")
against certain liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
495,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover overallotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $66,886,875,
$3,491,400 and $57,919,543, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel for the Underwriters. It
is expected that delivery of the Common Stock will be made against payment
therefor on or about October 24, 1997 in New York, New York.
------------------------
JEFFERIES & COMPANY, INC.
OPPENHEIMER & CO., INC.
PIPER JAFFRAY INC.
PACIFIC GROWTH EQUITIES, INC.
October 21, 1997
<PAGE> 2
[ARTWORK]
[THE INSIDE FRONT COVER OF THE PROSPECTUS WILL CONTAIN A GRAPHIC COMPRISED OF A
SERIES OF DISCS ILLUSTRATING THE INTEGRATION AND INTERACTION BETWEEN THE
COMPANY'S SOFTWARE PRODUCTS.]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. In addition to the historical
information contained herein, the discussion in this Prospectus may contain
certain forward looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors" below. Unless
the context otherwise requires, references herein to the "Company" and
"QuadraMed" refer to QuadraMed Corporation, a Delaware corporation, its wholly
owned subsidiaries and QuadraMed Corporation, its California predecessor. Except
as otherwise noted herein, information in this Prospectus assumes no exercise of
the Underwriters' overallotment option.
THE COMPANY
QuadraMed develops, markets and sells software products and services
designed to enable health care providers and payors to increase operational
efficiency, improve cash flow, measure the cost of care and effectively
administer managed care contracts. The Company's QuanTIM(R) suite of products is
an integrated offering of electronic data interchange ("EDI"), financial
management and decision support solutions for both providers and payors. In
addition, the Company provides business office outsourcing and cash flow
management services. To date, the Company's products have been purchased by over
670 health care providers and payors in 37 states.
Pressure to control rising health care costs is driving a movement toward
managed care and new complex forms of reimbursement and is shifting the
financial risk of providing care from payors to providers. These trends are
creating the need for information systems that enable providers to increase the
efficiency of the business office function. Although many health care providers
have made substantial capital investments over the past decade in financial and
administrative information systems, these legacy systems were designed as a
departmental solution in a fee-for-service environment and are not well equipped
to handle the increasingly complex demands of managing the health care
enterprise under managed care reimbursement models. The Company believes that in
addition to improving their systems infrastructure, providers and payors are
seeking to reduce costs by outsourcing various functions and departments,
including the business office, to third parties.
The Company's products are designed to simplify and accelerate the buying
decision. Accordingly, the Company targets its marketing efforts toward a single
buyer, the chief financial officer, and offers competitively priced products
that are modular, scalable and require relatively short implementation cycles.
The Company's QuanTIM(R) suite leverages a customer's existing technology
investment by being compatible with existing legacy systems, thereby avoiding
major capital expenditures. The Company's products thus enhance and prolong the
life of existing information systems, while achieving the functionality required
in today's competitive health care environment. In addition, QuadraMed generally
is able to demonstrate to its customers a rapid payback on the purchase of its
products. The Company offers products and services in the following categories:
Electronic data interchange products enable the editing and formatting
of all claims submitted to payors to help ensure accuracy and completeness,
which results in more efficient reimbursement of third party claims. The
Company collects and utilizes detailed clinical and financial information
from customers who license its EDI products. This data, which is
supplemented with similar, publicly-available information, forms the basis
of the Company's proprietary databases for its decision support products.
Financial management products utilize the enhanced data stream created
by the Company's EDI products to allow providers to track payor contract
terms and review medical billing information to ensure
3
<PAGE> 4
that bills are properly coded and include all services rendered. These
capabilities facilitate a provider's ability to obtain timely and accurate
reimbursement and to measure the profitability of managed care contracts.
Further, the Company offers a product that is designed to improve the
ability of health care providers to prevent Medicare and Medicaid fraud and
abuse by identifying potentially fraudulent coding in their medical bills.
In addition, the Company's electronic document imaging products allow the
Company's customers to improve work flow and move toward a paperless office
environment.
Decision support products include database analysis software and
national and regional benchmark data that enable customers to perform
clinical, financial and marketing analyses. These products utilize the
enhanced data stream created by the Company's EDI and financial management
products to build proprietary databases that enable providers to measure
more accurately the resources consumed in the provision of care and to
compare clinical outcomes against the associated costs.
Business office outsourcing and cash flow management services are
offered to health care providers, many of which are recognizing the value
of outsourcing their business office operations to reduce costs, increase
cash flow and improve operating efficiencies. The Company believes that it
possesses a significant advantage in the provision of outsourcing services
due to its ability to use its own QuanTIM(R) suite of software products and
its centralized cash flow management operations.
The Company's strategy is to continue to strengthen its position as a
leading provider of EDI, financial management and decision support software in
the health care market. In addition, the Company plans to leverage its software
products to expand its outsourcing business. Key elements of the Company's
strategy include (i) expanding its customer base through its direct sales force
and hospital association endorsements, (ii) leveraging cross-selling
opportunities within its existing customer base, (iii) selectively acquiring
complementary products, technologies and businesses, (iv) capitalizing on the
trend toward outsourcing and (v) expanding the Company's proprietary databases
for its decision support and financial management products with source data from
its EDI customers.
Since the Company's initial public offering in October 1996, the Company
has remained focused on these strategies. In the last twelve months, the Company
has added more than 300 new customers, including more than 80 new EDI customers,
which the Company believes offer significant cross-selling opportunities.
Approximately 60% of the Company's new contracts in the first half of 1997
resulted from cross-selling to existing customers. In the past year, the Company
has also completed four acquisitions, enhancing the Company's product and
services offerings and expanding its customer base. Moreover, revenues for the
Company's business office outsourcing services division in the first half of
1997 increased by 256% over the same period in 1996, as a result of acquisitions
and the Company's increased focus on this business.
The Company's executive offices are located at 80 East Sir Francis Drake
Blvd., Suite 2A, Larkspur, CA 94939. The Company's telephone number is (415)
461-7725.
DRGX(R) and QuanTIM(R) are registered trademarks of the Company. ASCX(TM),
QuadraMed(TM) and the logo of the Company are trademarks of the Company. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.
4
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 2,972,198 shares
Common Stock offered by the Selling Stockholders.... 327,802 shares
Total..................................... 3,300,000 shares
Common Stock to be outstanding after the Offering... 9,260,917 shares (1)
Use of proceeds..................................... For general corporate purposes,
including working capital and possible
acquisitions of products, technologies
and businesses.
Nasdaq National Market symbol....................... QMDC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................... $ 175 $ 517 $ 6,102 $ 7,603 $19,088 $9,449 $12,736
Cost of revenues............................. 138 466 6,033 6,333 9,977 5,133 5,697
---- ----- ------- ------- ------- ------ -------
Gross margin................................. 37 51 69 1,270 9,111 4,316 7,039
Write-off of acquired research and
development in process..................... -- 456 -- 6,240 -- -- --
Non-recurring start-up charges............... -- -- -- -- -- -- 694
Other operating expenses..................... 114 388 4,849 4,367 8,614 4,252 5,334
---- ----- ------- ------- ------- ------ -------
Income (loss) from operations................ (77) (793) (4,780) (9,337) 497 64 1,011
==== ===== ======= ======= ======= ====== =======
Net income (loss).......................... $ (80) $(804) $(4,865) $(9,434) $ 153 $ (244) $ 1,344
==== ===== ======= ======= ======= ====== =======
Pro forma net income (loss) per share(2)... $ (2.13) -- -- --
=======
Pro forma weighted average shares
outstanding.............................. 4,435 -- -- --
Net income (loss) per share(2)............. -- $ 0.03 $(0.05) $ 0.19
======= ====== =======
Weighted average shares outstanding........ -- 5,089 4,747 7,250
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 8,537 $ 57,963
Working capital............................................................. 13,104 62,530
Intangible assets........................................................... 9,231 9,231
Total assets................................................................ 31,876 81,302
Total debt.................................................................. 424 424
Stockholders' equity........................................................ 27,913 77,339
</TABLE>
- ---------------
(1) Based on actual shares outstanding as of August 31, 1997, plus 40,000 shares
of Common Stock issuable upon the exercise of options and 5,313 shares of
Common Stock issuable upon the exercise of warrants by certain Selling
Stockholders in connection with the Offering. Excludes 1,366,000 shares of
Common Stock reserved for issuance under the Company's stock option plans,
of which 1,326,839 shares were subject to outstanding options at a weighted
average exercise price of $8.65 per share, 193,869 shares reserved for
issuance under the Company's Employee Stock Purchase Plan and 1,504,209
shares of Common Stock issuable upon the exercise of outstanding warrants at
a weighted average exercise price of $3.80 per share. Also excludes 112,706
shares of Common Stock issued upon the consummation of the acquisition of
Healthcare Revenue Management, Inc. in September 1997. See "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 7, 8 and 13 of Notes to Consolidated Financial
Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing net income
per share. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which requires disclosure of basic earnings per share and
diluted earnings per share and is effective for periods ending subsequent to
December 15, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Accounting Pronouncement."
(3) Adjusted to reflect (i) the sale of Common Stock by the Company in the
Offering and the receipt of the estimated net proceeds therefrom and (ii)
the receipt of $175,436 ("Exercise Proceeds") from the exercise of options
and warrants by certain Selling Stockholders in connection with the
Offering. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and the Consolidated Financial Statements and Notes thereto.
5
<PAGE> 6
RISK FACTORS
In addition to the historical information contained herein, the discussion
in this Prospectus may contain certain forward looking statements that involve
risks and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein. The following risk factors should be considered
carefully in addition to the other information in this Prospectus before
purchasing the shares of Common Stock offered hereby.
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY
The Company incurred net losses of $4.9 million and $9.4 million for the
years ended December 31, 1994 and 1995, respectively, and as of June 30, 1997
had an accumulated deficit of $13.7 million. Although the Company recorded net
income of $153,000 and $1.3 million for the year ended December 31, 1996 and the
six months ended June 30, 1997, respectively, there can be no assurance that any
of the Company's business strategies will be successful or that the Company will
be able to achieve or sustain revenue growth or profitability on a quarterly or
annual basis. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON HOSPITAL MARKET
The Company's customers are typically hospitals and other health care
providers, and substantially all of the Company's revenues have been derived
from the sale of software products and services to hospitals. The Company's
performance is dependent on continued demand for its products. Consolidation in
the health care industry, particularly in the hospital market, could cause a
decrease in the number of potential purchasers of the Company's products and
services or the loss of one or more of the Company's significant customers as a
result of the acquisition of that customer by another company that uses products
or services provided by a competitor of the Company, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Legislative or market-driven reforms could also have material
adverse effects on the Company's business, financial condition and results of
operations. In addition, the decision to purchase the Company's products often
involves the approval of several members of management of a hospital or health
care provider. Consequently, it is difficult for the Company to predict the
timing or outcome of the buying decisions of customers or potential customers.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has expanded, and intends to continue to expand, in substantial
part through acquisitions of products, technologies and businesses. The
Company's ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of products,
technologies or businesses and management's ability to effectively negotiate and
consummate acquisitions and integrate and operate the new products, technologies
or businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to increasing consolidation in
the health care industry, increasing the costs of capitalizing on acquisition
opportunities. The Company competes for acquisition opportunities with other
companies that have significantly greater financial and management resources
than the Company. The inability to successfully identify appropriate acquisition
opportunities, consummate acquisitions or successfully integrate acquired
products, technologies, operations, personnel or businesses could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, acquisitions may divert management's
attention from other business concerns, expose the Company to the risks of
entering markets in which the Company has no direct prior experience or to risks
associated with the market acceptance of acquired products and technologies, or
result in the loss of key employees of the Company or the acquired company.
Moreover, future acquisitions by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and the
recognition
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<PAGE> 7
of amortization expenses related to goodwill and other intangible assets, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The acquisition of InterMed Healthcare Systems Inc. ("InterMed") in
December 1996 substantially increased the complexity of the software products
offered by the Company. The integration of InterMed's products and operations
into the products and operations of the Company will divert management attention
from other matters and has resulted and may continue to result in operational
and administrative expense. The acquisitions of Healthcare Recovery, Inc., doing
business as Synergy HMC ("Synergy"), in April 1997 and Healthcare Revenue
Management, Inc. ("HRM") in September 1997 substantially increased the number of
employees of the Company and the breadth of services offered by the Company. In
addition, the acquisitions of Synergy and HRM will require the reduction of
operating expenses and the successful integration of the Company's services with
those services of Synergy and HRM. The failure to reduce operating expenses or
integrate the products and operations of InterMed or the services of Synergy or
HRM could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate as
a result of a variety of factors, including the following: variability in demand
for the Company's products and services; the number, timing and significance of
announcements and releases of product enhancements and new products by the
Company and its competitors; the timing and significance of announcements
concerning the Company's present or prospective strategic alliances; the
termination of, or a reduction in, offerings of the Company's products and
services; the loss of customers due to consolidation in the health care
industry; delays in product delivery requested by customers; the timing of
sales; the amount of new potential contracts at the beginning of any particular
quarter; customer budgeting cycles and changes in customer budgets; investments
by the Company in marketing, sales, research and development, and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; software defects and other quality factors;
and general economic conditions.
In May 1997, the Company acquired, in exchange for $2.5 million, a 10.2%
equity stake in EDI USA, Inc., an organization owned and established by thirteen
independent Blue Cross and Blue Shield Plans to build and operate an EDI
transaction network to facilitate submission of claims, receipt of remittances,
eligibility verification and other health care transactions. The Company
recorded non-recurring charges of $334,000 and $360,000 in the first and second
quarters of 1997, respectively, related to start-up costs incurred in connection
with its arrangement to provide EDI processing and management services for EDI
USA's transactions, and the Company expects to incur similar charges in the
remaining two quarters of 1997, until the EDI transaction network is
operational. There can be no assurance that the Company will successfully
develop this transaction network, or that EDI USA will provide the Company with
the transaction volume necessary for the transaction network to become
profitable. Any failure of the network to become profitable could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The timing of customer purchases is difficult to predict given the complex
procurement decision process associated with most health care providers and
payors. As a result, the Company typically experiences sales cycles that extend
over several quarters for new customers. The Company expects that these factors
will result in variations in quarterly revenues and operating results. Moreover,
the Company's operating expense levels are relatively fixed. If revenues are
below expectations, net income is likely to be disproportionately affected.
Further, it is likely that in some future quarter the Company's revenues or
operating results will be below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
7
<PAGE> 8
HIGHLY COMPETITIVE MARKET
Competition in the market for the Company's products and services is
intense and is expected to increase. The Company's competitors include other
providers of health care information software and services, as well as health
care consulting firms. The Company's principal competitors include: (i) CIS
Technologies, Inc., a division of National Data Corporation, Inc., and
Sophisticated Software, Inc. in the market for its EDI products; (ii) Envoy
Corp. and MedE AMERICA in the market for its claims processing service; (iii)
Healthcare Cost Consultants, Inc., a division of CIS Technologies, Inc., and
Trego Systems, Inc. in the market for its contract management products; (iv)
IMNET Systems, Inc., Optika Imaging Systems, Inc. and LanVision Systems, Inc. in
the market for its electronic document management products; (v) Transition
Systems, Inc. and Healthcare Microsystems, Inc., a division of Health Management
Systems Inc., HCIA Inc. and MediQual Systems, Inc., a division of Cardinal
Health, Inc., in the market for its decision support products; and (vi) HMS and
ARTRAC, a division of Medaphis Corp., in the market for its business office
outsourcing services. In addition, current and prospective customers evaluate
the Company's capabilities against the merits of their existing information
systems and expertise. Furthermore, major software information systems
companies, including those specializing in the health care industry, not
presently offering products that compete with those offered by the Company may
enter the Company's markets. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. In addition, many of the Company's competitors and
potential competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than the
Company. Many of the Company's competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, the Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations. See
"Business -- Competition."
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
The Company's future performance will depend in large part upon the
Company's ability to provide the increasing functionality required by its
customers through the timely development and successful introduction of new
products and enhancements to its existing suite of products. The Company has
historically devoted significant resources to product enhancements and research
and development and believes that significant continuing development efforts
will be required to sustain the Company's operations. There can be no assurance
that the Company will successfully or in a timely manner develop, acquire,
introduce and market new product enhancements or products, or that product
enhancements or new products developed by the Company will meet the requirements
of hospitals or other health care providers and payors and achieve or sustain
market acceptance. See "Business -- The QuanTIM(R) Suite of Products" and
"-- Products Under Development and Joint Development Products."
NEED TO MANAGE CHANGING OPERATIONS; DEPENDENCE UPON KEY PERSONNEL
The Company's anticipated future operations may place a strain on its
management systems and resources. The Company expects that it will be required
to continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand, train and manage its work force. There
can be no assurance that the Company will be able to effectively manage these
tasks, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has hired in the last year a significant number of sales personnel. Thus, a
substantial percentage of the Company's sales force is currently inexperienced
in selling the Company's products and will remain so for some time. In addition,
competition for experienced sales personnel is intense, and there can be no
assurance that the Company will be able to attract, assimilate or retain highly
qualified employees in the future. The Company's future success also depends in
significant part upon the continued service of its
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<PAGE> 9
executive officers, its product managers and other key sales, marketing, and
development personnel. In July 1997, the Company hired a new Executive Vice
President and President of its EDI division who must be successfully integrated
into its management team. The loss of the services of any of its executive
officers or the failure to hire or retain other key employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additions of new, and departures of existing, personnel
can be disruptive and could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Employees" and "Management."
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company. Substantial
litigation regarding intellectual property rights exists in the software
industry, and the Company expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in the
Company's industry segment grows and the functionality of products overlaps.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any claim may
require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company has recently received notice of a claim filed with the United States
Trademark Appeal Board for the cancellation of its registered QuanTIM(R)
trademark, and also has recently received a letter from a separate third party
challenging this trademark. The Company believes it has meritorious defenses to
these claims and it intends to defend these claims vigorously. However, there
can be no assurance that the Company will be successful in its defense of these
or similar claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products such as those offered by the Company frequently contain errors or
failures, especially when first introduced or when new versions are released.
Although the Company conducts extensive testing, the Company has discovered
software errors in certain of its enhancements and products after their
introduction. The Company is currently developing various new applications and
has recently introduced versions of certain of its existing applications
designed to function with the Microsoft Windows(TM) NT operating system. There
can be no assurance that, despite testing by the Company and by current and
potential customers, errors or performance failures will not occur in these
products under development or in other enhancements or products after
commencement of commercial shipments, resulting in loss of revenues, delay in
market acceptance, diversion of development resources, damage to the Company's
reputation or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Products Under Development and Joint
Development Products."
RISK OF INTERRUPTION OF DATA PROCESSING
The Company currently processes substantially all its customer data at its
facilities in Larkspur, California and Neptune, New Jersey. While the Company
has safeguards for emergencies such as power interruption or breakdown in
temperature controls, the Company has no mirror processing site to which
processing could be transferred in the case of a catastrophic event at either of
these facilities. The occurrence of a major catastrophic event at either the
Larkspur or the Neptune facility could lead to an interruption of data
processing and could have a material adverse effect on the Company's business,
financial condition and results of operations.
9
<PAGE> 10
RISKS RELATED TO OUTSOURCING BUSINESS
The Company provides business office outsourcing and cash flow management
services, including the billing and collection of receivables. The
infrastructure for the Company's outsourcing business was acquired by the
Company. In addition, the Company often uses its software products to provide
outsourcing services. As a result, the Company has not been required to make
significant capital investments in order to service existing outsourcing
contracts. However, if the Company experiences a period of substantial expansion
in its outsourcing business, the Company may be required to make substantial
investments in capital assets and personnel, and there can be no assurance that
the Company will be able to assess accurately the investment required and
negotiate and perform in a profitable manner any of the outsourcing contracts it
may be awarded. The Company's failure to estimate accurately the resources and
related expenses required for a project or its failure to complete its
contractual obligations in a manner consistent with the project plan upon which
this contract was based could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's failure to meet a client's expectations in the performance of its
services could damage the Company's reputation and adversely affect its ability
to attract new business. Finally, the Company could incur substantial costs and
expend significant resources correcting errors in its work, and could possibly
become liable for damages caused by these errors.
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
The Company expects to use the net proceeds to be received by the Company
for general corporate purposes, including working capital and possible
acquisitions of products, technologies and businesses. Consequently, the Board
of Directors and management of the Company will have broad discretion in
allocating a significant portion of such net proceeds. The Company has expanded
and intends to continue to expand, in substantial part, through acquisitions of
products, technologies and businesses. See "Use of Proceeds."
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") is responsible
for assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer products are subject to regulation when
they are used or are intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. The FDA could
determine in the future that any predictive aspects of the Company's products
make them clinical decision tools subject to FDA regulation. Compliance with
these regulations could be burdensome, time consuming and expensive. The Company
also could become subject to future legislation and regulations concerning the
development and marketing of health care software systems. These could increase
the cost and time necessary to market new products and could affect the Company
in other respects not presently foreseeable. The Company cannot predict the
effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
10
<PAGE> 11
UNCERTAINTY IN THE HEALTH CARE INDUSTRY
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care organizations. Changes in current health care financing and
reimbursement systems could result in the need for unplanned product
enhancements, in delays or cancellations of product orders or shipments or in
the revocation of endorsement of the Company's products by hospital associations
or other customers. Any of these occurrences could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, many health care providers are consolidating to create integrated
health care delivery systems with greater regional market power. As a result,
these emerging systems could have greater bargaining power, which may lead to
price erosion of the Company's products. The failure of the Company to maintain
adequate price levels would have a material adverse effect on the Company's
business, financial condition and results of operations. Other market-driven
reforms could have unpredictable effects on the Company's business, financial
condition and results of operations. See "Business -- Government Regulation and
Health Care Reform."
RISK OF PRODUCT-RELATED CLAIMS
Certain of the Company's products and services relate to the payment,
collection, coding and billing of health care claims. Any failure by employees
of the Company or by the Company's products to accurately assess, process or
collect such claims could result in claims against the Company by its customers.
The Company has been and currently is involved in claims for money damages
related to services provided by its accounts receivable management business. The
Company maintains insurance to protect against certain claims associated with
the use of its products, but there can be no assurance that its insurance
coverage would adequately cover any claim asserted against the Company. A
successful claim brought against the Company that is in excess of, or excluded
from, its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. Even
unsuccessful claims could result in the Company's expenditure of funds in
litigation and management time and resources. There can be no assurance that the
Company will not be subject to material claims in the future, that such claims
will not result in liability in excess of its insurance coverage, that the
Company's insurance will cover such claims or that appropriate insurance will
continue to be available to the Company in the future at commercially reasonable
rates. In addition, if liability of the Company were to be established,
substantial revisions to its products could be required that may cause the
Company to incur additional unanticipated research and development expenses.
RISKS ASSOCIATED WITH CERTAIN INVESTMENTS
The Company has made, and may continue to make in the future, certain
investments in which it obtains a minority equity interest in certain early
stage companies. The Company does not have the ability to control the operations
of any of these companies. Investing in early stage companies is subject to
certain significant risks, and there can be no assurance that any of these
companies will be successful or achieve profitability or that the Company will
ever realize a return on its investments. To the extent any of these companies
are unprofitable, the Company may be required to recognize a loss on its
investment during a reporting period. Any loss in connection with these
investments could have a material adverse effect on the Company's business,
financial condition or results of operations during a particular reporting
period. In addition, to the extent any of such companies fail or become bankrupt
or insolvent, the Company may be required to record a total loss on its
investment, which could have a material adverse effect on the Company's results
of operations during a particular reporting period. See "-- Potential
Variability in Quarterly Operating Results."
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law applicable to the Company could have the
effect of delaying, deterring or preventing a change in control of the Company,
including Section 203 of the Delaware General Corporation Law, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's Certificate of Incorporation and Bylaws contain certain
11
<PAGE> 12
provisions that could discourage potential takeover attempts and make attempts
by stockholders to change management more difficult. The Company's Board of
Directors is classified into three classes of directors serving staggered,
three-year terms and has the authority without action by the Company's
stockholders to fix the rights and preferences and issue shares of preferred
stock, and to impose various procedural and other requirements that could make
it more difficult for stockholders to effect certain corporate actions. The
Company's Certificate of Incorporation provides that directors may be removed
only by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the corporation entitled to vote. Any vacancy on the Board of
Directors may be filled only by vote of the majority of directors then in
office. Further, the Company's Certificate of Incorporation provides that any
"Business Combination" (as therein defined) requires the affirmative vote of
two-thirds of the shares entitled to vote, voting together as a single class.
These provisions, and certain other provisions of the Certificate of
Incorporation which may have the effect of delaying proposed stockholder actions
until the next annual meeting of stockholders, could have the effect of delaying
or preventing a tender offer for the Company's Common Stock or other changes of
control or management of the Company, which could adversely affect the market
price of the Common Stock. See "Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE; LOW TRADING VOLUME
The stock market historically has experienced volatility which has affected
the market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. The trading price of
the Company's Common Stock could also be subject to significant fluctuations in
response to variations in quarterly results of operations, announcements of new
products or acquisitions by the Company or its competitors, governmental
regulatory action, other developments or disputes with respect to proprietary
rights, general trends in the industry and overall market conditions, and other
factors. The market price may also be affected by movements in prices of equity
securities in general. In addition, the average daily trading volume of the
Company's Common Stock since public trading of the Common Stock commenced has
been low. To the extent this trading pattern continues, the price of the Common
Stock may fluctuate significantly as a result of changes in demand for such
shares and sales of stock by stockholders.
BENEFITS OF THE OFFERING TO SELLING STOCKHOLDERS
Existing stockholders will be selling 327,802 shares of the Common Stock
offered hereby. The price per share paid by the Selling Stockholders for their
shares is a fraction of the proposed public offering price for the Common Stock
offered hereby.
12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting the underwriting discount and estimated offering
expenses and adding the Exercise Proceeds, are approximately $49.4 million
(approximately $57.7 million if the Underwriters' overallotment option is
exercised in full). The Company expects to use the net proceeds for general
corporate purposes, including working capital and possible acquisitions of
products, technologies and businesses. As of the date of this Prospectus the
Company has not entered into any commitments with respect to any acquisitions
and is not currently in negotiation with respect to any acquisitions. Pending
such uses, the net proceeds of the Offering will be invested in short-term,
investment-grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain future earnings, if any, to fund
the development and growth of its business and does not anticipate paying any
cash dividends on the Common Stock in the foreseeable future. In addition, the
Company's credit agreement contains provisions that restrict the payment of
dividends.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "QMDC" since October 10, 1996. The Company's initial public offering
price was $12.00 per share. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Company's Common Stock
as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1996:
Fourth Quarter (beginning October 10, 1996).................. $13 1/2 $8 9/16
Year Ending December 31, 1997:
First Quarter................................................ $12 1/4 $9 5/8
Second Quarter............................................... 10 5/8 6 3/4
Third Quarter................................................ 20 6 3/4
Fourth Quarter (through October 20, 1997).................... 21 15/16 17
</TABLE>
On October 20, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $18.00 per share. As of August 31, 1997, there
were approximately 62 holders of record of the Company's Common Stock. The
Company believes that the actual number of stockholders of the Company's Common
Stock substantially exceeds this number.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the Company's
capitalization (i) on an actual basis and (ii) as adjusted to reflect the sale
of the Common Stock offered hereby after deducting the underwriting discount and
estimated offering expenses and adding the Exercise Proceeds. This table should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. See "Use of
Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Long-term obligations(1).......................................... $ 366 $ 366
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value per share; 5,000,000 shares
authorized, none issued and outstanding, actual; 5,000,000
authorized, none issued and outstanding, as adjusted......... -- --
Common Stock, $0.01 par value per share; 20,000,000 shares
authorized, 6,213,000 shares issued and outstanding, actual;
20,000,000 shares authorized, 9,230,511 shares issued and
outstanding, as adjusted(2).................................. 60 90
Additional paid-in capital...................................... 41,872 91,268
Deferred compensation........................................... (291) (291)
Accumulated deficit............................................. (13,728) (13,728)
-------- --------
Total stockholders' equity...................................... 27,913 77,339
-------- --------
Total capitalization.................................... $ 28,279 $ 77,705
======== ========
</TABLE>
- ---------------
(1) Consists of capital lease obligations.
(2) Includes 40,000 shares of Common Stock issuable upon the exercise of options
and 5,313 shares of Common Stock issuable upon the exercise of warrants by
certain Selling Stockholders in connection with the Offering. Excludes, as
of June 30, 1997, 1,366,000 shares of Common Stock reserved for issuance
under the Company's stock option plans, of which 937,000 shares were subject
to outstanding options at a weighted average exercise price of $7.66 per
share, 193,869 shares reserved for issuance under the Company's Employee
Stock Purchase Plan, and 1,530,321 shares of Common Stock issuable upon the
exercise of outstanding warrants at a weighted average exercise price of
$3.80 per share. Also excludes 112,706 shares of Common Stock issued upon
the consummation of the acquisition of Healthcare Revenue Management, Inc.
in September 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 7, 8 and 13 of Notes to
Consolidated Financial Statements.
14
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data presented below for the years
ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995 and 1996 are derived, and qualified by reference to, the
audited consolidated financial statements included elsewhere in this Prospectus.
The consolidated statement of operations data presented below for the years
ended December 31, 1992 and 1993 and the consolidated balance sheet data as of
December 31, 1992 and 1993 are derived, and qualified by reference to, the
audited financial statements not included in this Prospectus. The selected
consolidated financial data for the six months ended June 30, 1996 and 1997
presented below are derived from unaudited consolidated financial statements
included elsewhere in this Prospectus. The unaudited consolidated financial data
include all adjustments, consisting only of normal recurring adjustments, which
are considered necessary for a fair presentation of the financial position and
results of operations of each company for these periods. Results for interim
periods are not necessarily indicative of those to be expected for the year or
for any future period. The selected consolidated financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the consolidated
financial statements, notes thereto and other consolidated financial information
included herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
----- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses........................................... $ 175 $ 482 $ 1,437 $ 4,420 $16,223 $ 7,809 $ 8,477
Services........................................... -- 35 4,665 3,183 2,865 1,640 4,259
---- ------ ------- ------- ------- ------ -------
Total revenues................................ 175 517 6,102 7,603 19,088 9,449 12,736
---- ------ ------- ------- ------- ------ -------
Operating expenses:
Cost of licenses................................... 138 349 2,557 2,676 7,294 3,711 3,293
Cost of services................................... -- 117 3,476 3,657 2,683 1,422 2,404
General and administration......................... -- 161 2,039 2,439 3,221 1,477 1,792
Sales and marketing................................ 51 91 1,874 1,225 2,434 1,293 1,769
Research and development........................... 63 130 767 653 2,499 1,263 1,411
Amortization of goodwill........................... -- 6 169 50 460 219 362
Write-off of acquired research and development in
process.......................................... -- 456 -- 6,240 -- -- --
Non-recurring start-up charges..................... -- -- -- -- -- -- 694
---- ------ ------- ------- ------- ------ -------
Total operating expenses...................... 252 1,310 10,882 16,940 18,591 9,385 11,725
---- ------ ------- ------- ------- ------ -------
Income (loss) from operations........................ (77) (793) (4,780) (9,337) 497 64 1,011
==== ====== ======= ======= ======= ====== =======
Interest income (expense), net....................... (3) (11) (85) (110) (329) (284) 388
Other income (expense), net.......................... -- -- -- 13 (15) (24) (5)
Provision for income taxes........................... -- -- -- -- -- -- 50
---- ------ ------- ------- ------- ------ -------
Net income (loss).................................. $ (80) $ (804) $(4,865) $(9,434) $ 153 $ (244) $ 1,344
==== ====== ======= ======= ======= ====== =======
Pro forma net income (loss) per share(1)........... -- -- -- $ (2.13) $ -- $ -- $ --
=======
Pro forma weighted average shares outstanding...... -- -- -- 4,435 -- -- --
Net income (loss) per share(1)..................... -- -- -- -- $ 0.03 $ (0.05) $ 0.19
======= ====== =======
Weighted average shares outstanding................ -- -- -- -- 5,089 4,747 7,250
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE
------------------------------------------------- 30,
1992 1993 1994 1995 1996 1997
----- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 19 $ 252 $ 164 $ 266 $18,486 $ 8,537
Working capital (deficit)............................... 46 (1,866) (1,494) (6,372) 18,357 13,104
Intangible assets....................................... -- 669 125 4,809 4,605 9,231
Total assets............................................ 130 2,123 2,801 9,533 29,569 31,876
Total debt.............................................. 54 1,794 1,794 10,267 228 424
Stockholders' equity (deficit).......................... 72 (667) (1,457) (5,817) 24,893 27,913
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing net income
per share. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which requires disclosure of basic earnings per share and
diluted earnings per share and is effective for periods ending subsequent to
December 15, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Accounting Pronouncement."
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. In addition to the historical
information contained herein, the discussion in this Prospectus may contain
certain forward looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and in "Risk
Factors."
OVERVIEW
QuadraMed develops, markets and sells software products and services
designed to enable health care providers and payors to increase operational
efficiency, improve cash flow, measure the cost of care and effectively
administer managed care contracts. The Company was incorporated in September
1993 in California under the name QuadraMed Corporation and reincorporated in
Delaware in 1996, and has expanded significantly since its inception, primarily
through the acquisition of other businesses, products and services. Since
inception, the Company has completed the acquisitions of eleven companies and
products, as reflected in the following table:
<TABLE>
<CAPTION>
DESCRIPTION OF COMPANY OR PRODUCT
COMPANY OR PRODUCT ACQUIRED ACQUIRED DATE ACQUIRED
- ------------------------------------ --------------------------------------- ---------------
<S> <C> <C>
Coast Micro, Inc. EDI services October 1993
Seton Financial Accounts receivable management services December 1993
Criterion Healthcare Management Accounts receivable management services December 1993
Trim Healthcare Systems, Inc. Cash flow management services December 1993
Health Information Technology, Inc. Managed care contract administration June 1994
software
Healthview Clinically based provider profiling December 1994
system
Healthcare Design Systems Health care financial management and December 1995
decision support software company
InterMed Healthcare Systems Inc. Client-server information systems for December 1996
health care payors
Healthcare Recovery, Inc., doing Cash flow management services April 1997
business as Synergy HMC
Queen City Microsystems, Inc. EDI services August 1997
Healthcare Revenue Management, Inc. Managed care department outsourcing and September 1997
auditing services
</TABLE>
The Company's suite of products, called QuanTIM(R), may be licensed either
as an integrated solution or as ten individual applications. The Company
licenses its software products pursuant to either a one-time payment for a
perpetual license with the option of purchasing support and maintenance or
pursuant to annual renewal licenses. The latter method provides the Company with
a recurring component to its revenues each year. Revenues from annual renewal
license fees are recognized on the contract anniversary date. Revenues
16
<PAGE> 17
from perpetual software license agreements are generally recognized upon
shipment and involve one-time license fees that are significantly greater than
license fees under contracts that have annual renewal provisions. Revenue from
perpetual license fees can cause the Company's revenues to vary from quarter to
quarter.
In addition to its software products, the Company provides business office
outsourcing and cash flow management services. The Company offers partial and
full outsourcing of business office functions for hospitals, physicians, home
health care agencies and other providers. The Company often uses its software
products in delivering these services. The focus of these services is to
increase the cash flow of and to improve the efficiencies of business operations
for health care providers. Business office outsourcing revenues typically
consist of fixed monthly fees plus incentive-based payments based on a
percentage of dollars recovered for the provider. The monthly fees from
outsourcing services are recognized as revenues on a monthly basis, and
incentive fees are recognized as revenues based on the collection of accounts
from payors. The Company also provides cash flow management services to update
and organize a provider's standard billing and charge information to facilitate
appropriate reimbursement for the provider.
The Company has experienced operating margins at differing levels related
to licenses and services. The service business has historically realized
fluctuating margins that were significantly lower than margins associated with
licenses. The Company expects this trend to continue with the recent acquisition
of Synergy.
The signing of a major perpetual license agreement could generate an
increase in revenues and net income for any given quarter or fiscal year. In
addition, the Company typically experiences long sales cycles for new customers
that may extend over several quarters. As a result, the Company believes that
quarterly results of operations will continue to be subject to significant
fluctuations and that its results of operations for any particular quarter or
year may not be indicative of results of operations for future periods.
The Company capitalizes a portion of its software costs for internally
developed products. These capitalized costs relate primarily to the development
of new products and the extension of applications to new markets or platforms
using existing technologies. The capitalized costs are amortized on a
straight-line basis over the estimated lives of the products (usually five
years), commencing when each product is available to the market.
In February 1997, the Company entered into an arrangement with EDI USA to
provide EDI processing and management services for EDI USA's transactions. The
Company recorded non-recurring charges of $334,000 and $360,000 in the first and
second quarters of 1997, respectively, related to start-up costs incurred in
connection with the processing arrangement. QuadraMed expects to incur similar
charges in the remaining two quarters of 1997, until the EDI transaction network
is operational.
To date, QuadraMed has had more than 670 customers, a substantial majority
of which were hospitals, located in 37 states and the District of Columbia. The
Company expects to maintain a high percentage of hospital customers for the
foreseeable future, but also expects its customer mix to begin to shift toward
other providers, including integrated health care delivery systems ("IDSs"), as
well as payors and employers. For the years ended December 31, 1994 and 1995,
revenues from one customer were 19% and 11%, respectively. No single customer
accounted for more than 10% of the Company's revenues in 1996 or for the six
months ended June 30, 1997.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the consolidated statement of operations of QuadraMed expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses...................................... 23.5% 58.1% 85.0% 82.6% 66.6%
Services...................................... 76.5 41.9 15.0 17.3 33.4
----- ------ ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of licenses.............................. 41.9 35.2 38.2 39.3 25.9
Cost of services.............................. 57.0 48.1 14.1 15.0 18.9
General and administration.................... 33.4 32.1 16.9 15.6 14.1
Sales and marketing........................... 30.7 16.1 12.8 13.7 13.9
Research and development...................... 12.6 8.6 13.1 13.4 11.1
Amortization of goodwill...................... 2.8 0.7 2.4 2.3 2.8
Write-off of acquired in process research..... -- 82.1 -- -- --
Non-recurring start-up costs.................. -- -- -- -- 5.4
----- ------ ----- ----- -----
Total operating expenses.............. 178.4 222.9 97.5 99.3 92.1
----- ------ ----- ----- -----
Income (loss) from operations................... (78.4) (122.9) 2.5 0.7 7.9
Interest income (expense), net.................. (1.4) (1.4) (1.7) (3.0) 3.0
Other income (expense), net..................... -- 0.2 -- (0.3) --
----- ------ ----- ----- -----
Net income (loss) before tax
provision........................... (79.8) (124.1) 0.8 (2.6) 10.9
Provision for income taxes...................... -- -- -- -- (0.4)
----- ------ ----- ----- -----
Net income (loss)............................. (79.8) (124.1) 0.8 (2.6) 10.5
===== ====== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues
Licenses. For the six months ended June 30, 1997, software license revenues
increased 8.6% to $8.5 million compared to $7.8 million in the same period last
year. The increase in license revenues was due principally to an increase in new
customers and several perpetual license agreements entered into during the
second quarter of 1997. Software license revenues include license, installation,
consulting and post-contract support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products.
Services. For the six months ended June 30, 1997, service revenues
increased 159.7% to $4.3 million, compared to $1.6 million in the same period
last year. The increase in service revenues was due principally to new customers
acquired from the Synergy acquisition in April 1997.
Cost of Revenues
Cost of Licenses. For the six months ended June 30, 1997, cost of license
revenues decreased 11.3% to $3.3 million from $3.7 million in the same period
last year. Cost of licenses consists primarily of salaries, benefits and
allocated costs related to the installation process and customer support and
royalties to third parties. As a percentage of license revenues, cost of
licenses decreased to 38.8% in the six months ended June 30, 1997 from 47.5% in
the same period last year. The decrease in cost of licenses and cost of licenses
as a percentage of license revenues is principally due to fewer third-party
hardware sales in the first half of 1997 and a decrease in royalties on software
sales.
18
<PAGE> 19
Cost of Services. For the six months ended June 30, 1997, cost of service
revenues increased 69.1% to $2.4 million from $1.4 million in the same period
last year. Cost of services includes expenses associated with services performed
in connection with business office outsourcing and cash flow management
services. As a percentage of service revenues, cost of services decreased to
56.4% in the six months ended June 30, 1997 from 86.7% in the same period last
year. The increase in cost of services was principally due to additional
operating costs associated with Synergy, which was acquired in April 1997, while
cost of services as a percentage of service revenues decreased principally due
to an increase in revenues with relatively moderate associated costs.
Operating Expenses
General and Administration. For the six months ended June 30, 1997, general
and administration expenses increased to $1.8 million from $1.5 million in the
same period last year, and decreased as a percentage of total revenues to 14.1%
from 15.6% in the same period last year. The increase in general and
administration expenses reflects significant legal costs incurred in the second
quarter of 1997 to settle certain litigation. The Company believes that general
and administration expenses will increase in the future, but should decline
slightly as a percentage of total revenues, although there can be no assurance
in this regard.
Sales and Marketing. For the six months ended June 30, 1997, sales and
marketing expenses increased to $1.8 million from $1.3 million, and remained
constant as a percentage of total revenues for the six months ended June 30,
1997 and 1996, respectively. The increase in sales and marketing expenses
resulted principally from the addition of sales personnel hired by the Company
during the first and second quarters of 1997, including Synergy personnel, and
higher advertising costs incurred by the Company. The Company believes sales and
marketing expenses will continue to increase primarily due to the hiring of
additional sales and marketing personnel, but should remain relatively constant
as a percentage of total revenues, although there can be no assurance in this
regard.
Research and Development. For the six months ended June 30, 1997, research
and development expenses increased to $1.4 million from $1.3 million in the same
period last year, and decreased as a percentage of total revenues to 11.1% from
13.4% in the same period last year. The increase in research and development
expenses in the first half of 1997 was principally due to the hiring of
additional software programmers. The Company intends to continue to make
investments in the development of new products and in the further integration of
acquired technologies into the Company's suite of products and believes that
these expenses will increase in the future.
Amortization of Goodwill. For the six months ended June 30, 1997,
amortization of goodwill was $362,000 as compared to $219,000 in the same period
last year. Goodwill is principally due to the acquisitions of Healthcare Design
Systems, Inc. in December 1995 and Synergy in April 1997.
Non-Recurring Start-Up Charges. The Company recorded non-recurring start-up
charges of $334,000 and $360,000 in the first and second quarters of 1997,
respectively, associated with start-up costs incurred for the claims processing
arrangement entered into with EDI USA, Inc. during the first quarter of 1997.
The Company expects to incur similar charges in the remaining two quarters of
1997, until the EDI transaction network is operational.
Interest Income (Expense). For the six months ended June 30, 1997, interest
income was $388,000, as compared to interest expense of $284,000 in the same
period last year. Interest income was earned on cash balances, resulting from
the Company's initial public offering in October 1996, which raised net proceeds
of approximately $26.4 million. Interest expense in the first half of 1996 was
principally the result of debt the Company incurred for the acquisition of
Healthcare Design Systems, Inc. and for working capital purposes.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues
Licenses. For 1996, software license revenues increased 267.0% to $16.2
million from $4.4 million in 1995. The significant increase in software license
revenues was due principally to sales of acquired products included in revenues
for 1996 and, to a lesser extent, an increase in new customers.
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<PAGE> 20
Services. For 1996, service revenues decreased 10.0% to $2.9 million in
1996 from $3.2 million in 1995. The decline in service revenues reflects a
decrease in the number of customers in the Company's outsourcing business, which
is comprised of projects with a defined service period which were not replaced
with other products.
Cost of Revenues
Cost of Licenses. Cost of licenses increased 172.6% to $7.3 million in 1996
from $2.7 million in 1995. This increase reflects an increase in the number of
licensed installations. As a percentage of license revenues, cost of licenses
decreased to 45.0% in 1996 from 60.5% in 1995. The decrease in cost of licenses
as a percentage of license revenues reflects the significant increase in license
revenues during 1996 combined with only a moderate increase in the costs
associated with such license revenues.
Cost of Services. Cost of services decreased 26.6% to $2.7 million in 1996
from $3.7 million in 1995. As a percentage of service revenues, cost of services
decreased to 93.6% in 1996 from 114.9% in 1995. The decline in cost of services
and as a percentage of service revenues reflects a decrease in the number of
service business personnel.
Operating Expenses
General and Administration. General and administration expenses increased
32.1% to $3.2 million in 1996 from $2.4 million in 1995. The increase in general
and administration expenses reflects the addition of personnel associated with
an acquisition in December 1995 and higher communication and travel costs
associated with establishing an office on the East Coast. As a percentage of
total revenues, general and administration expenses decreased to 16.9% in 1996
from 32.1% in 1995.
Sales and Marketing. Sales and marketing expenses increased 98.7% to $2.4
million in 1996 from $1.2 million in 1995. The increase in sales and marketing
expenses resulted primarily from the addition of sales personnel and project
managers. The increase in sales and marketing expenses can also be attributed in
part to increased advertising expenditures. As a percentage of total revenues,
sales and marketing expenses declined to 12.8% in 1996 from 16.1% in 1995.
Research and Development. Research and development expenses increased
282.7% to $2.5 million in 1996 from $653,000 in 1995. The increase in research
and development expenses represents a significant increase in the number of
personnel dedicated to the development and enhancement of the Company's
products. As a percentage of total revenues, research and development expenses
increased to 13.1% in 1996 from 8.6% in 1995.
Amortization of Goodwill. Amortization of goodwill increased to $460,000 in
1996 from $50,000 in 1995. The increase in amortization is primarily the result
of amortization of goodwill associated with an acquisition in December 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues
Licenses. For 1995, software license revenues increased 207.6% to $4.4
million in 1995 from $1.4 million in 1994. The significant increase in license
revenues was due principally to increased sales of QuanTIM(R) EDI, QuanTIM(R)
Contract Management and sales attributed from the acquisition of InterMed.
Services. For 1995, services revenues decreased 31.8% to $3.2 million in
1995 from $4.7 million in 1994. The decline in services revenues resulted from
the completion of certain projects and the loss of several accounts in the
Company's outsourcing business.
Cost of Revenues
Cost of Licenses. Cost of licenses increased 4.7% to $2.7 million in 1995
from $2.6 million in 1994. The slight increase in cost of licenses resulted
primarily from increased costs related to customer support and
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<PAGE> 21
installation costs related to the increased license revenues. As a percentage of
license revenues, cost of licenses decreased to 60.5% in 1995 from 177.9% in
1994.
Cost of Services. Cost of services increased 5.2% to $3.7 million in 1995
from $3.5 million in 1994. The increase in cost of services resulted primarily
from decreased service revenues combined with the relatively fixed costs
associated with service revenues. As a percentage of service revenues, cost of
services increased to 114.9% in 1995 from 74.5% in 1994.
Operating Expenses
General and Administration. General and administration expenses increased
19.6% to $2.4 million in 1995 from $2.0 million in 1994, principally due to an
increase in the allowance for doubtful accounts, an increase in legal expenses,
a small increase in administrative support staff and an increase in travel due
to an acquisition. As a percentage of total revenues, general and administration
expenses decreased to 32.1% in 1995 from 33.4% in 1994.
Sales and Marketing. Sales and marketing expenses decreased 34.6% to $1.2
million in 1995 from $1.9 million in 1994. This decrease resulted primarily from
a temporary reduction in sales personnel during the year and a redirection of
sales emphasis toward software sales rather than service contracts. As a
percentage of total revenues, sales and marketing expenses declined to 16.1% in
1995 from 30.7% in 1994.
Research and Development. Research and development expenses decreased 14.9%
to $653,000 in 1995 from $767,000 in 1994 as a result of the completion of
QuanTIM(R) EDI and the capitalization of certain other software development
costs. As a percentage of total revenues, research and development expenses
decreased to 8.6% in 1995 from 12.6% in 1994.
Amortization of Goodwill. Goodwill amortization decreased 70.4% to $50,000
in 1995 from $169,000 in 1994, reflecting a post-acquisition adjustment to
accurately represent the purchase of net assets from Coast Micro, Inc. and Seton
Financial.
Write-Off of Acquired In-Process Research and Development. In 1995, in
connection with an acquisition, the Company wrote off $6.2 million as a result
of the purchase of in-process research and development that had not reached
feasibility and had no probable future use.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth in working
capital required to support its growth in revenues and for acquisitions of
products, technologies and businesses. In October 1996, the Company completed
its initial public offering of 2.5 million shares of common stock, which raised
net proceeds of approximately $26.4 million. From inception until the Company's
initial public offering in October 1996, the Company's primary source of working
capital was private placements of Preferred Stock, through which it raised
approximately $12.8 million, net of expenses.
At June 30, 1997, the Company had $8.5 million of cash and cash
equivalents, and $13.1 million of net working capital. Net cash used in
operating activities was $3.4 million, $584,000, $3.7 million and $3.2 million
for the six months ended June 30, 1997, and in 1996, 1995 and 1994,
respectively. Net cash used in operating activities in the six months ended June
30, 1997 was principally due to an increase in accounts receivable and payments
of accounts payable and accrued liabilities. Accounts payable and accrued
liabilities decreased due to payments to vendors using the proceeds from the
initial public offering in October 1996. Accounts receivable increased primarily
due to the acquisition of Synergy, which significantly increased receivables and
the volume of monthly billings. Net cash used in operating activities in 1996
was principally due to earnings before depreciation and amortization, partially
offset by an increase in the Company's accounts receivable and a decrease in
deferred revenue. The increase in accounts receivable was primarily due to an
increase in volume of monthly billings associated with the increase in revenues
in 1996, while deferred revenue decreased primarily due to the timing of
payments from customers. Net cash used in operating activities in 1995 and 1994
was related to investments in the Company's infrastructure and research and
development.
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Net cash used in investing activities was $6.6 million, $1.7 million,
$678,000 and $750,000 for the six months ended June 30, 1997 and in 1996, 1995
and 1994, respectively. Investing activities for the six months ended June 30,
1997 primarily included the acquisition of Synergy, additions to capital
equipment, the investment in EDI USA, and the capitalization of computer
software development costs. Investing activities for 1996, 1995 and 1994
primarily included additions to capital equipment and the capitalization of
computer software development costs.
Net cash provided by financing activities was $42,000, $20.5 million, $4.5
million and $3.9 million for the six months ended June 30, 1997 and in 1996,
1995 and 1994, respectively. Financing activities in the six months ended June
30, 1997 related to the issuance of common stock through the Company's Employee
Stock Purchase Plan, offset by payments made under capital lease obligations.
Financing activities in 1996 related to the issuance of convertible Preferred
Stock and the net proceeds from the Company's initial public offering in October
1996. This was partially offset by the repayments of all outstanding notes and
loans payable from the proceeds from the initial public offering.
In July 1997, the Company entered into an unsecured line of credit
arrangement to borrow up to $5.0 million at the bank's prime rate. The line
expires in July 1998 and contains certain restrictions, including among others,
maintaining a minimum quick ratio, minimum tangible net worth and a minimum
ratio of total liabilities to tangible net worth retroactive to June 30, 1997.
At June 30, 1997, the Company had no outstanding borrowings under the line of
credit.
The Company anticipates that current cash balances, anticipated cash flows
from operations, funds available under the line of credit, and the proceeds of
the Offering will be sufficient to meet its working capital and capital
expenditure needs through at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which requires disclosure of basic earnings per share and diluted earnings per
share and is effective for periods ending subsequent to December 15, 1997. The
pro forma effect of adoption of SFAS No. 128 is included in the table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED ----------------
DECEMBER 31, 1996 1996 1997
----------------- ------ -----
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
AS REPORTED:
Net income (loss) per share................................ $0.03 $(0.05) $0.19
Weighted average number of common and common equivalent
shares outstanding...................................... 5,089 4,747 7,250
PRO FORMA FOR SFAS NO. 128:
Basic net income (loss) per share.......................... $0.08 $(0.37) $0.22
Weighted average number of common shares outstanding....... 1,920 654 6,091
Diluted net income (loss) per share........................ $0.03 $(0.05) $0.19
Weighted average number of common and common equivalent
shares outstanding...................................... 5,089 4,747 7,250
</TABLE>
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<PAGE> 23
BUSINESS
OVERVIEW
QuadraMed develops, markets and sells software products and services
designed to enable health care providers and payors to increase operational
efficiency, improve cash flow, measure the cost of care and effectively
administer managed care contracts. The Company's QuanTIM(R) suite of products is
an integrated offering of EDI, financial management and decision support
solutions for both providers and payors. In addition, the Company provides
business office outsourcing and cash flow management services. To date, the
Company's products have been purchased by over 670 health care providers and
payors in 37 states.
INDUSTRY BACKGROUND
The United States health care industry is undergoing rapid change. In
recent years, health care expenditures have increased at a rapid rate to almost
$1 trillion in 1995. Pressure to control these costs is driving a movement
toward managed care and new forms of reimbursement for health care providers,
shifting the financial risk for providing care from payors to providers. In
addition, competition in the industry is leading to the formation of integrated
health care delivery systems ("IDSs") which are affiliations of payors and
providers, including physicians and hospitals, that service a community or
defined member population. These IDSs and other providers are entering into
complex reimbursement arrangements with payors and employers, thereby creating
the need for information systems that effectively administer such arrangements.
In order to manage their operations more efficiently, providers need
decision support tools in order to accurately determine revenues earned and
resources consumed under new forms of managed care reimbursement. Although many
health care providers have made substantial capital investments over the last
decade in financial and administrative information systems, these legacy systems
were designed primarily to track charges and third-party reimbursement.
Accordingly, many of these systems are not well equipped to handle the
allocation of revenues and costs under new managed care reimbursement models.
Furthermore, as individual providers with disparate information systems
consolidate to form IDSs, the ability of providers to compare resources consumed
against contractual reimbursement provisions is further complicated.
Deficiencies in current information systems also hinder providers in the
negotiation of managed care contracts and in tracking clinical and financial
performance under these contracts. In addition to effectively administering
multiple reimbursement arrangements, providers also need to be able to monitor
practice patterns, clinical outcomes and cost of care. Legacy systems were
typically not designed to provide timely and accurate input for decision support
applications. Consequently, information retrieved from such systems is of less
value in making decisions in a competitive, managed care environment.
In order to improve and accelerate the reimbursement process, providers and
payors are transitioning from a paper-based process to EDI. EDI is the
electronic transfer of information between two or more parties, which improves
work flow and increases operational efficiency. To date, health care providers
and payors have used EDI systems principally to process medical claims
electronically. However, the Company believes that the demand for on-line
eligibility verification and referral authorization and for electronic receipt
and posting of payment information will increase. Payors are increasingly using
the data stream provided by EDI applications as the basis for sophisticated
decision support systems that are used to evaluate and negotiate with providers
more effectively. As a result of this trend, the Company believes that providers
need access to similar information to document their clinical outcomes and
associated costs and to enable them to negotiate with payors more effectively.
The transition to EDI in the reimbursement process is being driven largely
by payors who are encouraging providers to install direct EDI connections to
payors in an effort to reduce administrative costs. Since most payors have
instituted unique formats for claim submission, providers seeking to use EDI
with multiple payors have installed multiple EDI systems. These providers,
however, generally have not developed an effective method for utilizing these
disparate systems, resulting in errors or incomplete submissions, which in turn
result in delayed and rejected claims. Installing and operating multiple EDI
systems also adds significant expense to a provider's administrative operations.
Moreover, most hospitals generate bills automatically a few days after
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patient discharge without verifying that all relevant information has been input
into the billing system. As a result, many of these bills do not reflect all
services rendered which can result in improper or incomplete coding of the bill
and can cause providers to receive less reimbursement than that to which they
are entitled. In addition, existing EDI systems also do not generate and retain
edited claims data, which is a source of important information for providers
seeking to manage the complexities of managed care.
In recent years, health care providers have begun to outsource the business
office function to improve operating efficiencies and increase cash flow. A
survey undertaken by a hospital consulting firm in August 1996 found that 88% of
hospital CFO's are considering outsourcing their business office functions. As a
result, the Company believes the market potential for business office
outsourcing among health care providers in the health care industry is
substantial.
In addition to these trends, the issue of fraud and abuse in the Medicare
and Medicaid programs has received significant attention in the health care
industry and the news media. On August 21, 1996, Congress passed the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"), which addresses
escalating losses in Medicare and Medicaid and outlines civil and criminal
action to be taken against those who defraud government health care programs.
Targeted areas include improper billing of outpatient services rendered within
72 hours of an inpatient admission, unbundling of procedures for increased
payment reflecting multiple procedures performed, and "upcoding" of inpatient
claims to increase reimbursement based on a higher paying diagnosis related
group ("DRG") code assignment. Many hospitals and providers are being subjected
to intense scrutiny by the federal government. As a result, hospitals and other
providers nationwide are developing and implementing fraud and abuse compliance
programs.
THE QUADRAMED SOLUTION
The Company offers a suite of products, called QuanTIM(R), which is
designed to improve the operational efficiencies, work flow and clinical,
financial and administrative decision making of health care providers.
QuanTIM(R)'s EDI applications provide a universal, all-payor interface that
enables providers to edit and format all claims submitted to all payors. The
Company's products are designed to operate with, enhance and leverage existing
health care information systems while providing the functionality required in
today's competitive health care environment.
QuanTIM(R)'s EDI applications capture detailed clinical and financial
encounter data at the patient level that is utilized by its financial management
and decision support applications. Because the Company's EDI software products
enable providers to edit claims at providers' sites and format claims data for
all payors, the Company's customers gain access to a detailed database of
information for use with the Company's decision support products, which measure
outcomes and resource allocation. These EDI products offer detailed information
from disparate information systems allowing consistent, enterprise-wide decision
support analysis. The Company's financial management products allow providers to
track contract terms and to hierarchically review medical records information to
ensure that a bill is properly coded and includes all services rendered. This
capability facilitates providers' ability to obtain timely and accurate
reimbursement and to measure the profitability of managed care contracts. The
Company's fraud and abuse product complements providers' existing compliance
efforts by monitoring coding and billing practices for compliance with mandated
guidelines. Moreover, through electronic document imaging and information
transfer, the Company's products improve workflow, allowing providers to move
toward a paperless environment for most reimbursement and decision support
functions.
In addition, the Company provides business office outsourcing and cash flow
management services. The Company offers partial and full outsourcing of business
office services for hospitals, physicians, home health care agencies and health
care providers.
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<PAGE> 25
STRATEGY
The Company's strategy is to continue to strengthen its position as a
leading provider of EDI, financial management and decision support software in
the health care market. In addition, the Company plans to leverage its software
products to expand its outsourcing business. Key elements of the Company's
strategy include:
- Expand Customer Base. The Company intends to expand its installed
customer base through the efforts of its direct sales force, hospital
association endorsements and selected acquisitions. The Company intends
to focus its EDI expansion efforts on selected regional markets where it
believes there is significant opportunity to sell additional
applications. In addition, the Company believes that as payors, IDSs and
other providers increasingly utilize EDI, the market for EDI and related
applications will expand, creating additional demand for the Company's
EDI products as well as its financial management and decision support
applications.
- Leverage Cross-Selling Opportunities. With more than 75% of the Company's
customers currently using three or fewer of QuadraMed's ten products, the
Company is actively pursuing cross-selling opportunities within its
existing customer base. The modular design of the QuanTIM(R) suite of
products facilitates cross-selling, as its individual applications can be
readily integrated into customers' existing legacy systems.
- Selectively Acquire Complementary Products, Technologies and
Businesses. The Company intends to continue to pursue acquisition
opportunities that will enhance the depth and breadth of its financial
management and decision support products. The Company is seeking to
acquire value-added products that utilize health care data generated from
EDI transactions. The Company also believes that standardized clinical
information databases will become increasingly important to providers and
is therefore seeking to expand its capabilities in this area. The Company
also intends to expand its EDI and business office outsourcing customer
base and enter new geographical areas through the acquisition of
strategically located regional companies.
- Capitalize on Outsourcing Opportunities. The Company intends to continue
to capitalize on the trend in the health care industry toward outsourcing
business office services. The Company believes that it possesses a
significant advantage in the provision of outsourcing services due to its
ability to use its own QuanTIM(R) suite of software products and its
centralized cash flow management operations. The Company believes it is
well positioned to attract additional business office outsourcing
customers.
- Expand Databases for Decision Support and Financial Management. The
Company builds and maintains its databases with summary and detailed
claims data that is collected from its customers during the claims
transmission process and with purchased third-party data. The Company
intends to increase its installed base, thereby enlarging the medical
claims databases that the Company provides. The Company believes that
providing large, detailed medical claims databases is a competitive
advantage in selling its decision support and financial management
products to providers, including emerging IDSs.
THE QUANTIM(R) SUITE OF PRODUCTS
QuanTIM(R), The Information Management system, is QuadraMed's suite of EDI,
financial management and decision support software products designed to improve
operational efficiencies and decision-making of health care providers.
QuanTIM(R), with its modular architecture and flexible electronic interface, is
designed to utilize data from disparate health care information systems and to
allow its users to extend the life and functionality of legacy hospital
information and practice management systems. QuanTIM(R) may be licensed either
as an integrated suite or as individual applications. As a result of this
modular design, additional applications can be readily integrated into
customers' existing applications.
The Company's EDI products provide an all-claims, all-payor electronic
claims editing and submission system and an electronic remittance advice system
that receives and posts payment information to the customer's financial
management system. The Company's financial management products are designed to
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<PAGE> 26
enable providers to effectively administer their contracts to increase the
accuracy and timeliness of reimbursement and to improve the ability of health
care providers to prevent Medicare and Medicaid fraud and abuse by identifying
potentially fraudulent coding in their medical bills. In addition, these
products are designed to improve work flow through the use of electronic files
and document imaging for management of clinical and financial information and
patient records. The Company's decision support products use edited, accurate
claims data for clinical and financial resource utilization monitoring, provider
profiling and clinical outcomes monitoring.
EDI Products
The Company's EDI products enable providers to edit claims at providers'
sites and format detailed claims data for all payors, giving the Company's
customers access to a detailed database of information for use with QuadraMed's
financial management and decision support products.
QuanTIM(R) EDI is a software application that downloads summary and
detailed claims data from existing legacy financial information systems, and
then edits and formats it to meet payor-specific requirements, including unique
data fields. As part of the editing process, QuanTIM(R) EDI screens the data for
payor-specific demographic, diagnosis or procedure information and identifies
illogical data inputs that are not within expected ranges. For example, the
software would alert the operator if it encountered inputs that indicated that a
male patient had given birth. After the standardized claim has been edited for
payor-specific requirements, QuanTIM(R) EDI transmits the claim to the payor.
QuanTIM(R) ERA is a software application that receives detailed payment
information, known as electronic remittance advice, from payors, posts this
information to a provider's legacy financial system and generates a secondary
bill for another insurance carrier, if appropriate.
Financial Management Products
The Company's financial management products allow providers to track
managed care and capitated contract terms and to hierarchically review medical
records information to ensure that bills are properly coded and include all
services rendered. The Company's customers use this capability to obtain timely
and accurate reimbursement, to prevent fraud and abuse and to measure the
profitability of managed care contracts.
QuanTIM(R) Contract Management is a software application that tracks
providers' multiple managed care, capitated, governmental and other payor
contract terms, including coverage and reimbursement for individual diagnoses
and procedures. The application calculates expected reimbursement and the
contractual allowance, which is the difference between the standard charge
generated by the provider and the actual amount owed by the payor under the
contract. Expected reimbursement and contractual allowance amounts can be posted
automatically to the provider's financial information system at the time of
billing. QuanTIM(R) Contract Management allows providers to measure the
allocation of revenues and the profitability of contracts based on specific
payor contract terms. QuanTIM(R) Contract Management's pricing module eliminates
labor intensive, error prone manual repricing of bills, a process that often
leads to inaccurate reimbursement and financial statements. In addition,
QuanTIM(R) Contract Management is used as a modeling tool for managed care
contract negotiation and detailed analysis of contract performance.
QuanTIM(R) DRGX(R) is a software application designed to assist providers
in managing the complexities of the DRG reimbursement system and to ensure
equitable payment based on the submission of a complete and accurate claim.
QuanTIM(R) DRGX(R) is not designed to encode or group information to maximize
DRG reimbursement, but instead is designed to ensure appropriate reimbursement
based on accurate and complete billing information. This product interfaces with
legacy financial and medical records information systems prior to billing to
hierarchically review all billing records on a concurrent basis and to select
those bills that have a clinical, financial or statistical reason to be held in
the billing cycle until medical claim coding can be completed. The product
serves as a "safety net," catching revenues that would otherwise be lost through
billing of incomplete or inaccurately coded data.
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QuanTIM(R) ASCX(TM) is a software application designed to assist
in managing the complexities of ambulatory surgical center ("ASC") reimbursement
and outpatient coding systems. ASC coding is often based on incomplete medical
record information, resulting in missing charges or inaccurate coding of
procedures performed and inaccurate assignment of payment level classifications.
QuanTIM(R) ASCX(TM) flags incomplete or inaccurate medical claim
coding by hierarchically reviewing billing records prior to billing and
identifying those bills that have clinical, financial or statistical reasons for
review.
QuanTIM(R) Electronic Document Management is a software application for
patient accounting and medical records departments that captures, indexes,
stores and retrieves paper-based demographic, clinical and financial information
and records. This product is based on an open software architecture which
utilizes electronic files that integrate financial and ancillary department
electronic information with scanned images of paper documents. The Company
believes that this application improves provider work flow, reduces
administrative cost and helps providers move toward paperless business offices
and medical records departments. Multi-user access to the electronic patient
account file reduces the need for paper files and storage while offering access
to account information from any work station. The combination of existing
electronic financial information and scanned images with multi-user capabilities
effectively creates a complete electronic patient account file that can be
efficiently routed through billing and administration departments, thus
improving work flow. In addition to licensing this software application, the
Company offers customers the option of purchasing the hardware required to
implement this solution.
QuanTIM(R) FACTS, introduced in the third quarter of 1997, is a software
application designed to assist hospitals in managing the complexities of federal
requirements under HIPAA and in submitting accurate billing and clinical data.
The product complements providers' existing compliance efforts by monitoring
coding and billing practices for compliance with mandated guidelines. QuanTIM(R)
FACTS includes the following six modules: a 72-hour rule compliance module
designed to identify claims for non-physician services performed within three
days of a hospital admission; a prospective payment system module designed to
select billing records with a high probability of inaccurate coding which may
lead to overpayments by payees which may, in turn, trigger federal government
fines for inappropriate billing practices; a data quality monitoring tool that
is designed to identify inconsistencies in coding and to flag inclusive codes
that may result in potential overestimates of revenue; a benchmarking study that
utilizes publicly available data to identify a hospital's exposure to potential
fraud and abuse by analyzing correlations between a given hospital's DRG codes
and national norms and identifying a hospital's exposure at the DRG level; a
laboratory report based on a thorough review of a provider's detail billing data
identifying clinical laboratory billing practices of that provider which are of
the type generally scrutinized by the government; and a Medicare Billing
Compliance Guide designed to assist hospitals and other providers in
implementing fraud and abuse compliance programs.
Decision Support Products
The Company's decision support products generally include database analysis
software and national and regional benchmark data that may be licensed to the
customer. The customer provides its own internally generated clinical and
financial information to the Company, and the Company performs risk and severity
adjustments on such information based on patient demographics and health status
and formats it for comparison against the national and regional data. The
updated and adjusted data sets are returned to the customer for use with the
database analysis software. The Company's QuanTIM(R) Performance Measurement
System has been accepted for inclusion on the Joint Commission on Accreditation
of Healthcare Organization's initial list of performance measurement systems.
QuanTIM(R) Clinical Performance Measurement is a software application that
measures clinical outcomes and resource utilization based on diagnosis, patient,
physician and other variables. This product is used as a benchmarking tool to
compare hospital-level information against 101 risk and severity adjusted
outcome indicators. The benchmarking information is derived from a standardized
national set of 10 million patient records. The outcomes database is organized
into six major categories: overall mortality, obstetrics, surgery, neonatal,
radiology and general medical. The customer typically produces reports that
compare its performance against competitor or peer group providers and against
expected outcomes derived from the national and regional data set.
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QuanTIM(R) Financial Performance Measurement is a software application that
employs cost accounting, length-of-stay, and other benchmark information to
allow customers to measure cost, clinical resource utilization and profitability
by physician, payor, diagnosis and procedure. Most providers have access to
charge and reimbursement information for procedures and diagnoses, but do not
have accurate measures for the cost of care in these categories. Therefore,
these providers cannot accurately track profitability by procedure or diagnosis.
Through an interface with QuanTIM(R) Clinical Performance Measurement, providers
can benchmark the risk adjusted outcomes and financial performance by physician,
diagnosis, patient and other variables. This application can also be used to
analyze the profitability of managed care and capitated contracts.
QuanTIM(R) Market Analysis Performance Measurement is a software
application that consists of licensed software and database information that is
derived from statewide and national hospital billing data sets and other
demographic and population statistics. This application enables customers to
perform market share, community health assessment, managed care activity and
physician admitting pattern analyses.
BUSINESSES OFFICE OUTSOURCING AND CASHFLOW MANAGEMENT SERVICES
In addition to its QuanTIM(R) software applications, the Company provides
business office outsourcing and cash flow management services. The Company often
makes use of its software applications in delivering such services. The Company
offers partial and full outsourcing of business office services for hospitals,
physicians, home health care agencies and other providers. The focus of these
services is to increase cash flow and to improve operational efficiencies for
health care providers. Under full outsourcing arrangements, the Company hires
and/or replaces existing business office personnel. The Company typically
implements selected components of its QuanTIM(R) suite of products to enhance
the efficiency of the business office. Under partial outsourcing arrangements,
the Company bills and collects receivables that have aged beyond a certain point
or that involve selected payors. See "Risk Factors -- Risks Related to
Outsourcing Business."
PRODUCTS UNDER DEVELOPMENT AND JOINT DEVELOPMENT PRODUCTS
The Company has employed a joint development strategy to design certain of
its products, having worked with the New Jersey Hospital Association ("NJHA") to
develop its DRGX(R) product and to develop QuanTIM(R) Clinical
Performance Measurement. In exchange for joint development funding, the Company
typically pays its joint development partners royalties based on sales of the
jointly developed product.
Currently, the Company is involved in a joint development project to create
a capitation management application designed to track managed care eligibility,
manage capitation payments to providers, and assist with risk pool accounting,
modeling and forecasting in both inpatient and outpatient settings. This project
is being funded and developed jointly by the Company and UniHealth, a Southern
California-based multi-hospital and medical group health care organization.
Portions of this development have been released and once the project is
complete, the Company intends to market this product as its next generation
contract management application. The Company anticipates that the capitation
management application will be completed in 1998.
QuanTIM(R) Net is being developed by the Company as an on-line
Internet/intranet solution focused on integrated health care delivery systems.
QuanTIM(R) Net provides on-line access to the Company's decision support
database and to publicly available data for performance measurement analysis and
reporting. The product is being developed in conjunction with the New Jersey
Hospital Association and is expected to be marketed initially to New Jersey
hospitals, beginning in the fourth quarter of 1997.
In May 1997, the Company acquired a 10.2% equity stake in EDI USA, Inc., an
organization owned and established by thirteen independent Blue Cross and Blue
Shield Plans to build and operate an EDI transaction network to facilitate
submission of claims, receipt of remittances, eligibility verification and other
health care transactions. The Company has a contract to provide EDI processing
and management services for EDI USA's transactions. See "Risk
Factors -- Potential Variability in Quarterly Operating Results" and "-- Risks
Associated with Certain Investments."
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There can be no assurance that any of these products will be successfully
developed or released according to the Company's schedule. See "Risk
Factors -- Risk of Product Defects; Failure to Meet Performance Criteria,"
"-- Dependence on Hospital Market and "-- New Product Development and System
Enhancements."
CUSTOMERS
Historically, QuadraMed has marketed its products primarily to hospitals,
with additional marketing to hospital associations, physician groups, payors and
self-administered employers. Substantially all of the Company's revenues have
been derived from the sale of software products and services to hospitals. With
the industry trend toward the formation of IDSs, the Company has designed its
product suite to accommodate this emerging industry sector. To date, QuadraMed
has had more than 670 customers, a substantial majority of which were hospitals,
located in 37 states and the District of Columbia. The Company expects to
maintain a high percentage of hospital customers for the foreseeable future, but
also expects its customer mix to begin to shift toward other providers,
including IDSs, as well as payors and employers. See "Risk Factors -- Dependence
on Hospital Market."
SALES AND MARKETING
As of August 31, 1997, the Company employed 27 direct sales representatives
and product managers, and a marketing support staff of three individuals. The
Company markets its products and services through direct sales contacts,
strategic alliances, participation in trade shows and advertisements in industry
publications. In addition, senior management plays an active role in the sales
process by cultivating industry contacts.
The Company supplements its marketing arrangements through endorsement
agreements. The Company has endorsement agreements and/or marketing agreements
for certain of its products with state and regional hospital associations in New
Jersey, Iowa, Northern and Central California, Connecticut, Florida, Maryland,
New York, Ohio, Pennsylvania, Virginia, West Virginia and Wisconsin.
The NJHA has been a strategic partner with the Company since December 1989.
The Company is also a subcontractor to the Health Research and Education Trust
of New Jersey ("HRET"), a subsidiary of NJHA. QuadraMed provides information
processing services to HRET to assist HRET in fulfilling New Jersey state data
reporting requirements, including inpatient, same day surgical and uniform
billing data. In addition, the Company has a strategic marketing relationship
with NJUP Plus, a for-profit subsidiary of NJHA, for marketing and customer
support assistance for its DRGX(R) customers.
Since January 1997, the Company has outsourced the Information Systems
Department of NJHA, employing all staff and managing the operation. In addition,
the development of QuanTIM(R) Net and its marketing to New Jersey hospitals,
planned for release in the fourth quarter of 1997, is a joint development effort
between NJHA and the Company.
The Association of Iowa Hospitals & Health Systems selected QuadraMed in
mid-1994 as its sole endorsed vendor of EDI products and services. The need for
an EDI vendor in Iowa hospitals was brought about by state legislation requiring
that all health care transactions be conducted electronically. To date, the
Company has licensed its EDI products to 97 Iowa providers.
TECHNOLOGY
Software Architecture. The Company uses industry standard software whenever
possible to minimize development and maintenance costs. The QuanTIM(R) suite of
products operates on the DOS and Novell Netware operating systems. Certain of
the Company's current products operate on all versions of the Windows(TM) NT
operating system. The Windows(TM) NT versions of some of the Company's products
were released in late 1996, and the Company expects that Windows(TM) NT versions
of its EDI product, which are currently under development, will be released in
1998. All major software components of QuanTIM(R) are assembled in a modular
architecture for application independence and to facilitate the replacement of
modules as new technology becomes available and as market demand dictates.
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Hardware Platform. The Company's software products operate on PC-based
single and multi-user hardware platforms. In addition, the Company also offers
its imaging product on Sun Microsystems platforms. These platforms also include
high capacity storage devices for the large storage requirements of document
imaging.
RESEARCH AND DEVELOPMENT
As of August 31, 1997, the Company employed 46 people in the areas of
product design, research and development and 13 people in the areas of quality
assurance and technical support. The Company's product development strategy is
focused on continually enhancing existing products by increasing their
functionality and ease of use. In addition, the Company is enhancing the
reporting capabilities for its performance measurement clinical and financial
applications, expanding its outpatient and inpatient databases and improving its
comparative reporting and benchmarking capabilities with third-party databases.
See "-- Products Under Development and Joint Development Projects."
In 1994, 1995, 1996, and the six months ended June 30, 1996 and 1997, the
Company's research and development expenses totalled $767,000, $653,000, $2.5
million, $1.3 million and $1.4 million, respectively, representing 12.6%, 8.6%,
13.1%, 13.4% and 11.1%, respectively, of its total revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
Competition in the market for the Company's products and services is
intense and is expected to increase. The Company's competitors include other
providers of health care information software and services, as well as health
care consulting firms. The Company's principal competitors include (i) CIS
Technologies, Inc., a division of National Data Corporation, and Sophisticated
Software, Inc. in the market for its EDI products; (ii) Envoy Corp. and MedE
AMERICA in the market for its claims processing service; (iii) Healthcare Cost
Consultants, Inc., a division of CIS Technologies, Inc., and Trego Systems, Inc.
in the market for its contract management products; (iv) IMNET Systems, Inc.,
Optika Imaging Systems, Inc. and LanVision Systems, Inc. in the market for its
electronic document management products; (v) Transition Systems, Inc. and
Healthcare Microsystems, Inc., a division of Health Management Systems Inc.,
HCIA Inc. and MediQual Systems, Inc., a division of Cardinal Health, Inc., in
the market for its decision support products; and (vi) HMS and ARTRAC, a
division of Medaphis Corp., in the market for its accounts receivable management
services. In addition, current and prospective customers evaluate the Company's
capabilities against the merits of their existing information systems and
expertise. Furthermore, major health care information companies not presently
offering products that compete with those offered by the Company may enter the
Company's markets. Increased competition could result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, many of the Company's competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than the
Company. Many of the Company's competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, the Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations. The Company
believes that the principal competitive factors in its markets are product
functionality and features, price, customer support and firm reputation. See
"Risk Factors -- Highly Competitive Market."
GOVERNMENT REGULATION AND HEALTH CARE REFORM
The United States Food and Drug Administration (the "FDA") is responsible
for assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer products are subject to regulation when
they are used or are intended to be used in the diagnosis of disease or other
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<PAGE> 31
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. The FDA could
determine the future that any predictive aspects of the Company's products make
them clinical decision tools subject to FDA regulation. Compliance with these
regulations could be burdensome, time consuming and expensive. The Company also
could become subject to future legislation and regulations concerning the
development and marketing of health care software systems. These could increase
the cost and time necessary to market new products and could affect the Company
in other respects not presently foreseeable. The Company cannot predict the
effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to
implement security measures that may require substantial expenditures by the
Company. There can be no assurance that changes to state or federal laws will
not materially restrict the ability of health care providers to submit
information from patient records using the Company's products.
The health care industry is highly regulated and subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of health care organizations. The Company's products are
designed to function within the structure of the health care financing and
reimbursement system currently being used in the United States. Changes in
current health care financing and reimbursement systems could result in the need
for unplanned product enhancements, delays or cancellations of product orders or
shipments, or the revocation of endorsement of the Company's products by
hospital associations or other customers. Any of such occurrences could have a
material adverse effect on the Company's business, financial condition and
results of operations. During the past several years, the United States health
care industry has been subject to an increase in governmental regulation of,
among other things, reimbursement rates. Certain proposals to reform the U.S.
health care system are periodically considered by Congress and certain state
legislatures. These programs may contain proposals to increase governmental
involvement in health care and otherwise change the operating environment for
the Company's customers and potential customers. Health care organizations may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's products.
On the other hand, changes in the regulatory environment have increased and may
continue to increase the needs of health care organizations for cost-effective
information management and thereby enhance the marketability of the Company's
products and services. The Company cannot predict with any certainty what
impact, if any, such proposals or health care reforms might have on the
Company's business, results of operations and financial condition. In addition,
many health care providers are consolidating to create integrated health care
delivery systems with greater regional market power. As a result, these emerging
systems could have greater bargaining power, which may lead to price erosion of
the Company's products. The failure of the Company to maintain adequate price
levels would have a material adverse effect on the Company's business, financial
condition and results of operations. Other legislative or market-driven reforms
could have unpredictable effects on the Company's business, financial condition
and results of operations. See "Risk Factors -- Government Regulation" and
"-- Uncertainty in the Healthcare Industry."
INTELLECTUAL PROPERTY
The Company considers its methodologies, computer software and many of its
databases to be proprietary. The Company seeks to protect its proprietary
information through nondisclosure agreements with its employees. The Company's
policy is to have employees enter into nondisclosure agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside the Company, requiring disclosure to the Company of any new ideas,
developments, discoveries or inventions conceived during
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employment, and requiring assignment to the Company of proprietary rights to
such matters that are related to the Company's business.
The Company also relies on a combination of trade secrets, copyright and
trademark laws, contractual provisions and technical measures to protect its
rights in various methodologies, systems, products and databases. The Company
has no patents or copyrights covering its software technology. Any infringement
or misappropriation of the Company's proprietary software and databases would
disadvantage the Company in its efforts to retain and attract new customers in a
highly competitive market and could cause the Company to lose revenues or incur
substantial litigation expense.
There can be no assurance that measures taken by the Company to protect its
intellectual property will be adequate or that the Company's competitors will
not independently develop products and services that are substantially
equivalent or superior to those of the Company. Substantial litigation regarding
intellectual property rights exists in the software industry, and the Company
expects that software products may be increasingly subject to third-party
infringement claims as the number of competitors in the Company's industry
segment grows and the functionality of products overlaps. However, due to the
nature of its application software, the Company believes that patent, trade
secret and copyright protection are less significant than the Company's ability
to further develop, enhance and modify its current products.
Although the Company believes that its products do not infringe on the
intellectual rights of others, there can be no assurance that such a claim will
not be asserted against the Company in the future, or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. Any such claim may require the Company to incur
substantial litigation expenses or subject the Company to significant
liabilities and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Limited
Proprietary Rights; Risk of Infringement."
EMPLOYEES
As of August 31, 1997, the Company employed 302 people, including 28 in
general administration, 46 in product design, research and development, 27 in
sales and marketing and 201 in operations, quality assurance and technical
support. None of the Company's employees is represented by a union or other
collective bargaining group. The Company believes its relationship with its
employees to be satisfactory.
FACILITIES
The Company's executive and corporate offices are located in Larkspur,
California, in approximately 11,500 square feet of leased office space under a
lease that expires in June 1998. The Company also maintains offices in Fresno,
California; Neptune, New Jersey; Howell, New Jersey; Kansas City, Missouri;
Atlanta, Georgia; Denver, Colorado; Grand Junction, Colorado; Pittsburgh,
Pennsylvania; and Richmond, Virginia.
The Company believes that its facilities are adequate for its current
operations.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this Prospectus, the Company is not a party to any legal proceedings
which, if decided adversely to the Company, would, individually or in aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Risk Factors -- Limited Proprietary Rights; Risk of
Infringement."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the executive officers
and directors of the Company as of August 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ---- ----------------------------------------------------------
<S> <C> <C>
James D. Durham............. 50 Chairman of the Board, President and Chief Executive
Officer
John V. Cracchiolo.......... 41 Executive Vice President, Chief Financial Officer and
Secretary
Eugene M. Arnone............ 50 Executive Vice President and President, Business Office
Outsourcing Services Division
Lemuel C. Stewart, Jr....... 51 Executive Vice President and President, EDI Division
Frederick Stodolak.......... 40 Executive Vice President and President, Value-Added
Systems Division
Suzanne J. Blumenthal....... 44 Senior Vice President, Business Development
Keith M. Roberts............ 32 Vice President and General Counsel
John H. Austin, M.D.(1)..... 52 Director
Albert L. Greene............ 47 Director
Kenneth E. Jones............ 50 Director
Thomas F. McNulty(2)........ 58 Director
Joan P. Neuscheler(2)(1).... 38 Director
Cornelius T. Ryan(1)........ 65 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
James D. Durham founded the Company in September 1993 when he became its
President and Chief Executive Officer and a director. In May 1996, Mr. Durham
became Chairman of the Board. From November 1992 to December 1993, Mr. Durham
served as the Chief Executive Officer of Trim Healthcare Systems, Inc., a
reimbursement consulting services company. From April 1992 to April 1993, Mr.
Durham served as Chief Executive Officer of Care Partners, Inc., an accounts
receivable processing and funding company co-founded by Mr. Durham. From
February 1986 until its acquisition by Ameritech in February 1992, Mr. Durham
served as President and Chief Executive Officer of Knowledge Data Systems, Inc.,
a health care information systems company. Mr. Durham holds a B.S. with honors
in Industrial Engineering from the University of Florida and an M.B.A. with an
emphasis in Finance from the University of California, Los Angeles and is a
Certified Public Accountant.
John V. Cracchiolo joined the Company in May 1995 as its Executive Vice
President, Chief Financial Officer and Secretary. Prior to joining the Company,
Mr. Cracchiolo worked for PSICOR, Inc., a health care services company, serving
as its Chief Financial Officer from February 1993 to May 1995, and its corporate
Controller from May 1989 to February 1993. Previously, Mr. Cracchiolo worked in
various management positions for software, hardware, defense contractor and
personnel and professional services organizations within the health care and
other industries. Mr. Cracchiolo holds a B.S. in Business Administration from
California State University, Long Beach and is a Certified Public Accountant.
Eugene M. Arnone joined the Company in April 1997 as Executive Vice
President and President, Business Office Outsourcing Services Division. From
September 1978 to March 1997, Mr. Arnone was the President and co-founder of KA
Consulting, a health care consulting company. Mr. Arnone also served, from
November 1984 to March 1997, as the President and co-founder of Healthcare
Recovery, Inc., a cash flow management company, which was acquired by QuadraMed
in April 1997, and served, from November 1985 to March 1997, as the President
and co-founder of Medical Claims Processing, a cash flow management company. Mr.
Arnone holds an M.B.A. in Finance from New York University and a B.A. in
Economics from Catholic University.
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<PAGE> 34
Lemuel C. Stewart, Jr. joined the Company in July 1997 as its Executive
Vice President and President, EDI Division. From January 1997 to June 1997, Mr.
Stewart was a general manager of the Virginia-based EDI division of National
Data Corporation ("NDC"), an information systems and services company for the
health care and payment systems markets. From September 1986 to January 1997,
Mr. Stewart was the President, Chief Operating Officer and general manager of
the EDI division's predecessor, Health Communication Services, Inc. Mr.. Stewart
holds a B.S. in Business/Finance from East Tennessee State University and an
A.A. in Business from Richard Bland College of William and Mary.
Frederick Stodolak rejoined the Company in November 1996 as Executive Vice
President and President, Value-Added Systems Division. From August 1996 to
November 1996, Mr. Stodolak was a consultant to the Company. From January 1996
to August 1996, Mr. Stodolak served as the Company's Chief Operating Officer.
From November 1989 until December 1995, Mr. Stodolak was the Chief Executive
Officer of Healthcare Design Systems, a division of Kaden Arnone, a privately
held health care consulting company, until that division was acquired by the
Company in December 1996. Previously, Mr. Stodolak was the director of budgets
and reimbursement for a 500-bed teaching hospital in New Jersey for six years.
Mr. Stodolak holds a B.S. degree in accounting from Stockton State College and
is a Fellow with the Healthcare Financial Management Association (FHFMA Status),
of which he has been a member since 1978.
Suzanne J. Blumenthal joined the Company in January 1994 as Vice President,
Sales. From January 1995 to December 1995, Ms. Blumenthal served as Vice
President, Business Development and in January 1996 she became Senior Vice
President, Business Development. From October 1992 to December 1993, Ms.
Blumenthal served as Vice President, Sales for StallarNert, a company
specializing in EDI software. From March 1988 to October 1992, Ms. Blumenthal
served as Western Regional Director for CSC Healthcare Systems, Inc., a division
of Computer Sciences Corporation, which specializes in managed care software.
Ms. Blumenthal holds a B.A. in Urban Planning from Washington University and a
Master's in Healthcare Administration from George Washington University.
Keith M. Roberts joined the Company in March 1997 as Vice President and
General Counsel. From May 1995 to March 1997, Mr. Roberts was an associate of
Brobeck, Phleger & Harrison LLP, a private law firm. From September 1992 to May
1995, Mr. Roberts was an associate of Hale & Dorr, a private law firm. Mr.
Roberts holds a J.D. from Stanford Law School and a B.A. in economics and
philosophy from the University of Rochester.
John H. Austin, M.D., has been a director of the Company since April 1995.
Dr. Austin has been the President and Chief Executive Officer of Arcadian Health
Management, a manager of rural hospitals, since June 1997. From April 1997 to
June 1997, Dr. Austin was an independent consultant in the health care industry.
From October 1994 to April 1997, Dr. Austin served as President, Professional
Services Division for UniHealth, a multi-hospital and medical group health care
organization. Prior to joining UniHealth, Dr. Austin was a consultant in the
health care industry from June 1992 to October 1994 and served as Executive Vice
President, Health Plan of America HMO for St. Joseph Health System from January
1987 to June 1992. Mr. Austin is also a director of Coventry Corp., a nursing
home company.
Albert L. Greene has been a director of the Company since May 1997. Mr.
Greene has been the President and Chief Executive Officer of Alta Bates Medical
Center, a 527-bed acute care hospital located in Berkeley, California, since
1990. Mr. Greene also has been the President and Chief Executive Officer of Alta
Bates Health System, the parent company of Alta Bates Medical Center, since
January 1996, and a Senior Vice President of the East Bay Market Service Area of
Sutter Health, a health care delivery system and the parent company of Alta
Bates Health System, since June 1996. Mr. Greene has served as an executive in
hospital administration since 1979, most recently as the President of Sinai
Samaritan Medical Center in Milwaukee, Wisconsin from 1988 to 1990. Mr. Greene
received a masters of hospital administration at the University of Michigan, and
is presently a diplomate of the American College of Healthcare Executives and a
member of the American Hospital Association. Mr. Greene is also chair-elect of
the California Healthcare Association, a member of the board of directors of
Acuson Corporation, a manufacturer and provider of medical diagnostic ultrasound
systems, and a member of the board of directors of several other privately held
hospitals and hospital associations.
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Kenneth E. Jones has been a director of the Company since May 1997. Mr.
Jones has been the Chairman of the Board and Chief Executive Officer of Globe
Wireless, a provider of marine communications services, since 1990. Mr. Jones
has also held various senior management positions with other companies,
including President and Chief Executive Officer of Ditech Corporation, a
telecommunications company, President and Chief Executive Officer of Automated
Call Processing Corporation, a telecommunications company, President and Chief
Executive Officer of ClausenKoch Company, a producer of canned meat products and
Vice President and Chief Financial Officer of Hills Bros. Coffee, Inc., a
producer of coffee. Mr. Jones holds a B.S. in Chemical Engineering from the
University of Nebraska and an M.B.A. from Harvard University.
Thomas F. McNulty has been a director of the Company since October 1994.
Mr. McNulty has served as Senior Vice President, Chief Financial Officer and
Treasurer of Henry Ford Health Systems, an integrated delivery system, since
1983. Mr. McNulty is also a director of several privately held companies and
charitable organizations.
Joan P. Neuscheler has been a director of the Company since March 1994. Ms.
Neuscheler has been a general partner of Tullis-Dickerson Partners, a venture
capital firm, and the Chief Financial Officer of Tullis-Dickerson & Co., Inc.,
since April 1989. Tullis-Dickerson Partners is the general partner of
Tullis-Dickerson Capital Focus, L.P., a stockholder of the Company. Ms.
Neuscheler is also a director of American Consolidated Laboratories, Inc., a
manufacturer of contact lenses, and several privately held companies.
Cornelius T. Ryan has been a director of the Company since March 1995. Mr.
Ryan has been a general partner of Oxford Partners since 1981 and of OBP
Management L.P., and OBP Management (Bermuda) Limited Partnership since 1992.
OBP Management L.P. and OBP Management (Bermuda) Limited Partnership are the
general partners of Oxford Bioscience Partners L.P. and Oxford Bioscience
Partners (Bermuda) Limited Partnership, respectively, each a stockholder of the
Company. Mr. Ryan is also a director of several privately held companies.
COMPOSITION OF BOARD OF DIRECTORS
The Company's Bylaws set the number of directors at seven. The Company's
Board of Directors is divided into three classes, designated Class I, Class II
and Class III. The term of Class I, currently consisting of John M. Austin,
M.D., Albert L. Greene and Kenneth E. Jones, will expire at the annual meeting
of stockholders to be held in the year 2000; the term of Class II, currently
consisting of Joan P. Neuscheler and Cornelius T. Ryan, will expire at the
annual meeting of stockholders to be held in 1998; and the term of Class III,
currently consisting of James D. Durham and Thomas F. McNulty, will expire at
the annual meeting of stockholders to be held in 1999. The Company's directors
are elected by the stockholders at the annual meeting of stockholders and will
serve until their successors are elected and qualified, or until their earlier
resignation or removal. At each annual meeting of stockholders, the successors
to directors whose terms will then expire will be elected to serve for a term of
three years, subject to the foregoing.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of the
Company.
DIRECTOR COMPENSATION
Non-employee directors are reimbursed for their reasonable expenses
incurred in connection with attending board meetings. Any non-employee director
who first joins the Board after the May 20, 1996 effective date of the Company's
1996 Stock Incentive Plan (the "1996 Plan") is granted an option to purchase
10,000 shares of Common Stock upon joining the Board. In addition, at each
annual meeting of stockholders, each non-employee director is awarded an option
to purchase an additional 4,000 shares of Common Stock. Such options are
immediately exercisable and will have a maximum term of 10 years. However, any
unvested shares purchased under such option will be subject to repurchase by the
Company, at the exercise price paid per share, upon the optionee's cessation of
service as a director prior to vesting in those shares.
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INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that its directors will
not be liable to the Company or its stockholders for monetary damages for
breaches of fiduciary duty to the fullest extent permitted by Delaware law. This
provision is intended to allow the Company's directors the benefit of Delaware
General Corporation Law, which provides that directors of Delaware corporations
may be relieved of monetary liability for breaches of their fiduciary duty of
care except under certain circumstances, including breach of the duty of
loyalty, acts or omissions not in good faith or involving intentional misconduct
or known violation of law, or any transaction from which the director derived an
improper personal benefit.
The Company has entered into separate indemnification agreements with each
of its directors and executive officers whereby the Company has agreed, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors or executive officers and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
AUDIT COMMITTEE
The Audit Committee's duties include reviewing internal financial
information, monitoring cash flow, budget variances and credit arrangements,
reviewing the audit program of the Company, reviewing with the Company's
independent accountants the results of all audits upon their completion,
annually selecting and recommending independent accountants, overseeing the
quarterly unaudited reporting process and taking such other action as may be
necessary to assure the adequacy and integrity of all financial information
distributed by the Company. The Audit Committee currently consists of Ms.
Neuscheler and Mr. McNulty.
COMPENSATION COMMITTEE
The Compensation Committee recommends compensation levels of senior
management and works with senior management on benefit and compensation programs
for Company employees. In addition, the Compensation Committee administers the
1996 Plan. The Compensation Committee currently consists of Dr. Austin, Ms.
Neuscheler and Mr. Ryan.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain information regarding the
compensation earned during the 1996 fiscal year by (i) the Company's Chief
Executive Officer, (ii) each of the three other most highly compensated
executive officers of the Company serving as such as of the end of the last
fiscal year whose total annual salary and bonus exceeded $100,000 and (iii) one
former executive officer of the Company, for services rendered in all capacities
to the Company for the fiscal years ended December 31, 1996 and December 31,
1995. Such individuals will be hereafter referred to as the "Named Executive
Officers."
36
<PAGE> 37
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
---------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/WARRANTS
- -------------------------------------- ------ -------- ------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
James D. Durham....................... 1996 $187,425 $ -- $ -- 101,600
Chairman of the Board, 1995 178,003 -- -- 388,574(1)
President and Chief Executive
Officer
Robert Burrows........................ 1996 127,500(2) -- 18,229(3) 130,000(4)
Former President and Chief 1995 -- -- -- --
Operating Officer
John V. Cracchiolo.................... 1996 133,333(5) 52,000 -- --
Executive Vice President, 1995 73,149(6) -- 14,000(3) 70,000
Chief Financial Officer and
Secretary
Frederick Stodolak.................... 1996 118,141(7) -- 134,198(8) --
Executive Vice President 1995 -- -- -- 24,000
and President, Value-Added
Systems Division
Suzanne J. Blumenthal................. 1996 110,000 32,646(9) -- --
Senior Vice President, 1995 85,000 28,505(10) -- 20,400
Business Development
</TABLE>
- ---------------
(1) Includes a warrant to purchase 254,000 shares which was originally issued
in September 1995. In September 1996, this warrant was combined with the
warrant to purchase 101,600 shares which was originally issued in June
1996. Also includes a warrant to purchase 134,574 shares.
(2) Represents salary paid from March 1996 through December 1996. Mr. Burrows
resigned from the Company effective January 1997.
(3) Represents reimbursement for moving expenses.
(4) Upon Mr. Burrows' resignation from the Company in January 1997, all of
these options were cancelled.
(5) Effective November 1996, Mr. Cracchiolo's annual salary was increased from
$130,000 to $150,000 by the Board of Directors.
(6) Represents salary paid from May 1995 through December 1995.
(7) Represents salary paid through June 15, 1996 and from November 19, 1996
through December 31, 1996. Mr. Stodolak's annual salary for 1996 was
$175,000. In addition, for the period of September 1, 1996 through November
18, 1996, Mr. Stodolak was a consultant with the Company and received a
$20,000 retainer fee.
(8) For the period June 16, 1996 through August 31, 1996, Mr. Stodolak received
35,786 shares of Common Stock, at $3.75 per share, in lieu of receiving
cash salary. The fair market value of the Common Stock was $7.50 per share.
The aggregate value of the difference between the fair market value and the
purchase price of the shares was $134,198.
(9) Includes $12,646 for commissions earned and paid.
(10) Represents commissions earned and paid.
37
<PAGE> 38
STOCK OPTIONS
The following table sets forth information concerning the stock option
grants made to each of the Named Executive Officers during the 1996 fiscal year.
No stock appreciation rights ("SARs") were granted during the 1996 fiscal year
to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------ AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES
SECURITIES TOTAL OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL 1996 PER SHARE(1) DATE 5% 10%
- ------------------------- --------- --------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James D. Durham.......... 101,600(3) 29.1% $ 3.75 06/26/01 $105,263 $232,604
Robert Burrows........... 130,000(4) 37.3 7.50 04/11/01 269,375 595,247
</TABLE>
- ---------------
(1) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
purchase procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares and the
federal and state income tax liability incurred by the optionee in
connection with such exercise.
(2) There can be no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price appreciation
over the 10-year option term will be at the assumed 5% and 10% compounded
annual rates or at any other defined level. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants made to the Named Executive Officers.
(3) In June 1996, the Company issued a warrant to Mr. Durham to purchase up to
101,600 shares of Common Stock at an exercise price of $3.75 per share. In
September 1996, this warrant was combined with another warrant held by Mr.
Durham to purchase up to 254,000 shares of Common Stock at an exercise price
of $3.75 per share. The warrant is currently exercisable for an aggregate of
284,480 shares. Provided Mr. Durham continues to perform services for the
Company as an employee, consultant or director through September 26, 2000,
the warrant will at that time become exercisable in full and will remain
exercisable until June 26, 2001 when it will expire. The warrant will become
exercisable in full prior to September 26, 2000 upon the occurrence of
certain events.
(4) These options were granted under the Company's 1994 Stock Plan. Upon Mr.
Burrow's resignation from the Company in January 1997, all of these options
were cancelled.
38
<PAGE> 39
OPTION EXERCISES AND YEAR-END VALUES
No options were exercised by the Named Executive Officers and no SARs were
outstanding during the 1996 fiscal year. The following table sets forth certain
information with respect to the Named Executive Officers concerning shares of
the Company's Common Stock subject to exercisable and unexercisable stock
options which the Named Executive Officers held at the end of the 1996 fiscal
year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James D. Durham............................. 139,887(2) 355,600(3) $ 1,078,599 $ 2,755,900
Robert Burrows(4)........................... -- -- -- --
John V. Cracchiolo.......................... 70,000 -- 542,500 --
Frederick Stodolak.......................... 24,000 -- 186,000 --
Suzanne J. Blumenthal....................... 36,400 -- 282,100 --
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the Company's Common Stock as of December 31, 1996 and the exercise price of
the option.
(2) Includes 134,574 shares of Common Stock issuable upon exercise of a warrant
held by Trigon Resources Corporation and 5,313 shares of Common Stock
issuable upon exercise of a warrant held by Wentorf International
Corporation. See "Principal and Selling Stockholders."
(3) Represents 355,600 shares of Common Stock issuable upon exercise of a
warrant held by Mr. Durham.
(4) At fiscal year-end, Mr. Burrows held 130,000 options with a value of
$422,500. Upon Mr. Burrows' resignation from the Company in January 1997,
all of these options were cancelled. As of such date, none of these options
had vested.
EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL ARRANGEMENTS
In April 1995, the Company entered into a letter agreement with John V.
Cracchiolo, the Company's Chief Financial Officer. Pursuant to the letter
agreement, Mr. Cracchiolo is to receive a base salary of $150,000 for the 1997
calendar year and is eligible for such annual cash bonuses as the Board of
Directors in its discretion shall award. The letter agreement also includes (i)
a severance provision pursuant to which Mr. Cracchiolo, if terminated without
cause, will receive four months' salary, and (ii) a provision entitling Mr.
Cracchiolo to an option to purchase 40,000 shares of Common Stock at an exercise
price of $3.75 per share. The Company is currently negotiating a new employment
agreement with Mr. Cracchiolo.
In December 1996, the Company entered into an employment agreement with
Frederick Stodolak, the Company's Executive Vice President and President,
Value-Added Systems Division. Pursuant to the terms of the agreement, Mr.
Stodolak is to receive a base salary of $175,000 per year and is eligible for
such annual cash bonuses as the Board of Directors in its discretion shall
award. The agreement also contains a severance provision pursuant to which Mr.
Stodolak will receive $175,000 if Mr. Stodolak terminates his employment with
cause (as defined in the agreement) or if Mr. Stodolak is terminated by the
Company (i) without cause or (ii) because he has become disabled. The agreement
terminates in December 1998 unless extended by mutual agreement of the parties.
In January 1997, the Company entered into a letter agreement with James D.
Durham, the Company's President and Chief Executive Officer. Pursuant to the
letter agreement, Mr. Durham is to receive a base salary of $225,000 for the
1997 calendar year. In addition, Mr. Durham (i) is eligible for such annual cash
bonuses as the Board of Directors in its discretion shall award, based upon the
recommendation of the Board's Compensation Committee and (ii) will receive a car
allowance of approximately $500 per month during the
39
<PAGE> 40
term of his employment. The letter agreement also contains the following
severance provisions: (i) if Mr. Durham dies, his estate will receive a special
termination payment equal to one month's salary and (ii) if Mr. Durham is
terminated by reason of disability or an Involuntary Termination other than a
Termination for Cause (as those terms are defined in the letter agreement), Mr.
Durham will receive an aggregate amount equal to the sum of his average annual
rate of base salary for the two immediately preceding calendar years and will
also continue to receive for a period of 12 months (24 months if Mr. Durham's
termination is effected in connection with a Change in Control, as defined in
the letter agreement) his life, health and disability and other benefits. The
letter agreement terminates on December 31, 1998, but will automatically renew
for a term of one year on such date and each succeeding anniversary of such
date, unless the Company provides written notice to Mr. Durham, not later than
three months prior to such anniversary date, that it will not extend the term of
the letter agreement.
In March 1997, the Company entered into a letter agreement with Keith M.
Roberts, the Company's Vice President and General Counsel. Pursuant to the
letter agreement, Mr. Roberts is to receive a base salary of $125,000 for the
1997 calendar year and is eligible for such annual cash bonuses as the Board of
Directors in its discretion shall award. The letter agreement also includes (i)
a provision entitling Mr. Roberts to an option to purchase 85,000 shares of
Common Stock at an exercise price of $9.625 per share, and (ii) a severance
provision pursuant to which Mr. Roberts, if terminated without cause or in
connection with a change in control of the Company, will receive six months'
salary and his option to purchase 85,000 shares of Common Stock will vest
immediately.
In April 1997, the Company entered into a letter agreement with Eugene M.
Arnone, the Company's Executive Vice President and President, Business Offices
Outsourcing Services Division. Pursuant to the letter agreement, Mr. Arnone is
to receive a base salary of $175,000 for the 1997 calendar year, subject to
annual adjustments at the discretion of the Board of Directors, and is eligible
for such annual bonuses as the Board of Directors in its discretion shall award.
The letter agreement also includes a severance provision pursuant to which Mr.
Arnone will receive, if terminated for a reason other than for cause (as defined
in the letter agreement), the amount of compensation he would have received
during the remainder of the then applicable term of the letter agreement. If Mr.
Arnone enters into any employment, consulting or similar arrangement with a
third party, such severance payments by the Company shall terminate. The letter
agreement terminates in April 1999, but automatically renews for successive
one-year terms unless notice of termination is delivered by either party at
least 90 days in advance of the then current term.
In July 1997, the Company entered into a letter agreement with Lemuel C.
Stewart, Jr., the Company's Executive Vice President and President, EDI
Division. Pursuant to the letter agreement, Mr. Stewart is to receive a base
salary of $175,000 for the 1997 calendar year, subject to annual adjustments at
the discretion of the Board of Directors and is eligible for such annual bonuses
as the Board of Directors in its discretion shall award. The letter agreement
also includes the following severance provisions: (i) if Mr. Stewart dies, his
estate will receive a special termination payment equal to one month's salary
and (ii) if Mr. Stewart is terminated (a) by reason of disability, (b) in an
Involuntary Termination other than a termination for Cause or (c) in connection
with a Change in Control (as those terms are defined in the letter agreement),
Mr. Stewart will receive an aggregate amount equal to his average annual rate of
base salary for the two immediately preceding calendar years and will continue
to receive for a period of 12 months his life, health and disability and other
benefits. The letter agreement terminates on June 30, 1999, but will
automatically renew for a term of one year on such date and each succeeding
anniversary of such date, unless the Company provides written notice to Mr.
Stewart, not later than three months prior to such anniversary date, that it
will not extend the term of the letter agreement.
In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by the Chief Executive Officer and the other
executive officers under the Company's 1994 Stock Plan (the predecessor equity
incentive program to the 1996 Plan) or the 1996 Plan will automatically
accelerate in full, except to the extent such options are to be assumed by the
successor corporation. In addition, the Compensation Committee as Plan
Administrator of the 1996 Plan will have the authority to provide for the
accelerated vesting of the shares of Common Stock subject to outstanding options
held by the Chief Executive Officer or any other executive officer or any
unvested shares of Common Stock subject to direct issuances held
40
<PAGE> 41
by such individual, in connection with the termination of the officer's
employment following: (i) a merger or asset sale in which these options are
assumed or are assigned or (ii) certain hostile changes in control of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists of Dr. Austin, Ms.
Neuscheler and Mr. Ryan. No member of such Committee was at any time during the
1996 fiscal year or at any other time an officer or employee of the Company. No
executive officer of the Company served on the compensation committee of another
entity or on any other committee of the board of directors of another entity
performing similar functions during the Company's last fiscal year.
41
<PAGE> 42
CERTAIN TRANSACTIONS
In September 1997, the Company entered into an agreement with Sedona
Healthcare Group ("Sedona") for a business office outsourcing services
engagement. Under the terms of the agreement, the Company will receive (i)
approximately $23,000 per month, (ii) a per claim fee for claims processed and
(iii) additional compensation if the Company meets certain performance-based
targets. Cornelius T. Ryan, a director of the Company, is a director of Sedona.
In addition, Mr. Ryan is a general partner of OBP Management L.P. and OBP
Management (Bermuda) Limited Partnership (collectively, "Oxford"). Oxford, a
stockholder of the Company, is also a stockholder of Sedona. The foregoing
transaction was negotiated on an arms length basis and the Company believes the
terms are no less favorable to the Company than could be obtained from
disinterested third parties. See "Management" and "Principal and Selling
Stockholders."
In August 1997, the Company entered into a Settlement Agreement and Mutual
General Release in the matter of THCS Holding, Inc. et al. v. Innovative
Financial Strategies, Inc. et al. Pursuant to the terms of the settlement
agreement, certain stockholders of the Company transferred an aggregate of
147,500 shares of the Company's Common Stock and an aggregate of $329,105 to
certain of the cross-complainants in this action, and the Company transferred an
aggregate of $170,895 to certain of the cross-complainants in this action. James
D. Durham, the Company's Chairman and Chief Executive Officer, was a party to
the settlement agreement and was released from all claims arising out of the
factual allegations contained in the cross-complaint in this action. Certain of
the entities affiliated with The CW Group, stockholders of the Company, also
were parties to the settlement agreement. See "Principal and Selling
Stockholders."
42
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 12, 1997 and as adjusted
to reflect the sale of shares of Common Stock offered hereby by (i) each person
(or group of affiliated persons) known by the Company to be the beneficial owner
of more than five percent of the outstanding shares of the Company's Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer,
(iv) all executive officers and directors of the Company as a group and (v) each
Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO OFFERING OWNED
(1) AFTER OFFERING
------------------- NUMBER OF SHARES -------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ----------------------------------------- --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Wells Fargo Bank, N.A.(2)................ 612,500 9.4% -- 612,500 6.4%
420 Montgomery Street
San Francisco, CA 94163
Tullis-Dickerson Capital Focus L.P.(3)... 619,098 9.2 -- 619,098 6.3
One Greenwich Plaza
Greenwich, CT 06830
Entities Affiliated with The CW
Group(4)............................... 555,786 8.2 -- 555,786 5.7
1041 Third Avenue, 2nd Floor
New York, NY 10021
Entities Affiliated with Oxford
Bioscience Partners(5)................. 391,915 5.9 -- 391,915 4.1
315 Post Road West
Westport, CT 06880
James D. Durham(6)....................... 711,199 10.3 200,000 511,199 5.1
Robert Burrows(7)........................ -- * -- -- *
John V. Cracchiolo(8).................... 70,575 1.1 30,000 40,575 *
Suzanne J. Blumenthal(9)................. 37,416 * -- 37,416 *
Frederick Stodolak(10)................... 60,536 * -- 60,536 *
John H. Austin, M.D.(11)................. 22,666 * -- 22,666 *
Albert L. Greene(12)..................... 10,000 * -- 10,000 *
Kenneth E. Jones(12)..................... 10,000 * -- 10,000 *
Thomas F. McNulty(13).................... 36,666 * 10,000 26,666 *
Joan P. Neuscheler(14)................... 634,060 9.4 -- 634,060 6.5
Cornelius T. Ryan(15).................... 405,915 6.1 -- 405,915 4.2
All executive officers and directors as a
group (14 persons)(16)................. 2,166,721 28.7 240,000 1,926,721 18.3
R. Kirby Godsey(17)...................... 83,301 1.3 40,000 43,301 *
Emily P. Myers(17)....................... 63,107 1.0 31,000 32,107 *
Sirrom Investments, Inc.(17)............. 28,555 * 14,278 14,277 *
Donald Midkiff(17)....................... 5,048 * 2,524 2,524 *
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding for computing the percentage of the person holding such
options. but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
43
<PAGE> 44
(2) Based upon a Schedule 13G filed on or about February 14, 1997. Wells Fargo
Bank, N.A. has sole voting power with respect to 612,500 shares of Common
Stock and shared investment power with respect to 598,500 of such shares.
All such shares are held in trust accounts for the economic benefit of the
beneficiaries of those accounts.
(3) Includes 249,270 shares of Common Stock issuable upon exercise of certain
warrants issued to Tullis-Dickerson Capital Focus L.P. Tullis-Dickerson
Partners is the general partner of Tullis-Dickerson Capital Focus L.P., and
as such may be deemed to have voting and investment power with respect to
the shares held by Tullis-Dickerson Capital Focus L.P. The general partners
of Tullis-Dickerson Partners are Joan P. Neuscheler, a director of the
Company, James L.L. Tullis and Thomas P. Dickerson. Each of such general
partners disclaim beneficial ownership of the shares held by
Tullis-Dickerson Capital Focus L.P. except to the extent of each of their
pecuniary interest in Tullis-Dickerson Partners.
(4) Includes 64,614 shares of Common Stock owned by CW Ventures; 24,627 shares
of Common Stock owned by CW R&D II (Financial) L.P.; 175,242 shares of
Common Stock owned by CW Ventures II, L.P.; 14,913 shares of Common Stock
owned by CW Partners III, L.P.; 10,632 shares of Common Stock owned by CW
R&D II, L.P.; 15,159 shares of Common Stock owned by Overseas Medical
Ventures, IL; and 250,599 shares of Common Stock issuable upon exercise of
certain warrants issued to CW Ventures II, L.P. CW Partners, CW Partners
II, L.P. and CW Partners III, L.P. are the general partners of CW Ventures,
CW R&D II (Financial) L.P. and CW Ventures II, L.P., respectively, and as
such may be deemed to have voting and investment power with respect to the
shares held by such funds. Voting and investment decisions with respect to
Overseas Medical Ventures, IL are made by CW Group, Inc. The general
partners of CW Partners, CW Partners II, L.P. and CW Partners III, L.P.,
and the stockholders of CW Group, Inc., are Walter Channing, Charles M.
Hartman and Barry Weinberg. Each of such general partners disclaim
beneficial ownership of the shares held by such funds except to the extent
of each of their pecuniary interest in such funds.
(5) Includes 214,578 shares of Common Stock owned by Oxford Bioscience Partners
L.P.; 59,831 shares of Common Stock owned by Oxford Bioscience Partners
(Bermuda) Limited Partnership; 91,655 shares of Common Stock issuable upon
exercise of a warrant issued to Oxford Bioscience Partners L.P.; and 25,851
shares of Common Stock issuable upon exercise of a warrant issued to Oxford
Bioscience Partners (Bermuda) Limited Partnership. OBP Management L.P. and
OBP Management (Bermuda) Limited Partnership are the general partners of
Oxford Bioscience Partners L.P. and Oxford Bioscience Partners (Bermuda)
Limited Partnership, respectively, and as such may be deemed to have voting
and investment power with respect to the shares held by such funds. The
general partners of OBP Management L.P. are Cornelius T. Ryan, a director
of the Company, Alan G. Walton, Ph.D. and Edmund M. Olivier. The general
partners of OBP Management (Bermuda) Limited Partnership are OBP Management
Bermuda Ltd. and Messrs. Ryan, Walton & Olivier. Each of such general
partners disclaim beneficial ownership of the shares held by Oxford
Bioscience Partners L.P. and Oxford Bioscience Partners (Bermuda) Limited
Partnership except to the extent of each of their pecuniary interest in OBP
Management L.P. and OBP Management (Bermuda) Limited Partnership,
respectively.
(6) Includes 282,965 shares of Common Stock owned by Trigon Resources
Corporation ("Trigon"), a corporation owned by Mr. Durham and his two
children, 3,867 shares held in Mr. Durham's individual retirement account,
134,574 shares of Common Stock issuable upon exercise of a warrant held by
Trigon, 5,313 shares of Common Stock issuable upon exercise of a warrant
held by Wentorf International Corporation ("Wentorf"), a corporation owned
by Mr. Durham and 284,480 shares issuable upon exercise of a warrant held
by Mr. Durham. Does not include 71,120 shares issuable upon exercise of a
warrant held by Mr. Durham. Mr. Durham's address is 80 East Sir Francis
Drake Boulevard, Suite 2A, Larkspur, CA 94939. Of the 200,000 shares shown
in this table as being offered by Mr. Durham, 3,867 shares will be offered
by Mr. Durham's individual retirement account, 190,820 shares will be
offered by Trigon and 5,313 shares will be offered by Wentorf upon the
exercise in full of the warrant held by Wentorf.
44
<PAGE> 45
(7) Mr. Burrows resigned from the Company effective January 1997. Upon his
resignation, his options to purchase 130,000 shares of Common Stock
terminated. None of the options had vested prior to the termination of the
options.
(8) Includes 70,000 shares issuable upon exercise of options, 33,750 of which
shares will be vested as of 60 days from September 12, 1997. The 30,000
shares shown in this table as being offered by Mr. Cracchiolo will be
offered upon the exercise of options to purchase 30,000 shares.
(9) Includes 36,400 shares issuable upon exercise of options, 23,349 of which
shares will be vested as of 60 days from September 12, 1997.
(10) Includes 24,000 shares issuable upon exercise of options, 11,000 of which
shares will be vested as of 60 days from September 12, 1997.
(11) Includes 22,666 shares issuable upon exercise of options, 10,777 of which
shares will be vested as of 60 days from September 12, 1997.
(12) Includes 10,000 shares issuable upon exercise of options, none of which
shares will be vested as of 60 days from September 12, 1997.
(13) Includes 36,666 shares issuable upon exercise of options, 34,332 of which
shares will be vested as of 60 days from September 12, 1997. The 10,000
shares shown in this table as being offered by Mr. McNulty will be offered
upon the exercise of options to purchase 10,000 shares.
(14) Includes 369,828 shares of Common Stock owned by, and 249,270 shares of
Common Stock issuable upon exercise of certain warrants issued to,
Tullis-Dickerson Capital Focus, L.P. Also includes 14,000 shares issuable
upon exercise of options held by Ms. Neuscheler, 5,277 of which shares will
be vested as of 60 days from September 12, 1997. Ms. Neuscheler, a director
of the Company, is a general partner of Tullis-Dickerson Partners, which is
the general partner of Tullis-Dickerson Capital Focus, L.P. Ms. Neuscheler
disclaims beneficial ownership in the shares held by Tullis-Dickerson
Capital Focus, L.P., except to the extent of her pecuniary interest arising
from her general partnership interest in Tullis-Dickerson Partners. Also
includes 231 shares held in trust for the benefit of Susannah Dickerson and
231 shares held in trust for the benefit of Caroline Dickerson. Ms.
Neuscheler disclaims beneficial ownership in such shares. Ms. Neuscheler's
address is One Greenwich Plaza, Greenwich, CT 06830.
(15) Includes 214,578 shares of Common Stock owned by Oxford Bioscience Partners
L.P.; 59,831 shares of Common Stock owned by Oxford Bioscience Partners
(Bermuda) Limited Partnership; 91,655 shares of Common Stock issuable upon
exercise of a warrant issued to Oxford Bioscience Partners L.P.; and 25,851
shares of Common Stock issuable upon exercise of a warrant issued to Oxford
Bioscience Partners (Bermuda) Limited Partnership. Also includes 14,000
shares issuable upon exercise of options held by Mr. Ryan, 5,277 of which
shares will be vested as of 60 days from September 12, 1997. Mr. Ryan, a
director of the Company, is a general partner of OBP Management L.P. and
OBP Management (Bermuda) Limited Partnership, which are the general
partners of Oxford Bioscience Partners L.P. and Oxford Bioscience Partners
(Bermuda) Limited Partnership, respectively. Mr. Ryan disclaims beneficial
ownership in the shares held by Oxford Bioscience Partners L.P. and Oxford
Bioscience Partners (Bermuda) Limited Partnership, except to the extent of
his pecuniary interest arising from his general partnership interests in
OBP Management L.P. and OBP Management (Bermuda) L.P., respectively. Mr.
Ryan's address is 315 Post Road West, Westport, CT 06880.
(16) Includes 791,143 shares issuable upon exercise of certain warrants. Also
includes 237,732 shares issuable upon exercise of options, 123,762 of which
shares will be vested as of 60 days from September 12, 1997. Does not
include 71,120 shares issuable upon exercise of a warrant held by Mr.
Durham. Of the 240,000 shares shown in this table as being offered by all
executive officers and directors as a group, 5,313 shares will be offered
upon the exercise of a warrant and 40,000 shares will be offered upon the
exercise of options. See footnotes 6, 8 and 13.
(17) These selling stockholders were stockholders of InterMed Healthcare
Systems, Inc., which was acquired by the Company in December 1996.
45
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share. After giving effect to the Offering and the
exercise of options and warrants to purchase shares of Common Stock by certain
Selling Stockholders in connection with the Offering, there will be 9,260,917
shares of Common Stock outstanding. No shares of the Company's Preferred Stock
will be outstanding upon the completion of the Offering.
COMMON STOCK
As of August 31, 1997, there were 6,243,406 shares of Common Stock
outstanding, held of record by 62 stockholders. Subject to the rights of the
holders of any Preferred Stock which may be outstanding, each holder of Common
Stock on the applicable record date is entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available therefor,
and, in the event of liquidation, to share pro rata in any distribution of the
Company's assets after payment or providing for the payment of liabilities and
the liquidation preference of any outstanding Preferred Stock. Each holder of
Common Stock is entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of stockholders,
including the election of directors. Holders of Common Stock have no preemptive
rights to purchase or subscribe for any stock or other securities, and there are
no conversion rights or redemption or sinking fund provisions with respect to
such Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby, will be when issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock in
one or more series and to designate the rights, preferences, limitations,
restrictions of and upon shares of each series, including voting, redemption and
conversion rights. The Board of Directors may also designate dividend rights and
preferences in liquidation. It is not possible to state the effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of Preferred Stock. However, such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock or impairing the
liquidation rights of such shares without further action by holders of Common
Stock. In addition, under certain circumstances, the issuance of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management, which could thereby depress
the market price of the Company's Common Stock.
WARRANTS
As of August 31, 1997, the Company had outstanding warrants to purchase an
aggregate of 1,504,209 shares of Common Stock at a weighted average purchase
price of $3.80 per share, excluding 5,313 shares issuable upon the exercise of
warrants by James D. Durham in connection with the Offering. Other than the
warrant to purchase an aggregate of 355,600 shares of Common Stock issued to Mr.
Durham, which is currently exercisable for 284,480 shares and will vest in full
prior to September 26, 2000 only upon the occurrence of certain events, the
warrants are immediately exercisable for all of the warrant shares.
ANTI-TAKEOVER PROVISIONS
Delaware Law
Section 203 of the Delaware General Corporation Law ("DGCL") ("Section
203") is applicable to corporate takeovers of Delaware corporations. Subject to
certain expectations set forth therein, Section 203 provides that a corporation
shall not engage in any business combination with any "interested stockholder"
for a three-year period following the date that such stockholder becomes an
interested stockholder unless (a) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (b) upon
consumma-
46
<PAGE> 47
tion of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares) or (c) on or subsequent to such date, the business combination
is approved by the Board of Directors of the corporation and by the affirmative
votes of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder. Except as specified therein, an interested
stockholder is defined to include any person that is the owner of 15% or more of
the outstanding voting stock of the corporation, or is an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior to the
relevant date, and the affiliates and associates of such person. Under certain
circumstances, Section 203 makes it more difficult for an interested stockholder
to effect various business combinations with a corporation for a three-year
period, although the stockholders may, by adopting an amendment to the Company's
Certificate of Incorporation or Bylaws, elect not to be governed by this
section, effective 12 months after adoption. The Company's Certificate of
Incorporation and the Bylaws do not exclude the Company from the restrictions
imposed under Section 203. It is anticipated that the provisions of Section 203
may encourage companies interested in acquiring the Company to negotiate in
advance with the Board of Directors of the Company since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approve either the business combination or the transaction which resulted
in the stockholder becoming an interested stockholder. These provisions may have
the effect of deterring hostile takeovers or delaying changes in control of the
Company, which could depress the market price of the Common Stock and which
could deprive the stockholders of opportunities to realize a premium on their
Common Stock.
Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. The Certificate of
Incorporation and the Bylaws provide for a classified Board of Directors and
permit the Board to create new directorships and to elect new directors to serve
for the full term of the class of director in which the new directorship was
created. The terms of the directors are staggered to provide for the election of
approximately one-third of the Board members each year, with each director
serving a three-year term. The Board (or its remaining members, even though less
than a quorum) is also empowered to fill vacancies on the Board occurring for
any reason for the remainder of the term of the class of directors in which the
vacancy occurred. Stockholders may remove a director or the entire Board, and
such removal requires the affirmative vote of two-thirds of the outstanding
voting stock. The Company's Certificate of Incorporation provides that
stockholders may not take action by written consent but only at a stockholders'
meeting, and that special meetings of the stockholders of the Company may only
be called by the Chairman of the Board, a majority of the Board or by the
holders of at least 10% of the voting securities of the Company.
The Company's Certificate of Incorporation provides that, in addition to
the requirements of the DGCL, any "Business Combination" (as defined in the
Certificate of Incorporation) requires the affirmative vote of two-thirds of the
votes entitled to be cast by the holders of the Company's then outstanding
capital stock, voting together as a class, unless two-thirds of the directors
(excluding certain directors affiliated with persons interested in the Business
Combination) approve the proposed transaction.
A "Business Combination," as defined in the Company's Certificate of
Incorporation, includes (i) a merger or consolidation of the Company or any of
its subsidiaries with an "Interested Stockholder" (as defined in the Certificate
of Incorporation) or any other corporation which is, or after such transaction
would be, an "Affiliate" or "Associate" (as such terms are defined in the
Securities Exchange Act of 1934) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition to or with, or
proposed by or on behalf of, any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder involving any assets of the Company or
any subsidiary that constitute five percent or more of the total assets of the
Company; (iii) the issuance or transfer by the Company or any subsidiary of any
securities of the Company or any subsidiary to, or proposed by on behalf of, an
Interested Stockholder or any Affiliate or Associate of an Interested
Stockholder in exchange for cash, securities or other property that constitute
five percent or more of the total assets of the Company; (iv) the adoption of
any plan or proposal for the
47
<PAGE> 48
liquidation or dissolution of the Company or any spin-off or split-up of any
kind of the Company or any subsidiary, proposed by or on behalf of an Interested
Stockholder or any Affiliate or Associate of an Interested Stockholder; or (v)
any reclassification, recapitalization, or merger or consolidation of the
Company with any of its subsidiaries or any other transaction that has the
effect, directly or indirectly, of increasing the proportionate share of any
class or series of capital stock of the Company or any of its subsidiaries that
is beneficially owned by any Interested Stockholder or an Affiliate or Associate
of any Interested Stockholder.
The Company's Certificate of Incorporation defines an "Interested
Stockholder" as (i) an individual, corporation or other entity (a "person")
which is or was at any time within the two-year period preceding the date of the
transaction in question, the beneficial owner of 15% or more of the outstanding
voting securities of the Company; (ii) an Associate or Affiliate of the Company
who within the two-year period preceding the date of the transaction in question
was the beneficial owner of 15% or more of the outstanding voting securities of
the Company; or (iii) under certain circumstances, an assignee of any of the
foregoing persons. A person is a "beneficial owner" of any stock of the Company
(a) which such person or any of its Affiliates and Associates beneficially owns,
directly or indirectly; (b) which such person or any of its Affiliates or
Associates has, directly or indirectly, (i) the right to acquire (whether such
right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange warrants or options, or otherwise, or (ii) the right
to vote pursuant to any agreement, arrangement or understanding; or (c) which
are beneficially owned, directly or indirectly, by any other person with which
such person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock.
The foregoing provisions of the Certificate of Incorporation and Bylaws of
the Company may deter any potential unfriendly offers or other efforts to obtain
control of the Company that are not approved by the Board of Directors and could
thereby deprive the stockholders of opportunities to realize a premium on their
Common Stock and could make removal of incumbent directors more difficult. At
the same time, these provisions may have the effect of inducing any persons
seeking control of the Company or a business combination with the Company to
negotiate terms acceptable to the Board of Directors. Such provisions of the
Company's Certificate of Incorporation and Bylaws can be changed or amended only
by the affirmative vote of the holders of at least two-thirds of the Company's
then outstanding voting stock.
REGISTRATION RIGHTS
In the event the Company proposes to register any of its securities under
the Securities Act, for its own account or otherwise at any time, certain
stockholders and warrantholders of the Company, including certain directors of
the Company, collectively holding an aggregate of approximately 2,060,108 shares
of Common Stock and warrants exercisable for Common Stock (the "Registrable
Shares") following the consummation of the Offering, or certain of their
permitted transferees, will be entitled to notice of such registration and to
include shares of such Common Stock therein, subject to certain conditions and
limitations. In addition, the holders of an aggregate of 200,000 of 1,782,318 of
the Registrable Shares (the "Original Registrable Shares") will continue to have
the right following the consummation of the Offering, subject to certain
conditions and limitations, to require the Company on up to two occasions,
whether or not the Company proposes to register its Common Stock for sale, to
register all or part of their Original Registrable Shares for sale to the public
under the Securities Act. The Company is obligated to pay all the expenses
(other than underwriting discounts) for each of such registrations. In addition,
the holders of the Original Registrable Shares will continue to have the right
following the consummation of the Offering to require the Company to register
all or part of their shares on Form S-3, or any similar form, if the Company
then qualifies for use of such form, subject to certain conditions and
limitations. The Company is obligated to pay all the expenses (other than
underwriting discounts) for such S-3 registrations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is The First National
Bank of Boston.
48
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell an aggregate of
3,300,000 shares of Common Stock to the Underwriters named below (the
"Underwriters"), for whom Jefferies & Company, Inc., Oppenheimer & Co., Inc.,
Piper Jaffray Inc. and Pacific Growth Equities, Inc. are acting as
representatives ("Representatives"), and the Underwriters have severally agreed
to purchase from the Company and the Selling Stockholders the number of shares
of Common Stock set forth opposite their respective names in the table below at
the price set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ----------
<S> <C>
Jefferies & Company, Inc. ........................................ 650,000
Oppenheimer & Co., Inc. .......................................... 650,000
Piper Jaffray Inc. ............................................... 650,000
Pacific Growth Equities, Inc. .................................... 650,000
Cowen & Company................................................... 50,000
Credit Lyonnais Securities (USA) Inc. ............................ 50,000
Furman Selz LLC................................................... 50,000
Lazard Freres & Co. LLC........................................... 50,000
Prudential Securities Incorporated................................ 50,000
Smith Barney Inc. ................................................ 50,000
Adams, Harkness & Hill, Inc. ..................................... 25,000
Crowell, Weedon & Co. ............................................ 25,000
Dain Bosworth Incorporated........................................ 25,000
Equitable Securities Corporation.................................. 25,000
First of Michigan Corporation..................................... 25,000
Ladenburg Thalmann & Co. Inc. .................................... 25,000
McDonald & Company Securities, Inc. .............................. 25,000
Morgan Keegan & Company, Inc. .................................... 25,000
Needham & Company, Inc. .......................................... 25,000
Nesbitt Burns Securities Inc. .................................... 25,000
Rodman & Renshaw, Inc. ........................................... 25,000
Stephens Inc. .................................................... 25,000
Sutro & Co. Incorporated.......................................... 25,000
Van Kasper & Company.............................................. 25,000
Vector Securities International, Inc. ............................ 25,000
Wessels, Arnold & Henderson, L.L.C. .............................. 25,000
---------
Total................................................... 3,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase shares of Common Stock is subject to certain conditions. The
Underwriters are committed to purchase all of the shares of Common Stock (other
than those covered by the overallotment option described below), if any are
purchased.
The Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a concession not in excess of $0.54 per
share. The Underwriters may allow, and such dealers may reallow, a discount not
in excess of $0.10 per share to certain other dealers. After the Offering, the
public offering price, the concession to selected dealers and the reallowance to
other dealers may be changed by the Representatives. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
49
<PAGE> 50
The Company has also granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to 495,000 additional
shares of Common Stock at the public offering price, less the underwriting
discount. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
above in the preceding table. The Underwriters may exercise such right of
purchase only for the purpose of covering overallotments, if any, made in
connection with the sale of the shares of Common Stock.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company has agreed with the Underwriters not to offer, issue or sell
any shares of Common Stock or securities exercisable for or convertible into
shares of Common Stock ("Securities") for a period of 90 days from the date of
the Prospectus, subject to certain limited exceptions, without the prior written
consent of Jefferies & Company, Inc.
The executive officers, directors and certain stockholders of the Company,
owning an aggregate of 948,509 shares of Common Stock after the Offering (or
10.2% of the then outstanding Common Stock), have agreed with the Underwriters
not to sell or otherwise dispose of any of their Securities for a period of 90
days from the date of this Prospectus, without the prior written consent of
Jefferies & Company, Inc.
The Company has been advised by the Representatives that the
Representatives presently intend to make a market in the Common Stock offered
hereby; however, the Representatives are not obligated to do so, and any market
making activity may be discontinued at any time without notice.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualified market makers on The Nasdaq Stock Market may
engage in passive market making transactions in the Common Stock on The Nasdaq
Stock Market in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), during the business day
prior to the pricing of the Offering before the commencement of offers or sales
of the Common Stock. Passive market makers must comply with applicable volume
and price limitations and must be identified as such. In general, a passive
market maker must display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered below the
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
On December 6, 1996, Jefferies & Company, Inc. ("Jefferies") and the
Company entered into an agreement (the "Financial Advisor Agreement") pursuant
to which Jefferies acts as a financial advisor to the Company in connection with
certain acquisitions. Pursuant to the Financial Advisor Agreement, the Company
has paid Jefferies an aggregate of $150,000 to date in exchange for services
rendered thereunder and the
50
<PAGE> 51
Company may be obligated to pay Jefferies additional customary compensation in
connection with certain future acquisitions, if any.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Brobeck, Phleger & Harrison LLP, San Francisco, California.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Cooley Godward LLP, San Francisco and Palo Alto, California.
EXPERTS
The audited consolidated financial statements and schedules of the Company
included and incorporated by reference in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports, with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The audited combined financial statements of The Synergy Companies included
and incorporated by reference in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports, with respect thereto, and are
included herein in reliance upon the authority of said Firm as experts in giving
said reports.
The audited financial statements of Healthcare Revenue Management, Inc.
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Smith & Company, certified public accountants, as indicated in
their reports, with respect thereto, and are included herein in reliance upon
the authority of said Firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). This
Registration Statement, including exhibits thereto, and such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected without charge and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at its Regional Offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any
part thereof may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 upon the payment of the fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is http://www.sec.gov. Reports and other information concerning the
Company also may be inspected at the offices of the Nasdaq National Market, 1735
K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to the
shares of the Company being offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
51
<PAGE> 52
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are incorporated by reference in this Prospectus:
(1) the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, as amended;
(2) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997, as amended;
(3) the Company's Proxy Statement, dated April 28, 1997;
(4) the Company's Current Report on Form 8-K, dated January 9, 1997;
(5) the Company's Current Report on Form 8-K, dated May 9, 1997, as
amended; and
(6) the Company's Current Report on Form 8-K, dated October 10, 1997.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus
and prior to the termination of the Offering shall be deemed to be incorporated
by reference herein and to be a part hereof from the respective dates of the
filing of such documents. Any statement contained in a document incorporated or
is deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates by reference documents which are not presented
herein or delivered herewith. These documents (without exhibits, unless such
exhibits are specifically incorporated by reference) are available from the
company without charge upon request. Requests for documents should be directed
to
80 East Sir Francis Drake Blvd., Ste. 2A, Larkspur, California 94939, Attention:
John Cracchiolo (telephone number: (415) 461-7725).
52
<PAGE> 53
QUADRAMED CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUADRAMED CORPORATION:
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)...................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)......... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1997
(unaudited)...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)......... F-6
Notes to Consolidated Financial Statements.......................................... F-7
THE SYNERGY COMPANIES:
Report of Independent Public Accountants............................................ F-19
Combined Balance Sheet for the year ended December 31, 1996......................... F-20
Combined Statement of Operations and Accumulated Deficit for the year ended December
31, 1996......................................................................... F-21
Combined Statement of Cash Flows for the year ended December 31, 1996............... F-22
Notes to Combined Financial Statements.............................................. F-23
HEALTHCARE REVENUE MANAGEMENT, INC.:
Report of Certified Public Accountants.............................................. F-28
Balance Sheets as of December 31, 1994, 1995 and 1996............................... F-29
Statements of Operations for the years ended December 31, 1996, 1995 and 1994....... F-30
Statements of Changes in Stockholders' Equity for the years ended December 31, 1993,
1994, 1995, and 1996............................................................. F-31
Statements of Cash Flows for the year ended December 31, 1996, 1995 and 1994........ F-32
Notes to Financial Statements....................................................... F-33
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To QuadraMed Corporation:
We have audited the accompanying consolidated balance sheets of QuadraMed
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, statements of
changes in stockholders' equity (deficit) and cash flows each of the three years
in the period ended December 31, 1996. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QuadraMed
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Jose, California
March 5, 1997 (except with
respect to the second paragraph
of Note 11, as to which
the date is July 15, 1997)
F-2
<PAGE> 55
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
------------- -------- --------
(RESTATED)
(SEE NOTE 10) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 266 $ 18,486 $ 8,537
Restricted cash...................................... 163 30 33
Accounts receivable, net of allowance for
uncollectible accounts of $229, $239, and $294
respectively...................................... 2,426 4,040 7,556
Prepaid expenses and other........................... 261 328 575
-------- -------- --------
Total current assets......................... 3,116 22,884 16,701
-------- -------- --------
EQUIPMENT, at cost:
Equipment............................................ 2,265 3,528 5,289
Less -- Accumulated depreciation..................... (787) (1,533) (2,055)
-------- -------- --------
Equipment, net.................................... 1,478 1,995 3,234
LONG-TERM INVESTMENT................................... -- -- 2,500
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net............ 520 950 1,121
ACQUIRED SOFTWARE, net of accumulated amortization of
$0, $323, and $485 respectively...................... 1,940 1,617 1,455
GOODWILL, net of accumulated amortization of $225,
$568, and $789, respectively......................... 2,349 2,038 6,655
OTHER.................................................. 130 85 210
-------- -------- --------
$ 9,533 $ 29,569 $ 31,876
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of capital lease obligations...... $ 155 $ 79 $ 58
Accounts payable..................................... 1,169 1,523 665
Accrued liabilities.................................. 1,869 1,410 1,648
Amount payable related to acquisition of Healthcare
Design Systems.................................... 4,250 -- --
Deferred revenue..................................... 2,045 1,515 1,226
-------- -------- --------
Total current liabilities.................... 9,488 4,527 3,597
AMOUNT PAYABLE RELATED TO ACQUISITION OF HEALTHCARE
DESIGN SYSTEMS, less current portion................. 4,500 -- --
LOANS PAYABLE.......................................... 1,125 -- --
CAPITAL LEASE OBLIGATIONS, less current portion........ 237 149 366
-------- -------- --------
Total liabilities............................ 15,350 4,676 3,963
-------- -------- --------
CONTINGENCIES (Note 11) -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.01 par, 5,000 shares authorized,
1,804, 0, and 0 shares issued and outstanding,
respectively...................................... 18 -- --
Common stock, $0.01 par, 20,000 shares authorized,
626, 6,011, and 6,213 shares issued and
outstanding, respectively......................... 6 57 60
Additional paid-in capital........................... 9,384 40,244 41,872
Deferred compensation................................ -- (336) (291)
Accumulated deficit.................................. (15,225) (15,072) (13,728)
-------- -------- --------
Total stockholders' equity (deficit)......... (5,817) 24,893 27,913
-------- -------- --------
$ 9,533 $ 29,569 $ 31,876
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 56
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------------------- -------------------
1994 1995 1996 1996 1997
------------- ------------- ------- ------- -------
(RESTATED) (RESTATED)
(SEE NOTE 10) (SEE NOTE 10) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Licenses........................ $ 1,437 $ 4,420 $16,223 $ 7,809 $ 8,477
Services........................ 4,665 3,183 2,865 1,640 4,259
------- ------- ------- ------- -------
Total revenues.......... 6,102 7,603 19,088 9,449 12,736
------- ------- ------- ------- -------
OPERATING EXPENSES:
Cost of licenses................ 2,557 2,676 7,294 3,711 3,293
Cost of services................ 3,476 3,657 2,683 1,422 2,404
General and administration...... 2,039 2,439 3,221 1,477 1,792
Sales and marketing............. 1,874 1,225 2,434 1,293 1,769
Research and development........ 767 653 2,499 1,263 1,411
Amortization of goodwill........ 169 50 460 219 362
Write-off of acquired research
and development in process... -- 6,240 -- -- --
Non-recurring start-up
charges...................... -- -- -- -- 694
------- ------- ------- ------- -------
Total operating
expenses.............. 10,882 16,940 18,591 9,385 11,725
------- ------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS..... (4,780) (9,337) 497 64 1,011
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest income................. -- 66 214 -- 388
Interest expense................ (85) (176) (543) (284) --
Other income (expense), net..... -- 13 (15) (24) (5)
------- ------- ------- ------- -------
Total other income
(expense)............. (85) (97) (344) (308) 383
------- ------- ------- ------- -------
PROVISION FOR INCOME TAXES........ -- -- -- -- 50
------- ------- ------- ------- -------
NET INCOME (LOSS)................. $(4,865) $(9,434) $ 153 $ (244) $ 1,344
======= ======= ======= ======= =======
PRO FORMA NET LOSS PER SHARE...... $ (2.13) $ -- $ -- $ --
======= ======= ======= =======
PRO FORMA WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES.... 4,435 -- -- --
======= ======= ======= =======
NET INCOME PER SHARE.............. $ -- $ 0.03 $ (0.05) $ 0.19
======= ======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES............... -- 5,089 4,747 7,250
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 57
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- ----------------------------- PAID IN DEFERRED
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION
------ ------- ------ ------- ------------- ------------- ------------- ------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 10) (SEE NOTE 10) (SEE NOTE 10)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.... -- $-- -- $ -- 314 $ 3 $ 248 $ --
Issuance of Series A preferred
stock at $4.79 per share,
net of issuance costs....... 480 5 -- -- -- -- 2,236 --
Conversion of notes payable to
related parties to Series A
preferred stock at $4.79 per
share....................... 342 3 -- -- -- -- 1,637 --
Conversion of notes payable to
related parties to common
stock....................... -- -- -- -- 330 3 197 --
Conversion of common stock at
$2.50 per share to Series A
preferred stock at $4.79 per
share....................... 13 -- -- -- (23) -- -- --
Net loss...................... -- -- -- -- -- -- -- --
------ --- ------ ---- ----- --- ------- -----
BALANCE, DECEMBER 31, 1994.... 835 8 -- -- 621 6 4,318 --
Issuance of warrant to
purchase common stock....... -- -- -- -- -- -- 57 --
Issuance of common stock at
$2.50 per share............. -- -- -- -- 5 -- 12 --
Conversion of notes payable to
related parties to Series A
preferred stock at $4.79 per
share....................... 77 1 -- -- -- -- 367 --
Conversion of notes payable to
related parties to Series B
preferred stock at $5.25 per
share, net of issuance
costs....................... -- -- 892 9 -- -- 4,630 --
Net loss...................... -- -- -- -- -- -- -- --
------ --- ------ ---- ----- --- ------- -----
BALANCE AT DECEMBER 31,
1995........................ 912 9 892 9 626 6 9,384 --
Issuance of common stock at
$3.75 per share............. -- -- -- -- 56 1 209 --
Conversion of notes payable to
related parties to Series B
preferred stock at $5.25 per
share, net of issuance
costs....................... -- -- 740 7 -- -- 3,862 --
Issuance of warrant to
purchase common stock....... -- -- -- -- -- -- 381 (381)
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 45
Issuance of Series A preferred
stock under exchange
agreement (Note 6).......... 251 -- -- -- -- -- -- --
Repurchase of Series B
preferred stock............. -- -- (6) -- -- -- (53) --
Conversion of Series A and B
preferred stock to common
stock....................... (1,163) (9) (1,626) (16) 2,789 25 -- --
Exercise of common stock
options..................... -- -- -- -- 40 -- 100 --
Issuance of common stock from
initial public offering, net
of issuance costs........... -- -- -- -- 2,500 25 26,361 --
Net income.................... -- -- -- -- -- -- -- --
------ --- ------ ---- ----- --- ------- -----
BALANCE, DECEMBER 31, 1996.... -- -- -- -- 6,011 57 40,244 (336)
Issuance of common stock...... -- -- -- -- 182 2 1,525 --
Issuance of common stock from
stock purchase plan......... -- -- -- -- 6 -- 61 --
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 45
Exercise of common stock
options..................... -- -- -- -- 14 1 42 --
Net income.................... -- -- -- -- -- -- -- --
------ --- ------ ---- ----- --- ------- -----
BALANCE, JUNE 30, 1997
(unaudited)................. -- $-- -- $ -- 6,213 $60 $41,872 $ (291)
====== === ====== ==== ===== === ======= =====
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------- -------------
(RESTATED) (RESTATED)
(SEE NOTE 10) (SEE NOTE 10)
<S> <C> <C>
BALANCE, DECEMBER 31, 1993.... $ (926) $ (675)
Issuance of Series A preferred
stock at $4.79 per share,
net of issuance costs....... -- 2,241
Conversion of notes payable to
related parties to Series A
preferred stock at $4.79 per
share....................... -- 1,640
Conversion of notes payable to
related parties to common
stock....................... -- 200
Conversion of common stock at
$2.50 per share to Series A
preferred stock at $4.79 per
share....................... -- --
Net loss...................... (4,865) (4,865)
-------- -------
BALANCE, DECEMBER 31, 1994.... (5,791) (1,459)
Issuance of warrant to
purchase common stock....... -- 57
Issuance of common stock at
$2.50 per share............. -- 12
Conversion of notes payable to
related parties to Series A
preferred stock at $4.79 per
share....................... -- 368
Conversion of notes payable to
related parties to Series B
preferred stock at $5.25 per
share, net of issuance
costs....................... -- 4,639
Net loss...................... (9,434) (9,434)
-------- -------
BALANCE AT DECEMBER 31,
1995........................ (15,225) (5,817)
Issuance of common stock at
$3.75 per share............. -- 210
Conversion of notes payable to
related parties to Series B
preferred stock at $5.25 per
share, net of issuance
costs....................... -- 3,869
Issuance of warrant to
purchase common stock....... -- --
Amortization of deferred
compensation................ -- 45
Issuance of Series A preferred
stock under exchange
agreement (Note 6).......... -- --
Repurchase of Series B
preferred stock............. -- (53)
Conversion of Series A and B
preferred stock to common
stock....................... -- --
Exercise of common stock
options..................... -- 100
Issuance of common stock from
initial public offering, net
of issuance costs........... -- 26,386
Net income.................... 153 153
-------- -------
BALANCE, DECEMBER 31, 1996.... (15,072) 24,893
Issuance of common stock...... -- 1,527
Issuance of common stock from
stock purchase plan......... -- 61
Amortization of deferred
compensation................ -- 45
Exercise of common stock
options..................... -- 43
Net income.................... 1,344 1,344
-------- -------
BALANCE, JUNE 30, 1997
(unaudited)................. $ (13,728) $27,913
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 58
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------------------- ------------------
1994 1995 1996 1996 1997
------------- ------------- ------- ------ -------
(UNAUDITED)
RESTATED RESTATED
(SEE NOTE 10) (SEE NOTE 10)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(4,865) $(9,434) $ 153 $ (244) $ 1,344
Adjustments to reconcile net income (loss) to net cash
used for operating activities --
Depreciation and amortization........................... 395 531 1,409 710 642
Amortization of deferred compensation................... -- -- 45 -- 45
Write-off of in-process research and development........ -- 6,240 -- --
Cash acquired in acquisition of Healthcare Design
Systems................................................. -- 13 -- -- --
Changes in assets and liabilities, net of acquisitions --
Accounts receivable, net................................ (348) (223) (1,614) (2,296) (2,796)
Restricted cash......................................... -- (163) 132 78 (3)
Prepaid expenses and other.............................. (32) 86 (120) (40) (206)
Other assets............................................ 99 (9) 45 11 --
Accounts payable and accrued liabilities................ 1,444 (528) (104) 1,169 (2,082)
Borrowings to fund advances to customers................ 29 (241) -- --
Deferred revenue........................................ 52 53 (530) 9 (337)
-------- -------- ------- ------ -------
Cash used for operating activities................. (3,226) (3,675) (584) (603) (3,393)
-------- -------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Synergy, net of cash
acquired................................................ -- -- -- -- (2,771)
Long-term investments..................................... -- -- -- -- (2,500)
Additions to equipment.................................... (688) (253) (1,263) (240) (1,078)
Capitalization of computer software development costs..... (62) (425) (460) (278) (249)
-------- -------- ------- ------ -------
Cash used for investing activities................. (750) (678) (1,723) (518) (6,598)
-------- -------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations........ (17) (64) (163) (80) (62)
Borrowings (repayments) under notes and loans payable..... 1,664 4,507 (9,875) (3,750) --
Borrowings under lines of credit.......................... -- -- -- 973 --
Deferred offering costs................................... -- -- -- (308) --
Issuance of convertible preferred stock, net of issuance
costs................................................... 2,241 -- 3,869 3,890 --
Issuance of common stock, net of issuance costs........... -- 12 26,596 187 104
Proceeds from exercise of common stock options and
issuance of common stock from stock purchase plan....... -- -- 100
-------- -------- ------- ------ -------
Cash provided by financing activities.............. 3,888 4,455 20,527 912 42
-------- -------- ------- ------ -------
Net increase (decrease) in cash and cash equivalents...... (88) 102 18,220 (209) (9,949)
CASH AND CASH EQUIVALENTS, beginning of period.............. 252 164 266 266 18,486
-------- -------- ------- ------ -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 164 $ 266 $18,486 57 $ 8,537
======== ======== ======== ====== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ 66 $ -- $ 543 $ -- $ --
Cash paid for taxes....................................... -- -- -- -- 50
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Purchase of equipment subject to capital lease............ 186 17 128 -- --
Repurchase of Series B preferred stock in exchange for
extinguishment of shareholder receivable................ -- -- 53 -- --
Conversion of notes payable to related parties to
convertible preferred stock............................. 1,640 5,007 3,869 -- --
Conversion of notes payable to related parties to common
stock................................................... 200 -- -- -- --
Conversion of common stock to convertible preferred
stock................................................... 60 -- -- -- --
Conversion of convertible preferred stock to common
stock................................................... -- -- 25 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 59
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS
UNAUDITED)
1. THE COMPANY
QuadraMed Corporation (the Company) was incorporated in California in
September 1993. In August 1996, the Company reincorporated in Delaware. The
Company operates in a single industry segment and offers a suite of decision
support, financial management and electronic data interchange (EDI) software
products that are designed to enable health care providers to increase
operational efficiency and measure the cost of care and to facilitate the
negotiation of managed care contracts and capitation agreements. In addition to
its software products, the Company provides business office outsourcing and
reimbursement consulting services.
The Company is subject to a number of risks, including, but not limited to,
dependence on the hospital market, successful integration of acquired
subsidiaries, competition from larger companies, market acceptance of the
Company's products and uncertainty in the health care industry. There can be no
assurance that the Company will successfully integrate acquired subsidiaries or
be able to increase market share for its products from larger competitors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Unaudited Interim Financial Data
Unaudited interim financial statements as of June 30, 1997 and for the six
months ended June 30, 1997 and 1996 have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The data disclosed in
the notes to the consolidated financial statements for these periods are
unaudited. The Company believes the results of operations for the interim
periods are not necessarily indicative of the results to be expected for any
future period.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. The Company's investments have consisted of certificates of
deposit, money market accounts and commercial paper, all with original
maturities of three months or less.
Equipment
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets which
is generally three to seven years.
Software Development Costs
Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as establishment of a
working model which is typically the beta version of the software. Capitalized
software development costs require a
F-7
<PAGE> 60
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continuing assessment of their recoverability. This assessment requires
considerable judgment by management with respect to various factors, including,
but not limited to, anticipated future gross product revenues, estimated
economic lives and changes in software and hardware technology. The Company
capitalized software development costs of $62,000, $497,000, including $72,000
which was acquired from Healthcare Design Systems, $460,000 and $249,000 in
1994, 1995, 1996 and for the six months ended June 30, 1997, respectively.
Amortization of capitalized software development costs was $47,000, $32,000 and
$77,000 for the years ended December 31, 1995, 1996 and for the six months ended
June 30, 1997, respectively. Amortization is based upon the greater of the
amount computed using (a) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product, generally five years.
Long-term Investment
The long-term, non-marketable investment is stated at cost. During the six
month period ended June 30, 1997, sales to the investee were approximately
$514,000.
Revenue Recognition
The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue is composed of business office outsourcing and reimbursement consulting
services. The product suite is comprised of three primary elements: financial
management, decision support and EDI software. Each of these elements includes a
variety of products which can be licensed individually or as a suite of
interrelated products. Products are generally licensed under term arrangements
(which range from one year to three years) which typically include monthly
payments over the term of the arrangement. However, the product suite can also
be licensed on a perpetual basis.
Revenues from term licenses of decision support and EDI products are
recognized ratably over the term of the license arrangement, beginning at the
date of installation. Revenues from perpetual licenses of the financial
management and decision support products are recognized upon shipment of the
software if there are no significant post-delivery obligations, payment of the
license fee is due within one year and collectibility is probable. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.
The Company provides business office outsourcing and reimbursement
consulting services to certain hospitals under contract service arrangements.
Business office outsourcing revenues typically consist of fixed monthly fees
plus incentive-based payments that are based on a percentage of dollars
recovered for the provider for which the service is being performed. The monthly
fees are recognized as revenue on a monthly basis at the end of each month.
Incentive fees are recognized as the conditions upon which such fees are based
are realized based on collection of accounts from payors. Reimbursement
consulting services typically consist of fixed fee services and additional
incentive payments based on a certain percentage of revenue returns realized by
the customer as a result of the services provided by the Company. The fixed fee
portion is recognized as revenue upon the completion of the project. Incentive
amounts are recognized upon cash collection from the customer.
Other services are also provided to certain of the Company's licensees of
software product, which consist primarily of consulting and post-contract
customer support. Consulting services generally consist of installation of
software at customer sites and is recognized upon completion of installation.
Such services generally do not include customization or modification of the
underlying software code. If included in a license agreement, such services are
unbundled at their fair market value based on the value established by the
independent sale of such services to customers. If customization of the software
code is performed, the license and service fees
F-8
<PAGE> 61
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are recognized together on a percentage-of-completion basis during the
customization period. Post-contract customer support is recognized ratably over
the term of the support period. If support is included in a perpetual license
agreement such amounts are unbundled from the license fee at its fair market
value based on the value established by the independent sale of such support to
customers.
Cost of license revenues consist primarily of salaries, benefits and
allocated costs related to the installation process and customer support and
royalties to third parties.
Cost of service revenues consist primarily of salaries, benefits and
allocated costs related to providing such services.
Deferred revenue primarily consists of revenue deferred under annual
maintenance and annual license agreements.
Major Customers
For the years ended December 31, 1994, 1995, 1996 and the six months ended
June 30, 1997, respectively, the Company had the following customers who
accounted for greater than 10% of revenues:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Customer A.................. 19% * * *
Customer B.................. * 11% * *
</TABLE>
- ---------------
* These customers did not account for over 10% of revenue in these periods.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company does not require collateral on trade accounts receivable as the
Company's customer base consists primarily of hospitals and to a lesser extent
hospital associations, physician groups, medical payors and self-administered
employers. The Company provides reserves for credit losses.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable, approximate
their fair values.
Goodwill
Goodwill represents the amount of purchase price in excess of the fair
value of the tangible net assets, purchased software and acquired in-process
research and development purchased in acquisitions completed by the Company and
is amortized on a straight-line basis over five years. Acquired software
purchased in acquisitions and completed by the Company, is amortized on a
straight-line basis over six years. Goodwill is evaluated annually for
impairment and written down to net realizable value if necessary. No impairment
has been recorded to date.
Net Income Per Share and Pro Forma Net Loss Per Share
For periods after the Company's initial public offering in October 1996,
net income per share has been computed using the weighted average number of
common and common equivalent shares (using the treasury stock method for
outstanding stock options and warrants).
For the year ended December 31, 1995 and for the portion of 1996 preceding
the initial public offering, net loss per share was computed on a pro forma
basis.
F-9
<PAGE> 62
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of Convertible Preferred Stock (using the if converted
method) and stock options and warrants (using the treasury stock method). Common
stock options and warrants are excluded from the computation if their effect is
antidilutive except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, such computations include all
common and common equivalent shares issued within the 12 months preceding the
filing date as if they were outstanding for all periods presented (under the
treasury stock method using an assumed initial public offering price).
Convertible Preferred Stock outstanding during the period is included (using the
if converted method) in the computation as common equivalent shares. Primary and
fully diluted earnings per share were substantially the same in all periods
presented.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. Effective January 1,
1996, the Company adopted SFAS No. 121. The adoption of SFAS No. 121 did not
have a material impact on the financial statements taken as a whole.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company has adopted SFAS No. 123 in
fiscal 1996, and in accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its stock
option and stock purchase plans.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" which requires
disclosure of basic and diluted earnings per share and is effective for periods
ending subsequent to December 15, 1997. The pro forma effect of adoption of SFAS
No. 128 would be as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1997
------ -----
<S> <C> <C>
Reported earnings (loss) per share........................ $(0.05) $0.19
Basic earnings (loss) per share (pro forma)............... (0.37) 0.22
Diluted earnings (loss) per share (pro forma)............. $(0.05) $0.19
</TABLE>
3. LINE OF CREDIT
In January 1996, the Company arranged a line of credit agreement (the
"Agreement") with a bank which expired on January 2, 1997. There were no
outstanding borrowings under the line of credit at
F-10
<PAGE> 63
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996. Borrowings bore interest at the bank's prime rate plus 1.5%.
Borrowings were limited to the lesser of 80% of eligible borrowing base
(accounts receivable) or $1,200,000. Borrowings were secured by all of the
Company's assets and a perfected security interest on $500,000 of accounts
receivable acquired in the acquisition of Healthcare Design Systems. In
addition, warrants were issued to the bank for the purchase of $50,000 worth of
Series B Preferred Stock at $5.25 per share. Under the Agreement, the Company
was required to maintain certain financial covenants, including a minimum quick
ratio, a minimum net worth of $6,800,000, a maximum ratio of total liabilities
to tangible net worth of $1.4 million and losses not to exceed $250,000 in the
quarter ending June 30, 1996 and after-tax profitability on a quarterly basis
beginning the quarter ending June 30, 1996. The Company was in compliance with
these financial covenants as of December 31, 1996. The Company is currently
negotiating a new line of credit arrangement.
4. CAPITAL AND OPERATING LEASE OBLIGATIONS
The Company leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under the Company's
capital and operating leases are as follows at June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997 (six months)......................................... $ 89 $ 701
1998...................................................... 155 1,158
1999...................................................... 129 983
2000...................................................... 112 871
2001...................................................... 7 220
2002 and thereafter....................................... -- 71
---- -----
Total minimum payments.......................... 492 $ 4,004
=====
Interest on capital lease obligations at a rate of 8.5
percent................................................. (68)
----
Net minimum principal payments............................ 424
Current maturities........................................ (58)
----
$ 366
====
</TABLE>
The net book value of assets acquired under capital leases was $228,000 and
$424,000 at December 31, 1996 and June 30, 1997. Rental expense was
approximately $560,000, $741,000, $906,000 and $594,000 for fiscal 1994, 1995,
1996 and the six months ended June 30, 1997 respectively.
5. BRIDGE FINANCING
In January 1996, the Company entered into a bridge loan agreement with
certain stockholders of the Company (the "Bridge Investors"), pursuant to which
such Bridge Investors loaned an aggregate of $3,869,160 to the Company. In
addition, the Bridge Investors were issued warrants to purchase an aggregate of
957,376 shares of Common Stock at a purchase price of $3.75 per share. The
warrants expire on January 31, 2001. In June 1996, the notes issued in
connection with the Bridge Loan Agreement were converted into an aggregate of
734,000 shares of Series B Preferred Stock. The 250,653 shares of the Company's
Series A Preferred Stock issuable under the exchange agreement discussed in Note
6 were issued at the time of the conversion of notes into Series B Preferred
Stock. The proceeds from the Bridge Financing were used to pay down a portion of
the amounts payable to the sellers of Healthcare Design Systems.
6. CONVERTIBLE PREFERRED STOCK
Upon the initial public offering, all outstanding shares of Convertible
Preferred Stock were converted into Common Stock.
F-11
<PAGE> 64
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1994, 835,511 shares of Series A Preferred Stock were issued at $4.79
per share for cash of $2,241,325, net of issuance costs, conversion of notes
payable and accrued interest of $1,640,000 and conversion of Common Stock of
$60,000. In 1995, 76,805 shares of Series A Preferred Stock were issued at $4.79
for conversion of notes payable and accrued interest of $367,703 and 891,519
shares of Series B Preferred Stock were issued at $5.25 per share for cash of
$3,959,450, net of issuance costs and conversion of notes payable and accrued
interest of $680,475.
In June 1996, 6,400 shares of Series B Preferred Stock was returned to the
Company in exchange for the extinguishment of a shareholder receivable for
approximately $53,000.
Exchange Agreements
As part of the original capitalization of the Company, the Company entered
into an agreement with the Company's original three investors, whereby the
original investors had the right to exchange the investors Common Stock of THCS
Holding, Inc. (THCS) for 250,653 shares of the Company's Series A Preferred
Stock. As of December 31, 1996 all such shares have been issued under this
right.
Warrants
In connection with a bridge financing in 1994 the Company issued warrants
to purchase 16,000 shares of Series A Preferred Stock at $4.79 per share. Each
of such warrants expire on September 29, 1999. The value of the warrants at the
date of issuance was nominal; therefore, no value was assigned to the warrants
for accounting purposes.
7. COMMON STOCK
In October 1996, the Company completed its initial public offering of
2,500,000 shares of its common stock, which raised $26,386,000, net of offering
costs and the underwriters discount of $3,614,000.
In June 1996, the Company effected a 1-for-25 reverse stock split. In
October 1996, the Company effected a change in the authorized number of Common
and Preferred shares, respectively. The authorized number of Common shares
increased from 1,162,000 to 20,000,000. The authorized number of Preferred
shares increased from 2,795,467 to 5,000,000. The accompanying financial
statements have been restated to reflect this increase in authorized shares and
the reverse stock split.
In September 1995 and June 1996, the Company issued warrants to its Chief
Executive Officer to purchase up to 254,000 and 101,600 shares respectively, of
Common Stock at $3.75 per share. In connection with the warrant issued in June
1996, the Company recorded deferred compensation for $381,000, representing the
intrinsic value of the warrant at the date of issuance. The Company will record
a charge to compensation expense ratably over the fifty-one month vesting
period. The Company recorded compensation expense of $45,000 for the year ended
December 31, 1996. Provided he is performing services for the Company in the
capacity of an employee, consultant or director at September 26, 2000, the
warrants will then become exercisable in full and shall remain exercisable until
September 26, 2001, when they expire. The warrants will become exercisable prior
to September 26, 2000 upon certain events, which include (i) the sale of all or
substantially all of the Company's assets or the sale of 80% or more of the
Company's outstanding capital stock, in each case for cash in an amount that
exceeds certain valuation thresholds; (ii) a merger of the Company with another
entity that has a publicly traded security, and which meets certain valuation
thresholds; or (iii) not less than six nor more than eighteen months following
the Company's initial public offering if certain valuation thresholds are met.
In September 1994, the Company entered into consulting arrangements with
two individuals pursuant to which each individual has warrants to purchase
17,000 shares of Common Stock at a purchase price of $4.79 per share for an
aggregate of 34,000 shares of Common Stock. The warrants expire on October 31,
2004.
F-12
<PAGE> 65
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1995, the Company entered into a joint development arrangement
with another software company pursuant to which the Company issued a warrant to
purchase 28,560 shares of Common Stock at a purchase price of $5.25 per share.
The warrant expires on June 25, 2001.
In December 1995, the Company issued a warrant to KTU, an affiliate of its
Chief Executive Officer to purchase up to 134,574 shares of Common Stock at an
exercise price of $3.75 per share. In June 1996, the Chief Executive Officer
transferred the warrant to Trigon Resources Corporation, a corporation owned by
him and his children.
In connection with the acquisition of the net assets of Healthcare Design
Systems, the Company issued rights to two former Healthcare Design Systems
employees as part of their employment agreement with the Company whereby these
employees were granted the right to purchase 73,333 shares of common stock at
$3.75 per share of which 55,786 shares were exercised in April through
September, 1996. The right to purchase the remaining 17,547 shares has expired.
8. STOCK OPTION AND PURCHASE PLANS
Stock Option Plan
Under the Company's 1994 Stock Option Plan and its successor plan, the 1996
Stock Incentive Plan, which became effective in October 1996, (collectively, the
"Option Plan"), the Board of Directors may grant incentive and nonqualified
stock options to employees, directors and consultants. The exercise price per
share for an incentive stock option cannot be less than the fair market value,
on the date of grant. The exercise price per share for a nonqualified stock
option cannot be less than 85% of the fair market value on the date of grant.
Option grants under the Option Plan generally expire ten years from the date of
grant and generally vest over a four-year period. Options granted under the
Option Plan are exercisable, subject to the vesting schedule. As of December 31,
1996, a total of 1,369,391 shares of common stock have been authorized by the
Company's stockholders for grant under the Option plan.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan. Accordingly, no compensation cost has been
recognized for its Option Plan. Had compensation cost for the Company's Option
Plan been determined based on the fair value at the grant dates for the awards
calculated in accordance with the method prescribed by FASB Statement No. 123,
the Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C> <C>
Net income (loss).......................... As Reported $(9,434) $ 153
Pro forma $(9,484) $ (327)
Net income (loss) per share................ As Reported $ (2.13) $ 0.03
Pro forma $ (2.14) $(0.06)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield........................... 0.00%
Expected stock price volatility................... 79.00%
Risk-free interest rate........................... 6.80%
Expected life of options.......................... 4.5 years
</TABLE>
F-13
<PAGE> 66
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value of options granted during 1995, 1996, and
1997 were $3.75, $7.49, and $10.63 per share, respectively. Option activity
under the option plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED
AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, December 31, 1993........................... -- -- --
Adoption of stock plan............................. 212 -- --
Granted............................................ (192) 192 $ 2.56
Canceled........................................... 14 (14) $ 2.52
---- ----
Balance, December 31, 1994........................... 34 178 $ 2.57
Authorized......................................... 328 -- --
Granted............................................ (353) 353 $ 3.75
Canceled........................................... 106 (106) $ 2.95
---- ----
Balance, December 31, 1995........................... 115 425 $ 3.45
Authorized......................................... 830 -- --
Granted............................................ (247) 247 $ 7.49
Exercised.......................................... -- (40) $ 2.54
Canceled........................................... 39 (39) $ 3.48
---- ----
Balance, December 31, 1996........................... 737 593 $ 5.18
Authorized......................................... 90 -- --
Granted............................................ (578) 578 $10.63
Exercised.......................................... -- (14) $ 3.00
Canceled........................................... 180 (180) $ 6.56
---- ----
Balance, June 30, 1997 (unaudited)................... 429 977 $ 7.96
==== ====
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1997 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 6/30/97 CONTRACTUAL LIFE EXERCISE PRICE AS OF 6/30/97 EXERCISE PRICE
----------------------- ------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$2.1800............... 12,000 9.43 $ 2.18 12,000 $ 2.18
$2.5000............... 19,000 7.95 $ 2.50 15,000 $ 2.50
$3.7500............... 293,000 6.38 $ 3.75 134,000 $ 3.75
$7.5000............... 54,000 7.19 $ 7.50 6,000 $ 7.50
$7.7500............... 42,000 2.28 $ 7.75 1,000 $ 7.75
$9.6300............... 177,000 6.94 $ 9.63 -- --
$11.5000............... 350,000 9.51 $ 11.50 -- --
$12.0000............... 30,000 4.61 $ 12.00 10,000 $ 12.00
--------- ---- -------- ------- --------
$12.0000............... 977,000 7.50 $ 7.95 182,000 $ 3.88
========= ==== ======== ======= ========
</TABLE>
F-14
<PAGE> 67
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in June 1996. A total of 200,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan will enable eligible employees to purchase Common Stock at 85%
of the lower of the fair market value of the Company's Common Stock on the first
day or the last day of each six-month purchase period. 6,131 shares have been
issued under the Purchase Plan as of June 30, 1997.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Savings Plan (the "Plan"). All eligible
employees can participate in the Plan. Under the terms of the Plan, employees
may elect to contribute 1% to 15% of their pre-tax compensation to the Plan.
Employee contributions are 100% vested at all times. The Company may make
discretionary contributions to the Plan, which vest annually over the four year
vesting period. No Company contributions were made to the Plan in 1994, 1995 or
1996. Company contributions were $30,117 for the six months ended June 30, 1997.
10. ACQUISITIONS
In October 1993, the Company acquired the net assets of Coast Micro for
$350,000 in cash. Accounted for as a purchase, $152,000 was allocated to
goodwill that is being amortized over a five-year period and $230,000 was
determined to be acquired research and development costs for which technological
feasibility had not yet been achieved. This amount was expensed upon completion
of the acquisition. The remaining purchase price was allocated to tangible
assets.
In December 1993, the Company acquired the net assets of Seton Financial
for $1,000,000 in cash. The acquisition was accounted for as a purchase. Assets
acquired included certain intangible assets consisting of in-process research
and development. In the opinion of management, the acquired in-process research
and development had not yet reached technological feasibility and had no
alternative future use. Accordingly, the Company recorded a charge of $226,000
in the 1993 financial statements. Intangible assets acquired also included
goodwill of approximately $57,000, which is being amortized over a five-year
period. The remaining purchase price was allocated to tangible assets.
In December 1995, the Company acquired the net assets of Healthcare Design
Systems for a purchase price of approximately $8,750,000, which was comprised of
$3,750,000 in cash paid in February 1996 and a note payable of $5,000,000. The
note bore interest at the prime rate as established by Bank of America. The note
and accrued interest were repaid in full in October 1996. Costs and fees related
to the acquisition totaled approximately $110,000.
In connection with the acquisition, which was accounted for as a purchase,
the Company allocated the purchase price based upon the estimated fair value of
the assets acquired and liabilities assumed. Intangible assets acquired
aggregated $10,209,000, of which $1,940,000, $2,029,000 and $6,240,000 were
assigned to acquired software, goodwill and acquired research and development
in-process, respectively. Because there was no assurance that the Company would
be able to successfully complete the development and integration of the acquired
research and development in-process or that it had alternative future use at the
acquisition date, the acquired in-process product development was charged to
expense by the Company in its quarter ended December 31, 1995. Net tangible
liabilities assumed in the acquisition totaled approximately $1,348,000. No fair
value adjustments to net tangible and intangible assets and liabilities were
recorded in the purchase accounting outside of the acquired intangible assets
listed above.
F-15
<PAGE> 68
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the acquired research and development in process and
acquired software capitalized by product group were as follows (expressed as a
percentage of the amounts recorded in the purchase accounting for such items):
<TABLE>
<CAPTION>
ACQUIRED
ACQUIRED RESEARCH AND
SOFTWARE DEVELOPMENT
CAPITALIZED IN PROCESS
----------- ------------
<S> <C> <C>
Financial Management Products........................ 45% 71%
Decision Support Products............................ 49% 23%
Service Products..................................... 6% 6%
--- ---
100% 100%
=== ===
</TABLE>
The unaudited pro forma results of operations for the years ended December
1994 and 1995 are as follows (In thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Net revenues......................................... $ 11,537 $ 13,986
Net loss............................................. $ (5,247) $(10,798)
Pro forma net loss per share......................... $ -- $ (2.43)
</TABLE>
Prior to the acquisition, Healthcare Design Systems acted as a distributor
of certain of QuadraMed's products. Sales by Healthcare Design Systems were
approximately $60,000 in fiscal year 1995.
In December 1996, the Company acquired InterMed Healthcare Systems Inc.
("InterMed") through the issuance of common stock and options to purchase common
stock in the aggregate of 316,287 shares (including 25,208 options to purchase
common stock), of which 29,108 shares of common stock have been placed into
escrow subject to the satisfaction of all representations and warranties under
the terms and conditions of the acquisition agreement, in exchange for all the
capital stock of InterMed. The acquisition was accounted for as a pooling of
interests. The accompanying consolidated financial statements have been restated
to reflect the acquisition of InterMed on a pooling of interests basis. Upon the
closing of the acquisition the assets and liabilities of InterMed were recorded
at net book value and consisted primarily of accounts receivable, fixed assets
and capitalized software development costs. Liabilities assumed consisted of
vendor payables and two loans payable. The outstanding balances on the loans
payable of $1,125,000 were repaid by the Company in December 1996.
The unaudited pro forma results from operations of the Company and Intermed
for the year ended December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
QUADRAMED
CORPORATION INTERMED CONSOLIDATED
----------- -------- ------------
<S> <C> <C> <C>
Revenues.............................. $17,304 $1,784 $ 19,088
Net income (loss)..................... $ 268 $ (115) $ 153
</TABLE>
11. CONTINGENCIES
Seton Financial, acquired by QuadraMed in December 1993 ("Seton"), is a
defendant in two separate lawsuits in which the plaintiffs allege losses
resulting from Seton's role in processing and collecting health care benefit
receivables for health care providers. The plaintiff in one action (filed in
January 1996 and pending in the United States District Court for the District of
New Jersey) is American Infusion, Inc. and the plaintiffs in the other action
(filed in October 1995 and pending in the Superior Court of California, Marin
County) are Option Care, Inc., River City Pharmacists, Inc., Jergensen/Zwick
Inc., Pharmacare, Inc., Pharmacare, Inc.
F-16
<PAGE> 69
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fresno, Pharmacare, Inc. Visalia, Option Care Enterprises, Inc., and Owens
Pharmacy, Inc. American Infusion alleges damages in the amount of $5.3 million
and plaintiffs in the other action allege damages in excess of $800,000. Both
plaintiffs also seek punitive damages. Each of the plaintiffs alleges losses as
a result of Seton's role in collecting health care benefit receivables. These
actions are being defended by the Company's errors and omissions insurance
carrier under a reservation of rights that entitles the insurance carrier to
seek reimbursement from the Company of amounts paid if it later determines that
the losses are not covered by the policy. The errors and omissions insurance
policy has a policy limit of $1.0 million. The Company believes that it has
meritorious defenses to these claims and intends to defend the litigation
vigorously. Management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial condition or results
of operations.
In February 1995, Richard W. Pendleton ("Pendleton") and Daniel T. Soldahl
("Soldahl") filed a lawsuit in the Superior Court of California for the County
of Contra Costa naming QuadraMed, James Durham and Walter Channing as defendants
(collectively, the "Defendants"). An amended complaint added Coast Micro, Inc.
("Coast") as a plaintiff. The plaintiffs allege breach of contract, breach of
the implied covenant of good faith and fair dealing, intentional and negligent
misrepresentation, suppression of fact, breach of employment contract,
interference with contractual relationship and conspiracy. In July 1997, the
Company entered into a mutual release and agreement for settlement of claims
with Pendleton and Soldahl, whereby the Company issued 30,000 options and 5,000
options to purchase common stock at an exercise price of $2.50 per share to
Pendleton and Soldahl, respectively. These options are exercisable immediately.
In addition, Pendleton, Soldahl and Coast released the Company from all pending
and future claims.
12. INCOME TAXES
The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes," since its inception. SFAS No. 109 provides for an asset and liability
approach to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. The Company had incurred net operating losses in
each year through December 31, 1995.
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 2,699 $ 2,240
Accruals and reserves................................ 338 367
Writeoff of acquired research and development in
process........................................... 3,053 3,749
------- -------
6,090 6,356
Deferred tax liabilities:
Depreciation......................................... 145 294
Capitalized software costs........................... 123 198
------- -------
268 492
Net deferred tax asset before allowance................ 5,822 5,864
Valuation allowance.................................... (5,822) (5,864)
------- -------
Net deferred tax asset............................... $ -- $ --
======= =======
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset
as a result of uncertainties regarding the realization of the asset including
the limited operating history of the Company.
F-17
<PAGE> 70
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the Company had net operating loss carryforwards
for Federal and state income tax reporting purposes of approximately $4,745,000
and $2,000,000, respectively. These carryforwards expire in various periods from
2008 to 2010. The Tax Reform Act of 1986 contains provisions which may limit the
net operating loss and research and development credit carryforwards to be used
in any given year upon the occurrence of certain events, including a significant
change in ownership interest.
13. SUBSEQUENT EVENTS (UNAUDITED)
In July 1997, the Company entered into a line of credit arrangement to
borrow up to $5,000,000 at the bank's prime rate. The line of credit expires in
July 1998 and contains certain restrictions, including among others, maintaining
a minimum quick ratio, tangible net worth, and total liabilities to tangible net
worth retroactive to June 30, 1997. The Company was in compliance with these
covenants at June 30, 1997. The line of credit is unsecured.
In April 1997, the Company acquired Healthcare Recovery, Inc. and successor
in interest to the Synergy Companies doing business as "Synergy HMC". The
Company paid an aggregate amount of $3,416,000, consisting of $1,415,000 in cash
and 181,855 shares of its common stock, the aggregate fair market value of which
was $2,000,405 and repaid $1,706,000 in indebtedness of Synergy HMC. In
connection with the acquisition, the Company recorded $4,900,000 of goodwill
which is being amortized ratably over a ten year period.
The Company expects to complete the acquisition of Healthcare Revenue
Management, Inc., a provider of managed care department outsourcing and auditing
services ("HRM"), in the third quarter of 1997, for an aggregate purchase price
of 112,706 shares of the Company's Common Stock, the aggregate fair market value
of which is approximately $2,254,120 and $245,880 in cash. The Company expects
to account for the acquisition of HRM as a purchase, and expects to record
goodwill in the amount of $3,137,000 which will be amortized over ten years.
The unaudited pro forma results of operations of the Company, the Synergy
Companies and Healthcare Revenue Management, Inc., for periods noted below are
as follows (in thousands):
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
QUADRAMED HEALTHCARE REVENUE THE SYNERGY PRO FORMA
CORPORATION MANAGEMENT, INC. COMPANIES ADJUSTMENTS CONSOLIDATED
----------- ------------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $19,088 $4,554 $ 7,893 (16) $ 31,519
Net income (loss)................. $ 153 $ (212) $(1,183) (823) $ (2,065)
</TABLE>
For the six months ended June 30, 1997:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, 1997 ENDED MARCH 31, 1997
-------------------------------- -------------------------
QUADRAMED HEALTHCARE REVENUE THE SYNERGY PRO FORMA
CORPORATION MANAGEMENT, INC. COMPANIES ADJUSTMENTS CONSOLIDATED
----------- ------------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $12,736 $1,809 $ 1,722 (4) $ 16,263
Net income(loss).................. $ 1,344 $ (857) $ (109) (284) $ 94
</TABLE>
F-18
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Medical Claims Processing, Inc.;
Healthcare Recovery Incorporated;
And Claims Management Services
(a Division of Kaden Arnone, Inc.)
We have audited the accompanying combined balance sheet of The Synergy
Companies (see Note 1) as of December 31, 1996 and the related combined
statements of operations and accumulated deficit and cash flows for the year
then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Synergy
Companies as of December 31, 1996 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 9, 1997
F-19
<PAGE> 72
THE SYNERGY COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash.......................................................................... $ 496,882
Accounts receivable, net of allowance for doubtful accounts of $30,150........ 883,815
Due from Kaden Arnone, Inc. .................................................. 24,342
Prepaid expenses.............................................................. 25,878
-----------
Total current assets.................................................. 1,430,917
PROPERTY AND EQUIPMENT, net (Notes 1, 2, 4 and 5)............................... 370,300
OTHER ASSETS (Note 3)........................................................... 148,355
-----------
Total assets.......................................................... $ 1,949,572
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings (Note 4)................................................ $ 1,212,698
Current portion of long-term debt (Note 5).................................... 39,090
Due to stockholder (Note 6)................................................... 379,397
Accounts payable.............................................................. 1,115,401
Accrued expenses.............................................................. 445,574
Deferred revenue.............................................................. 50,600
-----------
Total current liabilities............................................. 3,242,760
-----------
LONG-TERM DEBT (Note 5)......................................................... 74,824
-----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT:
Capital stock (Note 8)--
HRI common, no par, 2,500 shares authorized, 1,115 shares issued and
outstanding............................................................... 251
MCP common, no par, 1,000 shares authorized, 500 shares issued and
outstanding............................................................... 1,000
MCP treasury stock, 250 shares, at cost....................................... (28,000)
Additional paid-in capital.................................................... 33,125
Accumulated deficit........................................................... (1,374,388)
-----------
Total stockholders' deficit........................................... (1,368,012)
-----------
Total liabilities and stockholders' deficit........................... $ 1,949,572
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-20
<PAGE> 73
THE SYNERGY COMPANIES
COMBINED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUE (Note 1):
Services...................................................................... $ 7,893,341
OPERATING EXPENSES:
Cost of services.............................................................. 6,317,468
General and administrative.................................................... 1,910,569
Sales and marketing........................................................... 607,927
Impairment loss (Note 2)...................................................... 103,083
-----------
Total operating expenses.............................................. 8,939,047
-----------
Loss from operations.................................................. (1,045,706)
INTEREST EXPENSE................................................................ 136,672
-----------
Net loss.............................................................. (1,182,378)
ACCUMULATED DEFICIT -- JANUARY 1, 1996.......................................... (192,010)
-----------
ACCUMULATED DEFICIT -- DECEMBER 31, 1996........................................ ($1,374,388)
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-21
<PAGE> 74
THE SYNERGY COMPANIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $(1,182,378)
Adjustments to reconcile net loss to net cash used in operating activities --
Depreciation and amortization, including impairment loss................... 216,207
Changes in operating assets and liabilities
Accounts receivable, net................................................. 542,473
Prepaid expenses......................................................... 3,041
Other assets............................................................. (57,731)
Accounts payable......................................................... 411,771
Accrued expenses......................................................... (82,262)
Deferred revenue......................................................... 11,305
-----------
Net cash used in operating activities................................. (137,574)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (297,271)
-----------
Net cash used in investing activities................................. (297,271)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings....................................... 361,728
Net proceeds from shareholder loan............................................ 379,397
Net proceeds from long-term debt.............................................. 67,401
Repayments under capital leases............................................... (8,820)
Repayments to and advances to Kaden Arnone, Inc............................... (481,093)
-----------
Net cash provided by financing activities............................. 318,613
-----------
Net decrease in cash.................................................. (116,232)
CASH, beginning of period....................................................... 613,114
-----------
CASH, end of period............................................................. $ 496,882
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest................................................................... $ 124,775
Taxes...................................................................... 24,199
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-22
<PAGE> 75
THE SYNERGY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include The Synergy Companies, composed
of, Medical Claims Processing, Inc. (MCP); Healthcare Recovery Incorporated
(HRI); and Claims Management Services (a division of Kaden Arnone, Inc.) (CMS).
All significant intercompany accounts and transactions have been eliminated.
The individual ownership of The Synergy Companies at December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
CMS HRI MCP
----- ----- -----
<S> <C> <C> <C>
Eugene Arnone(a)............................................ 26.29% 92.21% 100.0%
Frederick Stodolak(a)....................................... 15.89 -- --
David Rikkola(a)............................................ 17.18 -- --
Joanne Vaul(a).............................................. 12.97 -- --
Marc Stahl(a)............................................... 12.97 -- --
Gregory Adams(a)............................................ 7.40 -- --
Samuel Donio(a)............................................. 7.30 -- --
Charles Hehn................................................ -- 6.23 --
Deborah Marsh............................................... -- 1.56 --
</TABLE>
- ---------------
(a) Kaden Arnone, Inc. Stockholders
On January 30, 1997 CMS was split off from Kaden Arnone, Inc. and
incorporated as CMS Receivables Management, Inc. (CMS, Inc.).
On January 30, 1997 CMS, Inc. and MCP were merged with and into HRI. Since
all of the entities were deemed to be under common control the merger was
accounted for in a manner similar to a pooling of interests. Each share of
common stock of the surviving corporation (HRI, doing business as Synergy HMC)
remained issued and outstanding following the merger. Each share of the MCP
stock and the CMS, Inc. stock was converted into .808 and .0867 shares of the
surviving corporation stock, respectively following the merger.
Effective April 24, 1997, all of the common stock and net assets of The
Synergy Companies were acquired by QuadraMed Corporation ("QuadraMed"), a
Delaware company. Pursuant to the acquisition agreement, QuadraMed paid an
aggregate amount of approximately $3,416,000 consisting of $1,416,000 in cash
and 181,885 shares of common stock, the aggregate fair value of which was
$2,000,000. In addition, QuadraMed repaid certain indebtedness of The Synergy
Companies of approximately $1,706,000 (see Notes 4, 5 and 6).
Business --
The Synergy Companies, located in Howell, New Jersey provide accounts
receivable management services as well as hospital and physician billing
services and collection services.
Income Taxes --
HRI and MCP and their stockholders elected to be taxed as an S Corporations
under the provisions of the Internal Revenue Code. As such, the taxable income
of the Companies is included in the individual tax returns of the stockholders
for Federal income tax purposes. HRI has also elected to be treated as an S
Corporation for state tax purposes. Accordingly, HRI provides for the applicable
state income taxes at the
F-23
<PAGE> 76
THE SYNERGY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
S Corporation rate. MCP provides for state income taxes at C Corporation rate.
CMS is a division of an S Corporation for both Federal and state purposes.
Deferred state tax assets and liabilities for HRI and MCP are determined
based on the temporary differences between the financial accounting and tax
bases of assets and liabilities. Deferred tax assets or liabilities at the end
of each period are determined using the currently enacted tax rates expected to
apply to taxable income in the periods in which the deferred tax asset or
liability is expected to be settled or realized. As of December 31, 1996, there
were no significant temporary differences requiring deferred tax provisions or
credits.
Revenue Recognition --
The Synergy Companies generate revenue from professional services rendered.
Revenue is recognized as earned under the contingency contract, as defined
within the contract, with the corresponding cost of providing those services
reflected as a cost of service. Substantially all customers are billed on a
contingency basis. Billings to customers for out-of-pocket expenses are recorded
as a reduction of expenses incurred.
Property and Equipment --
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets (five to twenty years). Costs of maintenance and
repairs are charged to expenses as incurred.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1996:
<TABLE>
<S> <C>
Equipment............................................... $ 1,233,610
Furniture and fixtures.................................. 120,446
Leasehold improvements.................................. 34,251
Automobiles............................................. 24,032
Computer software....................................... 22,641
-----------
1,434,980
Less -- Accumulated depreciation........................ (1,064,680)
-----------
$ 370,300
===========
</TABLE>
F-24
<PAGE> 77
THE SYNERGY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Effective January 1, 1996 The Synergy Companies have adopted the provisions
of Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a result of The
Synergy Companies review of their long-lived assets, approximately $103,000 was
charged to operations in 1996. This amount represents the amount by which the
carrying value of the assets exceeded the fair value of the assets which was
determined by a professional appraisal using both the cost and market approach.
3. OTHER ASSETS:
Other assets consists principally of deposits on leased property.
4. SHORT-TERM BORROWINGS:
The Synergy Companies are co-borrowers with Kaden Arnone, Inc. Together the
companies maintain a revolving line of credit which provides for borrowings up
to $1,500,000. The portion of the outstanding borrowings attributable to The
Synergy Companies and Kaden Arnone, Inc. totaled $1,212,698 and $283,451 at
December 31, 1996, respectively. The balance is due on demand. Interest is
payable monthly at the Bank's prime rate plus .75% (9.0% at December 31, 1996).
The line is secured by substantially all of the assets of HRI, MCP and Kaden
Arnone, Inc.
As a result of the acquisition of Synergy HMC by QuadraMed Corporation on
April 24, 1997 (see Note 1), all of the outstanding debt at December 31, 1996
has been subsequently repaid.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
TOTAL CURRENT LONG-TERM
-------- ------- ---------
<S> <C> <C> <C>
CoreStates -- Equipment Loan(A)................. $ 24,978 $10,240 $14,738
CoreStates -- Equipment Loan(B)................. 52,041 15,380 36,661
Covenant -- Equipment Loan (C).................. 16,743 4,930 11,813
Covenant -- Equipment Loan (D).................. 20,152 8,540 11,612
-------- ------- -------
$113,914 $39,090 $74,824
======== ======= =======
</TABLE>
- ---------------
(A) Term loan payable in monthly principal payments of $853 through July 1999
plus interest at the Bank's prime rate plus 1% (9.25% at December, 31,
1996). Secured by substantially all of the assets of HRI.
(B) Term loan payable in monthly principal payments of $1,282 through July 2000
plus interest at the Bank's prime rate plus 1% (9.25% at December, 31,
1996). Secured by substantially all of the assets of HRI.
(C) Term loan payable in monthly principal payments of $375 through June 2000,
plus interest at the Bank's prime rate plus 1% (9.25% at December 31, 1996).
Secured by substantially all of the assets of HRI and guaranteed by certain
stockholders of HRI.
(D) Term loan payable in monthly principal payments of $650 through May 1999
plus interest at the Bank's prime rate plus 1% (9.25% at December 31, 1996).
Secured by substantially all of the assets of HRI and guaranteed by certain
stockholders of HRI.
As a result of the acquisition of Synergy HMC by QuadraMed Corporation on
April 24, 1997 (see Note 1), all of the outstanding debt at December 31, 1996
has been subsequently repaid.
F-25
<PAGE> 78
THE SYNERGY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. DUE TO STOCKHOLDERS:
The amounts due to stockholder are due on demand and bear interest at 6%
per year. As a result of the acquisition of The Synergy Companies by QuadraMed
Corporation on April 24, 1997 all amounts due to stockholders have subsequently
been repaid.
7. RETIREMENT PLAN:
The Synergy Companies maintain a combined 401(K) and profit sharing plan.
The profit sharing plan is a discretionary defined contribution plan which
covers substantially all full-time employees. If a participant elects to
contribute to the 401(k) plan, 25% of the first 3% of the contribution is
matched by The Synergy Companies. Total expense related to the plan was $25,352
for year ended December 31, 1996.
8. STOCK REDEMPTION AGREEMENTS:
Transactions related to the common stock of The Synergy Companies are
subject to terms and conditions of stockholders' agreements. Stockholders may
sell or otherwise dispose of their stock only in accordance with this agreement.
Included within the agreements are certain put and call options. A
stockholder has the right to sell (put option) all of his stock to the
individual Synergy Company (The Company) upon death, permanent disability, or
retirement. The price to be paid by The Company is predominately based upon the
value of The Company and the percentage of ownership of the withdrawing
stockholder.
The Company has the option to call all of the stock owned by any
stockholder upon certain terms and conditions. The price to be paid is based
upon the applicable value of The Company and other matters.
All stockholder agreements were canceled upon the formation of Synergy HMC
(Note 1).
9. COMMITMENTS AND CONTINGENCIES:
Commitments
The Synergy Companies leases office facilities and office equipment under
various operating leases. The minimum annual lease payments for future years are
as follows:
<TABLE>
<S> <C>
1997.............................................. $578,000
1998.............................................. 585,000
1999.............................................. 607,000
2000.............................................. 540,000
2001.............................................. 12,000
</TABLE>
Lease expense was approximately $633,000 for the year ended December 31,
1996.
Contingencies
The Synergy Companies are involved in a legal proceeding in which a former
employee has alleged improper termination under the New Jersey Conscientious
Employees' Protection Act. The Synergy Companies have indicated that the
plaintiff's employment was terminated for legitimate and independent reasons and
have filed a motion for summary judgment.
Another action has been brought by a former part-time employee of MCP,
alleging employment discrimination in violation of New Jersey's Law Against
Discrimination. The plaintiff, who is deaf, alleges that MCP was obligated to
provide an interpreter. The Synergy Companies position is that there were
independent
F-26
<PAGE> 79
THE SYNERGY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
and legitimate performance based reasons for the plaintiff's termination and
that, in any event, the imposition of the requirement of an interpreter given
the part-time status of plaintiff, the nature of plaintiff's position, the size
of MCP and its financial circumstances at the time would constitute an undue
burden.
The Synergy Companies from time to time are involved in various legal
proceedings incurred in the normal course of business. In the opinion of
management, if adversely decided, none of these proceedings would have a
material effect on The Synergy Companies combined financial statements.
F-27
<PAGE> 80
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Healthcare Revenue Management, Inc.
We have audited the accompanying balance sheets of Healthcare Revenue
Management, Inc. as of December 31, 1996, 1995 and 1994, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. 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 financial position of Healthcare Revenue
Management, Inc. as of December 31, 1996, 1995, and 1994, and the results of its
operations, changes in stockholders' equity, and cash flows for the years then
ended in conformity with generally accepted accounting principles.
SMITH & COMPANY
Salt Lake City, Utah
March 21, 1997 except as to Note 5
for which the date is April 30, 1997
F-28
<PAGE> 81
HEALTHCARE REVENUE MANAGEMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash................................................. $ 205,238 $ 19,332 $ 66,415
Accounts receivable, net of allowance of $38,018
($36,799 in 1995 and $24,854 in 1994)(Note 2)..... 1,666,789 1,321,982 861,857
Income tax refunds receivable........................ 42,266 0 0
Prepaid expenses..................................... 53,324 37,330 19,233
---------- ---------- ----------
TOTAL CURRENT ASSETS......................... 1,967,617 1,378,644 947,505
EQUIPMENT (Note 4)..................................... 193,720 135,390 105,379
OTHER ASSETS
Organization costs (Note 2).......................... 0 15,066 31,298
Deferred tax asset (Note 5).......................... 32,829 7,000 0
Deposits............................................. 17,700 12,396 12,345
---------- ---------- ----------
$2,211,866 $1,548,496 $1,096,527
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................... $ 264,402 $ 181,576 $ 92,332
Accrued expenses..................................... 237,425 303,400 210,419
Income taxes payable................................. 29,824 2,400 17,200
Current portion of long-term debt and capital leases
(Notes 6 and 7)................................... 241,490 369,479 191,469
Unearned revenue..................................... 103,000 55,000 0
---------- ---------- ----------
TOTAL CURRENT LIABILITIES.................... 876,141 911,855 511,420
Long term debt and capital leases (Notes 6 and 7).... 1,144,802 434,982 447,473
Deferred income taxes (Note 5)....................... 1,828 6,000 7,000
---------- ---------- ----------
TOTAL LIABILITIES............................ 2,022,771 1,352,837 965,893
STOCKHOLDERS' EQUITY
Convertible, Voting $.015 Non-cumulative Preferred
stock $.001 par value
Authorized 2,000,000 shares, issued 1,333,394
shares
(0 in 1995 and 1994)............................ 1,333 0 0
Common stock $.001 par value
Authorized 50,000,000 shares, issued 10,678,950
shares (10,678,950 in 1995 and 10,328,950 in
1994)........................................... 10,679 10,679 10,329
Additional paid-in capital............................. 329,498 130,831 96,181
Stock subscription receivable.......................... 0 (5,000) 0
Retained earnings (deficit)............................ (152,415) 59,149 24,124
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY................... 189,095 195,659 130,634
---------- ---------- ----------
$2,211,866 $1,548,496 $1,096,527
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE> 82
HEALTHCARE REVENUE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE............................................. $ 4,554,430 $ 4,339,750 $ 4,497,761
EXPENSES
Salaries and benefits............................. 2,885,873 2,735,316 2,864,558
Contract labor.................................... 246,435 213,461 302,625
Travel and promotion.............................. 535,711 480,913 383,383
Office equipment rental, supplies, and expenses... 106,231 158,195 167,774
Rent.............................................. 195,738 192,025 166,768
Telephone......................................... 139,384 126,064 120,132
Interest.......................................... 102,608 68,520 58,727
Depreciation and amortization..................... 88,615 58,082 52,244
Postage and courier fees.......................... 41,679 46,585 59,097
Taxes and licenses................................ 27,411 24,354 31,330
Insurance......................................... 93,052 56,243 29,607
Legal and accounting.............................. 61,101 52,128 33,649
Bad debt.......................................... 76,838 40,560 90,807
Licensing support................................. 23,083 13,429 17,488
Other operating expenses.......................... 3,331 26,525 3,328
----------- ----------- -----------
TOTAL EXPENSES............................ 4,627,090 4,292,400 4,381,517
----------- ----------- -----------
NET INCOME (LOSS) BEFORE OTHER...................... (72,660) 47,350 116,244
Other expense (Note 3)............................ (179,500) 0 0
----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES............... (252,160) 47,350 116,244
Income tax expense (benefit) (Note 5)............... (40,596) 12,325 34,000
----------- ----------- -----------
NET INCOME (LOSS)......................... $ (211,564) $ 35,025 $ 82,244
=========== =========== ===========
Net income (loss) per common share.................. $ (.02) $ .00 $ .01
=========== =========== ===========
Weighted average common shares outstanding.......... 10,678,950 10,388,444 10,328,950
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-30
<PAGE> 83
HEALTHCARE REVENUE MANAGEMENT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK RETAINED
--------------------- ------------------- PAID-IN SUBSCRIPTION EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT)
---------- ------- --------- ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at 12/31/92.......... 10,328,950 $10,329 0 $ 0 $ 96,181 $ $ (99,228)
Net income.................... 41,108
---------- ------- --------- ------ -------- ------ --------
Balances at 12/31/93.......... 10,328,950 10,329 0 0 96,181 0 (58,120)
Net income.................... 82,244
---------- ------- --------- ------ -------- ------ --------
Balances at 12/31/94.......... 10,328,950 10,329 0 0 96,181 0 24,124
Common stock purchased
(Note 9).................... 350,000 350 34,650 (5,000)
Net income.................... 35,025
---------- ------- --------- ------ -------- ------ --------
Balances at 12/31/95.......... 10,678,950 10,679 0 0 130,831 (5,000) 59,149
Sale of Preferred stock....... 1,333,334 1,333 198,667
Stock Subscription paid....... 5,000 (211,564)
---------- ------- --------- ------ -------- ------ --------
Balances at 12/31/96.......... 10,678,950 $10,679 1,333,334 $1,333 $ 329,498 $ 0 $(152,415)
========== ======= ========= ====== ======== ====== ========
</TABLE>
See Notes to Financial Statements.
F-31
<PAGE> 84
HEALTHCARE REVENUE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $(211,564) $ 35,025 $ 82,244
Adjustments to reconcile net income in cash provided
(used) by operating activities:
(Increase) decrease in deferred tax assets........ (25,829) (7,000) 9,000
Increase (decrease) in deferred taxes payable..... (4,172) (1,000) 7,000
Depreciation and amortization..................... 88,615 58,082 52,244
Bad debts......................................... 76,838 40,560 90,807
Changes in assets and liabilities:
Accounts receivable............................... (421,645) (500,685) (77,849)
Income tax refunds receivable..................... (42,266) 0 0
Prepaid expenses and deposits..................... (18,905) (18,548) 8,291
Accounts payable.................................. 82,826 94,631 20,714
Accrued expenses.................................. (65,975) 92,981 (30,367)
Unearned revenue.................................. 48,000 55,000 0
Income taxes payable.............................. 27,424 (14,800) 17,200
--------- ----------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES................................. (466,653) (165,754) 179,284
INVESTING ACTIVITIES
Organization costs................................... (2,393) 0 0
Purchase of equipment................................ (131,879) (71,861) (69,283)
--------- ----------- ---------
NET CASH USED BY INVESTING ACTIVITIES........ (134,272) (71,861) (69,283)
FINANCING ACTIVITIES
Proceeds from borrowing*............................. 750,000 2,480,533 904,967
Debt reduction*...................................... (168,169) (2,320,001) (989,038)
Capital stock sold................................... 205,000 30,000 0
--------- ----------- ---------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................. 786,831 190,532 (84,071)
--------- ----------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 185,906 (47,083) 25,930
Cash and cash equivalents at beginning of year......... 19,332 66,415 40,485
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE
YEAR....................................... $ 205,238 $ 19,332 $ 66,415
========= =========== =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.......................................... $ 94,701 $ 73,936 $ 44,290
Income taxes...................................... $ 4,247 $ 33,976 $ 800
</TABLE>
- ---------------
* During 1994, the Company borrowed $904,967 and repaid $735,000 under the terms
of a line of credit. During 1995, the Company borrowed $2,480,533 and repaid
$2,298,500 under the terms of a line of credit. During 1996, the Company
borrowed $750,000 and repaid $352,000 under the terms of a line of credit.
See Notes to Financial Statements.
F-32
<PAGE> 85
HEALTHCARE REVENUE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: HISTORY AND CURRENT STATUS
Healthcare Revenue Management, Inc. ("HRM"), a Nevada corporation, is a
non-reporting public company. The name was changed on November 26, 1991 at the
time of acquisition of certain assets from Healthcare Receivables Management,
Inc., a California based provider of revenue enhancement and receivables
management services to hospitals and large clinics.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
Accounting Method
The accompanying financial statements have been prepared on the accrual
method using generally accepted accounting principles applicable to a going
concern which contemplates the realization of assets and the liquidation of
liabilities in the normal course of business. All assets are listed at
historical cost.
Revenue Recognition
The Company generates the majority of its revenues from revenue enhancement
projects. Revenue is recognized on these projects when services are
substantially completed and the revenue can be reasonably estimated. The Company
also provides receivables management services. Revenue is recognized upon
collection of such receivables.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). Under the liability method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. An allowance against deferred tax
assets is recorded when it is more likely than not that such tax benefits will
not be realized.
Equipment and Depreciation
Equipment is recorded at cost. Expenditures for additions and major
improvements are capitalized. Expenditures for repairs and maintenance and minor
improvements are charged to expense as incurred. When property or equipment is
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts. Gains or losses from retirements and disposals
are recorded as other income or expenses.
Equipment is depreciated over its estimated useful lives. Leasehold
improvements and assets financed under capital leases are amortized over their
estimated useful lives or the lease term, whichever is shorter. Depreciation is
computed using the straight-line method for financial reporting purposes, and
straight-line and accelerated methods for tax purposes over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures................................ 5-10
Computer equipment.................................... 2-5
Computer software..................................... 1-5
Leased equipment...................................... 2-5
</TABLE>
F-33
<PAGE> 86
HEALTHCARE REVENUE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Organization Costs
Organization costs were fully amortized over the 60 month period from
December, 1991, through November, 1996, using the straight-line method.
Earnings (Losses) Per Share
Earnings or losses per share are calculated based on the weighted average
number of shares outstanding at the end of each year.
NOTE 3: COMMITMENTS, CONTINGENCIES, AND LEGAL MATTERS
There are no contingencies or legal matters pending which, in the opinion
of management, will have a material adverse effect on the financial position of
the Company.
The Company settled a lawsuit during 1996 (without admission of any
wrongdoing) in which the Company agreed to pay a total of $179,500 including
legal fees.
NOTE 4: EQUIPMENT
Equipment as of December 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK VALUE
DEPRECIATION ---------------------
COST AT 12/31/96 12/31/96 12/31/95
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
Furniture and fixtures................ $ 67,040 $ 52,072 $ 14,968 $ 21,672
Computer system....................... 203,647 120,047 83,600 105,900
Leased equipment...................... 234,017 138,865 95,152 7,818
-------- ----------- -------- --------
$504,704 $ 310,984 $193,720 $135,390
======== ========= ======== ========
</TABLE>
Depreciation expense for the year ended December 31, 1996 amounted to
$73,549 ($41,850 in 1995 and $36,012 in 1994).
NOTES 5: INCOME TAXES (BENEFIT)
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Current
Federal............................................... $(14,968) $13,000
State................................................. 5,373 7,325
-------- -------
(9,595) 20,325
-------- -------
Deferred
Federal............................................... (20,309) (6,500)
State................................................. (10,692) (1,500)
-------- -------
(31,001) (8,000)
-------- -------
Income tax expense (benefit)............................ $(40,596) $12,325
======== =======
</TABLE>
F-34
<PAGE> 87
HEALTHCARE REVENUE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of income tax expense (benefit) computed at the federal
statutory rate to the actual income tax expense is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Federal income taxes at statutory rate.................. $(71,932) $ 9,100
State income taxes...................................... (19,675) 6,800
Nondeductible expenses.................................. 73,415 5,400
Difference due to graduated federal rates and deferred
tax assets............................................ (22,404) (8,975)
-------- -------
Income tax expense (benefit)............................ $(40,596) $12,325
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets
Accumulated depreciation............................... $(1,828) $(6,000)
Net operating loss..................................... 7,170 0
Allowance for doubtful accounts........................ 25,659 7,000
Reserve for vacation................................... 19,800 0
------- -------
Net deferred tax asset................................... $31,001 $ 1,000
======= =======
</TABLE>
NOTES PAYABLE AND RELATED PARTY TRANSACTIONS
Notes payable as of December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Line of credit due to a bank, interest is payable in monthly
installments that are based on the outstanding principal
balance, the interest rate is prime + 2% (10.5% at
12/31/95) due 4/30/96. Secured by accounts receivable...... $ 0 $352,000
Note due to a bank, monthly payments of $12,744 commencing
12/5/96 through 12/5/03, including interest at prime + 2.5%
(10.75% at 12/31/96). Secured by accounts receivable and by
personal guarantee of the President........................ 749,440 0
Note due to the President of the Company, monthly payments of
$182 commencing 11/1/96, including interest at 16%. (This
is for a note that was obtained by the President in his
name on behalf of the Company.)............................ 7,334 0
Note due to a bank for debt obtained by the President of the
Company on behalf of the Company........................... 19,667 0
Note due to Healthcare Receivables Management, Inc. (a
related party), monthly payments of $3,000 commencing
2/1/93 including interest at 6%, and the balance including
unpaid interest due 2/1/98. As of 12/31/96, payments were
in arrears for 5 months ($15,000).......................... 390,278 402,461
Legal settlement payable, 24 monthly installments of $3,125
beginning February 1997 (see Note 3)....................... 75,000 0
Note due to a related party, interest installments payable
monthly at 13%, entire principal, including unpaid interest
is due 2/15/97............................................. 50,000 50,000
---------- ---------
1,291,719 804,461
Less current portion......................................... 200,072 369,479
---------- ---------
Long-term portion............................................ $1,091,647 $434,982
========== =========
</TABLE>
F-35
<PAGE> 88
HEALTHCARE REVENUE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Scheduled principal reductions are as follows:
<TABLE>
<S> <C>
12/31/97................................. $ 200,072
12/31/98................................. 495,165
12/31/99................................. 98,853
12/31/00................................. 106,630
12/31/01................................. 118,427
Thereafter............................... 272,572
----------
$1,291,719
==========
</TABLE>
During 1996 interest of $30,531 was paid to related parties and $11,628 was
accrued.
* See Note 8 for effects of possible merger.
NOTE 7: LEASES
The Company finances certain property and equipment under noncancelable
capital lease obligations. Maturities of capital lease obligations included in
office furniture and equipment at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1997...................................................... $ 50,873
1998...................................................... 33,846
1999...................................................... 17,438
2000...................................................... 9,165
Thereafter................................................ 0
--------
Total minimum lease payments.................... 111,322
Less amount representing interest......................... 16,749
--------
Present value of net minimum lease payments............... 94,573
Less current portion...................................... 41,418
--------
$ 53,155
========
</TABLE>
Included in property and equipment is $234,017 of equipment under capital
leases at December 31, 1996. The related accumulated amortization is $138,865.
NOTE 8: POSSIBLE MERGER
The Company ("Newco") is in the process of working out the terms of a
merger with Healthcare Receivables Management, Inc. ("Oldco"). See Note 6 for
details of the note payable to Oldco. The merger is expected to take place in
1997.
F-36
<PAGE> 89
HEALTHCARE REVENUE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a preliminary pro forma balance sheet after the merger
based on balances as of December 31, 1996:
<TABLE>
<CAPTION>
NEWCO OLDCO ELIMINATIONS COMBINED
---------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Current assets..................... $1,949,119 $ 74,770 $ (29,262) $1,994,627
Equipment.......................... 193,720 0 0 193,720
Other assets....................... 78,700 371,720 (371,720) 78,700
---------- -------- --------- ----------
$2,221,539 $446,490 $ (400,982) $2,267,047
========== ======== ========= ==========
Current liabilities................ $ 846,317 $ 0 $ (29,262) $ 817,055
Long-term liabilities.............. 1,155,802 0 (371,720) 784,082
---------- -------- --------- ----------
2,002,119 0 (400,982) 1,601,137
Stockholders' equity............... 219,420 446,490 0 665,910
---------- -------- --------- ----------
$2,221,539 $446,490 $ (400,982) $2,267,047
========== ======== ========= ==========
</TABLE>
Oldco balance sheet at December 31, 1996 (unaudited):
<TABLE>
<S> <C>
Assets:
Cash............................................................................ $ 45,508
Receivable from Newco:
Note receivable:
Current portion............................................................ $ 18,558
Long-term portion.......................................................... 371,720
--------
390,278
Interest receivable........................................................ 10,704
--------
400,982
--------
$446,490
========
Liabilities and Equity:
Total current liabilities....................................................... $ 0
Stockholders' capacity
Common stock................................................................. 145,332
Retained earnings............................................................ 301,158
--------
446,490
--------
$446,490
========
</TABLE>
NOTE 9: INCENTIVE STOCK OPTION PLAN
The Company has implemented an incentive stock option plan that was
approved by the shareholders on November 18, 1992, that provides for a maximum
of 1,000,000 shares of the Company's stock to be available to individuals who
directly contributed to the profitability of the Company.
Pursuant to the plan, 350,000 shares were issued at $.10 per share during
1995 as set forth in the statements of changes in stockholders' equity. No
shares were issued under the plan during 1996.
F-37
<PAGE> 90
QUADRAMED CORPORATION, HEALTHCARE REVENUE MANAGEMENT, INC.
AND THE SYNERGY COMPANIES
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------------------------------------
HISTORICAL
HEALTHCARE HISTORICAL
HISTORICAL REVENUE THE SYNERGY PRO FORMA PRO FORMA
QUADRAMED(A) MANAGEMENT, INC.(A) COMPANIES(A) ADJUSTMENTS COMBINED
------------ ------------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents... $ 8,537 $ 79 (1,445)(b) $ 7,416
Restricted cash............. 33 -- 33
Accounts receivable, net.... 7,556 1,067 8,623
Prepaid and other........... 575 81 656
-------- ------ --- ------- --------
Total current
assets............ 16,701 1,227 -- (1,200) 16,728
EQUIPMENT, at cost:
Equipment................... 5,289 548 5,837
Accumulated depreciation.... (2,055) (353) -- -- (2,408)
-------- ------ --- ------- --------
Equipment, net...... 3,234 195 -- -- 3,429
Long-term investment.......... 2,500 -- 2,500
CAPITALIZED SOFTWARE
DEVELOPMENT COSTS, net...... 1,121 -- 1,121
ACQUIRED SOFTWARE, net........ 1,455 -- 1,455
GOODWILL, net................. 6,655 -- 3,137(c) 9,792
OTHER......................... 210 79 289
-------- ------ --- ------- --------
$ 31,876 $ 1,501 $-- $ 1,692 $ 35,314
======== ====== === ======= ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable............... $ -- $ 251 (11)(b) $ 140
Current maturities of
capital lease
obligations.............. 58 -- 58
Accounts payable............ 665 220 885
Accrued liabilities......... 1,648 483 2,131
Deferred revenue............ 1,226 95 1,321
-------- ------ --- ------- --------
Total current
liabilities....... 3,597 1,049 -- -- 4,535
CAPITAL LEASE OBLIGATIONS,
less current portion........ 366 -- 366
LOANS PAYABLE................. -- 1,089 (1,089)(b) --
-------- ------ --- ------- --------
Total Liabilities... 3,963 2,138 -- (1,200) 4,901
STOCKHOLDERS' EQUITY..........
Preferred stock............. -- 1 (1)(d) --
Common stock................ 60 11 (10)(d) 61
Deferred compensation....... (291) -- -- (291)
Additional paid-in
capital.................. 41,872 330 1,924(d) 44,371
Accumulated deficit......... (13,728) (979) 979(d) (13,728)
-------- ------ ------- --------
Total Stockholders'
Equity
(Deficit)......... 27,913 (637) -- -- 30,413
-------- ------ --- ------- --------
$ 31,876 $ 1,501 $-- $ 1,692 $ 35,314
======== ====== === ======= ========
</TABLE>
F-38
<PAGE> 91
QUADRAMED CORPORATION, HEALTHCARE REVENUE MANAGEMENT, INC.
AND THE SYNERGY COMPANIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED JUNE 30, 1997 ENDED MARCH
------------------------------- 31, 1997
HISTORICAL ------------
HEALTHCARE HISTORICAL
HISTORICAL REVENUE THE SYNERGY PRO FORMA PRO FORMA
QUADRAMED MANAGEMENT, INC.(A) COMPANIES(A) ADJUSTMENTS COMBINED
--------- ------------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Licenses..................... $8,477 -- -- (4)(e) 8,473
Services..................... 4,259 1,809 1,722 7,790
--------- ------- ------------ ----------- ---------
Total revenues....... 12,736 1,809 1,722 (4) 16,263
--------- ------- ------------ ----------- ---------
OPERATING EXPENSES:
Cost of licenses............. 3,293 -- -- 3,293
Cost of services............. 2,404 1,985 1,398 5,787
General and administration... 1,792 400 385 2,577
Sales and marketing.......... 1,769 281 -- 2,050
Research and development..... 1,411 -- -- 1,411
Amortization of intangible
assets.................... 362 -- -- 280(f) 642
Non-recurring start-up
charges................... 694 -- -- 694
--------- ------- ------------ ----------- ---------
Total operating
expenses........... 11,725 2,666 1,783 280 16,454
--------- ------- ------------ ----------- ---------
INCOME (LOSS) FROM
OPERATIONS................... 1,011 (857) (61) (284) (191)
--------- ------- ------------ ----------- ---------
Interest expense/(income)...... (388) -- 48 (340)
Other expense/(income), net.... 5 -- -- 5
Provision for income tax....... 50 -- -- 50
--------- ------- ------------ ----------- ---------
NET INCOME/(LOSS).............. $1,344 ($857) ($109) ($284) $94
======== =============== ========== ========= ========
NET INCOME PER SHARE........... $0.19 $0.01
======== ========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES..... 7,250 7,475
======== ========
</TABLE>
F-39
<PAGE> 92
QUADRAMED CORPORATION, HEALTHCARE REVENUE MANAGEMENT, INC.
AND THE SYNERGY COMPANIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------
HISTORICAL
HEALTHCARE HISTORICAL
HISTORICAL REVENUE THE SYNERGY PRO FORMA PRO FORMA
QUADRAMED MANAGEMENT, INC.(A) COMPANIES(A) ADJUSTMENTS COMBINED
--------- ------------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Licenses................. 16,223 -- -- (16)(e) 16,207
Services................. 2,865 4,554 7,893 15,312
------- ------ ------- ----- -------
Total revenues... 19,088 4,554 7,893 (16) 31,519
------- ------ ------- ----- -------
OPERATING EXPENSES:
Cost of licenses......... 7,294 -- -- 7,294
Cost of services......... 2,683 3,589 6,317 12,589
General and
administration........ 3,221 432 1,911 5,564
Sales and marketing...... 2,434 806 608 3,648
Research and
development........... 2,499 -- -- 2,499
Amortization of
intangible assets..... 460 -- -- 807(f) 1,267
Non-recurring expenses... -- -- 103 103
------- ------ ------- ----- -------
Total operating
expenses....... 18,591 4,627 8,939 807 32,964
------- ------ ------- ----- -------
INCOME/(LOSS) FROM
OPERATIONS............... 497 (73) (1,046) (823) (1,445)
------- ------ ------- ----- -------
Interest
expense/(income)......... 329 -- -- 329
Other expense/(income),
net...................... 15 180 137 332
Provision for income tax
(benefit)................ -- (41) -- (41)
------- ------ ------- ----- -------
NET INCOME/(LOSS).......... $ 153 $ (212) $(1,183) $(823) $(2,065)
======= ====== ======= ===== =======
NET INCOME (LOSS) PER
SHARE.................... $ 0.03 $ (0.38)
======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT
SHARES................... 5,089 5,384
======= =======
</TABLE>
F-40
<PAGE> 93
QUADRAMED CORPORATION, HEALTHCARE REVENUE MANAGEMENT, INC.
AND THE SYNERGY COMPANIES
NOTES TO PRO FORMA CONDENSED COMBINED
BALANCE SHEET AND STATEMENT OF OPERATIONS
(UNAUDITED)
NOTE 1. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined balance sheet and statement of operations as described below:
(a) Includes Healthcare Revenue Management, Inc. and Synergy Companies
historical condensed combined balance sheets as of June 30, 1997, and
results of operations for the six months ended June 30, 1997 for Healthcare
Revenue Management, Inc. and for the three months ended March 31, 1997 for
the Synergy Companies. The historical condensed combined balance sheet
information for the Synergy Companies as of June 30, 1997 is included in
the "Historical QuadraMed" column as these entities were acquired in April
1997.
(b) Reflects cash to be paid in the amount of $245,000 and the
anticipated repayment of indebtedness of Healthcare Revenue Management,
Inc. for $1,200,000 concurrent with the acquisition.
(c) Reflects the recording of goodwill acquired from the acquisition
of Healthcare Revenue Management, Inc. for $3,137,000.
(d) Reflects the elimination of Healthcare Revenue Management, Inc.
stockholders' equity.
(e) Reflects the elimination of revenues from licensing transactions
between QuadraMed and the Synergy Companies during the three months ended
March 31, 1997.
(f) Reflects the amortization of goodwill acquired of $4,925,000 for
the Synergy Companies and $3,137,000 for Healthcare Revenue Management,
Inc. which will be amortized on a straight line basis over their estimated
lives of ten years.
F-41
<PAGE> 94
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Dividend Policy....................... 13
Price Range of Common Stock........... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 33
Executive Compensation and Other
Information......................... 36
Certain Transactions.................. 42
Principal and Selling Stockholders.... 43
Description of Capital Stock.......... 46
Underwriting.......................... 49
Legal Matters......................... 51
Experts............................... 51
Available Information................. 51
Incorporation of Certain Documents by
Reference........................... 52
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
3,300,000 SHARES
LOGO
COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
OPPENHEIMER & CO., INC.
PIPER JAFFRAY INC.
PACIFIC GROWTH EQUITIES, INC.
OCTOBER 21, 1997
