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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 11, 1999
QUADRAMED CORPORATION
---------------------
(Exact name of registrant as specified in charter)
Delaware 0-21031 68-0422446
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(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
1003 WEST CUTTING BOULEVARD, 2ND FLOOR, RICHMOND CA 94804
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 620-2340
NONE
----
(Former name or former address, if changed since last report.)
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This Current Report of Form 8-K is being filed to amend and restate
QuadraMed Corporation's (the "Company") Consolidated Balance Sheets as of
December 31, 1997 and 1998 and the Company's Consolidated Statements of
Operations, Consolidated Statements of Changes in Stockholder' Equity (Deficit)
and Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 to reflect the pooling of interests for accounting purposes for
the Company's acquisition of the Compucare Company ("Compucare") pursuant to an
Acquisition Agreement and Plan of Merger dated February 3, 1999. Furthermore,
pursuant to Item 5 hereof, the Company has determined to update its
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in connection with the filing of the foregoing restated financial
statements.
ITEM 5. OTHER INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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. In addition, QuadraMed provides business
office outsourcing, compliance and consulting services. QuadraMed and its
subsidiaries have approximately 3,800 healthcare customers. In addition,
QuadraMed has received endorsements from approximately 15 state and regional
hospital associations.
The Company has expanded significantly since its inception in 1993,
primarily through the acquisition of other businesses, products and services.
Accordingly, the Company's consolidated financial statements have been restated
to include historical results of entities acquired on a pooling of interests
basis. The addition of historical results of acquired entities should be
considered when reading the period to period comparisons for fiscal years 1996,
1997 and 1998. Additionally, reference is made to the consolidated financials
statements and notes thereto for the effect of such acquisitions.
Since December 1995, the Company has completed the following
significant acquisitions:
<TABLE>
<CAPTION>
DESCRIPTION OF
COMPANY ACQUIRED COMPANY ACQUIRED POOLING/PURCHASE DATE ACQUIRED
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C>
Healthcare Design Systems Health care financial management Purchase December 1995
and decision support software
Medicus Systems Corporation Health care financial management Purchase November 1997*
and decision support software
Rothenberg Health Systems, Inc. Capitation management software Pooling December 1997
and Healthcare Research Affiliates, and H.E.D.I.S. reporting
Inc. (collectively, "Rothenberg")
Cabot Marsh Corporation Health care compliance and Purchase February 1998
consulting company
Pyramid Health Group, Inc. Cash flow management services Pooling June 1998
("Pyramid") company
Integrated Medical Networks, Inc. Health care financial management Pooling September 1998
("IMN")
The Compucare Company Enterprise wide software Pooling March 1999
</TABLE>
- -----------------
* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus
Systems Corporation on November 9, 1997. The remaining 43.3% shares of
capital stock were purchased by the Company in May 1998.
In March 1999, the Company completed the acquisition of the Compucare
Company ("Compucare") by acquiring all the outstanding capital stock of
Compucare in exchange for 2,957,000 shares of common stock. The acquisition was
accounted for as a pooling of interests. In accordance with pooling accounting
rules, the Company's consolidated financial statements have been restated to
include the historical operating results of Compucare for the 1997 and 1996
fiscal years.
In September 1998, the Company acquired all the outstanding capital
stock of Integrated Medical Networks, Inc.("IMN") in exchange for 1,550,000
shares of common stock. The acquisition was accounted for as a pooling of
interests. In accordance with pooling accounting rules, the Company's
consolidated financial statements have been restated to include the historical
operating results of IMN for the 1997 and 1996 fiscal years.
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In June 1998, the Company acquired all the outstanding capital stock of
Pyramid Health Group, Inc. ("Pyramid") in exchange for 2,740,000 shares of
common stock, of which 274,000 shares of common stock have been placed into
escrow for a period of one year under the terms and conditions of the
acquisition agreement. The acquisition was accounted for as a pooling of
interests. In accordance with pooling accounting rules, the Company's
consolidated financial statements have been restated to include the historical
operating results of Pyramid for the 1997 and 1996 fiscal years.
In March 1998, the Company acquired Velox Systems Corporation ("Velox")
for an aggregate purchase price of 40,562 shares of the Company's common stock,
the market value of which was approximately $1,500,000 and approximately
$3,100,000 in cash. In connection with this acquisition, which was accounted for
as a purchase, the Company allocated the purchase price based upon the estimated
fair value of the assets and liabilities assumed. The valuation was based on
accepted appraisal methodologies used at the time of the allocation. Since that
time, the SEC has provided new guidance with respect to the valuation of
intangible assets in purchase business combinations, including in-process R&D
("IPR&D"). In response to this new guidance, the Company elected to
retroactively adjust the amount of intangibles assigned to IPR&D from the
previously reported $4,800,000 to $1,500,000 in the quarter ended March 31,
1998.
In February 1998, the Company acquired Cabot Marsh Corporation ("Cabot
Marsh") for an aggregate purchase price of 382,767 shares of the Company's
common stock, the market value of which was approximately $8,400,000 and
approximately $2,800,000 in cash. In connection with this acquisition, which was
accounted for as a purchase, the Company allocated the purchase price based upon
the estimated fair value of the assets and liabilities assumed. The valuation
was based on accepted appraisal methodologies used at the time of the
allocation. Since that time, the SEC has provided new guidance with respect to
the valuation of intangible assets in purchase business combinations, including
IPR&D. In response to this new guidance, the Company elected to retroactively
adjust the amount of intangibles assigned IPR&D from the previously reported
$6,200,000 to $4,200,000 in the quarter ended March 31, 1998.
The Company acquired Rothenberg in December 1997. In exchange for all
the outstanding capital stock of Rothenberg, the Company issued 1,588,701 shares
of common stock. The acquisition was accounted for on a pooling of interests
basis. In accordance with pooling accounting rules, the Company's consolidated
financial statements have been restated to include the historical operating
results of Rothenberg for the 1996 fiscal year.
In November 1997, the Company acquired 56.7% of Medicus Systems
Corporation ("Medicus"). The Company's purchase price for the 56.7 percent
interest in Medicus which it acquired was approximately $26.3 million, which was
comprised of a cash payment of $21.7 million, the issuance of a note payable for
approximately $1.6 million to one selling stockholder, the value of warrants
issued to the selling stockholders of $700,000, and transaction costs of $2.3
million. 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 Company's proportionate share of the assets acquired and
liabilities assumed. Intangible assets acquired aggregated to $30.2 million, of
which $1.7 million, $6.7 million and $21.8 million were assigned to acquired
software, acquired intangible assets, 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 research and development in-process was charged
to expense by the Company in the year ended December 31, 1997. The Company's
proportionate share of net tangible liabilities assumed in the acquisition
totaled approximately $12.8 million. In May 1998, the Company completed its
acquisition of Medicus by purchasing the remaining 43.3% interest in Medicus.
The Company allocated the remaining 43.3% purchase price based on the estimated
fair value of the assets and liabilities assumed. The valuation was based on
accepted appraisal methodologies used at the time of the allocation. Since that
time, the SEC provided new guidance with respect to the valuation of intangible
assets in purchase business combinations, including IPR&D. In response to this
guidance, the Company elected to retroactively adjust the amount of intangibles
assigned to acquired in-process research and development from the previously
reported $17,146,000 to $4,763,000 in the quarter ended June 30, 1998. The
remaining intangible balance will be amortized over a 7 year average period.
During 1998, the Company recorded $4,202,000 of non-recurring charges.
These charges primarily related to costs associated with closing of a
duplicative operating facility within the Company's business office outsourcing
operations. Such costs included future rents and lease obligations the Company
is contractually obligated to fulfill as well as severance packages for
employees working out of that office.
In February 1997, the Company entered into an arrangement to provide
EDI processing and management services to 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. The Company and EDI USA, Inc.
terminated this arrangement in December 1997. The Company recorded non-
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recurring charges of $2,492,000 for the year ended December 31, 1997, related to
costs incurred in connection with the processing arrangement and the termination
thereof.
As of May 5, 1999, QuadraMed and its subsidiaries had approximately
3,800 customers, approximately 80% of which were hospitals, located in all 50
states, the District of Columbia, Canada, Puerto Rico, South Africa and the
Philippines. The Company expects to maintain a high percentage of hospital
customers, but also expects its customer mix to transition to a higher
percentage of other providers, including integrated delivery health care systems
("IDSs"), as well as physicians, payors and employers. No single customer
accounted for more than 10% of the Company's revenues in 1996, 1997 and 1998.
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 and health information management
outsourcing, cash flow management, compliance and consulting services.
The Company's product offering includes a variety of products which can
be licensed individually or as a suite of interrelated products. Products are
licensed either under term arrangements (which range from one year to three
years and typically include monthly or annual payments over the term of the
arrangement) or on a perpetual basis. Revenues from term licenses are recognized
monthly or annually over the term of the license arrangement, beginning at the
date of installation. Revenues from perpetual licenses are recognized upon
shipment of the software if there is persuasive evidence of an agreement,
collection of the resulting receivable is probable and the fee is fixed and
determinable. If an acceptance period is required, revenues are recognized upon
the earlier of customer acceptance or the expiration of the acceptance period.
Revenues from certain products, including the Company's enterprise solutions are
recognized on a percentage of completion basis of accounting.
Certain services are also provided to certain of the Company's
licensees of software products. These services consist primarily of consulting
and post-contract customer support. Consulting services generally consist of
installation of software at customer sites and revenue is generally recognized
upon completion of installation. Unbilled receivables consist of work performed
or software delivered which has not been billed under the terms of the
contractual arrangement with the customer. Post-contract customer support is
recognized ratably over the term of the support period. Deferred revenue
primarily consists of revenue deferred under annual maintenance and annual
license agreements on which amounts have been received from customers and for
which the earnings process has not been completed.
The Company provides business office and health information management
outsourcing, cash flow management, compliance and consulting services to
hospitals under contract service arrangements. Outsourcing revenues typically
consist of fixed monthly fees plus, in the case of business office outsourcing,
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. Cash flow management
services typically consist of fixed fee services and additional incentive
payments based on a certain percentage of revenue returns realized or estimated
to be 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 with the customer. Compliance and consulting revenues are recognized
as the services are provided. 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 capitalizes a portion of its software costs for internally
developed software 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 (usually five years) of the
products, commencing when each product is available to the market.
3
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the consolidated statements of operations of QuadraMed expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
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<S> <C> <C> <C>
Revenues:
Licenses .................................................... 60.8% 58.8% 56.5%
Services .................................................... 39.2 41.2 43.5
Total revenues .............................................. 100.0 100.0 100.0
Operating expenses:
Cost of licenses ............................................ 34.4 28.6 24.1
Cost of services ............................................ 25.0 27.5 28.4
General and administration .................................. 25.0 22.5 15.8
Sales and marketing ......................................... 12.8 10.1 9.4
Research and development .................................... 9.4 11.2 10.8
Amortization of intangibles ................................. 1.4 1.2 3.1
Acquisition costs ........................................... -- 2.2 4.9
Non-recurring charges ....................................... -- 3.4 2.0
Write-off of acquired in-process research
and development .......................................... -- 15.6 7.0
----- ----- -----
Total operating expenses .................................. 108.0 122.3 105.5
----- ----- -----
Loss from operations ............................................. (8.0) (22.3) (5.5)
Interest income (expense), net ................................... (2.7) (0.4) (0.2)
Other income (expense), net ...................................... (1.2) (1.8) (0.1)
----- ----- -----
Net loss before provision for income taxes ....................... (11.9) (24.5) (5.8)
Provision for income taxes ....................................... 0.1 0.8 2.1
Income (loss) from discontinued operations ....................... (31.8) (1.2) (1.1)
Dividend accretion ............................................... -- (0.2) (0.9)
----- ----- -----
Net loss ......................................................... (43.8)% (26.7)% (9.9)%
===== ===== =====
</TABLE>
Years Ended December 31, 1998 and 1997
RESTATEMENT OF QUARTERLY FINANCIAL DATA
Subsequent to the Securities and Exchange Commission's letter to the
Association of Independent Certified Public Accountants dated September 9, 1998,
regarding its views on in-process research and development ("IPR&D") the Company
re-evaluated its IPR&D charges on its 1998 acquisitions. The amounts allocated
to IPR&D and intangible assets in the first and second quarters of 1998 were
based on accepted appraisal methodologies used at the time of the allocations.
Since that time, the SEC provided new guidance with respect to the valuation of
intangible assets in purchase business combinations, including IPR&D. In
response to this new guidance, the Company elected to retroactively adjust the
amount of intangibles assigned to IPR&D related to these acquisitions. The
Company reduced its estimate of the amount allocated to IPR&D for its 1998
acquisitions by $18.2 million from the $32.7 million previously reported in the
first, second, and third quarters of 1998 to $14.5 million. Amortization of
intangibles increased $952,000 for the nine months ended September 30, 1998,
related to the amended amounts for the IPR&D.
Company management believes that the amended IPR&D charge of $14.5
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurance, however, that the SEC will
not take issue with any of the assumptions used in the Company's allocations and
require the Company to further revise the amount allocated to IPR&D. The Company
amended its quarterly earnings on Form 10-Q for the first, second, and third
quarters of 1998. The following table depicts the adjustments made to the values
ascribed to IPR&D during the year ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
ACQUISITION AS REPORTED AS RESTATED
<S> <C> <C>
Velox $ 4,800 $ 1,500
Cabot Marsh 6,200 4,200
Medicus (43.3%) 17,146 4,763
Other acquisitions 4,585 4,031
------- -------
Total $32,731 $14,494
======= =======
</TABLE>
The effect of these adjustments on the previously reported condensed
consolidated quarterly financial statements is present in the "QUARTERLY RESULTS
OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION" included in the consolidated
financial statements.
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Revenues
Licenses. License revenues increased 43.1% to $117.8 million in 1998
from $82.3 million in 1997. Software license revenues include 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. The increase in license revenues was primarily due to revenues
associated with the acquisition of Medicus and to a lesser extent, revenues from
new customers for the Company's coding, capitation and enterprise solution
software products.
Services. Service revenues increased 57.5% to 90.7 million in 1998 from
$57.6 million in 1997. The increase in service revenues was primarily due to new
customers associated with the Company's health information management
outsourcing business, and to a lesser extent, customers associated with the
acquisition of Cabot Marsh during the first quarter of 1998.
The substantial increases in revenues for 1998 and 1997 reflect the
completion of numerous acquisitions, several of which were significant. The
Company currently expects to complete fewer acquisitions in 1999. As a result
the Company does not expect revenues to increase at historical rates in the
future.
Cost of Revenues
Cost of licenses. Cost of licenses increased 25.2% to $50.2 million in
1998 from $40.1 million in 1997. Cost of licenses consists primarily of
salaries, benefits and allocated costs related to software installations,
hardware costs, customer support and royalties to third parties. As a percentage
of license revenues, cost of licenses decreased to 42.6% in 1998 from 48.7% in
1997. Cost of licenses increased primarily due to additional personnel hired to
support software installations and customer support for new customers during
1998. As a percentage of license revenues, cost of revenues decreased primarily
due to an increased revenue base during 1998.
Cost of services. Cost of services increased 53.8% to $59.2 million in
1998 from $38.5 million in 1997. Cost of services includes expenses associated
with services performed primarily in connection with health information
management outsourcing, compliance and consulting services. As a percentage of
service revenues, cost of services decreased to 65.2% in 1998 from 66.8% in
1997. Cost of services increased primarily due to additional personnel costs
associated with the Company's health information management outsourcing business
and to a lesser extent, additional operating costs as a result of its
acquisition of Cabot Marsh during the first quarter of 1998.
Operating Expenses
General and Administration. General and administration expenses
increased 5.1% to $33.0 million in 1998 from $31.4 million in 1997, and
decreased as a percentage of total revenues to 15.8% in 1998 from 22.5% in 1997.
The decrease in general and administration expense as a percentage of total
revenues was primarily due to a larger revenue base, the reduction of certain
overhead costs associated with prior acquisitions and to a lesser extent, legal
and other costs the Company incurred in 1997 to settle certain litigation
initiated in prior years.
Sales and Marketing. Sales and marketing expenses increased 38.7% to
$19.7 million in 1998 from $14.2 million in 1997, and decreased as a percentage
of total revenues to 9.4% in 1998 from 10.1% in 1997. Sales and marketing
expenses increased primarily from the hiring of additional sales personnel
during 1998 and increased advertising costs, including sponsoring and
participating in more trade shows during 1998. As a percentage of total
revenues, sales and marketing expenses decreased primarily due to a larger
revenue base in 1998.
Research and Development. Research and development expenses increased
44.2% to $22.5 million in 1998 from $15.6 million in 1997, and decreased as a
percentage of total revenues to 10.8% in 1998 from 11.2% in 1997. The increase
in research and development expenses was due to the hiring of additional
programmers from acquired companies and the ongoing development of product
enhancements and new products. As a percentage of total revenues, research and
development expenses decreased primarily due to a larger revenue base. The
Company capitalized $3.1 million, $973,000 and $793,000 of software development
costs in fiscal 1998, 1997 and 1996, respectively, which represented 12.1%, 5.9%
and 7.7% of total research and development expenditures in fiscal 1998, 1997 and
1996. Amortization of capitalized software development costs totaled $590,000,
$388,000 and $390,000 in fiscal 1998, 1997 and 1996, respectively. The Company
believes that research and development expenditures are essential to maintaining
its competitive position. As a result, 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. The Company believes
that these expenses will increase in the future, both in absolute terms and as a
percentage of total revenues.
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<PAGE> 7
Amortization of Intangibles. Amortization of intangibles increased to
$6.5 million in 1998 from $1.7 million in 1997. The increase in amortization of
intangibles is due primarily to the acquisition of 56.7% of Medicus in November
1997, the purchase of the remaining 43.3% of Medicus in May 1998, and the
acquisitions of Cabot Marsh and Velox during the first quarter of 1998. As a
result of the Company's adjustment of the amount of intangibles assigned to
acquired in-process research and development in 1998, the Company expects that
amortization of intangibles will increase significantly in future periods.
Acquisition Costs. The Company incurred $10.3 million of acquisition
costs associated with the acquisitions of Pyramid, Codemaster and Integrated
Medical Networks during 1998. Acquisition costs related to financial advisors
hired by the Company and the acquired companies, legal and accounting fees.
During the fourth quarter ended December 31, 1997, the Company completed two
acquisitions which were accounted for on a pooling of interests basis. In
connection with these acquisitions, the Company incurred $3.1 million in
acquisition and related costs.
Non-recurring Charges. The Company recorded $4.2 million of
non-recurring charges in 1998. These charges primarily related to costs
associated with closing of a duplicative operating facility within the Company's
business office outsourcing operations. Such costs included future rents and
lease obligations the Company is contractually obligated to fulfill as well as
severance packages for employees working out of that office. Such employees were
paid severance packages in which they were paid through November 1998.
Non-recurring charges in 1997 were associated with start-up costs incurred for
the claims processing arrangement entered into with EDI-USA, Inc. No such
charges were incurred in 1998 as this arrangement was terminated in December
1997. As a result of initiatives undertaken by the Company to integrate acquired
businesses and consolidate duplicate operations, the Company has recorded
significant non-recurring charges during 1999.
Acquired Research and Development. In connection with the acquisitions
of Velox, Cabot Marsh, the remaining 43.3% interest in Medicus, and several
other acquisitions, the Company allocated $14.5 million to in-process research
and development ("IPR&D") for the year ended December 31, 1998. This amount was
expensed as a non-recurring charge because the IPR&D projects identified has not
yet reached technological feasibility and has no alternative future use. The
following table depicts the allocations to IPR&D for the year ended December 31,
1998 (in thousands):
<TABLE>
<S> <C>
Velox $ 1,500
Cabot Marsh 4,200
Medicus (43.3%) 4,763
Other acquisitions 4,031
-------
Total $14,494
=======
</TABLE>
The amounts allocated to IPR&D during the year ended December 31, 1998,
were evaluated based on the SEC's current views regarding valuation
methodologies. The allocation to IPR&D was determined by estimating the costs to
develop the purchased technology into commercially viable products, estimating
the resulting net cash flows from each project, excluding the cash flows related
to the portion of each project that was incomplete at the acquisition date and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to develop
that project, and the associated risks. In each case, the selection of the
applicable discount rate was based on consideration of the Company's weighted
average cost of capital, as well as other factors including the useful life of
each technology, profitability levels of each technology, the uncertainty of
technology advances that were known at the time, and the stage of completion of
each technology.
If the projects are not successfully developed, the sales and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets may be impaired. Following is
a description of the significant allocations to IPR&D for the year ended
December 31, 1998.
VELOX. At the acquisition date, Velox was conducting development,
engineering and testing activities associated with the next generation of
SMARTLINK, a product which focuses on accounts receivable analysis and reporting
in hospitals, large physician practices, and other entities. Upon completion,
SMARTLINK was planned to have significant scalability, a multilayer
architecture, and the ability to address Windows NT 5.0 and the next generation
of Microsoft SQL Server. At the acquisition date, Velox was approximately 35%
complete with the research and development related to SMARTLINK. The Company
anticipated that SMARTLINK product development would be completed in phases
beginning in the last half of 1998, after which the Company expected to begin
generating economic benefits from the value of the completed IPR&D.
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<PAGE> 8
Revenues attributable to SMARTLINK were estimated to be $1.3 million in
1998 and $5.0 million in 1999. IPR&D revenue, as a percentage of total projected
company revenue, was expected to peak in 1999 and decline thereafter as new
product technologies were expected to be introduced by the Company. Operating
expenses (expressed as a percentage of revenue) average 79% over the projection
period. The costs to complete the IPR&D were expected to be $293,000 in 1998 and
$239,000 in 1999. A risk-adjusted discount rate of 20% was utilized to discount
projected cash flows.
CABOT MARSH. At the acquisition date, Cabot Marsh was conducting
development, engineering, and testing activities associated primarily with the
next generation of RAMS, a compliance product related to inpatient and
outpatient coding. At the acquisition date, Cabot Marsh was approximately 80%
complete with the development of the IPR&D. The Company anticipated that the
project would be completed in phases beginning in the second half of 1998, after
which the Company expected to begin generating economic benefits from the value
of the completed IPR&D.
Revenues attributable to the next generation of RAMS were estimated to
be $807,000 in 1998 and $11.3 million in 1999. IPR&D revenue, as a percentage of
total projected company revenue, was expected to peak in 1999 and decline
thereafter as new product technologies were expected to be introduced by the
Company. Operating expenses (expressed as a percentage of revenue) average 57%
over the projection period. The costs to complete the IPR&D efforts were
expected to be $140,000 in 1998 and $427,000 in 1999. A risk-adjusted discount
rate of 19% was utilized to discount projected cash flows.
MEDICUS. At the acquisition date, Medicus was conducting development,
engineering, and testing activities associated with the next generations of the
Company's Clinical Data Systems ("CDS") and Patient Focused Systems ("PFS")
product lines. At the acquisition date, Medicus was approximately 30% and 60%
complete with CDS and PFS, respectively. The Company anticipated that CDS and
PFS would be completed in 1999. After these release dates, the Company expected
to begin generating economic benefits from the value of the completed IPR&D.
Revenues attributable to CDS were estimated to be $6.0 million in 1999
and $18.0 million in 2000. IPR&D revenue, as a percentage of total projected
product revenue, was expected to peak in 2000 and decline thereafter as new
product technologies were expected to be introduced by the Company. Revenues
attributable to PFS were estimated to be $7.2 million in 2000 and $9.8 million
in 2001. IPR&D revenue, as a percentage of total projected product revenue, was
expected to peak in 2000 and decline thereafter as new technologies were
expected to be introduced by the Company. For both projects, operating expenses
(expressed as a percentage of revenue) average 61% over the projection period.
The costs to complete the CDS IPR&D efforts were expected to be $14,000 in 1998
and $1.2 million in 1999. The costs to complete the PFS IPR&D efforts were
expected to be $6,000 in 1998 and $309,000 in 1999. For each of the projects, a
risk-adjusted discount rate of 18% was utilized to discount projected cash
flows.
In connection with the acquisition of 56.7% of the outstanding stock of
Medicus in November, 1997, the Company allocated $21.9 million related to IPR&D.
This amount was expensed as a non-recurring charge because the IPR&D projects
identified had not yet reached technological feasibility and had no alternative
future use. The amounts allocated to IPR&D for the year ended December 31, 1997,
were evaluated based on current industry practices.
Provision for Income Taxes. Provision for income taxes increased to
$4.3 million in 1998 from $1.1 million in 1997. The provision for income taxes
is primarily due to state and alternative minimum tax liabilities on certain of
the Company's legal entities. In addition, amounts allocated to acquired
in-process research and development are not deductible for tax purposes. For
financial reporting purposes, a 100% valuation allowance of $15.9 million and
$19.2 million has been recorded against the Company's deferred tax assets
consisting primarily of the benefits associated with the Company's net operating
loss carryforwards in 1998 and 1997, as management is unable to conclude that it
is more likely than not that these assets will be realizable.
Years Ended December 31, 1997 and 1996
Revenues
Licenses. License revenues increased 33.8% to $82.3 million in 1997
from $61.5 million in 1996. The increase was due to license revenues associated
with the Company's enterprise solutions as well as other new customers and an
increase in perpetual license agreements entered into during the latter half of
1997.
Services. Service revenues increased 45.5% to $57.6 million in 1997
from $39.6 million in 1996. The increase in service revenues was primarily due
to new customers associated with the health information management outsourcing
business and to a lesser extent, new customers acquired in the Synergy
acquisition in April 1997 and Healthcare Revenue Management, Inc. in September
1997.
7
<PAGE> 9
Cost of Revenues
Cost of Licenses. Cost of license revenues increased 15.6% to $40.1
million in 1997 from $34.7 million in 1996. As a percentage of license revenues,
cost of licenses decreased to 48.7% in 1997 from 56.5% in 1996. The increase in
cost of licenses was principally due to additional personnel hired during 1997
to support software installations and, to a lesser extent, increases in
third-party hardware sales. The decrease in cost of licenses as a percentage of
license revenues was primarily contributed to an increase in software sales in
1997 related to Compucare.
Cost of Services. Cost of service revenues increased 52.2% to $38.5
million in 1997 from $25.3 million in 1996. As a percentage of service revenues,
cost of services increased to 66.8% in 1997 from 63.8% in 1996. The increase in
cost of services was principally due to additional operating costs associated
with the Company's health information management outsourcing business and to a
lesser extent, operating costs from the acquisitions of Synergy and Healthcare
Revenue Management, Inc., acquired in April 1997 and September 1997,
respectively.
Operating Expenses
General and Administration. General and administration expenses
increased 24.6% to $31.4 million in 1997 from $25.2 million in 1996, and
decreased as a percentage of total revenues to 22.5% in 1997 from 25.0% in 1996.
The increase in general and administration expenses reflects costs associated
with the Company's health information management outsourcing business, the
hiring of additional senior officers in 1997 and an increase in the number of
offices throughout the United States. The Company also incurred significant
legal and other costs during 1997 to settle certain litigation initiated in
prior years. As a percentage of total revenues, general and administration costs
decreased primarily due to a larger revenue base in 1997.
Sales and Marketing. Sales and marketing expenses increased 10.1% to
$14.2 million in 1997 from $12.9 million in 1996, and decreased as a percentage
of total revenues to 10.1% in 1997 from 12.8% in 1996. The increase in sales and
marketing expenses resulted principally from the addition of sales and marketing
personnel and increased advertising efforts associated with advertising in
publications, creating product brochures and participating in industry
conferences during 1997.
Research and Development. Research and development expenses increased
64.2% to $15.6 million in 1997 from $9.5 million in 1996, and increased as a
percentage of total revenues to 11.2% in 1997 from 9.4% in 1996. The increase in
research and development expenses is principally due to the hiring of additional
personnel for various software development projects.
Amortization of Intangibles. Amortization of intangibles increased to
$1.7 million in 1997 from $1.5 million in 1996. The increase in the amortization
of intangibles is due to the acquisitions of Synergy in April 1997, Healthcare
Revenue Management, Inc. in September 1997 and 56.7% of Medicus in November
1997.
Acquisition Costs. During the fourth quarter ended December 31, 1997,
the Company completed two acquisitions which were accounted for on a pooling of
interests basis. In connection with these acquisitions, the Company incurred
$3.1 million in acquisition and related costs.
Non-Recurring Charges. The Company recorded non-recurring charges of
$4.7 million in 1997. These non-recurring charges were comprised of $2.5 million
related to the termination of the claims processing arrangement with EDI USA,
Inc. and other charges associated with the write down of certain assets which
were determined to have no future realizable value.
Acquired In-Process Research and Development. In connection with the
acquisition of 56.7% of the outstanding stock of Medicus in November 1997, the
Company recorded a $21.9 million write-off related to acquired in-process
research and development that had not achieved technological feasibility and had
no alternative future use.
Interest Income (Expense). Interest expense decreased to $462,000 in
1997 compared to $2.7 million in 1996. The decrease in interest expense was
primarily due to various notes payable assumed from acquired companies, which
was offset by interest earned on higher cash balances, resulting from the
Company's initial public offering of common stock in October 1996 and follow-on
common stock offering in October 1997. The Company's public equity offerings
raised net proceeds of approximately $26.4 million and $57.3 million,
respectively. Interest expense in 1996 was principally the result of debt the
Company incurred in connection with the acquisition of Healthcare Design
Systems, Inc. and for working capital purposes.
8
<PAGE> 10
Provision for Income Taxes. The Company recorded a provision for income
taxes of $1.1 million in 1997 compared $147,000 in 1996. The provision for
income taxes in 1997 relates to state and alternative minimum tax liabilities of
the Company. In addition, amounts allocated to acquired in-process research and
development are not deductible for tax purposes. For financial reporting
purposes, a 100% valuation allowance of $19.2 million and $10.0 million has been
recorded against the Company's deferred tax assets consisting primarily of the
benefits associated with the Company's net operating loss carryforwards in 1997
and 1996, as management is unable to conclude that it is more likely than not
that these assets will be realizable.
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company completed its initial public offering of
common stock, which resulted in net proceeds to the Company of approximately
$26.1 million. In October 1997, the Company completed a follow-on offering of
common stock, which resulted in net proceeds to the Company of approximately
$57.3 million. In May 1998, the Company completed an offering of $115.0 million
principal amount of Convertible Subordinated Debentures, including the initial
purchasers' over-allotment option. The debentures are due May 1, 2005 and bear
interest, which is payable semi-annually at 5.25 percent per annum. Proceeds to
the Company from the offering were $110.8 million.
At December 31, 1998, the Company had $66.1 million of cash and cash
equivalents, $64.7 million of short and long-term investments and $95.2 million
in net working capital. Net cash used in operating activities was $26.0 million,
$7.5 million and $15.1 million in the years ended December 31, 1998, 1997 and
1996, respectively. Net cash used in operating activities in 1998 was
principally attributable to the Company's net loss in 1998, a substantial
portion of which was comprised of non-cash charges to write-off acquired
in-process research and development related to the remaining acquisition of
43.3% of Medicus in May 1998 and other acquisitions and acquisition and
non-recurring costs recorded during 1998. In addition, while accounts receivable
increased during 1998, accounts payable and accrued liabilities decreased during
1998. The increase in accounts receivable was primarily due to the significant
increase in revenues in 1998, while the decrease in accounts payable and accrued
liabilities was primarily due to the payment of acquisition and severance
related costs associated with acquisitions in the latter half of 1997 and the
pay down of other accrued liabilities from acquired companies.
Net cash used in investing activities was $87.5 million, $32.1 million
and $4.9 million in the years ended December 31, 1998, 1997 and 1996,
respectively. Investing activities in fiscal year 1998 primarily included the
purchase of short and long-term investments, cash paid for several acquisitions
and the purchase of equipment by the Company. Investing activities in fiscal
year 1997 primarily included cash paid for the Medicus and Synergy acquisitions,
purchases of equipment and the capitalization of computer software development
costs. Investing activities in fiscal year 1996 related to additions to capital
equipment and the capitalization of computer software development costs.
Net cash provided by financing activities was $131.3 million, $58.9
million and $35.7 million in the years ended December 31, 1998, 1997 and 1996,
respectively. Net cash provided by financing activities in 1998 primarily
related to the offering of $115 million Convertible Subordinated Debentures,
which raised net proceeds of $110.8 million in April 1998 and the exercise of
common stock warrants issued to former Medicus stockholders in November 1997 and
the exercise of common stock options during 1998. Net cash provided by financing
activities in fiscal year 1997 included $57.3 million in proceeds from the
Company's follow-on common stock offering in October 1997, which was partially
offset by the repayment of notes payable in connection with the November 1997
acquisition of Medicus. Net cash provided by financing activities in fiscal year
1996 included proceeds from the issuance of convertible preferred stock and
proceeds from the Company's initial public offering, which proceeds were offset
by repayment of notes payable. Net cash provided by financing activities in
fiscal year 1995 included borrowings related to notes payable and contributed
capital to Rothenberg.
In September 1998, the Company entered into an arrangement to guarantee
a line of credit of another company for up to $12,500,000. Outstanding balances
under the line of credit accrue interest at 8.5 percent and are due in October
2001. The Company has also entered into a reseller agreement with the same
company. Under the terms of the reseller agreement, the Company has a
non-exclusive license to resell the company's software. This reseller agreement
remains in effect for an initial term of three years, expiring in September
2001, and thereafter is subject to renewal for additional one year terms.
The Company, through the acquisition of the Compucare Company is party
to a $7,000,000 revolving credit and security agreement with its bank. Borrowing
under this credit facility may not exceed 85% of eligible billed receivables
plus 50% of eligible unbilled receivables. The Company pays interest at a rate
of prime + 1.5% (or 9.25% at December 31, 1998, weighted average of 9.86% for
1998) on the outstanding borrowings. The Company had $2,585,000 and $2,500,000
in borrowings at December 31, 1997,
9
<PAGE> 11
and 1998, respectively. In March 1999, the Company repaid all outstanding
balances and terminated the line of credit. The Company had $700,000 and
$1,000,000 letters of credit under this agreement at December 31, 1997, and
1998, respectively.
The Company believes that its current cash and investments will be
sufficient to fund operations at least through December 31, 1999.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(b) The Company has restated certain of its historical fiscal year end audited
financial statements to reflect the business combination with Compucare
consistent with the accounting treatment for a pooling of interest. Listed
below are the financial statements, related information which are responsive to
Item 7(b) hereof.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ended December
31, 1996, 1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
(c) The following exhibit is being filed herewith as a result of the
restatement of the Company's audited financial statements:
EXHIBITS:
23.1 Consent of Arthur Anderson LLP
INDEX TO FINANCIAL STATEMENTS
QUADRAMED CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ...................................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998 .................................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 .................... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss for the years ended
December 31, 1996, 1997 and 1998 .......................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 .................... F-5
Notes to Consolidated Financial Statements .................................................................... F-6
</TABLE>
10
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of QuadraMed Corporation:
We have audited the accompanying consolidated balance sheets of
QuadraMed Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1998, and the related consolidated statements of operations,
statements of changes in stockholders' equity (deficit) and comprehensive loss
and cash flows for each of the three years in the period ended December 31,
1998. These consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QuadraMed
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
August 11, 1999
11
<PAGE> 13
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1998
------------- -------------
(RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 48,384 $ 66,089
Short-term investments ...................................... 1,032 23,043
Accounts receivable, net of allowance for uncollectible
accounts of $2,834 and $5,723, respectively ............. 28,663 39,529
Unbilled receivables ........................................ 5,257 10,335
Notes and other receivables ................................. 2,354 3,989
Prepaid expenses and other .................................. 3,912 2,921
--------- ---------
Total current assets ................................. 89,602 145,906
--------- ---------
LONG-TERM INVESTMENTS ........................................... -- 41,641
EQUIPMENT, at cost:
Equipment ................................................... 18,608 26,636
Less-- Accumulated depreciation and amortization ............ (9,579) (15,377)
--------- ---------
Equipment, net .......................................... 9,029 11,259
--------- ---------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $1,821 and $2,444, respectively ............. 2,345 4,803
ACQUIRED SOFTWARE, net of accumulated amortization
of $643 and $1,610, respectively ............................ 4,178 3,211
INTANGIBLES, net of accumulated amortization
of $2,501 and $7,905, respectively .......................... 15,836 50,672
NON-MARKETABLE INVESTMENTS ..................................... 1,200 1,200
DEBT OFFERING COSTS AND OTHER ................................... 975 4,915
--------- ---------
$ 123,165 $ 263,607
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations ............. $ 513 $ 439
Line of credit .............................................. 2,585 2,500
Notes payable ............................................... 12,226 61
Accounts payable ............................................ 4,870 4,295
Accrued payroll and related ................................. 9,615 10,557
Accrued interest ............................................ 4,711 1,170
Other accrued liabilities ................................... 22,318 18,134
Deferred revenue ............................................ 15,662 13,509
Minority interest ........................................... 658 --
--------- ---------
Total current liabilities ............................ 73,158 50,665
CAPITAL LEASE OBLIGATIONS, less current portion ................. 432 583
NOTES PAYABLE ................................................... 14,156 19,186
CONVERTIBLE SUBORDINATED DEBENTURES ............................. -- 115,000
NET LIABILITIES OF DISCONTINUED OPERATIONS ...................... 10,921 9,157
--------- ---------
Total liabilities .................................... 98,667 194,591
--------- ---------
CONTINGENCIES (Note 14) ......................................... -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par, 50,000 shares authorized,
19,550 and 23,519 shares issued and outstanding, respectively 113 159
Additional paid-in capital .................................. 194,374 264,751
Deferred compensation ....................................... -- (3,940)
Unrealized loss on available-for-sale securities ............ -- (157)
Accumulated deficit ......................................... (169,989) (191,797)
--------- ---------
Total stockholders' equity ........................... 24,498 69,016
--------- ---------
$ 123,165 $ 263,607
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
12
<PAGE> 14
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
REVENUES:
Licenses ........................................ $ 61,464 $ 82,312 $ 117,822
Services ........................................ 39,612 57,574 90,728
--------- --------- ---------
Total revenues ........................... 101,076 139,886 208,550
--------- --------- ---------
OPERATING EXPENSES:
Cost of licenses ................................ 34,726 40,056 50,205
Cost of services ................................ 25,261 38,466 59,153
General and administration ...................... 25,248 31,436 33,016
Sales and marketing ............................. 12,928 14,197 19,677
Research and development ........................ 9,518 15,598 22,487
Amortization of intangibles ..................... 1,494 1,719 6,544
Acquisition costs ............................... -- 3,111 10,254
Non-recurring charges ........................... -- 4,705 4,202
Write-off of acquired research and
development in process ...................... -- 21,854 14,494
--------- --------- ---------
Total operating expenses ................. 109,175 171,142 220,032
--------- --------- ---------
LOSS FROM OPERATIONS ................................ (8,099) (31,256) (11,482)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ................................ (3,085) (1,479) (6,245)
Interest income ................................. 361 1,017 5,859
Other expense, net .............................. (1,221) (2,516) (212)
--------- --------- ---------
Total other expense, net ................. (3,945) (2,978) (598)
--------- --------- ---------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST ........................... (12,044) (34,234) (12,080)
PROVISION FOR INCOME TAXES .......................... 147 1,136 4,303
--------- --------- ---------
LOSS BEFORE MINORITY INTEREST ....................... (12,191) (35,370) (16,383)
--------- --------- ---------
MINORITY INTEREST IN LOSS ........................... -- 37 (379)
LOSS FROM CONTINUING OPERATIONS ..................... (12,191) (35,333) (16,762)
--------- --------- ---------
LOSS FROM DISCONTINUED OPERATIONS, NET .............. (32,090) (1,704) (1,999)
--------- --------- ---------
NET LOSS ............................................ (44,281) (37,037) (18,761)
========= ========= =========
DIVIDEND ACCRETION .................................. -- (348) (1,920)
========= ========= =========
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS ........... $ (44,281) $ (37,385) $ (20,681)
========= ========= ==========
BASIC AND DILUTED NET LOSS FROM CONTINUING
OPERATIONS ..................................... $ (1.17) $ (2.31) $ (0.74)
========= ========= =========
BASIC AND DILUTED NET LOSS FROM DISCONTINUED
OPERATIONS...................................... $ (3.07) $ (0.11) $ (0.09)
========= ========= =========
BASIC AND DILUTED LOSS FROM ACCRETION OF DIVIDENDS.. $ -- $ (0.02) $ (0.09)
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE AVAILABLE
TO COMMON STOCKHOLDERS.......................... $ (4.24) $ (2.44) $ (0.92)
========= ========= =========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC AND DILUTED ............................... 10,450 15,337 22,460
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
13
<PAGE> 15
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------------- -------------
(RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ............................. 912 $ 9 892 $ 9 8,877 $ 13
------ ------ ------ ------ ------ ------
Issuance of common stock ................................. -- -- -- -- 394 4
Conversion of notes payable to related parties to Series B
preferred stock at $5.25 per share, net of
issuance costs ....................................... -- -- 740 7 -- --
Contributed capital to pooled entities ................... -- -- -- -- -- --
Issuance of warrant to purchase common stock ............. -- -- -- -- -- --
Amortization of deferred compensation .................... -- -- -- -- -- --
Issuance of Series A preferred stock under exchange
agreement ............................................ 251 -- -- -- -- --
Repurchase of Series B preferred stock ................... -- -- (6) -- -- --
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 --
Issuance of common stock from initial public offering, net
of issuance costs .................................... -- -- -- -- 2,500 25
Net loss ................................................. -- -- -- -- -- --
------ ------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1996 ............................. -- -- -- -- 14,600 67
------ ------ ------ ------ ------ ------
Issuance of common stock in connection with the Synergy
acquisition .......................................... -- -- -- -- 182 2
Issuance of common stock in connection with Healthcare
Revenue Management, Inc. acquisition ................. -- -- -- -- 113 1
Amortization of deferred compensation .................... -- -- -- -- -- --
Capital contributed to pooled entities ................... -- -- -- -- -- --
Spin-off of subsidiary ................................... -- -- -- -- -- --
Dividend accretion ....................................... -- -- -- -- -- --
Issuance of common stock purchase warrants in connection
with the acquisition of Medicus Corporation .......... -- -- -- -- -- --
Conversion of notes payable to contributed capital ....... -- -- -- -- -- --
Conversion of notes payable to common stock -- -- -- -- 745 7
Issuance of common stock through Employee Stock
Purchase Plan ........................................ -- -- -- -- 14 --
Exercise of warrants to purchase common stock ............ -- -- -- -- 322 --
Exercise of common stock options ......................... -- -- -- -- 107 1
Issuance of common stock from public offering, net of
issuance costs ....................................... -- -- -- -- 3,467 35
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
AVAILABLE-
ADDITIONAL DEFERRED FOR-SALE
PAID IN CAPITAL COMPENSATION SECURITIES
--------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ................. $ 53,357 $ (430) $ --
--------- --------- ----------
Issuance of common stock ..................... 21,034 -- --
Conversion of notes payable to related parties
to Series B preferred stock at $5.25 per
share, net of issuance costs ............. 3,862 -- --
Contributed capital to pooled entities ....... 1,246 -- --
Issuance of warrant to purchase
common stock ............................. 381 (381) --
Amortization of deferred compensation ........ -- 108 --
Issuance of Series A preferred
stock under exchange agreement ........... -- -- --
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 ........................ 26,361 -- --
Net loss ..................................... -- -- --
--------- --------- -----
BALANCE AT DECEMBER 31, 1996 ................. 106,288 (703) --
--------- --------- -----
Issuance of common stock in
connection with the Synergy
acquisition .............................. 1,680 -- --
Issuance of common stock in
connection with Healthcare
Revenue Management, Inc. .................
acquisition .............................. 2,330 -- --
Amortization of deferred compensation ......... -- 703 --
Capital contributed to pooled entities ........ 251 -- --
Distributions by pooled entities .............. -- -- --
Spin-off of subsidiary ........................ -- -- --
Dividend accretion ............................ -- -- --
Issuance of common stock purchase
warrants in connection with
the acquisition of Medicus
Systems Corporation ....................... 700 -- --
Conversion of notes payable to
contributed capital ....................... 9,578 -- --
Conversion of notes payable to
common stock .............................. 15,643 -- --
Issuance of common stock through
Employee Stock Purchase Plan .............. 135 -- --
Exercise of warrants to purchase
common stock .............................. -- -- --
Exercise of common stock options .............. 476 -- --
Issuance of common stock from public
offering, net of issuance costs ........... 57,293 -- --
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
DEFICIT EQUITY (DEFICIT) LOSS
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
------------- ---------------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ................. $ (84,599) $ (31,641)
--------- ---------
Issuance of common stock ..................... -- 21,038
Conversion of notes payable to related parties
to Series B preferred stock at $5.25 per
share, net of issuance costs ............. -- 3,869
Contributed capital to pooled entities ....... -- 1,246
Issuance of warrant to purchase
common stock ............................. -- --
Amortization of deferred compensation ........ -- 108
Issuance of Series A preferred
stock under exchange agreement ........... -- --
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 loss ..................................... (44,281) (44,281) (44,281)
--------- --------- ---------
BALANCE AT DECEMBER 31, 1996 ................. (128,880) (23,228) (44,281)
--------- ---------
Issuance of common stock in
connection with the Synergy
acquisition .............................. -- 1,682
Issuance of common stock in
connection with Healthcare
Revenue Management, Inc. .................
acquisition .............................. -- 2,331
Amortization of deferred compensation ......... -- 703
Capital contributed to pooled entities ........ -- 251
Distributions by pooled entities .............. (40) (40)
Spin-off of subsidiary ........................ (3,684) (3,684)
Dividend accretion ............................ (348) (348)
Issuance of common stock purchase
warrants in connection with
the acquisition of Medicus
Systems Corporation ....................... -- 700
Conversion of notes payable to
contributed capital ....................... -- 9,578
Conversion of notes payable to
common stock .............................. -- 15,650
Issuance of common stock through
Employee Stock Purchase Plan .............. -- 135
Exercise of warrants to purchase
common stock .............................. -- --
Exercise of common stock options .............. -- 477
Issuance of common stock from public
offering, net of issuance costs ........... -- 57,328
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ ---------------------- ADDITIONAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID IN CAPITAL
------ -------- ------ -------- -------- -------- ---------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss .................................. -- -- -- -- -- -- --
---- -------- ---- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 ................ -- -- -- -- 19,550 113 194,374
---- -------- ---- -------- -------- -------- --------
Issuance of common stock and to record the
effect of an immaterial acquisition
accounted for on a pooling of
interests basis ...................... -- -- -- -- 507 5 212
Issuance of common stock in
connection with the InterLink
acquisition .......................... -- -- -- -- 65 1 1,467
Issuance of common stock in
connection with the Cabot Marsh
acquisition .......................... -- -- -- -- 384 4 8,417
Issuance of common stock in
connection with the Velox
acquisition .......................... -- -- -- -- 41 -- 1,372
Issuance of common stock in
connection with the Medicus
acquisition .......................... -- -- -- -- 892 15 24,518
Issuance of common stock through
Employee Stock Purchase Plan .......... -- -- -- -- 38 -- 467
Issuance of restricted shares of
common stock .......................... -- -- -- -- -- -- 3,940
Issuance of common stock .................. -- -- -- -- 769 8 8,465
Exercise of warrants to purchase
common stock .......................... -- -- -- -- 907 9 17,404
Exercise of common stock options .......... -- -- -- -- 366 4 4,115
Comprehensive Loss ........................ -- -- -- -- -- -- --
Dividend accretion ........................ -- -- -- -- -- -- --
Net loss .................................. -- -- -- -- -- -- --
---- -------- ---- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 ................ -- $ -- -- $ -- 23,519 $ 159 $264,751
==== ======== ==== ======== ======== ======== ========
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
AVAILABLE- TOTAL
DEFERRED FOR-SALE ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
COMPENSATION SECURITIES DEFICIT EQUITY (DEFICIT) LOSS
------------- ------------- ------------- --------------- -------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C> <C> <C>
Net loss ........................... -- -- (37,037) (37,037) (37,037)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ......... -- -- (169,989) 24,498 (37,037)
--------- --------- --------- --------- ---------
Issuance of common stock and to
record the effect of an
immaterial acquisition
accounted for on a pooling of
interests basis ............... -- -- (1,127) (910)
Issuance of common stock in
connection with the InterLink
acquisition ................... -- -- -- 1,468
Issuance of common stock in
connection with the Cabot Marsh
acquisition ................... -- -- -- 8,421
Issuance of common stock in
connection with the Velox
acquisition ................... -- -- -- 1,372
Issuance of common stock in
connection with the Medicus
acquisition ................... -- -- -- 24,533
Issuance of common stock through
Employee Stock Purchase Plan ... -- -- -- 467
Issuance of restricted shares
of common stock ................ (3,940) -- -- --
Issuance of common stock ........... -- -- -- 8,473
Exercise of warrants to purchase
common stock ................... -- -- -- 17,413
Exercise of common stock options ... -- -- -- 4,119
Comprehensive Loss ................. -- (157) -- (157) (157)
Dividend accretion ................. -- -- (1,920) (1,920)
Net loss ........................... -- -- (18,761) (18,761) (18,761)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 ......... $ (3,940) $ (157) $(191,797) $ 69,016 $ (18,918)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
17
<PAGE> 19
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $ (44,281) $ (37,037) $ (18,761)
Adjustments to reconcile net loss to net
Cash used for operating activities --
Depreciation and amortization ...................... 6,036 9,141 10,292
Amortization of deferred compensation .............. 108 703 --
Cash flows from discontinued operations ............ 13,671 847 (1,760)
Write-off of in-process research and development ... -- 21,854 14,494
Minority interest in net loss ...................... -- (37) 379
Changes in assets and liabilities, net of acquisitions--
Accounts receivable and unbilled receivables ......... (3,222) (5,769) (15,209)
Prepaid expenses and other ........................... 825 (1,869) 44
Accounts payable and accrued liabilities ............. 6,862 4,392 (13,694)
Deferred revenue ..................................... 4,870 322 (1,807)
--------- --------- ---------
Cash used for operating activities ............... (15,131) (7,453) (26,022)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Cabot Marsh,
net of cash acquired ................................. -- -- (2,748)
Cash paid for the acquisition of Velox,
net of cash acquired ................................. -- -- (3,121)
Cash paid for the acquisitions of other companies,
net of cash acquired ................................. -- (286) (6,832)
Cash paid for the acquisition of Synergy HMC,
net of cash acquired ................................. -- (2,776) --
Cash paid for the acquisition of Medicus
Systems Corporation, net of cash acquired ............ -- (21,454) --
Purchased technology ................................... -- (460) --
Purchase of available-for-sale securities, net.......... -- (1,032) (63,577)
Additions to equipment ................................. (4,136) (3,939) (7,630)
Purchase of non-marketable investments ................. -- (1,200) --
Issuance of notes receivable and other ................. -- -- (539)
Capitalization of computer software
development costs .................................. (793) (973) (3,098)
--------- --------- ---------
Cash used for investing activities .............. (4,929) (32,120) (87,545)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations ..... (177) (140) (2,331)
Borrowings (repayments) under notes and loans payable .. (16,918) 741 2,285
Issuance of convertible notes payable to related parties 3,869 -- --
Proceeds from the issuance of convertible
subordinated notes payable, net of offering costs .. -- -- 110,827
Distributions by pooled entities ....................... -- (40) (1,370)
Contributed capital to pooled entities ................. 1,246 -- --
Issuance of common stock, net of issuance costs ........ 47,558 57,691 6,530
Issuance of common stock through Employee
Stock Purchase Plan ................................ -- 135 467
Proceeds from exercise of common stock options and
warrants to purchase common stock .................. 100 477 14,864
--------- --------- ---------
Cash provided by financing activities ........... 35,678 58,864 131,272
--------- --------- ---------
Net increase in cash and cash equivalents .............. 15,618 19,291 17,705
CASH AND CASH EQUIVALENTS, beginning of period ............. 13,475 29,093 48,384
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period ................... $ 29,093 $ 48,384 $ 66,089
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest ................................. $ 2,803 $ 1,729 $ 7,993
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS:
Purchase of equipment subject to capital lease ......... 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 ............. 3,869 -- --
Conversion of notes payable and accrued interest to
related parties to contributed capital ............. -- 9,578 --
Conversion of convertible preferred stock to
common stock ....................................... 25 -- --
Issuance of common stock in connection with
the Cabot Marsh acquisition ........................ -- -- 8,400
Issuance of common stock in connection with the
Velox acquisition .................................. -- -- 1,500
Issuance of common stock in connection with the
InterLink acquisition .............................. -- -- 1,500
Conversion of subordinated notes payable to
common stock ....................................... -- -- 8,000
Issuance of common stock in connection with
the Synergy acquisition ............................ -- 2,000 --
Issuance of common stock in connection with
acquisition of Healthcare Revenue Management, Inc. . -- 2,300 --
Issuance of common stock warrants and common stock
in connection with acquisition of Medicus
Systems Corporation ................................ -- 700 24,533
Issuance of restricted common stock .................... $ -- $ -- $ 3,940
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE> 21
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 three operating segments 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 cash
flow management services.
The Company is subject to a number of risks, including, but not limited
to, its dependence on the hospital market, uncertainty in the health care
industry, risks associated with acquisitions (successful integration and
operation of new products, technologies or businesses), and its ability to
increase market share for its products from larger competitors. 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 subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
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. These investments have consisted of certificates of
deposit, money market accounts and commercial maturities of three months or
less.
Short and Long-Term Investments
The Company considers its short and long term securities to be
available-for-sale-securities and accordingly are stated at fair value. The
difference between amortized cost (cost adjusted for amortization of premiums
and accretion of discounts which are recognized as adjustments to interest
income) and fair value, representing unrealized holdings gains or losses, are
recorded as a separate component of stockholders' equity until realized. The
Company's policy is to record debt securities as available-for-sale because the
sale of such securities may be required prior to maturity. Any gains and losses
on the sale of debt securities are determined on a specific identification
basis. Realized gains and losses are included in interest income (expense) in
the accompanying statement of operations. There were no short or long term
investments during 1996. At December 31, 1997, the fair value of the investments
approximated amortized cost and, as such, gross unrealized holding gains and
losses were not material. At December 31, 1998, unrealized holding losses were
$157,000. The amortized cost, aggregate fair value and gross unrealized holding
gains and losses by major security type were as follows:
As of December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE
COST FAIR VALUE
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Debt securities issued by
the United States Government $ 408 $ 408
Corporate debt securities 624 624
------ ------
$1,032 $1,032
====== ======
</TABLE>
20
<PAGE> 22
As of December 31, 1998:
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON AVAILABLE-
AMORTIZED AGGREGATE FOR-SALE
COST FAIR VALUE SECURITIES
--------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term:
Debt securities issued by
the United States Government $ 8,996 $ 9,003 $ 7
Corporate debt securities 14,040 14,040 --
-------- -------- --------
$ 23,036 $ 23,043 $ 7
======== ======== ========
Long-term:
Debt securities issued by
the United States Government $ 22,157 $ 22,162 $ 5
Corporate debt securities 19,648 19,479 (169)
-------- -------- --------
$ 41,805 $ 41,641 $ (164)
======== ======== ========
Total Unrealized Loss $ (157)
========
</TABLE>
Comprehensive Income
In 1997, Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income," which was adopted by the Company in the first quarter of
1998. The Company has integrated the presentation of comprehensive income (loss)
with the Consolidated Financial Statements of Changes in Stockholders' Equity
(Deficit).
Non-Marketable Investments
In July 1997, the Company acquired an 11 percent equity interest in
VantageMed Corporation ("VantageMed"), a company that develops and sells
software to physician groups. The Company paid $1,200,000 for its equity
interest in VantageMed which is accounted for on the cost method. In addition,
the Company has provided VantageMed a revolving line of credit in the amount of
$500,000. The line of credit bears interest at a rate of 8% per annum and all
outstanding balances, including accrued interest, are due on December 31, 1998.
There were no outstanding borrowings at December 31, 1997. VantageMed borrowed
$500,000 against the line of credit during 1998. The $500,000 outstanding
balance under the line of credit was converted to an additional equity interest
subsequent to December 31, 1998. Subsequent to December 31, 1998, the Company
also acquired an additional $3,000,000 equity interest in VantageMed in exchange
for cash. In connection with these additional equity investments, the Company
owns 19 percent of the capital stock of VantageMed.
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. Leasehold improvements are amortized over the
term of the lease. Maintenance and repairs are expensed as incurred.
Software Development Costs
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 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
$793,000, $973,000 and $3,098,000 in 1996, 1997 and 1998, respectively.
Amortization of capitalized software development costs was $390,000, $388,000
and $590,000 for the years ended December 31, 1996, 1997 and 1998, 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.
21
<PAGE> 23
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 and health information management
outsourcing, cash flow management, compliance and consulting services.
The license product suite is comprised of three primary elements:
financial management, decision support compliance 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 licensed either under term
arrangements (which range from one year to three years and typically include
monthly or annual payments over the term of the arrangement) or on a perpetual
basis. Revenues from term licenses of financial management, decision support,
compliance and EDI products are recognized monthly or annually over the term of
the license arrangement, beginning at the date of installation. Revenues from
perpetual licenses of decision support, financial management, EDI and certain
compliance products are recognized upon shipment of the software if there is
persuasive evidence of an agreement, collection of the resulting receivable is
probable and the fee is fixed and determinable. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. Revenues from certain products, including
the Company's enterprise solutions are recognized on a percentage of completion
basis of accounting.
Other services are also provided to certain of the Company's licensees
of software products. These services consist primarily of consulting and
post-contract customer support. Consulting services generally consist of
installation of software at customer sites and revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
of revenue deferred under annual maintenance and annual license agreements on
which amounts have been received from customers and for which the earnings
process has not been completed. Deferred revenue also consists of undelivered
product and services yet to be performed as of year end. The Company expects to
recognize the revenues within one year.
The Company provides business office and health information management
outsourcing, cash flow management compliance and consulting services to
hospitals under contract service arrangements. Outsourcing revenues typically
consist of fixed monthly fees plus, in the case of business office outsourcing,
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. Cash flow management
services typically consist of fixed fee services and additional incentive
payments based on a certain percentage of revenue returns realized or estimated
to be 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 with the customer. Compliance and consulting revenues are recognized
as the services are provided.
Cost of license revenues consists primarily of salaries, benefits,
hardware costs and allocated costs related to the installation process and
customer support and royalties to third parties.
Cost of service revenues consists primarily of salaries, benefits and
allocated costs related to providing such services.
Major Customers
In the years ended December 31, 1996, 1997 and 1998, no single
customers accounted for more than 10% of total revenue.
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.
22
<PAGE> 24
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. The fair value of the Company's Convertible Subordinated
Debentures at December 31, 1998 was $97.8 million.
Intangibles
Intangibles include goodwill, which represents the amount of purchase
price in excess of the fair value of the tangible net assets, and acquired
software purchased in acquisitions completed by the Company and are amortized on
a straight-line basis over a period of five to ten years. Goodwill is evaluated
quarterly for impairment and written down to net realizable value if necessary.
Intangible assets also include acquired customer lists, tradenames and assembled
work forces which are amortized on a straight-line basis over a period of five
to ten years. During the quarter ended March 31, 1999, the Company recorded a
$10,600,000 charge for the write-down of certain intangible assets. The
intangible assets were associated with the Business Office Division, and were
related to the acquisitions of Synergy in 1997, InterLink, Velox and American
Hospital Directory in 1998. In accordance with SFAS #121, "Impairment of
Long-Lived Assets", projected cash flows from these product lines was not
sufficient to cover future amortization of the intangible assets and therefore
were written-down during the quarter ended March 31, 1999.
Intangible assets include the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
-------- --------
<S> <C> <C>
Customer lists $ 16,621 $ 20,951
Goodwill 241 35,285
Work force and trade names 1,475 2,341
-------- --------
18,337 58,577
Less: Accumulated amortization (2,501) (7,905)
-------- --------
$ 15,836 $ 50,672
======== ========
</TABLE>
Net Loss Per Share
Basic net income (loss) available to common stockholders per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted net income (loss) available to common stockholders per share
is computed using the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of stock
options and warrants (using the treasury stock method) and convertible
subordinated debentures (using the if converted method). Common equivalent
shares are excluded from the dilutive computation only if their effect is
anti-dilutive. As the Company recorded a net loss in each of three years in the
period ended December 31, 1998, no common equivalent shares are included in
diluted weighted average common shares outstanding.
Acquisition Costs
During 1998, the Company incurred $10,254,000 of acquisition costs
associated with the acquisitions of Pyramid, Codemaster and Integrated Medical
Networks, which were all accounted for on a pooling of interests basis.
Acquisition costs related to financial advisors hired by the Company and the
acquired companies, legal and accounting fees. During the fourth quarter ended
December 31, 1997, the Company completed two acquisitions which were accounted
for on a pooling of interests basis. In connection with these acquisitions, the
Company incurred and expensed $3,111,000 in acquisition and related costs. In
March 1999, the Company incurred $6.3 million of acquisition costs associated
with the acquisition of Compucare, which was accounted for on a pooling of
interests basis. Such costs were primarily for financial advisor fees of
approximately $5.4 million incurred by the Company and Compucare and to a
lesser extent, legal and accounting fees of approximately $900,000.
23
<PAGE> 25
Non-Recurring Charges
During 1997, the Company incurred certain non-recurring charges. In
February 1997, the Company entered into an arrangement to provide EDI processing
and management services to EDI USA, Inc. In connection with this claims
processing arrangement, and the termination thereof in December 1997, the
Company recorded a charge of $2,492,000. As a result of completed acquisitions
accounted for on a pooling of interest basis during 1997 and prior to 1997, the
Company recorded certain charges to write-off assets which were determined to
have no future realizable value. In connection with the Company's acquisition of
43.3% of Medicus in November 1997, the Company recorded a reserve in purchase
accounting to continue the plan of Medicus' management team to close its office
in Alameda, California. At December 31, 1997, the reserve for future rents for
its Alameda, California facility was $1,334,000.
Non-Recurring Charges
During 1998, the Company recorded $4,202,000 of non-recurring charges.
These charges primarily consisted of $3,020,000 of costs associated with closing
of a duplicative operating facility within the Company's business office
outsourcing operations. Such costs included future rents due for its Howell, New
Jersey office and lease obligations the Company is contractually obligated to
fulfill relating to furniture and equipment which was determined not to have any
future net realizable value. In addition, all of the employees, which
approximated 50, were involuntarily terminated during the third quarter ended
September 30, 1998 as part of the closing of this duplicative facility. In
addition, the Company also closed another smaller office for which the Company
accrued for future rent obligations during 1998. At December 31, 1998, there was
$1,579,000 accrued for future rents and lease obligations related to such
facilities.
During the first quarter of 1999, the Company recorded approximately
$18,800,000 of non-recurring charges. Those charges consisted of costs
associated with the closing of several duplicative operating facilities
primarily within the Company's Business Office Division and certain integration
costs related to prior acquisitions. The charge included approximately
$10,000,000 related to severance payments to employees ranging from several
weeks to two years in the case of certain management of Compucare. Such
severance payments are expected to be paid to involuntarily terminated employees
through August of 1999. In addition, the charge included $8,800,000 for future
rents and lease obligations the Company is obligated to fulfill as well as other
incremental costs to wind-down the operations of the offices. Future rents and
lease obligations are expected to be paid through July 2003. The following table
sets forth the Company's restructuring reserves and the activity against the
reserves (In thousands):
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS DECEMBER 31, COSTS MARCH 31,
DESCRIPTION 1997 AND EXPENSES PAYMENTS 1998 AND EXPENSES PAYMENTS 1999
----------- ---- ------------ -------- ---- ------------ -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Personnel costs ................... $ -- $ 820 $ (820) $ -- $10,000 $(1,200) $ 8,800
Rents and lease obligations ....... 1,334 1,260 (1,015) 1,579 3,282 (340) 4,521
Other incremental operating costs.. 940 (940) -- -- 5,470 (465) 5,005
------- ------- ------- ------- ------- ------- -------
Total Restructuring Accrual ..... $ 1,334 $ 3,020 $(2,775) $ 1,579 $18,752 $(2,005) $18,326
======= ======= ======= ======= ======= ======= =======
</TABLE>
Use of Estimates in Preparation of Financial Statements
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 to
disclose 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. Significant
estimates include the realizability of acquired intangible assets. Due to the
Company's large number of acquisitions generating these intangible assets, the
Company periodically evaluates the integration efforts related to these
acquisitions and the realizability of the related acquired intangible assets.
Reclassifications
Certain reclassifications have been made to the 1997 consolidated
financial statements to conform to the 1998 presentation.
24
<PAGE> 26
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. This Statement will not have a material impact on the financial condition
or results of the operations of the Company.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accounts (AICPA) issued Statement of
Position (SOP) 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
'Software Revenue Recognition,'" which defers for one year the application of
provisions in SOP 97-2 which limit what is considered vendor-specific objective
evidence of the fair value of the various elements in a multiple element
arrangement. All other provisions of SOP 97-2 remain in effect. This SOP was
effective as of March 31, 1998. In 1998, the AICPA issued SOP 98-9,
"Modification of SOP 97-2, 'Software Revenue Recognition,' With Respect to
Certain Transactions," which amends paragraphs 11 and 12 of SOP 97-2, Software
Revenue Recognition, to require recognition of revenue using the "residual value
method" under certain conditions. Effective December 15, 1998, SOP 98-9 amends
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, 'Software
Revenue Recognition,'" to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of this SOP are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not anticipate that these statements will have a material adverse
impact on its statement of operations.
In-Process Research and Development
In connection with the acquisition of 56.7% of the outstanding stock in
Medicus in November, 1997, the Company allocated $21.9 million related to
in-process research and development ("IPR&D")(see Note 12). This amount was
expensed as a non-recurring charge because the IPR&D projects identified had not
yet reached technological feasibility and had no alternative future use. The
amounts allocated to IPR&D for the year ended December 31, 1997, were evaluated
based on current industry practices.
In connection with the acquisitions of Velox, Cabot Marsh, the
remaining 43.3% interest in Medicus, and several other purchase business
combinations, the Company allocated $14.5 million to IPR&D for the year ended
December 31, 1998 (see Note 12). This amount was expensed as a non-recurring
charge because the IPR&D projects identified had not yet reached technological
feasibility and had no alternative future use. The following table depicts the
allocations to IPR&D for the year ended December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Velox $ 1,500
Cabot Marsh 4,200
Medicus (43.3%) 4,763
Other acquisitions 4,031
-------
Total $14,494
=======
</TABLE>
The allocations to IPR&D during the year ended December 31, 1998, were
evaluated based on the SEC's current views regarding valuation methodologies.
The value allocated to IPR&D was determined by estimating the costs to develop
the purchased technology into commercially viable products, estimating the
resulting net cash flows from each project, excluding the cash flows related to
the portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to develop
that project, the expected income stream, the life cycle of the product
ultimately developed, and the associated risks. In each case, the selection of
the applicable discount rate was based on consideration of the Company's
weighted average costs of capital, as well as other factors including the useful
life of each technology, profitability levels of each technology, the
uncertainty of technology advances that were known at the time, and the stage of
completion of each technology.
If the projects are not successfully developed, the sales and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets may be impaired. During the
first quarter of 1999, the Company determined that approximately $10.6 million
of intangibles had been impaired and such intangibles were written off.
Following is a discussion of the significant allocations to IPR&D during the
year ended December 31, 1998.
VELOX. At the acquisition date, Velox was conducting development,
engineering, and testing activities associated with SMARTLINK, a product which
focuses on accounts receivable analysis and reporting in hospitals, large
physician practices, and other entities. Upon completion, this product was
planned to have significant scalability, a multilayer architecture, and the
ability to address Windows NT 5.0 and the next generation of Microsoft SQL
Server. At the acquisition date, Velox was approximately 35% complete with the
development of this product. The Company anticipated that SMARTLINK would be
completed in the last half of 1998, after which the Company expected to begin
generating economic benefits from the value of the completed IPR&D.
Revenues attributable to SMARTLINK were estimated to be $1.3 million in
1998 and $5.0 million in 1999. IPR&D revenue, as a percentage of total projected
company revenue, was expected to peak in 1999 and decline thereafter as new
product technologies were expected to be introduced by the company. Operating
expenses (expressed as a percentage of revenue) average 79% over the projection
period. The costs to complete the IPR&D were expected to be $293,000 in 1998 and
$239,000 in 1999. A risk-adjusted discount rate of 20% was utilized to discount
projected cash flows.
CABOT MARSH. At the acquisition date, Cabot Marsh was conducting
development, engineering, and testing activities associated primarily with the
next generation of RAMS, a compliance product related to inpatient and
outpatient coding. At the acquisition date, Cabot Marsh was approximately 80%
complete with the development of the IPR&D. The Company anticipated that the
project would be completed in the second half of 1998, after which the Company
expected to begin generating economic benefits from the value of the completed
IPR&D.
25
<PAGE> 27
Revenues attributable to the next generation of RAMS were estimated to
be $807,000 in 1998 and $11.3 million in 1999. IPR&D revenue, as a percentage of
total projected company revenue, was expected to peak in 1999 and decline
thereafter as new product technologies were expected to be introduced by the
company. Operating expenses (expressed as a percentage of revenue) average 57%
over the projection period. The costs to complete the IPR&D efforts were
expected to be $140,000 in 1998 and $427,000 in 1999. A risk-adjusted discount
rate of 19% was utilized to discount projected cash flows.
MEDICUS. At the acquisition date, Medicus was conducting development,
engineering, and testing activities associated with the next generations of the
company's Clinical Data Systems ("CDS") and Patient Focused Systems ("PFS")
project lines. At the acquisition date, Medicus was approximately 30% and 60%
complete with CDS and PFS, respectively. The Company anticipated that CDS would
be completed at the end of 1998, with PFS scheduled for completion in mid-1999.
After these release dates, the Company expected to begin generating economic
benefits from the value of the completed IPR&D.
Revenues attributable to CDS were estimated to be $6.0 million in 1999
and $18.0 million in 2000. IPR&D revenue, as a percentage of total projected
product revenue, was expected to peak in 2000 and decline thereafter as new
product technologies were expected to be introduced by the company. Revenues
attributable to PFS were estimated to be $7.2 million in 2000 and $9.8 million
in 2001. IPR&D revenue, as a percentage of total projected product revenue, was
expected to peak in 2000 and decline thereafter as new technologies were
expected to be introduced by the company. For both projects, operating expenses
(expressed as a percentage of revenue) average 61% over the projection period.
The costs to complete the CDS IPR&D efforts were expected to be $14,000 in 1998
and $1.2 million in 1999. The costs to complete the PFS IPR&D efforts were
expected to be $6,000 in 1998 and $309,000 in 1999. For each of the projects, a
risk-adjusted discount rate of 18% was utilized to discount projected cash
flows.
Notes and other receivables
In December 1997, the Company entered into an agreement with Arcadian
Management Services, Inc. ("Arcadian") to develop a centralized business office
and to provide full business office outsourcing services for its managed
hospitals. In connection with this agreement, the Company purchased certain
accounts receivable from Chama Inc. ("Chama"), a customer of Arcadian, for the
purpose of increasing cash flow while the central business office was being
implemented. At December 31, 1998 approximately $2.2 million of these
receivables remained outstanding. The remaining balances are included in notes
and other receivables on the accompanying consolidated balance sheet. In October
1998, Chama filed for reorganization under Chapter 11. Prior to the filing, the
Company had perfected a security interest in the receivables purchased from
Chama and, pursuant to a court order, the receivables owned by the Company are
being segregated as they are collected. Management of the Company believes these
receivables are collectible.
Also included in notes and other receivables is accrued interest
receivable of approximately $1.3 million related to the Company's marketable
investments. Accrued interest on these investments is paid to the Company
periodically on specified dates depending on the investment instrument. As
discussed in Note 2, "Non-Marketable Investments", the Company has provided a
$500,000 line of credit to VantageMed. Outstanding balances due the Company
under the line of credit were $500,000 at December 31, 1998. The $500,000
outstanding balance under the line of credit was converted to additional equity
interest subsequent to December 31, 1998.
3. LINE OF CREDIT GUARANTEE
In September 1998, the Company entered into an arrangement to guarantee
a line of credit of another company for up to $12,500,000. Outstanding balances
under the line of credit accrue interest at 8.5 percent and are due in October
2001. The Company has also entered into a reseller agreement with the same
company. Under the terms of the reseller agreement, the Company has a
non-exclusive license to resell the company's software. This reseller agreement
remains in effect for an initial term of three years, expiring in September
2001, and thereafter is subject to renewal for additional one year terms.
4. LINE OF CREDIT AND NOTES PAYABLE
The Company's notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
-------- --------
<S> <C> <C>
Notes payable to Director and Stockholder of Medicus Systems Corporation,
unsecured, bearing interest at 5 percent, due January 5, 1998
Repaid in full in January 1998 ................................................. $ 1,620 $ --
Notes payable to Stockholder of
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C> <C>
Integrated Medical Networks, Inc., bearing
interest at 7.875% percent, due January 4, 2000 ................................ 12,671 19,184
Convertible subordinated notes, bearing interest at 10
percent, converted to shares of common stock in 1998 ........................... 8,000 --
Subordinated notes, bearing interest at 15
percent, due and repaid in full in June 1998 ................................... 750 --
Term note payable to former Antrim stockholders, principal and interest
payable in annual installments beginning October 31, 1996; interest at 7% ...... 1,750 --
Term note payable to former Antrim stockholders, principal and
interest due and payable on October 31, 1997; interest at 10% .................. 835 --
Miscellaneous notes payable .................................................... 756 63
-------- --------
26,382 19,247
-------- --------
Less: Current portion ............................................... (12,226) (61)
-------- --------
$ 14,156 $ 19,186
======== ========
</TABLE>
During 1996 and 1997, certain stockholders of Compucare loaned
Compucare $8.0 million and $1.8 million, respectively, in exchange for notes
bearing interest at 25%. As discussed in Note 7, in October 1997 these notes and
associated accrued interest were converted to preferred stock in Compucare
valued at $15.1 million.
During 1997, Rothenberg Health Systems, Inc. (see Note 12) converted
certain promissory ($5,000,000) and junior promissory ($3,700,000) notes
aggregating $8,700,000, along with accrued interest of $878,000 to contributed
capital.
During 1998, Pyramid Health Group, Inc. (see Note 12) converted certain
subordinated notes ($8,000,000) to common stock in connection with the
acquisition by the Company. Accrued interest of $4.5 million relating to the
subordinated notes was repaid by the Company during 1998.
In April 1998, the Company completed an offering of $115 million
principal amount of Convertible Subordinated Debentures, including the
underwriters' over-allotment option. The debentures are due May 1, 2005 and bear
interest at 5.25 percent per annum. The Debentures are convertible into common
stock at any time prior to the redemption or final maturity, initially at the
conversion price of $33.25 per share (resulting in an initial conversion ratio
of 30.075 shares per $1,000 principal amount). Net proceeds to the Company from
the offering were $110,827,000.
The Company is party to a $7,000,000 revolving credit and security
agreement with its bank. Borrowing under this credit facility may not exceed 85%
of eligible billed receivables plus 50% of eligible unbilled receivables. The
Company pays interest at a rate of prime + 1.5% (or 9.25% at December 31, 1998,
weighted average of 9.86% for 1998) on the outstanding borrowings. The Company
had $2,585,000 and $2,500,000 in borrowings at December 31, 1997, and 1998,
respectively. The line of credit was repaid and terminated by the Company in
March 1999. The Company had $700,000 and $1,000,000 letters of credit under this
agreement at December 31, 1997, and 1998, respectively.
5. 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 at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999 ..................................... $ 560 $ 7,350
2000 ..................................... 402 6,873
2001 ..................................... 158 5,070
2002 ..................................... 103 2,937
2003 ..................................... 12 1,916
Thereafter ............................... -- 3,379
------- -------
Total minimum payments .............. 1,235 $27,525
=======
Interest on capital lease obligations at a
rate of 8.5 percent ...................... (213)
-------
Net minimum principal payments ........... 1,022
Current maturities ....................... (439)
-------
$ 583
=======
</TABLE>
Rental expense was approximately $4,260,000, $4,958,000 and $4,941,000
for fiscal 1996, 1997 and 1998, respectively.
6. BRIDGE FINANCING
In January 1996, the Company entered into a bridge loan agreement with
certain preferred 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
27
<PAGE> 29
share. The warrants were partially exercised into 240,960 and 430,705 shares of
Common Stock during 1997 and 1998, respectively. The remaining 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 7 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, which was acquired by the Company
in December 1995.
7. CONVERTIBLE PREFERRED STOCK
Upon the Company's initial public offering in 1996, all outstanding
shares of Convertible Preferred Stock were converted into Common Stock.
In June 1996, 6,400 shares of Series B Preferred Stock were returned to
the Company in exchange for the extinguishment of a shareholder receivable for
approximately $53,000.
In March 1999, the Company acquired Compucare in a pooling of
interests. During 1997 and 1998 Compucare issued preferred stock, some of which
gave rise to dividend accretions in 1997 and 1998, as reflected in the financial
statements. The 1997 preferred issuance consisted of an exchange of preferred
shares with a value of approximately $15.1 million for debt and associated
accrued interest with a book value of approximately $11.8 million, resulting in
a charge of approximately $3.3 million to interest expense in the 1997
consolidated statement of operations. For presentation purposes on a pooled
basis, Compucare's preferred stock issuances have been presented as common stock
issuances for all periods.
Exchange Agreements
As part of its original capitalization, the Company entered into an
agreement with its original three investors, whereby the original investors had
the right to exchange the investors' Common Stock of THCS Holding, Inc. 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. These warrants were partially exercised into 5,313 shares of Common Stock
during 1997. The remaining 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.
In connection with a line of credit arrangement the Company entered
into during 1996, which has since expired, the Company issued a warrant to
purchase common stock. The warrant was exercised into 7,663 shares of common
stock during 1998.
In connection with the acquisition of the minority interest in Medicus
in May 1998, a former officer and director of Medicus exercised a warrant to
purchase 67,503 shares of common stock of the Company.
In addition, Medicus issued a warrant to purchase 100,000 shares of
common stock to an unaffiliated entity at $7.80 per share. The warrant is
exercisable anytime prior to March 1999. In connection with the acquisition of
the remaining 43.3 percent minority interest in Medicus in May 1998, the warrant
was exercised into 100,000 shares of common stock of the Company.
In connection with the Compucare acquisition in March 1999, the
Company assumed 124,030 warrants to purchase common stock, expiring at various
dates through 2006.
8. COMMON STOCK
In September 1994, the Company entered into consulting arrangements
with two individuals pursuant to which each individual was issued warrants to
purchase 17,000 shares of Common Stock at a purchase price of $4.79 per share.
These warrants were exercised for shares of Common Stock during 1997.
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 was partially exercised for 18,984 shares of Common Stock
during 1997. The remaining warrants expire on June 25, 2001.
In December 1995, the Company issued a warrant to KTU, an affiliate of
the Company's 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
Company's Chief Executive Officer transferred the warrant to Trigon Resources
Corporation, a corporation owned by him and his children.
In September 1995 and June 1996, the Company issued warrants to its
Chief Executive Officer to purchase up to 355,600 shares 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 which would be amortized over the vesting
period.
28
<PAGE> 30
The Company recorded compensation expense of $45,000 and $336,000 for the years
ended December 31, 1996 and 1997, respectively, as a result of the vesting of
the warrants. As of December 31, 1997, these warrants were fully exercisable.
In connection with the acquisition of Rothenberg Health Systems, Inc.
by Resource Health Partners, L.P. ("RHP") in November 1995 (see Note 12), RHP
granted Class C limited partnership units in RHP to certain officers and
employees of Rothenberg Health Systems, Inc. These units, which were valued at
$440,000, vest over a period of seven years. The related agreements also contain
provisions for accelerated vesting should there be a sale of all or
substantially all of the assets of Rothenberg Health Systems, Inc. With respect
to shares granted to employees who were not shareholders of Rothenberg Health
Systems, Inc. at the date of the acquisition, the Company recorded deferred
compensation expense as a component of stockholders' equity, which was being
amortized ratably over the seven year vesting period. In connection with the
acquisition of Rothenberg Health Systems, Inc., the Company amortized the
remaining deferred compensation during 1997.
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. Rights to purchase 55,786 shares were exercised in 1996. The
right to purchase the remaining 17,547 shares has expired.
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 October 1997, the Company completed a follow-on offering of
3,300,000 shares of common stock, of which 2,972,198 shares were offered by the
Company and 327,802 shares were offered by selling stockholders. In addition,
the underwriters exercised an over-allotment option to purchase an additional
495,000 shares. Total proceeds to the Company were $57,328,000 net of offering
costs and the underwriters' discount of $4,083,000.
In 1998, the Board of Directors and Stockholders of the Company
approved to increase the authorized shares of common stock from 20,000,000 to
50,000,000. In June 1996, the Company effected a l-for-25 reverse stock split.
The accompanying financial statements have been restated to reflect this
increase in authorized shares and the reverse stock split.
In November 1998, the Company issued 237,000 shares of restricted
common stock with a fair market value of $16.625 to certain officers of the
Company. In connection with the common stock issuance, the Company recorded
deferred compensation for $3,940,000, representing the intrinsic value of the
restricted common stock at the date of issuance which will be amortized over the
vesting period of five years.
9. STOCK OPTION AND PURCHASE PLANS
Stock Option Plans
1986 Stock Option Plan
Under the Pyramid Health Group, Inc. ("Pyramid") 1986 Employee Stock
Plan ("the 1986 Plan"), options could be granted to key employees, directors and
consultants. The 1986 Plan provided for the issuance of Nonqualified Stock
Options only. The options, option prices, dates of grant and number of shares
granted were determined by the Board of Directors, although options could not be
granted at prices less than 85 percent of the fair market value of the Company's
common stock. Options vested 26 percent at the first year anniversary of the
date of grant and 2% each month thereafter. Options under the 1986 Plan expire
five years from the date of grant. The 1986 Plan was terminated on March 31,
1997.
1997 Stock Option Plans
In 1997, Pyramid adopted the 1997 Stock Option Plan ("the 1997 Plan")
whereby options may be granted to employees, directors and consultants. The 1997
Plan is administered by the Board of Directors or a committee thereof. The 1997
Plan provides for the issuance of incentive stock options to employees and
nonqualified stock options to employees and consultants. A total of 325,228
shares have been reserved for issuance under the 1997 Plan. The 1997 Plan
expires on March 31, 2007, unless terminated earlier by the Board of Directors.
The exercise price of all incentive stock options granted to employees who would
be 10 percent shareholders in the Company must not be less than 110 percent of
the fair market value of the shares on the grant date. If granted to any other
employee, the exercise price of the incentive stock options must not be less
than the fair market value of the shares on the grant date.
29
<PAGE> 31
The exercise price for nonqualified stock options to a person who is a 10
percent shareholder of the Company must not be less than 110 percent of the fair
market value of the stock on the date of grant. The exercise price for
nonqualified stock options to any other person must not be less than 85 percent
of the fair market value of the shares on the date of grant. The options are
generally granted for a ten-year term. Options vest 20 percent at the first
anniversary of the date of grant and 1.67 percent each month thereafter. No
shares were exercisable under the 1997 Plan at December 31, 1997. There were
308,362 shares available for grant under the 1997 Plan at December 31, 1997. The
1997 Plan has been merged into the Company's Option Plan during 1998.
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, 1998, a
total of 3,085,463 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 plans. Had compensation cost for the Company's option
plans been determined based on the fair value at the grant dates for the awards
calculated in accordance with the method prescribed by SFAS No. 123, the
Company's net loss and net loss per share would have been the pro forma amounts
indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss available to common stockholders..... As reported $ (44,281) $ (37,385) $ (20,681)
Pro forma $ (44,861) $ (38,607) $ (32,059)
Basic and diluted net loss
per share .................................. As reported $ (3.68) $ (2.23) $ (0.91)
Pro forma $ (3.73) $ (2.30) $ (1.42)
</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 as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Expected dividend yield ....... 0.0% 0.0%
Expected stock price volatility 73.0% 77.5%
Risk-free interest rate ....... 5.50%-5.54% 4.74%
Expected life of options ...... 4.5 years 6.82 years
</TABLE>
The weighted average fair value of options granted during 1996, 1997,
and 1998 was $8.41, $11.71 and $20.54 per share, respectively. Option activity
under the option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Balance, December 31, 1995 654 $ 2.88
Authorized ........... -- --
Granted .............. 415 8.41
Exercised ............ (63) 2.13
Canceled ............. (103) 3.80
------ ------
Balance, December 31, 1996 903 9.88
------ ------
Authorized ........... -- --
Granted .............. 1,952 11.71
Exercised ............ (115) 3.87
Canceled ............. (365) 11.22
------ ------
Balance, December 31, 1997 2,375 10.08
------ ------
Authorized ........... -- --
Granted .............. 1,610 20.54
Exercised ............ (366) 11.78
Canceled ............. (164) 14.25
------ ------
Balance, December 31, 1998 3,455 $15.46
====== ======
</TABLE>
30
<PAGE> 32
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------- --------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICES 12/31/98 CONTRACTUAL LIFE PRICE 12/31/98 PRICE
- -------------------- ----------- ---------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 - $5.71 623,230 7.65 $ 4.31 569,962 $ 4.43
$7.50 - $9.13 645,443 7.79 $ 8.64 315,455 $ 8.52
$9.63 - $11.50 495,026 7.18 $ 10.90 230,715 $ 11.08
$11.56 - $16.63 251,267 4.88 $ 16.04 105,155 $ 14.22
$16.84 - $21.34 246,406 6.80 $ 18.65 213,692 $ 18.63
$22.38 - $22.38 416,650 7.37 $ 22.38 0 $ 0.00
$22.81 - $25.81 422,789 9.47 $ 23.91 34,375 $ 25.18
$26.26 -.$27.97 195,073 8.66 $ 27.65 25,073 $ 26.26
$33.37 - $33.37 8,910 5.81 $ 33.37 8,910 $ 33.37
$39.16 - $39.16 150,000 9.09 $ 39.16 0 $ 0.00
--------------- --------- --------- --------- --------- ---------
$ 0.11 - $39.16 3,454,794 7.47 $ 15.46 1,503,337 $ 10.02
=============== ========= ========= ========= ========= =========
</TABLE>
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 designate up to 10% of their
compensation for the purchase of stock. The purchase price is 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. During the years ended December 31,
1997 and 1998, 13,580 and 37,310 shares of common stock were issued under the
plan for an aggregate purchase price of $135,000 and $467,000, respectively.
10. RELATED PARTY TRANSACTIONS
The Company, through the acquisition of Rothenberg Health Systems,
Inc., assumed a long-term agreement expiring in 2010 to provide management
services to Physical Therapy Provider Network, Inc. ("PTPN"), an affiliated
entity. Under the terms of the agreement, the Company provides PTPN with
management services, employees and facilities and incurs other operating costs
on behalf of PTPN. All employee, facility and other operating costs are directly
reimbursed by PTPN. The Company also receives a 50 percent share of PTPN's net
income before taxes, which is shown in other income (expense) in the statement
of operations. Direct costs incurred by the Company and reimbursed by PTPN were
$879,000, $965,000 and $988,000 in 1996, 1997 and 1998, respectively.
11. 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 a four-year
vesting period. There were no contributions made to the Plan in 1996 and $72,000
and $194,000 was contributed by the Company in 1997 and 1998, respectively.
In connection with the acquisition of Compucare in March 1999, the
Company assumed Compucare's 401(k) Savings Plan (the "Compucare Plan") which
covers substantially all employees of Compucare. Pursuant to the Compucare Plan,
participants may contribute up to 15% of their annual compensation, which is
generally matched at a rate of 50% of the first 4% of employee contributions.
Participants are immediately vested in their voluntary contributions plus
earnings thereon and vest ratably over three years in employer contributions.
Included in general and administrative expenses are matching contributions
totaling $266,000, $264,000 and $261,000 for the years ended December 31, 1996,
1997, and 1998, respectively.
In connection with the acquisition of Rothenberg Health Systems, Inc.
in December 1997, the Company assumed Rothenberg's 401(k) Savings Plan (the
"Rothenberg Plan"). Pursuant to the Rothenberg Plan, employees may elect to
defer up to 10 percent of their pre-tax compensation to the Plan. The Company
may make matching contributions up to 25 percent of the employees' contribution.
For the years ended December 31, 1996 and 1997, the Company made contributions
of $36,000 and $72,000, respectively. Employees vest in company contributions
based on their years of service. Partial vesting begins after two years of
continuous employment. In addition, the Company, at its discretion, contributes
amounts to a profit sharing pool. These amounts are allocated to the accounts of
eligible employees principally based on the proportion that each eligible
employee's compensation bears to the total compensation of
31
<PAGE> 33
all eligible employees. The contribution is determined yearly by the Board of
Directors of Rothenberg based on its performance and profitability. The Company
accrued contributions to the profit sharing pool of $75,000 and $126,000 for the
years ended December 31, 1996 and 1997, respectively. Twenty percent of the
amount allocated to an employee for a given year vests immediately if the
employee has two years of service with the Company or, if the employee does not
have two years of service, after two years of service with the Company. The
remaining amount allocated vests at a rate of 20 percent for each additional
year so that the Company's contributions are fully vested four years after the
date of vesting of the first 20 percent. Notwithstanding the foregoing, the
Company's contributions immediately vest when the employee reaches age 65 or
upon the death or permanent disability of the employee while employed. The
Company plans to transition the Rothenberg Plan into the Company's Plan during
1998.
As a result of the acquisition of 56.7 percent of Medicus Systems
Corporation in November 1997, eligible employees of that Company may participate
in Medicus' 401(k) Savings Plan (the "Medicus Plan"). The Medicus Plan has
substantially the same terms and conditions as the Company's Plan. The Medicus
Plan was transitioned into the Company's Plan during 1998.
12. ACQUISITIONS
In December 1996, the Company acquired all of the outstanding capital
stock of InterMed Healthcare Systems Inc. ("InterMed") for 291,079 shares of
Common Stock and options to purchase 25,208 shares of Common Stock. 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
$1,100,000 were repaid by the Company in December 1996.
In April 1997, the Company acquired Healthcare Recovery, Inc., a
successor in interest to the Synergy Companies doing business as Synergy HMC.
The aggregate purchase price was $3,400,000, consisting of $1,400,000 in cash
and 181,855 shares of Common Stock (the aggregate fair market value of which was
$2,000,000). The Company also repaid $1,700,000 in indebtedness of Synergy HMC.
In connection with the acquisition, the Company recorded $4,900,000 of
intangibles, which primarily included customer lists that are being amortized
ratably over a seven year period.
In September 1997, the Company completed the acquisition of Healthcare
Revenue Management, Inc. ("HRM") for consideration consisting of 112,706 shares
of Common Stock (the aggregate fair market value of which was $2,300,000) and
$200,000 in cash. The acquisition was accounted for as a purchase. Additionally,
an intangible for customer lists was recorded in the amount of $3,100,000 and
will be amortized ratably over a ten year period.
In November 1997, Pyramid acquired all the outstanding capital stock of
Microport Applications, Inc. ("Microport") in exchange for shares of common
stock. The acquisition was accounted for as a purchase. In connection with this
acquisition, Pyramid recorded intangible assets of approximately $300,000.
In December 1997, the Company acquired all of the outstanding capital
stock of Fleming SoftLink Systems, Inc. ("SoftLink") in exchange for 110,857
shares of Common Stock, of which 11,086 shares of Common Stock were placed into
escrow for a period of one year under the terms and conditions of the
acquisition agreement. The acquisition was accounted for as a pooling of
interests. Upon closing of acquisition, the assets and liabilities of SoftLink
were recorded at net book value and consisted primarily of accounts receivable,
accrued liabilities and, to a lesser extent, deferred revenue. The accompanying
consolidated financial statements have been restated to reflect the acquisition
of SoftLink on a pooling of interests basis.
In December 1997, the Company acquired all of assets and assumed all of
the liabilities of RHP, and acquired and merged with its two wholly owned
subsidiaries Resource Holdings, Ltd. ("RHL") and FRA Acquisitions Inc. ("FRA")
(collectively doing business as "Rothenberg Health Systems, Inc."). The mergers
were completed pursuant to an Acquisition Agreement and Plan of Merger (the
"Acquisition Agreement"). The Company issued 1,588,701 shares of its Common
Stock, of which 155,014 were placed into escrow for a period of one year under
the terms and conditions of the Acquisition Agreement, in exchange for all of
the capital stock of RHL and FRA. The acquisition was accounted for as a pooling
of interests. The accompanying consolidated financial statements have been
restated to reflect the acquisition of RHL and FRA on a pooling of interests
basis. Upon closing of the acquisition, the assets and liabilities of Rothenberg
Health Systems, Inc. were recorded at net book value and consisted primarily of
cash, accounts receivable and accrued liabilities.
32
<PAGE> 34
Prior to the merger with the Company, in November 1995, FRA and RHP
acquired 100 percent of the outstanding shares of Rothenberg Health Systems,
Inc. ("Rothenberg") for consideration that consisted of short-term notes payable
of $9,600,000 due, and paid, in January 1996 and partnership interests in RHP.
The estimated fair value of the partnership interests was $2,200,000. Following
the acquisition of Rothenberg, all shares of Rothenberg owned by RHP were
contributed to FRA, resulting in FRA owning 100 percent of the outstanding
shares of Rothenberg. The acquisition was accounted for as a purchase.
Accordingly, the purchase price was allocated based upon the estimated fair
value of the assets acquired and liabilities assumed. The purchase price
allocated to in-process research and development was $8,600,000 and was charged
to expense in the year ended December 31, 1995.
In November 1997, the Company acquired 3,111,105 shares of Common Stock
of Medicus Systems Corporation ("Medicus") or 56.7 percent of the then issued
and outstanding shares of Medicus Common Stock from certain selling
stockholders. Pursuant to individual stock purchase agreements (the "Stock
Purchase Agreements"), the Company agreed to pay the selling stockholders $7.50
per share, in cash and a note payable, together with a warrant ("Warrant")
entitling the selling stockholders to acquire 0.3125 shares of QuadraMed Common
Stock for each share of Medicus Common Stock sold at a price of $24 per share
subject to adjustments and certain limitations. The consideration paid by the
Company to selling stockholders in November 1997 was approximately $21,700,000
in cash and a note payable for approximately $1,600,000 to a selling stockholder
which was due and repaid by the Company in January 1998, plus Warrants to
purchase an aggregate of 972,220 shares of QuadraMed Common Stock at $24 per
share.
The Company's purchase price for the 56.7 percent interest in Medicus
which it acquired was approximately $26.3 million, which was comprised of a cash
payment of $21.7 million, the issuance of a note payable for approximately $1.6
million to one selling stockholder, the value of warrants issued to the selling
stockholders of $700,000, and transaction costs of $2.3 million. 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
Company's proportionate share of the assets acquired and liabilities assumed.
Intangible assets acquired aggregated to $30.2 million, of which $1.7 million,
$6.7 million and $21.8 million were assigned to acquired software, acquired
intangible assets, 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 research and development in-process was charged
to expense by the Company in the year ended December 31, 1997. The Company's
proportionate share of net tangible liabilities assumed in the acquisition
totaled approximately $12.8 million.
Minority interest as of December 31, 1997 of $658,000 represents the
remaining 43.3 percent interest in the net assets and liabilities of Medicus
attributable to the minority stockholders. The Company completed the merger with
Medicus in the second quarter of 1998. Accordingly, the minority interest was
classified as a current liability in the accompanying December 31, 1997
consolidated balance sheet.
In May 1998, the Company completed its acquisition of Medicus by
purchasing the remaining 43.3% interest in Medicus. The Company allocated the
remaining 43.3% purchase price based on the estimated fair value of the assets
and liabilities assumed. Approximately $4.8 million of the total intangibles was
assigned to acquired in-process research and development. The remaining
intangible balance will be amortized over a 7 year average period.
In January 1998, the Company acquired entities affiliated with
InterLink Corporation for an aggregate purchase price of 65,224 shares of the
Company's common stock, the aggregate fair market value of which was $1.5
million and approximately $1.7 million in cash and the extinguishment of notes
receivable. In connection with this acquisition, which was accounted for as a
purchase, the Company allocated the purchase price based upon the estimated fair
value of the assets and liabilities assumed. Approximately $1.3 million of the
total intangibles was assigned to acquired in-process research and development.
The remaining balance will be written-off over a ten year period.
In February 1998, the Company acquired Cabot Marsh Corporation for an
aggregate purchase price of 382,767 shares of the Company's common stock, the
market value of which was approximately $8.4 million and approximately $2.8
million in cash. In connection with this acquisition, which was accounted for as
a purchase, the Company allocated the purchase price based upon the estimated
fair value of the assets and liabilities assumed. Approximately $4.2 million of
total intangibles was assigned to acquired in-process research and development.
The remaining intangible balance will be amortized over a ten year average
period.
In March 1998, the Company acquired Velox Systems Corporation ("Velox")
for an aggregate purchase price of 40,562 shares of the Company's common stock,
the market value of which was approximately $1.4 million and approximately $3.1
million in cash. In connection with this acquisition, which was accounted for as
a purchase, the Company allocated the purchase price based upon the
33
<PAGE> 35
estimated fair value of the assets and liabilities assumed. Approximately $1.5
million of the total intangibles was assigned to acquired in-process research
and development. The remaining intangible balance will be amortized over a 7
year average period.
In June 1998, the Company acquired all of the outstanding capital stock
of Pyramid Health Group, Inc. ("Pyramid") in exchange for 2,740,000 shares of
common stock of which 274,000 shares of common stock have been placed in escrow
for a period of one year under the terms and conditions of the acquisition
agreement. The acquisition was accounted for on a pooling of interests basis.
The accompanying consolidated financial statements have been restated to reflect
the acquisition of Pyramid on a pooling of interest basis.
In September 1998, the Company acquired all the outstanding capital
stock of Integrated Medical Networks, Inc. ("IMN") in exchange for 1,550,000
shares of common stock. The acquisition was accounted for on a pooling of
interests basis. The accompanying consolidated financial statements have been
restated to reflect the acquisition of IMN on a pooling of interests basis.
In 1998, the Company acquired all of the outstanding capital stock of
another healthcare company, in exchange for 507,000 shares of common stock of
the Company. The acquisition was accounted for on a pooling of interests basis,
but was not material to restate the consolidated financial statements.
In March 1999, the Company completed the acquisition of the Compucare
Company ("Compucare") by acquiring all the outstanding capital stock of
Compucare in exchange for 2,957,000 shares of common stock. The acquisition was
accounted for on a pooling of interests basis. The accompanying consolidated
financial statements have been restated to reflect the acquisition of Compucare
on a pooling of interests basis.
A reconciliation of the current consolidated financial statements with
previously reported separate Company information for entities with which the
Company has pooled is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
QuadraMed $ 19,088 $ 34,764 $ 88,226
Rothenberg and Softlink 10,043 12,483 --
Pyramid and IMN 45,138 54,699 77,157
Compucare 26,807 37,940 43,167
--------- --------- ---------
Consolidated $ 101,076 $ 139,886 $ 208,550
========= ========= =========
Net income (loss):
QuadraMed $ 153 $ (22,002) $ (16,501)
Rothenberg and Softlink (1,111) (4,437) --
Pyramid and IMN (3,366) (8,304) (3,078)
Compucare (39,957) (2,642) (1,102)
--------- --------- ---------
Consolidated $ (44,281) $ (37,385) $ (20,681)
========= ========= =========
</TABLE>
The unaudited pro forma results of operations of the Company, Synergy
HMC, HRM and Medicus for the year ended December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
Revenues $ 159,202
Net loss $ (23,182)
Basic and diluted net loss per share $ (1.38)
</TABLE>
The unaudited pro forma results of operations of the Company, Cabot
Marsh and Velox for the year ended December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
Revenues $ 210,303
Net loss $ (12,326)
Basic and diluted net loss per share $ (0.55)
</TABLE>
34
<PAGE> 36
13. DISCONTINUED OPERATIONS
In March 1997, Pyramid, a subsidiary acquired in a pooling of interest
basis, spun-off a subsidiary to its stockholders by distributing all of the
subsidiary's capital stock in the form of a one-for-one stock dividend. To
reflect this distribution, the $3,684,000 fair value of the net assets of the
discontinued operations was charged against the Company's accumulated deficit
and has been reflected as a discontinued operation in the accompanying
consolidated financial statements.
In November of 1996, Compucare, a subsidiary acquired by the Company in
March 1999 and accounted for on a pooling of interests basis, consummated the
sale of Antrim Corporation (Antrim), a wholly-owned subsidiary of the Company.
In December of 1996 the Company announced it was evaluating a plan to "spin-off"
or sell the operations of Health Systems Integration, Inc. (HSII), a wholly-
owned subsidiary of the Company. The Company completed transactions related to
the sale of HSII's intellectual property and the majority of its customer base
in December 1997. The Company incurred additional costs in 1998 related to
legal costs and other contingencies related to both Antrim and HSII.
The results of operations for the three year period ended December 31,
1998 presents HSII and Antrim as discontinued operations, and only the
healthcare provider focused operations of the Company are reflected as
continuing operations. The assets and liabilities relating to the discontinued
operations have been segregated on each of the aforementioned balance sheets.
Condensed and summarized balance sheet and statement of operations data
for the discontinued operations of Antrim and HSII is summarized as follows
(Note that the December 31, 1997 summarized balance sheet information does not
include Antrim information due to the sales transaction of November 26, 1996 as
noted above):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 115,000 $ --
Accounts receivable 1,565,000 --
Other current assets 350,000 206,000
----------- -----------
Total current assets 2,030,000 206,000
Property and equipment, net 519,000 --
Other and intangible assets, net 25,000 --
----------- -----------
Total assets 2,574,000 206,000
Liabilities:
Current liabilities 11,336,000 7,363,000
Non-current liabilities 2,159,000 2,000,000
----------- -----------
Total liabilities 13,495,000 8,463,000
=========== ===========
Net liabilities of discontinued operations $10,921,000 $ 9,157,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 38,743,000 $ 22,726,000 $ 3,107,000
Costs and expenses 69,459,000 24,548,000 5,106,000
------------ ------------ ------------
Loss from discontinued operations before
income taxes (30,716,000) (1,822,000) (1,999,000)
Provision for income taxes (481,000) -- --
------------ ------------ ------------
Loss from discontinued operations $(30,235,000) $ (1,822,000) $ (1,999,000)
============ ============ ============
</TABLE>
14. CONTINGENCIES
In 1996 and 1997, Pyramid settled certain litigation related to copying
charges in various states. Pyramid is currently, and may be in the future, a
party to pricing related litigation in other states. Pyramid has estimated its
exposure for such litigation, and has accrued such costs at December 31, 1997
and 1998, respectively.
Compucare is involved in legal and administrative proceedings and
claims of various types. While any litigation contains an element of
uncertainty, management presently believes that the outcome of such proceedings
or claim which is pending or known to be threatened, or all of them combined,
will not have a material adverse effect on the Company.
In July 1998, the Sunquest Corporation filed a legal action against
Compucare. Sunquest purchased the stock of Antrim from Compucare in November,
1996. The action alleges that Compucare breached certain representations and
warranties in the Stock Purchase Agreement and misrepresented and or failed to
disclose certain material facts in the course of negotiating the transaction.
35
<PAGE> 37
The action seeks unspecified damages for fraud and breach of contract. The Stock
Purchase Agreement, however, contains a provision which limits Compucare's
liability for breaches of representations and warranties in the Stock Purchase
Agreement to a maximum of $2.5 million. The Company and its counsel believe that
it is unlikely that these claims will have a material adverse effect on the
Company's financial position or results of operation.
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
December 31, 1998, the Company was not a party to any legal proceedings which,
if decided adversely to the Company, would, individually or in the aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.
15. INCOME TAXES
The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards 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, 1998.
The components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............... $ 3,827 $ 10,865 $ 7,254
Accruals and reserves .......................... 3,730 7,222 6,736
Writeoff of acquired research and development in
process ..................................... 2,764 2,452 3,270
-------- -------- --------
10,321 20,539 17,260
-------- -------- --------
Deferred tax liabilities:
Depreciation ................................... 301 554 553
Intangible assets .............................. -- 798 849
-------- -------- --------
301 1,352 1,402
-------- -------- --------
Net deferred tax asset before allowance ............ 10,020 19,187 15,858
Valuation allowance ................................ (10,020) (19,187) (15,858)
-------- -------- --------
Net deferred tax asset ......................... $ -- $ -- $ --
======== ======== ========
</TABLE>
The significant components of the provision for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ............ $ -- $ 970 $ 3,563
State .............. -- 166 629
------- ------- -------
Total current ...... -- 1,136 4,192
Deferred:
Federal ........... 642 (1,475) 2,945
State ............. 107 (267) 460
------- ------- -------
Total deferred .... 749 (1,742) 3,405
Change in valuation
allowance, net of
the effect of
acquisitions ...... (602) 1,742 (3,405)
------- ------- -------
$ 147 $ 1,136 $ 4,192
======= ======= =======
</TABLE>
Reconciliation of the provision for income taxes computed at the
statutory rate to the effective tax rate are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--- --- ---
<S> <C> <C> <C>
Federal income tax rate ....... (34)% (34)% (34)%
Change in valuation allowance . 34 6 (7)
Write off of acquired research
and development in process -- 27 53
Other ......................... 1 4 --
Alternative minimum tax ....... -- 1 1
--- --- ---
1% 4% 13%
=== === ===
</TABLE>
36
<PAGE> 38
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.
As of December 31, 1998, the Company had net operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $19,500,000 and $12,300,000, respectively. These carryforwards
expire in various periods from 2010 to 2012. In addition, the Company had
general business credit carryforwards for federal income tax purposes of
approximately $185,000, expiring through 2008. 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.
16. DISTRIBUTOR AGREEMENT
In 1997, Pyramid entered into a distributor agreement with a software
company whereby the other company granted Pyramid a non-exclusive,
non-transferable right to reproduce, market and license certain of the other
company's software to Pyramid's customers. The initial term of the agreement is
two years. Under the terms of the agreement, Pyramid agreed to a minimum
purchase of software having a value of $2.5 million. Pyramid had not sold any
software to its customers as of December 31, 1997 and does not expect to meet
the $2.5 million minimum purchase commitment. The Company recorded a loss
contingency of $2.5 million in 1997.
17. SEGMENT REPORTING
In June 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which was adopted by the
Company for the fiscal year ended December 31, 1998. This statement establishes
standards for reporting selected segment information quarterly and to report
entity-wide disclosures about products and services, geographic areas and major
customers.
The Company reported on three operating segments in 1998: the Business
Office Division (BO), Health Information Management (HIM) Division and the
Enterprise Division (ENT). The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The
Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. The Company does not
track long-lived assets by segment and therefore related disclosures are not
relevant and are not presented.
The Company's reportable segments are strategic business units that
offer different products and services. Each segment, with its own unique
position in the healthcare technology marketplace, yields individual technology
and service criteria. The Company's business lines in the Business Office
Division target a provider's chief financial officer as the primary buyer. The
divisions' solutions address the complex administrative and financial management
demands placed on healthcare organizations today, providing the technology and
expertise to increase cash flow and reduce administrative costs. The division is
comprised of the following product and service categories: decision support,
patient-focused solutions, electronic business office, managed care, executive
information systems and business office outsourcing.
QuadraMed's Health Information Management (HIM) division's business
lines primarily target medical records directors, as well as chief financial
officers throughout the provider system. The division is comprised of the
following products and services: coding and abstracting, compliance, document
imagining and workflow, and HIM outsourcing and consulting.
The Company's Enterprise division, consists primarily of Compucare and
provides enterprise systems to providers and integrated delivery networks.
Less than 5% of the Company's revenues were generated from Canada. The
Company developed its business divisions as a result of various acquisitions
during 1998. As such, financial performance was not reported to management in
this manner prior to 1998. For the year ended December 31, 1998, the following
table reports selected segment information required by SFAS No. 131:
<TABLE>
<CAPTION>
BO HIM ENT TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
License revenues $ 52,797 $ 21,858 $ 43,167 $ 117,822
Service revenues 32,198 58,530 -- 90,728
--------- --------- --------- ---------
Total revenues 84,995 80,388 43,167 208,550
Interest income 5,797 62 -- 5,859
Interest expense 4,668 1,577 -- (6,245)
--------- --------- --------- ---------
Interest income (expense), net 1,129 (1,515) -- (386)
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C>
Depreciation & amortization expense 3,038 6,443 811 10,292
Provision for income taxes 2,166 2,037 100 4,303
Segment earnings 422 (20,001) (1,102) (20,681)
Segment assets $ 186,553 $ 55,133 $ 21,921 $ 263,607
</TABLE>
18. UNAUDITED QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL
INFORMATION
Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D") the Company re-evaluated its IPR&D charges on its 1998
acquisitions. The amounts allocated to IPR&D and intangible assets in the first
and second quarters of 1998 were based on accepted appraisal methodologies used
at the time of the allocations. Since that time, the SEC provided new guidance
with respect to the valuation of intangible assets in purchase business
combinations, including, IPR&D. In response to this new guidance, the Company
elected to retroactively adjust the amount of intangibles assigned to acquired
IPR&D related to these acquisitions. The Company reduced its estimate of the
amount allocated to IPR&D for these acquisitions by $18.2 million from the $32.7
million previously reported in the first, second, and third quarters of 1998 to
$14.5 million. Amortization of intangibles increased $952,000 for the nine
months ended September 30, 1998, related to the amended amounts for the IPR&D.
Company management believes that the amended IPR&D charge of $14.5
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurance, however, that the SEC will
not take issue with any of the assumptions used in the Company's allocations and
require the Company to further revise the amount allocated to IPR&D. The Company
amended its quarterly earnings on Form 10-Q for the first, second, and third
quarters of 1998 (see below). The following table depicts the adjustments made
to the values ascribed to IPR&D during the year ended December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
ACQUISITION AS REPORTED AS RESTATED
----------- ----------- -----------
<S> <C> <C>
Velox $ 4,800 $ 1,500
Cabot Marsh 6,200 4,200
Medicus (43.3%) 17,146 4,763
Other acquisitions 4,585 4,031
------- -------
Total $32,731 $14,494
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS AMENDED AS AMENDED AS AMENDED
AS REPORTED AND RESTATED AS REPORTED AND RESTATED AS REPORTED AND RESTATED
FOR THE QUARTERS ENDED: MARCH 31, MARCH 31, JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
----------- ---------- ----------- ---------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $ 17,086 $ 42,953 $ 34,384 $ 49,157 $ 43,794 $ 56,483
Net Loss (9,441) (11,026) (19,860) (12,726) (3,880) (3,310)
Basic and Diluted Net
Loss Per Share $ (0.77) $ (0.53) $ (1.23) $ (0.59) $ (0.20) $ (0.15)
</TABLE>
38
<PAGE> 40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUADRAMED CORPORATION
DATE: August 11, 1999 By: /s/ E. Payson Smith
-------------------------------
Name: E. Payson Smith
Title: Executive Vice President,
Chief Financial Officer
<PAGE> 41
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
23.1 Consent of Arthur Andersen LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated August 11, 1999 with respect to the consolidated financial
statements and schedule included in this Form 8-K, into the Company's
previously filed Registration Statements on Form S-8 (File No. 333-16385, File
No. 333-35937, File No. 333-56171, and File No. 333-75945).
ARTHUR ANDERSEN LLP
San Jose, California
August 16, 1999