<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-21031
QUADRAMED CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1992861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 EAST SIR FRANCIS DRAKE BLVD., SUITE 2A, LARKSPUR, CALIFORNIA, 94939
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 461-7725
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
[ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of March 25, 1998 was approximately $384,000,000 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 25, 1998, approximately 12,581,405 shares of the
Registrant's Common Stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on or about June 1, 1998 are incorporated by
reference into Part III.
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QUADRAMED CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
<S> <C>
PART I...................................................................... 1
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 17
ITEM 3. LEGAL PROCEEDINGS.................................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 17
PART II..................................................................... 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................ 19
ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY DATA..................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 21
ITEM 8. FINANCIAL STATEMENTS............................................... 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 37
PART III.................................................................... 37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 37
ITEM 11. EXECUTIVE COMPENSATION............................................ 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 37
PART IV..................................................................... 38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 38
SIGNATURES.................................................................. 44
POWER OF ATTORNEY........................................................... 45
INDEX TO FINANCIAL STATEMENTS............................................... 48
EXHIBIT INDEX............................................................... 70
</TABLE>
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PART I
ITEM 1. BUSINESS.
Except for the historical financial information contained herein, the
matters discussed in this Annual Report on Form 10-K may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties and that
actual results could differ materially from those indicated by such
forward-looking statements. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include those risks identified in "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Certain Factors
That Might Affect Future Operating Results" and other risks identified from time
to time in the Company's reports and registration statements filed with the
Securities and Exchange Commission, including the registration statements on
Form S-4, filed on January 23, 1998 and Form S-3, filed on January 27, 1998.
OVERVIEW
QuadraMed Corporation ("QuadraMed" or the "Company") 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.
Quadramed's QuanTIM(R) suite of products as an integrated offering of EDI,
financial management, and decision support and compliance solutions for both
providers and payors. In addition, QuadraMed provides compliance, consulting and
business office outsourcing services. To date, the Company's products have been
purchased by over 2,800 health care providers in all 50 states, the District of
Columbia, Canada, South Africa and the Philippines.
The Company was incorporated in September 1993 in California under the
name QuadraMed Corporation and reincorporated in Delaware in 1996. The Company
has expanded significantly since its inception, primarily through the
acquisition of other businesses, products and services. Since its inception, the
Company has completed 17 acquisition transactions, as reflected in the following
table:
<TABLE>
<CAPTION>
COMPANY ACQUIRED DESCRIPTION OF COMPANY ACQUIRED DATE ACQUIRED
<S> <C> <C>
Coast Micro, Inc. EDI services October 1993
Seton Financial Accounts receivable management services December 1993
Criterion Healthcare Management Accounts receivable management services December 1993
Trim Healthcare Systems, Inc. Cash flow management services December 1993
Health Information Technology, Inc. Managed care contract administration June 1994
software
Healthview Clinically based provider profiling system December 1994
Healthcare Design Systems Health care financial management and December 1995
decision support software
InterMed Healthcare Systems Inc. Client-server information systems for health December 1996
care payors
Healthcare Recovery, Inc., doing Cash flow management services April 1997
business as Synergy HMC
Queen City Microsystems, Inc. EDI services August 1997
</TABLE>
1.
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<TABLE>
<S> <C> <C>
Healthcare Revenue Management,Inc. Managed care department outsourcing and September 1997
audit services
Medicus Systems Corporation Health care financial management and November 1997*
decision support software
Rothenberg Health Systems, Inc. Capitation management software December 1997
Healthcare Research Affiliates, Inc. H.E.D.I.S. reporting and consulting services December 1997
Fleming Softlink Systems, Inc. EDI software December 1997
Healthcare Cash Management Seminars, Healthcare seminar business January 1998
Inc.
American Medical Network, Inc. Health care decision support software January 1998
Cabot Marsh Corporation Health care consulting and compliance February 1998
company
Velox Systems Corporation Financial management software March 1998
</TABLE>
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* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus Systems
Corporation on November 9, 1997. It is anticipated that the merger of QuadraMed
and Medicus will be closed in the second quarter of 1998.
Unless the context otherwise requires, references herein to the
"Company" and "QuadraMed" refer to QuadraMed Corporation, a Delaware
corporation, its subsidiaries and QuadraMed Corporation, its California
predecessor. The Company's executive offices are located at 80 East Sir Francis
Drake Boulevard, Suite 2A, Larkspur, California, 94939 and its telephone number
is (415) 461-7725.
The Company intends to continue to expand in substantial part through
acquisitions of products, technologies and businesses. The Company's ability to
expand successfully through acquisitions depends on many factors, including the
successful identification and acquisition of products, technologies or
businesses and management's ability to effectively negotiate and consummate
acquisitions and integrate and operate the new products, technologies or
businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to increasing consolidation in
the health care industry, thereby increasing the costs of capitalizing on
acquisition opportunities. The Company competes for acquisition opportunities
with other companies that have significantly greater financial and management
resources than the Company. The inability to successfully identify appropriate
acquisition opportunities, consummate acquisitions or successfully integrate
acquired products, technologies, operations, personnel or businesses could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, acquisitions may divert management's
attention from other business concerns, expose the Company to the risks of
entering markets in which it has no direct prior experience or to risks
associated with the market acceptance of acquired products and technologies, or
result in the loss of key employees of the Company or the acquired company.
Moreover, acquisitions (including the merger (the "Medicus Merger") with Medicus
Systems Corporation ("Medicus") and the acquisition of Rothenberg Health
Systems, Inc. ("Rothenberg") and Healthcare Research Affiliates, Inc. ("HRA")
from Resource Health Partners, L.P. ("RHP") in two related merger transactions
(referred to as the "Rothenberg Merger")) by the Company in November and
December 1997 may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt and the recognition of amortization expenses
related to goodwill and other intangible assets, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has entered into a merger agreement with Medicus and
completed the Rothenberg Merger with the expectation that the Medicus Merger and
the Rothenberg Merger will result in certain benefits to the Company as the
combined company. Realizing the benefits of the Medicus Merger and the
Rothenberg Merger will depend in part upon the successful integration of the
businesses, products and employees of the Company, Rothenberg, HRA and Medicus
in an efficient manner, and there can be no assurance that such integration will
not entail substantial
2.
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costs, delays or other problems or that such integration will be successfully
completed. Combining the companies will divert the attention of management from
other matters and will result in significant operational and administrative
expense. Any difficulties encountered in the integration process could have a
material adverse effect on the revenues and operating results of the Company. In
addition, the process of combining the companies could cause the interruption
of, or a disruption in, the business activities of the constituent companies,
which could have a material adverse effect on the operations and financial
performance of the Company. Even if these companies are successfully integrated
into the Company, the acquired operations may not achieve sales, productivity
and profitability commensurate with the Company's historical operating results
or with projected results of the Company and financial analysts and investors.
Failure to achieve such projected results would have a material adverse effect
on the Company's financial performance, and in turn, on the market value of the
Company's Common Stock. QuadraMed will incur a significant amortization expense
in future periods as a result of the Medicus acquisition. There can be no
assurance that the Company will realize any of the anticipated benefits of the
Medicus Merger and the Rothenberg Merger or that such acquisitions will enhance
the Company's business or financial performance.
Acquisitions, including the Medicus Merger and the Rothenberg Merger,
involve a number of special risks including, without limitation, managing
geographically dispersed operations, failure of the acquired business to achieve
expected results, failure to retain key personnel of the acquired business,
inability to integrate the new business into existing operations and risks
associated with unanticipated events or liabilities, potential increases in
stock compensation expense and increased compensation expense resulting from
newly hired employees, the assumption of unknown liabilities and potential
disputes with the sellers of one or more acquired entities, all of which could
have a material adverse effect on the Company's business, results of operations
and financial condition. Additionally, customer dissatisfaction or performance
problems at a single acquired company could have an adverse effect on the
Company's reputation and its sales and marketing initiatives. With the addition
of the Medicus and RHP businesses, the Company's anticipated future operations
may place a strain on its management systems and resources. The Company expects
that it will be required to continue to improve its financial and management
controls, reporting systems and procedures, and will need to expand, train and
manage its work force. There can be no assurance that the Company will be able
to effectively manage these tasks, and the failure to do so could have a
material adverse effect on its business, financial condition and results of
operations.
A substantial portion of the Company's revenues have been and are
expected to be derived from the sale of software products and services to
hospitals. Consolidation in the health care industry, particularly in the
hospital and managed care markets, could cause a decrease in the number of
potential purchasers of the Company's products and services or the loss of one
or more of the Company's significant customers, insofar as customers may be
acquired by another company that uses products or services provided by a
competitor of the Company. Any of these occurrences could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the decision to purchase the Company's products often
involves the approval of several members of management of a hospital or health
care provider. Consequently, it is difficult for the Company to predict the
timing or outcome of the buying decisions of customers or potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company believes that
the commercial value and appeal of its products may be adversely affected if
the current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of the Company's customers are providing services under capitated
service agreements, and a reduction in the use of capitation arrangements as a
result of regulatory or market changes could have a material adverse effect on
the Company's business, financial condition and results of operations. During
the past several years, the health care industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain proposals to reform the health care
system have been and are being considered by Congress. These proposals, if
enacted, could change the operating environment for the Company's clients in
ways that cannot be predicted. Health care organizations may react to these
proposals by curtailing or deferring investments, including those for the
Company's products and services.
3.
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Changes in current health care financing and reimbursement systems
could result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of
endorsement of the Company's products by hospital associations or other
customers. Any of these occurrences could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, many health care providers are consolidating to create integrated
health care delivery systems with greater regional market power. As a result,
these emerging systems could have greater bargaining power, which may lead to
price erosion of the Company's products. The failure of the Company to
maintain adequate price levels would have a material adverse effect on the
Company's business, financial condition and results of operations. Other
market-driven reforms could also have unpredictable effects on the Company's
business, financial condition and results of operations.
The Company's performance also depends in significant part upon the
continued service of its executive officers, its product managers and other key
sales, marketing, and development personnel. The loss of the services of any of
its executive officers or the failure to hire or retain other key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. Additions of new, and departures of
existing, personnel can be disruptive and could have a material adverse effect
on the Company's business, financial condition and results of operations.
DRG[check mark](R) QuadraMed(R) and QuanTIM(R) are registered
trademarks of the Company. ASC[check mark](TM) and the logo of the Company are
trademarks of the Company. All other trademarks and trade names referred to in
this Annual Report on Form 10-K are the property of their respective owners.
THE QUANTIM(R) SUITE OF PRODUCTS
QuanTIM(R), The Information Management system, is QuadraMed's suite of
EDI, financial management, compliance and decision support software products
designed to improve operational efficiencies, assist organizations to more
accurately measure and analyze the cost and quality of care, proactively address
compliance issues and more effectively compete in an increasingly managed care
environment. QuanTIM(R), with its modular, open architecture design and flexible
electronic interface, is designed to utilize data from disparate health care
information systems, thereby extending the functional value of legacy system
investments. As a result of this modular design, additional applications can be
readily integrated into customers' existing applications.
The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company.
Substantial litigation regarding intellectual property rights exists in
the software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
products overlaps. Although the Company believes that its products do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that a license or similar agreement will be available on
reasonable terms in the event of an unfavorable ruling on any such claim. In
addition, any claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has received notice of a claim filed
with the United States Trademark Appeal Board for the cancellation of its
registered QuanTIM(R) trademark, and also has recently received a letter from a
separate third party challenging this trademark. There can be no assurance that
the Company will be successful in its defense of these or similar claims.
4.
<PAGE> 7
The Company's performance will depend in large part upon the Company's
ability to provide the increasing functionality required by its customers
through the timely development and successful introduction of new products and
enhancements to its existing suite of products. The Company has historically
devoted significant resources to product enhancements and research and
development and believes that significant continuing development efforts will be
required to sustain its operations and integrate the products and technologies
of acquired businesses. There can be no assurance that the Company will
successfully or in a timely manner develop, acquire, integrate, introduce and
market new product enhancements or products, or that product enhancements or new
products developed by the Company will meet the requirements of hospitals or
other health care providers and payors and achieve or sustain market acceptance.
Products such as those offered by the Company frequently contain errors
or failures, especially when initially introduced or when new versions are
released. Although the Company conducts extensive testing, software errors have
been discovered in certain enhancements and products after their introduction.
There can be no assurance that, despite testing by the Company and by current
and potential customers, errors or performance failures will not occur in these
products under development or in other enhancements or products after
commencement of commercial shipments, resulting in loss of revenues and
customers, delay in market acceptance, diversion of development resources,
damage to the Company's reputation or increased service and warranty costs, any
of which could have a material adverse effect upon its business, financial
condition and results of operations.
Many computer systems have experienced or will experience problems
handling dates beyond the year 1999. Therefore, some computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the internal readiness of its computer
systems and the compliance of its computer products and software sold to
customers for addressing the year 2000. The Company expects to implement
successfully the systems and programming changes necessary to address the year
2000 issues and does not believe that the cost of such actions will have a
material adverse effect on the Company's business, results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on its business, financial condition and results of operations.
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. A significant number of the Company's
customers are running product versions that are not year 2000 compliant. While
the Company has been encouraging such customers to migrate to current product
versions, it is possible that the Company may experience increased expenses in
addressing migration issues and may lose customers. In addition, there can be no
assurances that the Company's current products do not contain undetected errors
or defects associated with year 2000 date functions that may result in the
material costs to the Company. Some commentators have stated that significant
amounts of litigation will arise out of year 2000 compliance issues. Because of
the unprecedented nature of such litigation it is uncertain whether or to what
extent the Company may be affected by it.
The Company currently processes substantially all of its customer data
at its facilities in Larkspur, California and Neptune, New Jersey. While the
Company backs up its data nightly and has safeguards for emergencies such as
power interruption or breakdown in temperature controls, it has no mirror
processing site to which processing could be transferred in the case of a
catastrophic event at either of these facilities. The occurrence of a major
catastrophic event at either the Larkspur or the Neptune facility could lead to
an interruption of data processing and could have a material adverse effect on
the Company's business, financial condition and results of operations.
5.
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EDI Products
The Company's EDI products enable providers to edit claims on site,
format detailed claims data for all payors, and electronically submit them for
processing. The edited claims data is the foundation of a detailed database of
information that can be sued with the QuadraMed's financial management, decision
support and compliance products.
QuanTIM(R) EDI is a software application that downloads summary and
detailed claims data from existing legacy financial information systems, and
then edits and formats it to meet payor-specific requirements, including unique
data fields. As part of the editing process, QuanTIM(R) EDI screens the data for
payor-specific demographic, diagnosis or procedure information and identifies
illogical data inputs that are not within expected ranges. For example, the
software would alert the operator if it encountered inputs that indicated that a
male patient had given birth. After the standardized claim has been edited for
payor-specific requirements, QuanTIM(R) EDI transmits the claim to the payor.
QuanTIM(R) ERA is a software application that receives detailed payment
information from payors, known as electronic remittance advice ("ERA"),
translates this data and automatically posts this information to a provider's
financial system. Prior to posting, ERA data is extracted to generate automated
contractual adjustments based on payor-appropriate criteria, applicable
deductibles and co-insurance, and to track write-offs taken at the time of
billing.
Medicare Secondary Billing is a module designed to assist providers in
accelerating the traditional Medicare billing cycle by eliminating the 14-day
payment hold for billing Medigap carriers. The module automatically reviews all
open Medicare claims daily by logging onto the Medicare claims inquiry system,
and then, based on that analysis, generates appropriate, collated, ready-to-mail
UB92s and EOBs for secondary carriers.
Eligibility Determination is a module which automatically verifies the
eligibility of Medicare, Medicaid, Blue Cross and other specified in-patient
admissions types by continuously polling the patient admitting system and then
cross-checking these patient profiles against health plan eligibility and
benefits inquiry databases. This module is designed to assist providers in
proactively managing the risk of uncompensated and undercompensated care.
The 72 Hour Advisor module, which is a complement to the Eligibility
Determination module, is designed to assist providers in identifying instances
when a patient receives outpatient services less than 72 hours prior to being
admitted for an inpatient episode. If all care is not bundled as one episode, a
Medicare billing conflict is created, which is in violation of HCFA regulations
and typically delays payment for all care administered. The 72 Hour Advisor
constantly polls key in-patient and out-patient registration systems to check
for date conflicts within the 72 hour window.
A/R Link is a PC-based system designed to provide EDI connectivity
between hospitals and third-party billing companies handling self-pay portions
of patient charges by automating the transfer and processing of patient account
information. The software automatically queries the hospital patient accounting
system, searches by financial class, identifies self-pay accounts and downloads
relevant files to target sites. The module eliminates the time and staff
involved in manual keying of data, and speeds the overall billing process.
Financial Management and Compliance Products
The Company's financial management and compliance software products
allow providers to track managed care and capitated contract terms and to
hierarchically review medical records information to ensure that bills are
properly coded and include all services rendered. The Company's customers use
this capability to obtain timely and accurate reimbursement, to prevent fraud
and abuse and to measure the profitability of managed care contracts.
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QuanTIM(R) Contract Management is a software application that tracks
providers' multiple managed care, capitated, governmental and other payor
contract terms, including coverage and reimbursement for individual diagnoses
and procedures. The application calculates expected reimbursement and the
contractual allowance, which is the difference between the standard charge
generated by the provider and the actual amount owed by the payor under the
contract. Expected reimbursement and contractual allowance amounts can be posted
automatically to the provider's financial information system at the time of
billing. QuanTIM(R) Contract Management allows providers to measure the
allocation of revenues and the profitability of contracts based on specific
payor contract terms. QuanTIM(R) Contract Management's pricing module eliminates
labor intensive, error prone manual repricing of bills, a process that often
leads to inaccurate reimbursement and financial statements. In addition,
QuanTIM(R) Contract Management is used as a modeling tool for managed care
contract negotiation and detailed analysis of contract performance.
EZ CAP Managed Care Information System is a software application
designed to assist medical groups, IPAs, hospitals, PHOs and other organizations
that receive capitation payments from health plans and are at financial risk for
healthcare services. EZ CAP's key functional areas include enrollee demographic
data, benefits verification and co-payment information, automated
authorizations, flexible provider compensation methods, case management and
utilization tools, provider claims processing and claims data capture, and
detailed reporting capabilities. There are several software options that extend
the functionality of the core EZ CAP system. EZ PARTNER real-time interface
module electronically links EZ CAP to many popular PMSs (Practice Management
Systems) to provide shared information between the systems. EZ LINK modules
provide the ability to electronically receive and transmit data files between EZ
CAP and health plans or providers, via EDI technology. The PCL (Provider
Communications Link) module is designed to provide low cost, remote, real-time
authorized access to EZ CAP functions such as enrollee eligibility checking,
requests for referrals and authorizations, and determination of approval status.
Care Delivery Costing software products are designed to be
workload-driven staffing and care delivery costing analysis tools that address
the informational needs from both the clinical and financial management
perspective. Utilizing well established objective workload measurement
methodologies, patient care managers can utilize these software tools to
optimize the allocation of patient care resources, maintain clinical standards,
utilize benchmarking database resources for comparative analysis and manage
labor costs in a variety of in-patient and out-patient care settings.
Coding and Abstracting software products are designed to consolidate
the flow of patient-related data from disparate hospital systems into a
straightforward Windows-based system. The Coding and Abstracting system is
designed to maximize the productive results of the coding process at the
critical point where proper reimbursement decisions are in the hands of coding
personnel. Knowledge-based methodology and database resources are integrated
with on-line access to clinical notes, definitions, and coding reference guides
to assist in the accurate interpretation and validation of coding and DRG
assignment decisions.
Coding HelpDesk is a software resource tool designed specifically for
Health Information Management (HIM) professionals. HelpDesk includes
ComplySource legal references, but also includes information resources specific
to the concerns of HIM professionals and Compliance Officers, such as fiscal
intermediary response log (as required by the model hospital compliance plan),
carrier bulletins, carrier policy manuals, advanced coding Q&A, and CE Mine, an
on-line educational and testing tool that allows subscribers to attain CE
credits for successfully completing coding tests.
QuanTIM(R) DRG[checkmark] is a software application designed to assist
providers in managing the complexities of the DRG reimbursement system and to
ensure equitable payment based on the submission of a complete and accurate
claim. QuanTIM(R) DRG[checkmark] is not designed to encode or group information
to maximize DRG reimbursement, but instead is designed to ensure appropriate
reimbursement based on accurate and complete billing information. This product
interfaces with legacy financial and medical records information systems prior
to billing to hierarchically review all billing records on a concurrent basis
and to select those bills that have a clinical, financial or statistical reason
to be held in the billing cycle until medical claim coding can be completed.
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<PAGE> 10
The product serves as a "safety net," catching revenues that would otherwise be
lost through billing of incomplete or inaccurately coded data.
QuanTIM(R) ASC[checkmark] is a software application designed to assist
in managing the complexities of ambulatory surgical center ("ASC") reimbursement
and outpatient coding systems. ASC coding is often based on incomplete medical
record information, resulting in missing charges or inaccurate coding of
procedures performed and inaccurate assignment of payment level classifications.
QuanTIM(R) ASC[checkmark] flags incomplete or inaccurate medical claim coding by
hierarchically reviewing billing records prior to billing and identifying those
bills that have clinical, financial or statistical reasons for review.
QuanTIM(R) Electronic Document Management is a software application for
patient accounting and medical records departments that captures, indexes,
stores and retrieves paper-based demographic, clinical and financial information
and records. This product is based on an open software architecture which
utilizes electronic files that integrate financial and ancillary department
electronic information with scanned images of paper documents. The Company
believes that this application improves provider work flow, reduces
administrative cost and helps providers move toward paperless business offices
and medical records departments. Multi-user access to the electronic patient
account file reduces the need for paper files and storage while offering access
to account information from any work station. The combination of existing
electronic financial information and scanned images with multi-user capabilities
effectively creates a complete electronic patient account file that can be
efficiently routed through billing and administration departments, thus
improving work flow. In addition to licensing this software application, the
Company offers customers the option of purchasing the hardware required to
implement this solution.
QuanTIM(R) FACTS, introduced in the third quarter of 1997, is a
software application designed to assist hospitals in managing the complexities
of federal requirements under HIPAA and in submitting accurate billing and
clinical data. The product complements providers' existing compliance efforts by
monitoring coding and billing practices for compliance with mandated guidelines.
QuanTIM(R) FACTS includes the following six modules: a 72-hour rule compliance
module designed to identify claims for non-physician services performed within
three days of a hospital admission; a prospective payment system module designed
to select billing records with a high probability of inaccurate coding which may
lead to overpayments by payees which may, in turn, trigger federal government
fines for inappropriate billing practices; a data quality monitoring tool that
is designed to identify inconsistencies in coding and to flag inclusive codes
that may result in potential overestimates of revenue; a benchmarking study that
utilizes publicly available data to identify a hospital's exposure to potential
fraud and abuse by analyzing correlations between a given hospital's DRG codes
and national norms and identifying a hospital's exposure at the DRG level; a
laboratory report based on a thorough review of a provider's detail billing data
identifying clinical laboratory billing practices of that provider which are of
the type generally scrutinized by the government; and a Medicare Billing
Compliance Guide designed to assist hospitals and other providers in
implementing fraud and abuse compliance programs.
ARIS (Automated Risk Integrity Software) is a software tool designed by
compliance officers and attorneys to capture and assess compliance activity for
each department and entity within a provider organization. ARIS is designed to
create an on-going compliance actin plan in the areas of education, internal
monitoring, plan development and external auditing activities. ARIS's reporting
package is designed to track compliance activity and progress across an
organization.
ComplySource is a legal and compliance software resource package
designed to provide consolidated access to important legal and government
compliance-related documents, layman's synopsis of all statutes related to
healthcare compliance, OIG fraud alerts, and focused database tools such as
compliance disciplinary action, education attendance lists, audit tracking,
mandatory compliance activities and hotline calls.
Decision Support Products
The Company's decision support products generally include database
analysis software and national and regional benchmark data that may be licensed
to the customer. The customer provides its own internally
8.
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generated clinical and financial information to the Company, and the Company
performs risk and severity adjustments on such information based on patient
demographics and health status and formats it for comparison against the
national and regional data. The updated and adjusted data sets are returned to
the customer for use with the database analysis software. The Company's
QuanTIM(R) Performance Measurement System has been accepted for inclusion on the
Joint Commission on Accreditation of Healthcare Organization's initial list of
performance measurement systems.
QuanTIM(R) Clinical Performance Measurement is a software application
that measures clinical outcomes and resource utilization based on diagnosis,
patient, physician and other variables. This product is used as a benchmarking
tool to compare hospital-level information against 101 risk and severity
adjusted outcome indicators. The benchmarking information is derived from a
standardized national set of 10 million patient records. The outcomes database
is organized into six major categories: overall mortality, obstetrics, surgery,
neonatal, radiology and general medical. The customer typically produces reports
that compare its performance against competitor or peer group providers and
against expected outcomes derived from the national and regional data set.
QuanTIM(R) Financial Performance Measurement is a software application
that employs cost accounting, length-of-stay, and other benchmark information to
allow customers to measure cost, clinical resource utilization and profitability
by physician, payor, diagnosis and procedure. Most providers have access to
charge and reimbursement information for procedures and diagnoses, but do not
have accurate measures for the cost of care in these categories. Therefore,
these providers cannot accurately track profitability by procedure or diagnosis.
Through an interface with QuanTIM(R) Clinical Performance Measurement, providers
can benchmark the risk adjusted outcomes and financial performance by physician,
diagnosis, patient and other variables. This application can also be used to
analyze the profitability of managed care and capitated contracts.
QuanTIM(R) Market Analysis Performance Measurement is a software
application that consists of licensed software and database information that is
derived from statewide and national hospital billing data sets and other
demographic and population statistics. This application enables customers to
perform market share, community health assessment, managed care activity and
physician admitting pattern analyses.
Clinical Decision Support software is designed to provide integrated,
proactive medical management through a synthesis of clinical decision support
tools, health and disease management programs, and financial modeling.
Specifically, these modules include:
Resource Case Management: a software tracking and analysis
tool designed to improve care through monitoring and
enhancement of patient care management relative to cost and
quality imperatives.
Pathway Generator: software designed to assist in developing
initial care delivery protocols, or pathways, based on
historical utilization data. Cases can be grouped by DRG
(Diagnostic Related Group), diagnosis, admission and discharge
status and other user-specified characteristics. Pathways are
intended to assist in consistent care delivery results and
predictable care delivery costs within an organization for
specified patient conditions.
Enterprise Costing: software designed to enhance data sharing
within the enterprise so that departments can more effectively
perform distributed queries and updates to their
department-level cost standards. Such queries can assist in
comparative cost analysis and results analysis.
QuanTIM.net is a decision support software application that is designed
to integrate EDI, relational database and Web-enabling technologies into an
interactive, enterprise-wide claims management and decision support solution.
With electronic interfacing technology that links multiple facilities together,
QuanTIM.net serves as a consolidated resource for making data-intensive
financial and clinical decisions across organization lines. Within a framework
that ties all locations together, edited claims can be automatically priced,
risk- and severity-adjusted, and supplemented with public and private
benchmarking data via QuanTIM.net's integrated
9.
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software services prior to electronic claims submission to payors. Enhanced
claims data is consolidated in an Oracle relational database and, via Web
browser technology, is made accessible, on a subscriber basis, across a secure
network available to users throughout an enterprise.
COMPLIANCE AND CONSULTING SERVICES
An important adjunct to QuadraMed's software offerings are the range of
compliance and consulting offerings that are designed to provide value-added
service to clients, and better position the Company as a provider of more
comprehensive solutions. Currently, compliance and consulting services fall
under four main categories: Managed Care, Financial Reviews & Management,
Patient-Focused Studies, and Compliance Services. These services include:
accuracy and compliance assessments of clinical and patient accounting charge
capture mechanisms, managed care contract performance reviews and
re-negotiations (with integrated retrospective payment recovery services for
underperforming contracts), and clinically-oriented, patient-focused data
analysis and reviews by Master prepared Registered Nurses.
One of the fastest growing components of the Company's compliance and
consulting service offerings is in the area of compliance. QuadraMed offers a
comprehensive compliance program, including compliance assessment, auditing and
education expertise through a team of over 100 credentialed healthcare
attorneys, medical record professionals, registered nurses and physicians. These
services improve the ability of healthcare providers to prevent Medicare and
Medicaid fraud and abuse by identifying potentially fraudulent coding in a
medical bill. Many of these services are augmented by the use of integrated
software technologies. These services include: organizational risk and
compliance assessment, clinical data management compliance audits and
assessments, physician and ancillary services compliance audit and education
services, and professional development services which offer subscriber-based,
toll-free "expert help desk" coding and billing compliance assistance and
topical compliance seminar series throughout the country.
BUSINESSES OFFICE AND CONTRACT MANAGEMENT DEPARTMENT OUTSOURCING
In addition to software applications, the Company provides partial and
complete business office and contract management department outsourcing
services, including the billing and collection of receivables for the business
office, and comprehensive managed care contract administration and negotiations
for the contract management department. The Company offers business office
outsourcing services for hospitals, physicians, home health care agencies and
other providers. The focus of these services is to increase cash flow and to
improve operational efficiencies for healthcare providers. Under full
outsourcing arrangements, the Company hires and/or replaces existing personnel
at the facility. The Company typically implements selected components of its
QuanTIM(R) suite of products to enhance the efficiency of the business office or
contract management department. In partial business office outsourcing
arrangements, the Company bills and collects receivables that have aged beyond a
certain point, or that involve specified payer or payment arrangements.
The infrastructure for the Company's outsourcing business was acquired
by the Company. In addition, the Company often uses its software products to
provide outsourcing services. As a result, the Company has not been required to
make significant capital expenditures in order to service existing outsourcing
contracts. However, if the Company experiences a period of substantial expansion
in its outsourcing business, it may be required to make substantial investments
in capital assets and personnel, and there can be no assurance that it will be
able to assess accurately the investment required and negotiate and perform in a
profitable manner any of the outsourcing contracts it may be awarded. The
Company's failure to estimate accurately the resources and related expenses
required for a project or its failure to complete its contractual obligations in
a manner consistent with the project plan upon which a contract was based could
have a material adverse effect on its business, financial condition and results
of operations. In addition, the Company's failure to meet a client's
expectations in the performance of its services could damage the Company's
reputation and adversely affect its ability to attract new business. Finally,
the Company could incur substantial costs and expend significant resources
correcting errors in its work, and could possibly become liable for damages
caused by these errors.
Certain of the Company's products and services relate to the payment,
collection, coding and billing of health care claims and the administration of
managed care contracts. Any failure by employees of the Company or by the
Company's products to accurately assess, process or collect such claims could
result in claims against the Company by its customers. The Company has been and
currently is involved in claims for money damages related to services provided
by its accounts receivable management business. The Company maintains insurance
to protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company that is in excess of, or excluded from, its insurance coverage could
have a material adverse effect on its business, financial condition and results
of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. There can
be no assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of the Company's
insurance coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. In addition, if liability of the Company were
to be established, substantial revisions to its products could be required that
may cause it to incur additional unanticipated research and development
expense.
10.
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CUSTOMERS
Historically, QuadraMed has marketed its products primarily to
hospitals, with additional marketing to hospital associations, physician groups,
payors and self-administered employers. Substantially all of the Company's
revenues have been derived from the sale of software products and services to
hospitals. With the industry trend toward the formation of IDSs, the Company has
designed its product suite to accommodate this emerging industry sector. To
date, QuadraMed and its subsidiaries have approximately 2,800 customers, a
substantial majority of which are hospitals, located in all 50 states, the
District of Columbia, Canada, South Africa and the Philippines. The Company
expects to maintain a high percentage of hospital customers for the foreseeable
future, but also expects its customer mix to begin to shift toward other
providers, including IDSs, as well as payors and employers. The health care
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operation of health care
organizations. Changes in current health care financing and reimbursement
systems could result in the need for unplanned product enhancements, in delays
or cancellations
11.
<PAGE> 14
of product orders or shipments or in the revocation of endorsement of the
Company's products by hospital associations or other customers. Any of these
occurrences could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, many health care
providers are consolidating to create integrated health care delivery systems
with greater regional market power. As a result, these emerging systems could
have greater bargaining power, which may lead to price erosion of the Company's
products. The failure of the Company to maintain adequate price levels would
have a material adverse effect on the Company's business, financial condition
and results of operations. Other market-driven reforms could also have
unpredictable effects on the Company's business, financial condition and results
of operations.
SALES AND MARKETING
As of March 16, 1998, the Company employed 61 direct sales
representatives and product managers, and a marketing support staff of 12
individuals. The Company markets its products and services through direct sales
contacts, strategic alliances, participation in trade shows and advertisements
in industry publications. In addition, senior management plays an active role in
the sales process by cultivating industry contacts.
The Company supplements its marketing arrangements through endorsement
agreements. The Company has endorsement agreements and/or marketing agreements
for certain of its products with state and regional hospital associations in New
Jersey, Iowa, Northern and Central California, Connecticut, Florida, New York,
Ohio, Pennsylvania, Virginia, Wisconsin, Texas, Montana and Illinois.
In addition, the Company is in the process of building a regional
account manager organization within the national sales force that will be
responsible for particular customers rather than particular products. This
approach will require additional training so that sales personnel may become
more familiar with the Company's broader range of product and service offerings.
There can be no assurance that the Company will be successful
12.
<PAGE> 15
in its efforts to restructure its sales and marketing approach, and any failure
to successfully implement such strategy could have a material adverse effect on
its business, financial condition and results of operations.
TECHNOLOGY
Software Architecture. The Company uses industry standard software
whenever possible to minimize development and maintenance costs. The QuanTIM(R)
suite of products operates on the DOS and Novell Netware operating systems.
Certain of the Company's current products operate on all versions of the
Windows(TM) NT operating system. The Windows(TM) NT versions of some of the
Company's products were released in late 1996, and the Company expects that
Windows(TM) NT versions of its EDI product, which are currently under
development, will be released in 1998. All major software components of
QuanTIM(R) are assembled in a modular architecture for application independence
and to facilitate the replacement of modules as new technology becomes available
and as market demand dictates.
Hardware Platform. The Company's software products operate on PC-based
single and multi-user hardware platforms. In addition, the Company also offers
its imaging product on Sun Microsystems platforms. These platforms also include
high capacity storage devices for the large storage requirements of document
imaging.
RESEARCH AND DEVELOPMENT
As of February 28, 1998, the Company employed 65 people in the areas of
product design, research and development and 41 people in the areas of quality
assurance and technical support. The Company's product development strategy is
focused on continually enhancing existing products by increasing their
functionality and ease of use. In addition, the Company is enhancing the
reporting capabilities for its performance measurement clinical and financial
applications, expanding its outpatient and inpatient databases and improving its
comparative reporting and benchmarking capabilities with third-party databases.
A significant amount of the Company's research and development resources are
dedicated to integrating acquired technology into the Company's suite of
products. See "-Products Under Development and Joint Development Projects."
In fiscal years 1995, 1996, and 1997, the Company's research and
development expenses totalled $864,000, $3.5 million, and $5.1 million,
respectively, representing 8.6%, 12.1%, and 11.4%, respectively, of its total
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
13.
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COMPETITION
Competition in the market for the Company's products, and services
(including products and services acquired from Medicus and RHP is intense and is
expected to increase. Increased competition could result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. The Company's competitors include other providers of health care
information software and services, as well as health care consulting firms. The
combined company's principal competitors include: (i) CIS Technologies, Inc., a
division of National Data Corporation, Inc., and Sophisticated Software, Inc. in
the market for its EDI products; (ii) Envoy Corp. and MedE AMERICA in the market
for its claims processing service; (iii) Healthcare Cost Consultants, Inc., a
division of CIS Technologies, and Trego Systems, Inc. in the market for its
contract management products; (iv) IMNET Systems, Inc., Optika Imaging Systems,
Inc. and LanVision Systems, Inc. in the market for its electronic document
management products; (v) Transition Systems, Inc. and Healthcare Microsystems,
Inc., a division of Health Management Systems, Inc., HCIA Inc. and MediQual
Systems, Inc., a division of Cardinal Health, Inc., in the market for its
decision support products; (vi) HMS and ARTRAC, a division of Medaphis in the
market for its business office outsourcing services; and (vii) a subsidiary of
Minnesota Mining and Manufacturing and CodeMaster, in the market for its medical
records products. In addition, current and prospective customers evaluate the
Company's capabilities against the merits of their existing information systems
and expertise. Furthermore, major software information systems companies,
including those specializing in the health care industry, not presently offering
products that compete with those offered by the Company may enter the Company's
markets. In addition, many of the Company's competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than the
Company. Many of the Company's competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, the Company's competitors may be able to respond more
quickly to new or emerging technologies, changes in customer requirements and
political, economic or regulatory changes in the healthcare industry or to
devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
GOVERNMENT REGULATION AND HEALTH CARE REFORM
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. The
FDA could determine the future that any predictive aspects of the Company's
products make them clinical decision tools subject to FDA regulation. Compliance
with these regulations could be burdensome, time consuming and expensive. The
Company also could become subject to future legislation and regulations
concerning the development and marketing of health care software systems. These
could increase the cost and time necessary to market new products and could
affect the Company in other respects not presently foreseeable. The Company
cannot predict the effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under
which such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
14.
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The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company believes that
the commercial value and appeal of its products may be adversely affected if
the current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of the Company's customers are providing services under capitated
service agreements, and a reduction in the use of capitation arrangements as a
result of regulatory or market changes could have a material adverse effect on
the Company's business, financial condition and results of operations. During
the past several years, the health care industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain proposals to reform the health care
system have been and are being considered by Congress. These proposals, if
enacted, could change the operating environment for the Company's clients in
ways that cannot be predicted. Health care organizations may react to these
proposals by curtailing or deferring investments, including those for the
Company's products and services.
INTELLECTUAL PROPERTY
The Company considers its methodologies, computer software and many of
its databases to be proprietary. The Company seeks to protect its proprietary
information through nondisclosure agreements with its employees. The Company's
policy is to have employees enter into nondisclosure agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside the Company, requiring disclosure to the Company of any new ideas,
developments, discoveries or inventions conceived during employment, and
requiring assignment to the Company of proprietary rights to such matters that
are related to the Company's business.
The Company also relies on a combination of trade secrets, copyright
and trademark laws, contractual provisions and technical measures to protect its
rights in various methodologies, systems, products and databases. The Company
has no patents or copyrights covering its software technology. Any infringement
or misappropriation of the Company's proprietary software and databases would
disadvantage the Company in its efforts to retain and attract new customers in a
highly competitive market and could cause the Company to lose revenues or incur
substantial litigation expense.
There can be no assurance that measures taken by the Company to protect
its intellectual property will be adequate or that the Company's competitors
will not independently develop products and services that are substantially
equivalent or superior to those of the Company. Substantial litigation regarding
intellectual property rights exists in the software industry, and the Company
expects that software products may be increasingly subject to third-party
infringement claims as the number of competitors in the Company's industry
segment grows and the functionality of products overlaps. However, due to the
nature of its application software, the Company believes that patent, trade
secret and copyright protection are less significant than the Company's ability
to further develop, enhance and modify its current products.
Although the Company believes that its products do not infringe on the
intellectual rights of others, there can be no assurance that such a claim will
not be asserted against the Company in the future, or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. Any such claim may require the Company to incur
substantial litigation expenses or subject the Company to significant
liabilities and could have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of February 28, 1998, the Company employed 754 people, including 93
in general administration, 106 in product design, research and development
quality assurance and technical support, 73 in sales and marketing and 482 in
operations. None of the Company's employees is represented by a union or other
collective bargaining group. The Company believes its relationship with its
employees to be satisfactory.
15.
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<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of February
28, 1998, are as follows:
NAME AGE POSITION
<S> <C> <C>
James D. Durham 51 Chairman of the Board, President and Chief Executive Officer
John V. Cracchiolo 41 Executive Vice President, Chief Financial Officer and Secretary
Suzanne J. Blumenthal 44 Executive Vice President and President, Business Office Services and Technology Division
Andrew J. Hurd 34 Executive Vice President, Business Development
Steven D. McCoy 47 Executive Vice President and President, Managed Care Division
Keith M. Roberts 33 Executive Vice President, General Counsel and Assistant Secretary
Ruthann Russo 39 Executive Vice President and President, Compliance and Education Division
Lemuel C. Stewart, Jr. 51 Executive Vice President and President, EDI Division
Joanne H. Vaul 39 Executive Vice President and President, Value Added Systems Division
Bernie J. Murphy 32 Vice President, Finance and Chief Accounting Officer
</TABLE>
BACKGROUND
James D. Durham founded the Company in September 1993 when he became
its President and Chief Executive Officer and a director. In May 1996, Mr.
Durham became Chairman of the Board. From November 1992 to December 1993, Mr.
Durham served as the Chief Executive Officer of Trim Healthcare Systems, Inc., a
reimbursement consulting services company. From April 1992 to April 1993, Mr.
Durham served as Chief Executive Officer of Care Partners, Inc., an accounts
receivable processing and funding company cofounded by Mr. Durham. From February
1986 until its acquisition by Ameritech in February 1992, Mr. Durham served as
President and Chief Executive Officer of Knowledge Data Systems, Inc., a health
care information systems company. Mr. Durham holds a B.S. with honors in
Industrial Engineering from the University of Florida and an M.B.A. with an
emphasis in Finance from the University of California, Los Angeles and is a
Certified Public Accountant.
John V. Cracchiolo joined the Company in May 1995 as its Executive Vice
President, Chief Financial Officer and Secretary. Prior to joining the Company,
Mr. Cracchiolo worked for PSICOR, Inc., a health care services company, serving
as its Chief Financial Officer from February 1993 to May 1995, and its corporate
Controller from May 1989 to February 1993. Previously, Mr. Cracchiolo worked in
various management positions for software, hardware, defense contractor and
personnel and professional services organizations within the health care and
other industries. Mr. Cracchiolo holds a B.S. in Business Administration from
California State University, Long Beach and is a Certified Public Accountant.
Suzanne J. Blumenthal joined the Company in January 1994 as Vice
President, Sales. From January 1995 to December 1995, Ms. Blumenthal served as
Vice President, Business Development and in January 1996 she became Senior Vice
President, Business Development. In December 1997, Ms. Blumenthal became
President of the Company's Business Office Services and Technology Division.
From October 1992 to December 1993, Ms. Blumenthal served as Vice President,
Sales for StellarNet, a company specializing in EDI software. From March 1988
to October 1992, Ms. Blumenthal served as Western Regional Director for CSC
Healthcare Systems, Inc., a division of Computer Sciences Corporation, which
specializes in managed care software. Ms. Blumenthal holds a B.A. in Urban
Planning from Washington University and a Master's in Healthcare Administration
from George Washington University.
Andrew D. Hurd joined the Company in January 1998 as Executive Vice
President, Business Development. From November 1995 to January 1998, Mr. Hurd
was Vice President, Health Care Financial Services at National Data Corporation,
an EDI company. From 1988 to November 1995, Mr. Hurd was the Vice President and
General Manager of Amsco International, a medical supply company. Mr. Hurd
holds a B.A in Marketing and a B.S in Business Administration from Northern
Arizona University.
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Steven D. McCoy joined the Company in September 1997 as a Senior Vice
President. In February 1998, Mr. McCoy became the Executive Vice President and
President of the Company's Managed Care Division. From July 1987 to September
1997, Mr. McCoy was the President of Healthcare Revenue Management, Inc., a
managed care department outsourcing and audit services company, until that
company was acquired by QuadraMed in September 1997. Mr. McCoy holds a B.S. in
Computer Science from the Air Force Academy.
Keith M. Roberts joined the Company in March 1997 as Vice President and
General Counsel and became Executive Vice President, General Counsel and
Assistant Secretary in February 1998. From May 1995 to March 1997, Mr. Roberts
was an associate of Brobeck, Phleger & Harrison LLP, a private law firm. From
September 1992 to May 1995, Mr. Roberts was an associate of Hale & Dorr, a
private law firm. Mr. Roberts holds a J.D. from Stanford Law School and a B.A.
in economics and philosophy from the University of Rochester.
Ruthann Russo joined the Company in February 1998 as Executive Vice
President and President, Compliance and Education Division. From May 1991 until
February 1998, Ms. Russo was the Chief Executive Officer of Cabot Marsh
Corporation, a health care consulting company, until that company was acquired
by QuadraMed in February 1998. Ms. Russo holds a J.D. from American University
and a B.A. in Liberal Arts from Dickinson College.
Lemuel C. Stewart, Jr. joined the Company in July 1997 as its Executive
Vice President and President, EDI Division. From January 1997 to June 1997, Mr.
Stewart was a general manager of the Virginia-based EDI division of National
Data Corporation ("NDC"), an information systems and services company for the
health care and payment systems markets. From September 1986 to January 1997,
Mr. Stewart was the President, Chief Operating Officer and general manager of
Health Communication Services, Inc., which was acquired by NDC. Mr. Stewart
holds a B.S. in Business/Finance from East Tennessee State University and an
A.A. in Business from Richard Bland College of William and Mary.
Joanne H. Vaul joined the Company in December 1995 as a Senior Vice
President and became Executive Vice President and President, Value Added
Systems Division in February 1998. From December 1991 until December 1995, Ms.
Vaul was the Chief Operating Officer of Healthcare Design Systems, Inc., which
was acquired by the Company in December 1995. Ms. Vaul holds a B.S. in
Accounting and Economics as well as an M.B.A. from Widener University.
Bernie J. Murphy joined the Company in June 1996 as Corporate
Controller. In February 1998, Mr. Murphy became the Company's Vice President,
Finance and Chief Accounting Officer. From July 1988 to June 1996, Mr. Murphy
worked at Arthur Andersen LLP, where he served as a manager in the audit
practice for the last three years of employment with that firm. Mr. Murphy holds
a B.S. in Business Administration from the University of San Francisco and is a
Certified Public Accountant.
ITEM 2. PROPERTIES.
The Company's executive and corporate offices are located in Larkspur,
California, in approximately 11,500 square feet of leased office space under a
lease that expires in June 1998. The Company also maintains several regional
offices throughout the United States. The Company believes that its facilities
are adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may be involved in litigation relating
to claims arising out of its operations in the normal course of business. As of
the date of this Report, the Company is not a party to any legal proceedings
which, if decided adversely to the Company, would, individually or in aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of the Stockholders of the Company was held on
February 6, 1998 (the "Special Meeting"). The stockholders voted on a proposal
to approve a series of amendments to the Company's 1996
17.
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Stock Incentive Plan (the "Plan") including (i) a 750,000 share increase in the
number of shares of the Company's Common Stock available for issuance thereunder
and (ii) an increase in the maximum number of shares for which any one person
may receive options, separately exercisable stock appreciation rights and direct
stock issuances by an additional 300,000 shares.
The results of the voting were as follows: 4,598,012 votes in favor of
the proposal, 2,450,184 votes against the proposal, 6,902 abstentions and broker
nonvotes and zero votes withheld.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been quoted on the Nasdaq National
Market since October 10, 1996 under the symbol "QMDC." The following table sets
forth the range of high and low closing sales prices reported on the Nasdaq
National Market for Company Common Stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended December 31, 1996
Fourth Quarter (October 10, 1996 through December 31, 1996) $13 1/2 8 9/16
Year Ended December 31, 1997
First Quarter 12 1/4 9 5/8
Second Quarter 10 5/8 6 3/4
Third Quarter 20 6 3/4
Fourth Quarter 27 1/2 17
Year Ended December 31, 1998
First Quarter (through March 30, 1998) 35 1/4 18 15/16
</TABLE>
As of March 25, 1998, there were approximately 143 holders of record
of the Company's Common Stock. The Company believes that the number of
beneficial holders of Company Common Stock substantially exceeds this number.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain all future earnings, if any, to
fund the development and growth of its business and does not anticipate paying
any cash dividends on the Common Stock in the foreseeable future.
19.
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY DATA.
The following selected financial data of the Company for the fiscal
years ended December 31, 1993, 1994, 1995, 1996 and 1997, are derived from, and
are qualified by reference to, the audited financial statements and should be
read in conjunction with the consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ..................................... $ 517 $ 6,102 $ 10,035 $ 29,131 $ 44,926
Loss from operations ......................... (793) (4,780) (18,670) (154) (42,569)
Net loss ..................................... (804) (4,865) (18,829) (958) (42,573)
Basic and diluted loss per share(1) .......... $ (.40) $(2.26) $(8.10) $ (0.26) $ (4.91)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) .................... $ (1,866) $ (1,494) $ (3,071) $ 21,445 $ 23,578
Total assets ................................. 2,123 2,801 27,212 38,284 99,213
Stockholders' equity (deficit) ............... (667) (1,457) (9,565) 21,332 58,237
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing net income
per share. In February 1997, the Financial Accounting Standards board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which requires disclosure of basic earnings per share and
diluted earnings per share and is effective for periods ending subsequent to
December 15, 1997.
20.
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
This Annual Report on Form 10-K contains forward looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 24.
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. QuadraMed utilizes its technology solutions
to offer partial and complete business office outsourcing services to hospitals,
home care entities, MSOs, medical groups and other healthcare providers.
QuadraMed and its subsidiaries have approximately 2,800 healthcare customers. In
addition, QuadraMed has received endorsements from 13 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.
Through March 1998, the Company has completed 17 acquisition transactions, three
of which have been accounted for as a pooling of interests. 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 1995, 1996 and 1997.
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>
COMPANY ACQUIRED DESCRIPTION OF COMPANY ACQUIRED POOLING/PURCHASE DATE ACQUIRED
<S> <C> <C> <C>
Healthcare Design Systems Health care financial management and decision Purchase December 1995
support software
InterMed Healthcare Systems Inc. Client-server information systems for health care Pooling December 1996
payors
Healthcare Recovery, Inc., doing business Cash flow management services Purchase April 1997
as Synergy HMC
Healthcare Revenue Management, Inc. Managed care department outsourcing and audit Purchase September 1997
services
Medicus Systems Corporation Health care financial management and decision Purchase November 1997*
support software
Rothenberg Health Systems, Inc. and Capitation management software and H.E.D.I.S. Pooling December 1997
Healthcare Research Affiliates, Inc. reporting
(collectively, "Rothenberg")
Cabot Marsh Corporation Health care compliance and consulting company Purchase February 1998
</TABLE>
- -------------
* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus Systems
Corporation on November 9, 1997. It is anticipated that the merger of the
Company and Medicus will be closed in the second quarter of 1998. See "Recent
Developments -- Acquisition of Medicus Systems Corporation."
As indicated in the table above, the acquisition of Rothenberg 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
twelve months of the 1997 and 1996 fiscal years and for the last two calendar
months of 1995. As a result, the period to period comparison of the Company's
operating results for fiscal years 1995 and 1996 reflect increases from 1995 to
1996 that are attributable to Rothenberg's short operating history in 1995.
21.
<PAGE> 24
In connection with the Company's acquisition of 56.7% of Medicus in
November 1997, the Company recorded a non-recurring charge of $38.5 million in
the year ended December 31, 1997 related to the write-off of acquired in-process
research and development. Additionally, the Company expects that acquisitions in
the first quarter of 1998 will result in additional non-recurring charges
related to acquired in-process research and development in the quarter ended
March 31, 1998.
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-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 February 28, 1998, QuadraMed and its subsidiaries had
approximately 2,800 customers, approximately 80% of which were hospitals,
located in all 50 states, the District of Columbia and Canada. The Company
expects to maintain a high percentage of hospital customers, but also expects
its customer mix to a higher percentage of other providers, including integrated
delivery health care systems ("IDSs"), as well as physicians, payors and
employers. For the year ended December 31, 1995 revenues from one customer were
11%. No single customer accounted for more than 10% of the Company's revenues in
1996 and 1997.
The Company's suite of products, called QuanTIM, may be licensed either
as an integrated solution or as individual applications. The Company licenses
its software products pursuant to either a one-time payment for a perpetual
license with the option of purchasing support and maintenance or pursuant to
annual renewable licenses. The latter method provides the Company with a
recurring component to its revenues each year. Revenues from annual renewable
license fees are recognized on the contract anniversary date. Revenues from
perpetual software license agreements are significantly greater than license
fees under contracts that have annual renewal provisions and are generally
recognized upon shipment and involve one-time license fees, which can cause the
Company's revenues to vary from quarter to quarter. To date, a substantial
majority of customers who have purchased perpetual licenses have also purchased
annual support and maintenance agreements, the revenues from which are
recognized monthly.
In addition to its software products, the Company provides business
office outsourcing and cash flow management services. The Company offers partial
and full outsourcing of business office functions for hospitals, physicians,
home health care agencies and other providers. The Company often uses its
software products in delivering these services. The focus of these services is
to increase the cash flow and improve the efficiencies of business operations
for health care providers. The Company also provides cash flow management
services to update and organize a provider's standard billing and charge
information to facilitate appropriate reimbursement for the provider. Business
office outsourcing and cash flow management service revenues typically consist
of fixed monthly fees plus incentive-based payments based on a percentage of
dollars recovered for the provider. The monthly fees from outsourcing services
are recognized as revenues on a monthly basis, and incentive fees are recognized
as revenues based on the collection of accounts from payors. The Company 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the consolidated statement of operations of QuadraMed expressed as a
percentage of total revenues.
22.
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
------ ------ ------
Revenues:
Licenses ......................... 65.3% 88.8% 75.4%
Services ......................... 34.7 11.2 24.6
Total revenues ................... 100.0 100.0 100.0
Operating expenses:
Cost of licenses ................. 38.3 35.8 29.1
Cost of services ................. 44.5 13.1 15.6
General and administration ....... 28.0 20.6 18.0
Sales and marketing .............. 17.8 16.3 15.0
Research and development ......... 8.6 12.1 11.4
Amortization of intangibles ...... 1.0 2.6 3.5
Non-recurring charges ............ -- -- 17.4
Write-off of acquired in-
process research and
development .................. 147.9 -- 85.8
------ ------ ------
Total operating expenses ..... 286.1 100.5 195.8
------ ------ ------
Loss from operations .................. (186.1) (0.5) (95.8)
Interest income (expense), net ........ (2.1) (3.5) 2.6
Other income (expense), net ........... 0.5 0.7 0.3
------ ------ ------
Net loss before provision
for income taxes .................... (187.7) (3.3) (92.9)
Provision for income taxes ............ -- -- 1.7
------ ------ ------
Net loss .............................. (187.7) (3.3) (94.6)
====== ====== ======
</TABLE>
Years ended December 31, 1997 and 1996
Revenues
Licenses. License revenues increased 30.9% to $33.9 million in 1997
from $25.9 million in 1996. The increase in license revenues was due to license
revenues from new customers and an increase in perpetual license agreements
entered into during the latter half of 1997. Software license revenues include
license, installation, consulting and post-contract support fees, third-party
hardware sales and other revenues related to licensing of the Company's software
products.
Services. Service revenues increased 239.1% to $11.1 million in 1997
from $3.3 million in 1996. The increase in service revenues was due principally
to new customers acquired in the Synergy acquisition in April 1997 and, to a
lesser extent, new customers acquired in the acquisition of Healthcare Revenue
Management, Inc. in September 1997.
Cost of Revenues
Cost of Licenses. Cost of license revenues increased 25.2% to $13.1
million in 1997 from $10.4 million in 1996. 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 38.5% in 1997 from 40.3% 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 is
23.
<PAGE> 26
principally due to the leveraging of costs over an increased revenue base and to
a higher number of perpetual contracts entered into during 1997, which tend to
have higher operating margins.
Cost of Services. Cost of service revenues increased 82.9% to $7.0
million in 1997 from $3.8 million in 1996. Cost of services includes expenses
associated with services performed in connection with business office
outsourcing and cash flow management services. As a percentage of service
revenues, cost of services decreased to 63.3% in 1997 from 117.4% in 1996. The
increase in cost of services was principally due to additional operating costs
associated with Synergy and, to a lesser extent, additional operating costs
associated with Healthcare Revenue Management, Inc., acquired in April 1997 and
September 1997, respectively. Cost of services as a percentage of service
revenues decreased principally due to the leveraging of costs over an increased
revenue base and the addition of several larger contracts in 1997, which
typically have higher operating margins.
Operating Expenses
General and Administration. General and administration expenses
increased 35.2% to $8.1 million in 1997 from $6.0 million in 1996, and decreased
as a percentage of total revenues to 18.0% in 1997 from 20.6% in 1996. The
increase in general and administration expenses reflects costs associated with
the hiring of additional senior officers in 1997 and an increase 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.
Sales and Marketing. Sales and marketing expenses increased 42.1% to
$6.8 million in 1997 from $4.8 million in 1996, and decreased as a percentage of
total revenues to 15.0% in 1997 from 16.3% 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
45.3% to $5.1 million in 1997 from $3.5 million in 1996, and decreased as a
percentage of total revenues to 11.4% in 1997 from 12.1% in 1996. The increase
in research and development expenses is principally due to the addition of
personnel. The Company capitalized $607,000, $682,000 and $425,000 of software
development costs in fiscal 1997, 1996 and 1995, respectively, which represented
11.6%, 16.2% and 33.0% of total research and development expenditures in fiscal
1997, 1996 and 1995. Amortization of capitalized software development costs
totaled $155,000, $47,000 and $32,000 in fiscal 1997, 1996 and 1995,
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,
but should remain relatively constant as a percentage of total revenues,
although there can be no assurance in this regard.
Amortization of Intangibles. Amortization of intangibles increased to
$1.6 million in 1997 from $766,000 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 Medicus in November 1997.
Non-Recurring Charges. The Company recorded non-recurring charges of
$7.8 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. in December 1997, $3.1 million relating to two acquisitions in 1997 (which
were accounted for on a pooling of interests basis) 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 $38.5 million write-off related to acquired in-process
research and development that had not achieved technological feasibility and had
no alternative future use.
24.
<PAGE> 27
Interest Income (Expense). Interest income increased to $1.2 million in
1997 compared to interest expense of $1.0 million in 1996. The increase in
interest income resulted from 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.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $788,000 in 1997 compared to no provision in 1996. The provision for
income taxes in 1997 relates to state and alternative minimum tax liabilities of
the Company. For financial reporting purposes, a 100% valuation allowance of
$12.0 million and $7.3 million has been recorded against the Company's deferred
tax assets in 1997 and 1996, respectively, under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Years ended December 31, 1996 and 1995
Revenues
Licenses. License revenues increased 295.0% to $25.9 million in 1996
from $6.5 million in 1995. The significant increase in license revenues was due
principally to sales associated with businesses acquired in pooling transactions
that are included in revenues for 1996 and, to a lesser extent, an increase in
new customers.
Services. Service revenues decreased 6.4% to $3.3 million in 1996 from
$3.5 million in 1995. The decline in service revenues reflects a decrease in the
number of customers using the Company's accounts receivable management services,
which were comprised of projects with a defined service period, as a result of
certain projects that expired and were not replaced with other service
contracts.
Cost of Revenues
Cost of Licenses. Cost of license revenues increased 171.5% to $10.4
million in 1996 from $3.8 million in 1995. This increase is principally due to
the cost of licenses associated with the Rothenberg business (which was acquired
in a pooling transaction) and to an increase in the number of software license
installations during 1996. As a percentage of license revenues, cost of licenses
decreased to 40.3% in 1996 from 58.6% in 1995. The decrease in cost of licenses
as a percentage of license revenues reflects the significant increase in license
revenues with higher operating margins during 1996.
Cost of Services. Cost of service revenues decreased 14.3% to $3.8
million in 1996 from $4.5 million in 1995. As a percentage of service revenues,
cost of services decreased to 117.4% in 1996 from 128.2% in 1995. The decline in
cost of services and as a percentage of service revenues reflects a decrease in
the number of service personnel.
Operating Expenses
General and Administration. General and administration expenses
increased 113.5% to $6.0 million in 1996 from $2.8 million in 1995. The increase
in general and administration expenses is due to expenses associated with
businesses acquired in pooling transactions, the addition of personnel
associated with the Healthcare Design Systems acquisition in December 1995 and
higher communication and travel costs associated with establishing an office on
the East Coast. As a percentage of total revenues, general and administration
expenses decreased to 20.6% in 1996 from 28.0% in 1995.
25.
<PAGE> 28
Sales and Marketing. Sales and marketing expenses increased 166.3% to
$4.8 million in 1996 from $1.8 million in 1995. The increase in sales and
marketing expenses resulted primarily from the addition of sales personnel and
project managers in connection with acquisitions and is attributable in part to
increased advertising expenditures during 1996. As a percentage of total
revenues, sales and marketing expenses declined to 16.3% in 1996 from 17.8% in
1995.
Research and Development. Research and development expenses increased
307.2% to $3.5 million in 1996 from $864,000 in 1995. The increase in research
and development expenses represents a significant increase in the number of
personnel dedicated to the development and enhancement of the Company's
products. As a percentage of total revenues, research and development expenses
increased to 12.1% in 1996 from 8.6% in 1995.
Amortization of Intangibles. Amortization of goodwill increased to
$766,000 in 1996 from $102,000 in 1995. The increase in amortization is
primarily the result of amortization of goodwill associated with the acquisition
of Healthcare Design Systems in December 1995 and amortization previously
associated with Rothenberg, which was not included in the Company's results of
operations until November 1995.
Acquired In-Process Research and Development. In 1995, the Company
recorded a $6.2 million write-off related to acquired in-process research and
development that had not achieved technological feasibility and had no
alternative future use. In addition, Rothenberg recorded a write-off of $8.6
million associated with acquired in-process research and development during
1995.
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
$26.4 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.
At December 31, 1997, the Company had $43.7 million of cash and cash
equivalents, $1.0 million of short-term investments and $23.6 million in net
working capital. Net cash used in operating activities was $1.8 million,
$218,000 and $4.0 million in the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in operating activities in fiscal year 1997 was
principally attributable to the Company's net loss in 1997, a substantial
portion of which was comprised of a non-cash charge to write-off acquired
in-process research and development related to the Medicus acquisition in
November 1997. Net cash used in operating activities in fiscal year 1996 was
principally attributable to investments in the Company's infrastructure and net
cash used in operating activities in fiscal year 1995 was principally
attributable to a net loss by the Company.
Net cash used in investing activities was $29.9 million, $2.9 million
and $893,000 in the years ended December 31, 1997, 1996 and 1995, respectively.
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 years
1996 and 1995 related to additions to capital equipment and the capitalization
of computer software development costs.
Net cash provided by financing activities was $54.6 million, $12.2
million and $14.7 million in the years ended December 31, 1997, 1996 and 1995,
respectively. 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.
26.
<PAGE> 29
In April 1997, Medicus entered into an agreement with a bank that
provided for a secured revolving line of credit up to a maximum of $2,500,000.
There were no outstanding balances at December 31, 1997. The line of credit
agreement was terminated by the Company in January 1998.
In July 1997, the Company entered into an unsecured line of credit
arrangement to borrow up to $5,000,000 at the bank's prime rate. The line of
credit expires in July 1998 and contains certain financial and non-financial
restrictions, including among others, maintaining a minimum quick ratio, minimum
tangible net worth and a minimum ratio of total liabilities to tangible net
worth. The Company was not in compliance with certain of these covenants at
December 31, 1997; however, the Company received a waiver from the bank for
noncompliance with such financial covenants. There were no outstanding balances
at December 31, 1997.
YEAR 2000 COMPLIANCE
Many computer systems experience problems processing dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing both the internal readiness of its computer systems and the compliance
of its computer products and software sold to customers to address any year 2000
issues. The Company expects to implement successfully the systems and
programming changes necessary to address the year 2000 issues and does not
believe that the cost of such actions will have a material adverse effect on the
Company's business, results of operations or financial condition. There can be
no assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on its business,
financial condition and results of operations.
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. A significant number of the Company's
customers are running product versions that are not year 2000 compliant. While
the Company has been encouraging such customers to migrate to current product
versions, it is possible that the Company may experience increased expenses in
addressing migration issues and may lose customers. In addition, there can be no
assurances that the Company's current products do not contain undetected errors
or defects associated with year 2000 date functions that may result in the
material costs to the Company. Some commentators have stated that significant
amounts of litigation will arise out of year 2000 compliance issues. Because of
the unprecedented nature of such litigation it is uncertain whether or to what
extent the Company may be affected by it.
27.
<PAGE> 30
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), which was adopted by the Company in the quarter ended December 31,
1997, and in accordance with this standard all prior periods presented have been
restated to conform to its provisions. Under the new requirements for
calculating earnings per share, basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed using the weighted
average of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options and warrants (using the
treasury stock 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 the three years in the period ended December 31, 1997, no common
equivalent shares are included in diluted weighted average common shares
outstanding.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for reporting and
displaying comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements and is effective
for fiscal years beginning after December 15, 1997. The adoption of this
statement will not have a material impact on the Company's results of operations
or financial position.
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"). 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. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement will not have a material impact on the
Company's results of operations or financial position.
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
In addition to other information in this Annual Report on Form 10-K,
the following are important factors that should be considered in evaluating the
Company and its business.
History of Operating Losses; Uncertain Profitability
The Company incurred net losses of $18.8 million, $958,000 and $42.5
million for the years ended December 31, 1995, 1996 and 1997, respectively, and
as of December 31, 1997 had an accumulated deficit of $69.3 million. Although
the Company recorded net income of $153,000 and $1.4 million for the years ended
December 31, 1996 and December 31, 1997, respectively, these results do not
include the effect of the Medicus Merger and the Rothenberg Merger. On a pro
forma basis, after giving effect to the Rothenberg Merger and the Company's
acquisition of the Synergy Companies, Health Resource Management and Medicus,
the Company's net loss for the years ended December 31, 1996 and 1997 would have
been $9.2 million and $51.7 million, respectively. In connection with its
acquisitions, the Company has and will incur significant non-recurring charges
and will be required to amortize significant expenses related to goodwill and
other intangible assets in future periods. There can be no assurance that the
Company will be able to achieve or sustain revenue growth or profitability on a
quarterly or annual basis.
Potential Variability in Quarterly Operating Results
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate as
a result of a variety of factors, including the following: integration of
acquired businesses, variability
28.
<PAGE> 31
in demand for the Company's products and services; the number, timing and
significance of announcements and releases of product enhancements and new
products by the Company and its competitors; the timing and significance of
announcements concerning the Company's present or prospective strategic
alliances; the termination of, or a reduction in, offerings of the Company's
products and services; the loss of customers due to consolidation in the health
care industry; delays in product delivery requested by customers; the length of
the sales cycle or the timing of sales; the amount of new potential contracts at
the beginning of any particular quarter; customer budgeting cycles and changes
in customer budgets; investments by the Company in marketing, sales, research
and development, and administrative personnel necessary to support the Company's
anticipated operations; marketing and sales promotional activities; software
defects and other quality factors; and general economic conditions.
The timing of customer purchases is difficult to predict given the
complex procurement decision process associated with most health care providers
and payors. As a result, the Company typically experiences sales cycles that
extend over several quarters for new customers. The Company expects that these
factors will continue to result in variations in quarterly revenues and
operating results. Moreover, the Company's operating expense levels, which will
increase with the addition of acquired businesses are relatively fixed. If
revenues are below expectations, net income is likely to be disproportionately
adversely affected. Further, it is likely that in some future quarter the
Company's revenues or operating results will be below the expectations of
securities analysts and investors. In such event, the trading price of the
Company's Common Stock would likely be materially adversely affected.
Integration of Acquired Companies into the Company
The Company has entered into merger agreement with Medicus and
completed the Rothenberg Merger with the expectation that the Medicus Merger and
the Rothenberg Merger will result in certain benefits to the Company as the
combined company. Realizing the benefits of the Medicus Merger and the
Rothenberg Merger will depend in part upon the successful integration of the
businesses, products and employees of the Company, Rothenberg and Medicus in an
efficient manner, and there can be no assurance that such integration will not
entail substantial costs, delays or other problems or that such integration will
be successfully completed. Combining the companies will divert the attention of
management from other matters and will result in significant operational and
administrative expense. Any difficulties encountered in the integration process
could have a material adverse effect on the revenues and operating results of
the Company. In addition, the process of combining the companies could cause the
interruption of, or a disruption in, the business activities of the constituent
companies, which could have a material adverse effect on the operations and
financial performance of the Company. Even if these companies are successfully
integrated into the Company, the acquired operations may not achieve sales,
productivity and profitability commensurate with the Company's historical
operating results or with projected results of the Company and financial
analysts and investors. Failure to achieve such projected results would have a
material adverse effect on the Company's financial performance, and in turn, on
the market value of the Company Common Stock. QuadraMed will incur a significant
amortization expense in future periods as a result of the Medicus acquisition.
There can be no assurance that the Company will realize any of the anticipated
benefits of the Medicus Merger and the Rothenberg Merger or that such
acquisitions will enhance the Company's business or financial performance.
Dependence on Acquisitions Strategy
The Company intends to continue to expand in substantial part through
acquisitions of products, technologies and businesses. The Company's ability to
expand successfully through acquisitions depends on many factors, including the
successful identification and acquisition of products, technologies or
businesses and management's ability to effectively negotiate and consummate
acquisitions and integrate and operate the new products, technologies or
businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to increasing consolidation in
the health care industry, thereby increasing the costs of capitalizing on
acquisition opportunities. The Company competes for acquisition opportunities
with other companies that have significantly greater financial and management
resources than the Company. The
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inability to successfully identify appropriate acquisition opportunities,
consummate acquisitions or successfully integrate acquired products,
technologies, operations, personnel or businesses could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, acquisitions may divert management's attention from other business
concerns, expose the Company to the risks of entering markets in which it has no
direct prior experience or to risks associated with the market acceptance of
acquired products and technologies, or result in the loss of key employees of
the Company or the acquired company. Moreover, acquisitions (including the
Medicus Merger and the Rothenberg Merger) by the Company in November and
December 1997 may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt and the recognition of amortization expenses
related to goodwill and other intangible assets, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Associated with Acquisitions; Need to Manage Changing Operations
Acquisitions, including the Medicus Merger and the Rothenberg Merger,
involve a number of special risks including, without limitation, managing
geographically dispersed operations, failure of the acquired business to achieve
expected results, failure to retain key personnel of the acquired business,
inability to integrate the new business into existing operations and risks
associated with unanticipated events or liabilities, potential increases in
stock compensation expense and increased compensation expense resulting from
newly hired employees, the assumption of unknown liabilities and potential
disputes with the sellers of one or more acquired entities, all of which could
have a material adverse effect on the Company's business, results of operations
and financial condition. Additionally, customer dissatisfaction or performance
problems at a single acquired company could have an adverse effect on the
Company's reputation and its sales and marketing initiatives. With the addition
of the Medicus and RHP businesses, the Company's anticipated future operations
may place a strain on its management systems and resources. The Company expects
that it will be required to continue to improve its financial and management
controls, reporting systems and procedures, and will need to expand, train and
manage its work force. There can be no assurance that the Company will be able
to effectively manage these tasks, and the failure to do so could have a
material adverse effect on its business, financial condition and results of
operations.
Dependence on Key Personnel
The Company's performance also depends in significant part upon the
continued service of its executive officers, its product managers and other key
sales, marketing, and development personnel. The loss of the
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<PAGE> 33
services of any of its executive officers or the failure to hire or retain other
key employees could have a material adverse effect on the Company's business,
financial condition and results of operations. Additions of new, and departures
of existing, personnel can be disruptive and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Risks Related to Hospital and Managed Care Markets; Uncertainty in the Health
Care Industry
A substantial portion of the Company's revenues have been and are
expected to be derived from the sale of software products and services to
hospitals. Consolidation in the health care industry, particularly in the
hospital and managed care markets, could cause a decrease in the number of
potential purchasers of the Company's products and services or the loss of one
or more of the Company's significant customers, insofar as customers may be
acquired by another company that uses products or services provided by a
competitor of the Company. Any of these occurrences could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the decision to purchase the Company's products often
involves the approval of several members of management of a hospital or health
care provider. Consequently, it is difficult for the Company to predict the
timing or outcome of the buying decisions of customers or potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company believes that
the commercial value and appeal of its products may be adversely affected if the
current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of the Company's customers are providing services under capitated
service agreements, and a reduction in the use of capitation arrangements as a
result of regulatory or market changes could have a material adverse effect on
the Company's business, financial condition and results of operations. During
the past several years, the health care industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain proposals to reform the health care
system have been and are being considered by Congress. These proposals, if
enacted, could change the operating environment for the Company's clients in
ways that cannot be predicted. Health care organizations may react to these
proposals by curtailing or deferring investments, including those for the
Company's products and services.
Changes in current health care financing and reimbursement systems
could result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of endorsement
of the Company's products by hospital associations or other customers. Any of
these occurrences could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, many
health care providers are consolidating to create integrated health care
delivery systems with greater regional market power. As a result, these emerging
systems could have greater bargaining power, which may lead to price erosion of
the Company's products. The failure of the Company to maintain adequate price
levels would have a material adverse effect on the Company's business, financial
condition and results of operations. Other market-driven reforms could also have
unpredictable effects on the Company's business, financial condition and results
of operations.
31.
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Highly Competitive Market
Competition in the market for the Company's products and services
(including products and services acquired from Medicus and RHP is intense and is
expected to increase. Increased competition could result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. The Company's competitors include other providers of health care
information software and services, as well as health care consulting firms. The
combined company's principal competitors include: (i) CIS Technologies, Inc., a
division of National Data Corporation, Inc., and Sophisticated Software, Inc. in
the market for its EDI products; (ii) Envoy Corp. and MedE AMERICA in the market
for its claims processing service, (iii) Healthcare Cost Consultants, Inc., a
division of CIS Technologies, Inc., and Trego Systems, Inc. in the market for
its contract management products; (iv) IMNET Systems, Inc., Optika Imaging
Systems, Inc. and LanVision Systems, Inc. in the market for its electronic
document management products; (v) Transition Systems, Inc. and Healthcare
Microsystems, Inc., a division of Health Management Systems Inc., HCIA Inc. and
MediQual Systems, Inc., a division of Cardinal Health, Inc., in the market for
its decision support products. (vi) HMS and ARTRAC, a division of Medaphis in
the market for its business office outsourcing services; and (vii) a subsidiary
of Minnesota Mining and Manufacturing and CodeMaster, in the market for its
medical records products. In addition, current and prospective customers
evaluate the Company's capabilities against the merits of their existing
information systems and expertise. Furthermore, major software information
systems companies, including those specializing in the health care industry, not
presently offering products that compete with those offered by the Company may
enter the Company's markets. In addition, many of the Company's competitors and
potential competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than the
Company. Many of the Company's competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, the Company's competitors may be able to respond more
quickly to new or emerging technologies, changes in customer requirements and
political, economic or regulatory changes in the health care industry or to
devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
New Product Development and System Enhancement
The Company's performance will depend in large part upon the Company's
ability to provide the increasing functionality required by its customers
through the timely development and successful introduction of new products and
enhancements to its existing suite of products. The Company has historically
devoted significant resources to product enhancements and research and
development and believes that significant continuing development efforts will be
required to sustain its operations and integrate the products and technologies
of acquired businesses. There can be no assurance that the Company will
successfully or in a timely manner develop, acquire, integrate, introduce and
market new product enhancements or products, or that product enhancements or new
products developed by the Company will meet the requirements of hospitals or
other health care providers and payors and achieve or sustain market acceptance.
Limited Proprietary Rights; Risk of Infringement
The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company.
Substantial litigation regarding intellectual property rights exists in
the software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the
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<PAGE> 35
number of competitors in the Company's industry segment grows and the
functionality of products overlaps. Although the Company believes that its
products do not infringe upon the proprietary rights of third parties, there can
be no assurance that third parties will not assert infringement claims against
the Company in the future or that a license or similar agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim. In addition, any claim may require the Company to incur substantial
litigation expenses or subject the Company to significant liabilities and could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company has received notice of a claim filed with
the United States Trademark Appeal Board for the cancellation of its registered
QuanTIM(R) trademark, and also has recently received a letter from a separate
third party challenging this trademark. There can be no assurance that the
Company will be successful in its defense of these or similar claims.
Risk of Product Defects; Failure to Meet Performance Criteria
Products such as those offered by the Company frequently contain errors
or failures, especially when initially introduced or when new versions are
released. Although the Company conducts extensive testing, software errors have
been discovered in certain enhancements and products after their introduction.
There can be no assurance that, despite testing by the Company and by current
and potential customers, errors or performance failures will not occur in these
products under development or in other enhancements or products after
commencement of commercial shipments, resulting in loss of revenues and
customers, delay in market acceptance, diversion of development resources,
damage to the Company's reputation or increased service and warranty costs, any
of which could have a material adverse effect upon its business, financial
condition and results of operations.
Year 2000
Many computer systems have experienced or will experience problems
processing dates beyond the year 1999. Therefore, some computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the internal readiness of its computer
systems and the compliance of its computer products and software sold to
customers for addressing the year 2000 issues. The Company expects to implement
successfully the systems and programming changes necessary to address the year
2000 issues and does not believe that the cost of such actions will have a
material adverse effect on the Company's business, results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on its business, financial condition and results of operations.
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. A significant number of the Company's
customers are running product versions that are not year 2000 compliant. While
the Company has been encouraging such customers to migrate to current product
versions, it is possible that the Company may experience increased expenses in
addressing migration issues and may lose customers. In addition, there can be no
assurances that the Company's current products do not contain undetected errors
or defects associated with year 2000 date functions that may result in the
material costs to the Company. Some commentators have stated that significant
amounts of litigation will arise out of year 2000 compliance issues. Because of
the unprecedented nature of such litigation it is uncertain whether or to what
extent the Company may be affected by it.
Risk of Interruption of Data Processing
The Company currently processes substantially all its customer data at
its facilities in Larkspur, California and Neptune, New Jersey. While the
Company backs up its data nightly and has safeguards for emergencies such as
power interruption or breakdown in temperature controls, it has no mirror
processing site to which processing could be transferred in the case of a
catastrophic event at either of these facilities. The occurrence of a major
catastrophic
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<PAGE> 36
event at either the Larkspur or the Neptune facility could lead to an
interruption of data processing and could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Related to Outsourcing Business
The Company provides compliance, consulting and business office
outsourcing services, including the billing and collection of receivables. The
infrastructure for the Company's outsourcing business was acquired by the
Company. In addition, the Company often uses its software products to provide
outsourcing services. As a result, the Company has not been required to make
significant capital expenditures in order to service existing outsourcing
contracts. However, if the Company experiences a period of substantial expansion
in its outsourcing business, it may be required to make substantial investments
in capital assets and personnel, and there can be no assurance that it will be
able to assess accurately the investment required and negotiate and perform in a
profitable manner any of the outsourcing contracts it may be awarded. The
Company's failure to estimate accurately the resources and related expenses
required for a project or its failure to complete its contractual obligations in
a manner consistent with the project plan upon which a contract was based could
have a material adverse effect on its business, financial condition and results
of operations. In addition, the Company's failure to meet a client's
expectations in the performance of its services could damage the Company's
reputation and adversely affect its ability to attract new business. Finally,
the Company could incur substantial costs and expend significant resources
correcting errors in its work, and could possibly become liable for damages
caused by these errors.
Government Regulation
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. The
FDA could determine in the future that any predictive aspects of the Company's
products make them clinical decision tools subject to FDA regulation. Compliance
with these regulations could be burdensome, time consuming and expensive. The
Company also could become subject to future legislation and regulations
concerning the development and marketing of health care software systems. Such
legislation could increase the cost and time necessary to market new products
and could affect the Company in other respects not presently foreseeable. The
Company cannot predict the effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under
which such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal levels. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
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Risk of Product-Related Claims
Certain of the Company's products and services relate to the payment,
collection, coding and billing of health care claims and the administration of
managed care contracts. Any failure by employees of the Company or by the
Company's products to accurately assess, process or collect such claims could
result in claims against the Company by its customers. The Company has been and
currently is involved in claims for money damages related to services provided
by its accounts receivable management business. The Company maintains insurance
to protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company that is in excess of, or excluded from, its insurance coverage could
have a material adverse effect on its business, financial condition and results
of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. There can
be no assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of the Company's
insurance coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. In addition, if liability of the Company were
to be established, substantial revisions to its products could be required that
may cause it to incur additional unanticipated research and development
expenses.
Risks Associated with Certain Investments
The Company has made, and may continue to make in the future, certain
investments in which it obtains a minority equity interest in certain early
stage companies. The Company does not have the ability to control the operations
of any of these companies. Investing in early stage companies is subject to
certain significant risks, and there can be no assurance that any of these
companies will be successful or achieve profitability or that the Company will
ever realize a return on its investments. In addition, to the extent any of such
companies fail or become bankrupt or insolvent, the Company may be required to
record a total loss on its investment, which could have a material adverse
effect on its results of operations during a particular reporting period.
Potential Effect of Anti-Takeover Provisions
Certain provisions of Delaware law applicable to the Company could have
the effect of delaying, deterring or preventing a change in control of the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's Certificate of Incorporation and Bylaws contain certain provisions
that could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. The Company's Board of
Directors is classified into three classes of directors serving staggered,
three-year terms and has the authority without action by the Company's
stockholders to fix the rights and preferences and issue shares of preferred
stock, and to impose various procedural and other requirements that could make
it more difficult for stockholders to effect certain corporate actions. The
Company's Certificate of Incorporation provides that directors may be removed
only by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the Company entitled to vote. Any vacancy on the Board of
Directors may be filled only by vote of the majority of directors then in
office. Further, the Company's Certificate of Incorporation provides that any
"Business Combination" (as therein defined) requires
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<PAGE> 38
the affirmative vote of two-thirds of the shares entitled to vote, voting
together as a single class. These provisions, and certain other provisions of
the Certificate of Incorporation which may have the effect of delaying proposed
stockholder actions until the next annual meeting of stockholders, could have
the effect of delaying or preventing a tender offer for the Company's Common
Stock or other changes of control or management of the Company, which could
adversely affect the market price of the Company Common Stock.
Shares Eligible for Future Sale
Future sales of Common Stock by existing stockholders under Rule 144
and Rule 701 of the Securities Act and through the exercise of outstanding
registration rights could have an adverse effect on the price of the Company's
Common Stock. As of March 31, 1998, approximately 1,400,000 shares are available
for sale in the public market subject to compliance with Rule 144 or 701. In
addition, certain existing stockholders have rights under certain circumstances
to require the Company to register their shares for future sale.
During the second quarter of 1998, the Company will complete a merger
with Medicus. In connection with such merger, the Company may issue up to
1,800,000 shares of Common Stock pursuant to the Medicus Merger Agreement. Such
shares will be registered pursuant to a Registration Statement on Form S-4 and
will be freely tradeable. In addition, the Company issued warrants to certain
selling stockholders of Medicus to purchase 972,224 shares of Common Stock in
November 1997 (the "Warrants"). In December 1997, the Company issued 1,588,701
shares of Common Stock in connection with the Rothenberg Merger. All of such
shares of Common Stock issued in connection with the Rothenberg Merger and all
shares of Common Stock underlying Warrants will be registered for resale
pursuant to a Registration Statement on Form S-3 and will be freely tradeable.
As a result of the issuance of stock in the Rothenberg Merger and Medicus
Merger, substantial sales of the Company's Common Stock could occur immediately
after the registration of such equity securities.
Sales of a substantial number of the aforementioned shares of the
Company's Common Stock would adversely affect or cause substantial fluctuations
in the market price of the Company's Common Stock and impair and Company's
ability to raise additional capital through the sale of its securities. Sales of
substantial amounts of Common Stock in the public market under Rule 144 or Rule
701 under the Securities Act, or otherwise, or the perception that such sales
could occur, may adversely affect prevailing market prices of the Common Stock
and could impair the future ability of the Company to raise capital through an
offering of its equity securities.
Possible Volatility of Stock Price
The stock market historically has experienced volatility which has
affected the market price of securities of many companies and which has
sometimes been unrelated to the operating performance of such companies. The
trading price of the Company's Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or acquisitions by the Company or its competitors,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors. The market price may also be affected by
movements in prices of equity securities in general.
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ITEM 8. FINANCIAL STATEMENTS.
The Company's Consolidated Financial Statements are located on the
pages indicated below:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.................................... F-1
Report of Deloitte & Touche LLP, Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997..................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997....... F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997.................................................................................. F-6
Notes to Consolidated Financial Statements....................................................... F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about June 1, 1998. The information concerning the
Company's executive officers required by this item is incorporated by reference
to the section of Part I hereof entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about June 1, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about June 1, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about June 1, 1998.
37.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Financial Statements.
The consolidated financial statements contained herein are as
listed on the "Index" on page 37.
2. Financial Statement Schedule.
Reference is made to Schedule II following the signature pages
hereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K. The Company filed the following reports on Form
8-K during the last quarter of the fiscal year covered by this Annual
Report on Form 10-K:
On October 10, 1997, the Company filed a current
Report on Form 8-K dated September 29, 1997, in which it
reported the acquisition and merger of Healthcare Revenue
Management, Inc. ("HRM"). An amendment thereto on Form 8-K/A
was filed on March 10, 1998. The financial statements required
to be filed were incorporated by reference from pages F-28
through F-41 of the Company's Registration Statement on Form
S-3 (No.333-36189) as filed with the Securities and exchange
Commission (the "Commission") on September 23, 1997 and
amended by Amendment No. 1 and No. 2 thereto filed with the
Commission on October 1, 1997 and October 15, 1997,
respectively, and included the following historical financial
statements with respect to HRM:
(i) Balance Sheet as of December 31, 1996, 1995
and 1994 and the related Statements of
Operation, Changes in Stockholders' Equity
and Cash Flows for each of the three years
ended December 31, 1996, 1995 and 1994.
The Company also filed the following pro forma financial
statements in connection with the above filings:
(i) Condensed Combined Balance Sheet of the
Company, HRM and the Synergy Companies as of
June 30, 1997, and the Condensed Combined
Statements of Operations of the Company and
HRM for the year ended December 31, 1996 and
the six months ended June 30, 1997, and the
Condensed Combined Statements of Operations
of The Synergy Companies for the year ended
December 31, 1996 and the three months ended
March 31, 1997.
On November 21, 1997, the Company filed a current
Report on Form 8-K dated November 9, 1997, in which it
reported that it had acquired 56.7% of the outstanding capital
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<PAGE> 41
stock of Medicus Systems Corporation and entered into a
definitive agreement with Medicus to acquire the remaining
outstanding shares of Medicus Common Stock. An amendment
thereto on Form 8-K/A was filed on December 24, 1997. In
connection with such filings, the Company provided the
following historical financial statements with respect to
Medicus:
(i) Balance Sheet as of May 31, 1997 and 1996
and the related Statements of Operation,
Changes in Stockholders' Equity and Cash
Flows for each of the three years ended May
31, 1997; and
(ii) Balance Sheet as of August 31, 1997 and the
related Statements of Operations and Cash
Flows for the three months ended August 31,
1997 and 1996, respectively.
The Company also filed the following pro forma financial
statements in connection with the above filings:
(i) Consolidated Balance Sheet as of September
30, 1997, and Statements of Operations for
the nine months ended September 30, 1997 and
the year ended December 31, 1996.
On January 13, 1998, the Company filed a current
Report on Form 8-K dated December 29, 1997, in which it
reported that it had acquired the business of Resource Health
Partners, L.P.
(c) Exhibits.
2.1 Assets Purchase Agreement dated December 31, 1995, by and
among QuadraMed Corporation, a Delaware corporation and
California corporation.(1)
2.2 Assets Purchase Agreement dated December 31, 1995, by and
among QuadraMed Acquisition Corporation, Kaden Arnone, Inc.
and its stockholders.(1)
2.3 Exchange Agreement dated June 25, 1996, by and among QuadraMed
Holdings, Inc., QuadraMed Corporation, and certain
stockholders listed on Schedule A thereto.(1)
2.4 Acquisition Agreement and Plan of Merger dated December 2,
1996, between the Company and InterMed Acquisition
Corporation, a wholly owned subsidiary of the Company and
InterMed Healthcare Systems Inc. and its Stockholders.(2)
2.5 Acquisition Agreement and Plan of Merger, dated as of March 1,
1997, by and among QuadraMed Corporation, Healthcare Recovery
Acquisition Corporation, Healthcare Recovery Incorporated and
its Shareholders (the "HRI Acquisition Agreement and Plan of
Merger"). (3)
2.6 First Amendment to HRI Acquisition Agreement and Plan of
Merger, dated as of April 22, 1997. (3)
2.7 Second Amendment to HRI Acquisition Agreement and Plan of
Merger, dated as of April 24, 1997. (3)
2.8 Acquisition Agreement and Plan of Merger, dated as of
September 24, 1997, by and among QuadraMed Corporation, HRM
Acquisition Corporation, Healthcare Revenue Management, Inc.
and its Stockholders (the "Acquisition Agreement and Plan of
Merger").(4)
39.
<PAGE> 42
2.9 First Amendment to Acquisition Agreement and Plan of Merger,
dated as of September 29, 1997.(4)
2.10 Agreement and Plan of Reorganization by and between QuadraMed
Corporation and Medicus Systems Corporation, dated as of
November 9, 1997.(5)
2.11 Amendment No. 1 to Agreement and Plan of Reorganization, dated
as of February 26, 1998.
2.12 Amendment No. 2 to Agreement and Plan of Reorganization, dated
as of March 24, 1998.
2.13 Acquisition Agreement and Plan of Merger dated as of December
29, 1997, by and among QuadraMed Corporation and Resource
Health Partners, L.P. (6)
2.14 Acquisition Agreement and Plan of Merger dated as of February
2, 1998, by and among QuadraMed Corporation and Cabot Marsh
Corporation. (7)
3.1 Reserved.
3.2 Second Amended and Restated Certificate of Incorporation of
the Company.(1)
3.3 Reserved.
3.4 Amended and Restated Bylaws of the Company.(1)
4.1 Reference is made to Exhibits 3.2 and 3.4.(1)
4.2 Form of Common Stock certificate.(1)
4.3 Form of Exchange Agreement dated March 16, 1994, by and among
the Company, THCS Holding, Inc. and certain stockholders
listed on Schedule A thereto.(1)
4.4 Reserved.
4.5 Reserved.
4.6 Reserved.
4.7 Amended and Restated Agreement Regarding Adjustment Shares
dated June 25, 1996, by and among the Company, QuadNet
Corporation and the individuals listed on Schedule A
thereto.(1)
4.8 Amended and Restated Shareholder Rights Agreement dated June
25, 1996, by and between the Company and the investors listed
on Schedule A thereto.(1)
4.9 Stock Purchase Warrant dated September 27, 1995 issued to
James D. Durham and amendment #1 thereto dated July 10, 1997.
(8)
4.10 Reserved.
4.11 Form of Warrant to Purchase Common Stock.(1)
4.12 Registration Rights Agreement dated December 5, 1996, by and
between the Company and the investors listed on Schedule A
thereto.(8)
40.
<PAGE> 43
4.13 Registration Rights Agreement, dated as of December 29, 1997,
by and among QuadraMed Corporation, Resource Health Partners,
L.P. and certain stockholders. (6)
10.1 1996 Stock Incentive Plan of the Company.(1)
10.2 1996 Employee Stock Purchase Plan of the Company.(1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k)
Plan.(1)
10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers.(1)
10.5 Reserved.
10.6 Lease dated February 26, 1996 for facilities located at 1345
Campus Parkway, Building M, Block #930, Lot #51.02, Neptune,
New Jersey.(1)
10.7 Lease dated May 23, 1994 for facilities located at 80 East Sir
Francis Drake Boulevard, Suite 2A, Larkspur, California.(1)
10.8 Reserved.
10.9 Reserved.
10.10 Stock Purchase Agreement dated March 3, 1994, by and between
the Company and James D. Durham.(1)
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Reserved.
10.15 Credit Terms and Conditions dated July 2, 1997, by and between
Imperial Bank and the Company, with addendum thereto. (8)
10.16 Reserved.
10.16.1 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22 Reserved.
41.
<PAGE> 44
10.23 Reserved.
10.24 Reserved.
10.25 Reserved.
10.26 Reserved.
10.27 Reserved.
10.28 Reserved.
10.29 Reserved.
10.30 Reserved.
10.31 Reserved.
10.32 Reserved.
10.32 Reserved.
10.34 Reserved.
10.35 Reserved.
10.36 Reserved.
10.37 Reserved.
10.38 Reserved.
10.39 Letter dated July 1, 1997 from the Company to Lemuel C.
Stewart, Jr. regarding terms of employment.(9)
10.40 Form of Stock Purchase Agreement dated as of November 9, 1997
by and among QuadraMed Corporation and certain stockholders of
Medicus Systems Corporation.(5)
10.41 Form of Stock Purchase Warrant dated as of November 9, 1997
issued to certain stockholders of Medicus (including as
Appendix A to Exhibit 10.40).(5)
10.42 Letter dated November 1, 1997 from the Company to James D.
Durham, regarding terms of employment.(5)
10.43 Letter dated November 13, 1997 from the Company to John V.
Cracchiolo, regarding terms of employment.(5)
10.44 Reserved.
10.45 Letter dated January 15, 1998 from the Company to Andrew J.
Hurd, regarding terms of employment.
10.46 Employment Agreement dated September 29, 1997 by and between
Steven D. McCoy and the Company.
42.
<PAGE> 45
10.47 Letter dated March 17, 1998 from the Company to Keith M.
Roberts regarding terms of employment.
10.48 Employment Agreement dated February 4, 1998 by and between
Ruthann Russo and the Company.
21 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule for the Year Ended 12/31/1997.
27.2 Financial Data Schedule for the Year Ended 12/31/1996.
27.3 Financial Data Schedule for the Year Ended 12/31/1995.
- --------------------
(1) Incorporated herein by reference from the exhibit with the same number
to the Company's Registration Statement on Form SB-2, No. 333-5180-LA,
as filed with the Commission on June 28, 1996, as amended by Amendment
No. 1, Amendment No. 2 and Amendment No. 3 thereto, as filed with the
Commission on July 26, 1996, September 9, 1996, and October 2, 1996,
respectively.
(2) Incorporated herein by reference from the exhibit with the same number
to the Company's Current Report on Form 8-K, as filed with the
Commission on January 9, 1997.
(3) Incorporated herein by reference from the exhibit with the same number
to the Company's Current Report on Form 8-K, as filed with the
Commission on May 9, 1997, as amended on July 8, 1997 and March 10,
1998.
(4) Incorporated herein by reference from the exhibit with the same number
to the Company's current report on Form 8-K, as filed with the
Commission on October 10, 1997, as amended on March 10, 1998.
(5) Incorporated by reference from the exhibit with the same number to the
Company's Current Report on Form 8-K, as filed with the commission on
November 21, 1997.
(6) Incorporated herein by reference from Exhibit 2.11 to the Company's
current report on Form 8-K, as filed with the Commission on January 13,
1998.
(7) Incorporated herein by reference from Exhibit 2.12 to the Company's
current report on Form 8-K, as filed with the Commission on February
18, 1998.
(8) Incorporated herein by reference from the exhibit with the same number
to the Company's quarterly report on Form 10-Q for the quarter ended
June 30, 1997, as filed with the Commission on August 14, 1997, as
amended September 4, 1997.
(9) Incorporated by reference from the exhibit with the same number to the
Company's Registration Statement on Form S-3, No. 333-36189, as filed
with the Commission on September 23, 1997, as amended by Amendment No.
1 and Amendment No. 2 thereto, as filed with the Commission on October
1, 1997 and October 15, 1997 respectively.
43.
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUADRAMED CORPORATION
Date: March 31, 1998 By: /s/ JAMES D. DURHAM
-------------------------------------
James D. Durham
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JOHN V. CRACCHIOLO
-------------------------------------
John V. Cracchiolo
Executive Vice President,
Chief Financial Officer and
Secretary (Principal Financial
Officer)
By: /s/ BERNIE J. MURPHY
-------------------------------------
Bernie J. Murphy
Vice President, Finance and
Chief Accounting Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, John V.
Cracchiolo and Keith M. Roberts, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
44.
<PAGE> 47
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ JAMES D. DURHAM Chairman of the Board, President and March 31, 1998
- ----------------------------------------
James D. Durham Chief Executive Officer (Principal
Executive Officer)
/s/ JOHN V. CRACCHIOLO Executive Vice President, Chief March 31, 1998
- ----------------------------------------
John V. Cracchiolo Financial Officer and Secretary
(Principal Financial Officer)
/s/ BERNIE J. MURPHY Vice President, Finance and Chief March 31, 1998
- ---------------------------------------- Accounting Officer (Principal
Bernie J. Murphy Accounting Officer)
Director March __, 1998
- ----------------------------------------
John H. Austin, M.D.
Director March __, 1998
- ----------------------------------------
Albert L. Greene
/s/ KENNETH E. JONES Director March 31, 1998
- ----------------------------------------
Kenneth E. Jones
/s/ THOMAS F. McNULTY Director March 31, 1998
- ----------------------------------------
Thomas F. McNulty
/s/ JOAN P. NEUSCHELER Director March 31, 1998
- ----------------------------------------
Joan P. Neuscheler
/s/ CORNELIUS T. RYAN Director March 31, 1998
- ----------------------------------------
Cornelius T. Ryan
</TABLE>
45.
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
QUADRAMED CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants..................................................... F-1
Independent Auditors' Report................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 .. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997... F-6
Notes to Consolidated Financial Statements................................................... F-7
</TABLE>
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To QuadraMed Corporation:
We have audited the accompanying consolidated balance sheets of
QuadraMed Corporation (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
statements of changes in stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits. We did not audit
the consolidated balance sheets of FRA Acquisitions, Inc. and subsidiary as of
December 31, 1996, nor did we audit the related statements of operations,
statements of changes in stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1996, which statements represent total
assets of 17% of the 1996 consolidated total and total revenues of 30% and 16%
of the 1995 and 1996 consolidated totals, respectively. Those statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for that entity, is based solely
on the report of the other auditors.
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 as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
March 2, 1998
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FRA Acquisitions, Inc.
Rothenberg Health Systems Inc.
Woodland Hills, California:
We have audited the consolidated balance sheet of FRA Acquisitions, Inc. and
subsidiary (the "Company") as of December 31, 1996, and the related consolidated
statements of operations, shareholder's equity, and cash flows for the year
ended December 31, 1996, and the 55 day period ended December 31, 1995 (which
financial statements are not presented herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996,
and the results of its operations and its cash flows for the year ended
December 31, 1996, and the 55 day period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Los Angeles, California
April 25, 1997
F-2
<PAGE> 51
<TABLE>
<CAPTION>
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
------------------------
1996 1997
--------- ---------
(Restated)
(See Note 12)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $20,804 $43,689
Short-term investments ...................................... --- 1,032
Accounts receivable, net of allowance for uncollectible
accounts of $500 and $637, respectively................ 4,853 11,639
Unbilled receivables ........................................ 624 4,018
Notes and other receivables ................................. 2,843 2,069
Prepaid expenses and other .................................. 424 1,659
--------- ---------
Total current assets ................................. 29,548 64,106
--------- ---------
EQUIPMENT, at cost:
Equipment ................................................... 5,121 8,990
Less-- Accumulated depreciation and amortization ............ (2,055) (3,412)
--------- ---------
Equipment, net .......................................... 3,066 5,578
--------- ---------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net ..................... 1,172 1,262
ACQUIRED SOFTWARE, net of accumulated amortization
of $323 and $647, respectively .............................. 2,176 4,293
INTANGIBLES, net of accumulated amortization
of $568 and $2,665, respectively ............................ 2,038 22,487
LONG-TERM INVESTMENTS ........................................... --- 1,200
OTHER ........................................................... 284 287
--------- ---------
$38,284 $99,213
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations ............. $79 $163
Notes payable ............................................... --- 1,753
Payable to Medicus stockholders ............................. --- 17,819
Accounts payable ............................................ 1,582 1,774
Accrued liabilities ......................................... 4,466 13,815
Deferred revenue ............................................ 1,976 5,204
--------- ---------
Total current liabilities ............................ 8,103 40,528
NOTES PAYABLE ................................................... 8,700 163
CAPITAL LEASE OBLIGATIONS, less current portion ................. 149 285
--------- ---------
Total liabilities .................................... 16,952 40,976
--------- ---------
CONTINGENCIES (Note 13) ......................................... --- ---
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par, 20,000 shares authorized,
7,711 and 11,916 shares issued and outstanding, respectively. 57 96
Additional paid-in capital .................................. 48,723 127,415
Deferred compensation ....................................... (703) ---
Accumulated deficit ......................................... (26,745) (69,274)
--------- ---------
Total stockholders' equity ........................... 21,332 58,237
--------- ---------
$38,284 $99,213
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 52
<TABLE>
<CAPTION>
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1995 1996 1997
-------- -------- -------
(RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
REVENUES:
Licenses .......................... $6,549 $25,869 $33,864
Services .......................... 3,486 3,262 11,062
-------- -------- --------
Total revenues ............. 10,035 29,131 44,926
-------- -------- --------
OPERATING EXPENSES:
Cost of licenses .................. 3,839 10,423 13,051
Cost of services .................. 4,469 3,831 7,008
General and administration ........ 2,809 5,996 8,105
Sales and marketing ............... 1,784 4,751 6,751
Research and development .......... 864 3,518 5,112
Amortization of intangibles ....... 102 766 1,584
Non-recurring charges ............. --- --- 7,816
Write-off of acquired research and
development in process ........ 14,840 --- 38,544
-------- -------- --------
Total operating expenses ... 28,707 29,285 87,971
-------- -------- --------
LOSS FROM OPERATIONS .................. (18,672) (154) (43,045)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income(expense) .......... (206) (1,005) 1,153
Other income (expense) ............ 47 201 151
-------- -------- --------
Total other income (expense) (159) (804) 1,304
-------- -------- --------
PROVISION FOR INCOME TAXES ............ --- --- 788
-------- -------- --------
NET LOSS .............................. $(18,831) $(958) $(42,529)
======== ======== ========
NET LOSS PER SHARE:
BASIC AND DILUTED.................. $(8.10) $(0.26) $(4.91)
======== ======== ========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC AND DILUTED.................. 2,325 3,620 8,669
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 53
<TABLE>
<CAPTION>
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, DECEMBER 31, 1994....... 835 $ 8 -- $ -- 2,321 $ 6
Capital contribution............. -- -- -- -- -- --
Issuance of warrant to purchase
Common stock................. -- -- -- -- -- --
Issuance of common stock at
$2.50 per Share.............. -- -- -- -- 5 --
Deferred compensation............ -- -- -- -- -- --
Amortization of deferred
compensation................. -- -- -- -- -- --
Conversion of notes payable to
related Parties to Series A
preferred stock at $4.79 per
share........................ 77 1 -- -- -- --
Conversion of notes payable to
related Parties to Series B
preferred stock at $5.25
at $5.25 per share, net of
issuance costs............... -- -- 892 9 -- --
Net loss......................... -- -- -- -- -- --
------ ------ -------- ------- ------- -----
BALANCE AT DECEMBER 31, 1995..... 912 9 892 9 2,326 6
------ ------ -------- ------- ------- -----
Issuance of common stock at
$3.75 per Share.............. -- -- -- -- 56 1
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.............. -- -- -- -- -- --
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..... -- -- -- -- 7,711 57
------ ------ -------- ------- ------- -----
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................. -- -- -- -- -- --
Issuance of common stock
purchase warrants in
connection with
the acquisition of Medicus
Systems Corporation.......... -- -- -- -- -- --
Conversion of notes payable to
contributed capital.......... -- -- -- -- -- --
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
Net loss......................... -- -- -- -- -- --
------ ------ -------- ------- ------- -----
BALANCE, DECEMBER 31, 1997....... -- $ -- -- $ -- 11,916 $ 96
====== ====== ======== ======= ======= =====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<TABLE>
<CAPTION>
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Additional Total
----------------- Deferred Accumulated Stockholders'
Paid In Capital Compensation Deficit Equity (Deficit)
------------------ -------------- ------------- ---------------
(Restated) (Restated) (Restated) (Restated)
(See Note 12) (See Note 12) (See Note 12) (See Note 12)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994....... $ 9,553 $ -- $(6,956) $ 2,611
Capital contribution............. 1,568 -- -- 1,568
Issuance of warrant to purchase
Common stock................. 57 -- -- 57
Issuance of common stock at
$2.50 per Share.............. 12 -- -- 12
Deferred compensation............ 440 (440) -- --
Amortization of deferred
compensation................. 10 -- 10
Conversion of notes payable to
related Parties to Series A
preferred stock at $4.79 per
share........................ 367 -- -- 368
Conversion of notes payable to
related Parties to Series B
preferred stock at $5.25
at $5.25 per share, net of
issuance costs............... 4,630 -- -- 4,639
Net loss......................... -- -- (18,831) (18,831)
------ ------- -------- -------
BALANCE AT DECEMBER 31, 1995..... 16,627 (430) (25,787) (9,566)
------ ------- -------- -------
Issuance of common stock at
$3.75 per Share.............. 209 -- -- 210
Conversion of notes payable to
related parties to Series B
preferred stock
at $5.25 per share, net of
issuance costs............... 3,862 -- -- 3,869
Contributed capital.............. 1,236 -- -- 1,236
Issuance of warrant to purchase
common stock................. 381 (381) -- --
Amortization of deferred
compensation................. -- 108 -- 108
Issuance of Series A preferred
stock under exchange
agreement ................... -- -- -- --
Repurchase of Series B preferred
stock........................ (53) -- -- (53)
Conversion of Series A and B
preferred stock to common
stock........................ -- -- -- --
Exercise of common stock options. 100 -- -- 100
Issuance of common stock from
initial public offering, net
of issuance costs.......... 26,361 -- -- 26,386
Net loss......................... -- -- (958) (958)
------ ------ -------- -------
BALANCE AT DECEMBER 31, 1996..... 48,723 (703) (26,745) 21,332
------ ------ -------- -------
Issuance of common stock in
connection with the Synergy
acquisition............... 1,680 -- -- 1,682
Issuance of common stock in
connection with Healthcare
Revenue Management, Inc.
acquisition................ 2,330 -- -- 2,331
Amortization of deferred
compensation................. -- 703 -- 703
Issuance of common stock
purchase warrants in
connection with
the acquisition of Medicus
Systems Corporation.......... 7,200 -- -- 7,200
Conversion of notes payable to
contributed capital.......... 9,578 -- -- 9,578
Issuance of common stock through
Employee's Stock
Purchase Plan................ 135 -- -- 135
Exercise of warrants to purchase
common stock ................ -- -- -- --
Exercise of common stock options. 476 -- -- 477
Issuance of common stock from
public offering,
net of issuance costs........ 57,293 -- -- 57,328
Net loss......................... -- -- (42,529) (42,529)
-------- ------ -------- --------
BALANCE, DECEMBER 31, 1997....... $127,415 $ -- $(69,274) $58,237
======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 54
<TABLE>
<CAPTION>
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
1995 1996 1997
--------------- -------------- ---------
(RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................... $(18,831) $(958) $(42,529)
Adjustments to reconcile net loss to net
cash used for operating activities --
Depreciation and amortization .......... 654 2,117 5,234
Amortization of deferred compensation .. 10 108 703
Write-off of in-process research and
development............................. 14,840 --- 38,544
Cash acquired in the acquisition of
Healthcare Design Systems................. 13 --- ---
Changes in assets and liabilities, net of
acquisitions--
Accounts receivable and unbilled
receivables............................. (220) (1,400) (1,235)
Prepaid expenses and other ............... (81) 50 (545)
Other assets ............................. 50 52 10
Accounts payable and accrued liabilities . (563) 201 (1,648)
Deferred revenue ......................... 147 (388) (357)
-------- -------- --------
Cash used for operating activities ... (3,981) (218) (1,823)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Synergy HMC,
net of cash acquired ..................... --- --- (2,776)
Cash paid for the acquisition of Queen City
Microsystems ............................. --- --- (160)
Cash paid for the acquisition of Medicus
Systems Corporation, net of cash acquired .. --- --- (21,454)
Cash paid for the acquisition of Healthcare
Revenue Management, net of cash acquired.... --- --- (126)
Purchased technology ....................... --- --- (218)
Purchase of short-term investments ......... --- --- (1,032)
Purchase of long-term investments .......... --- --- (1,200)
Additions to equipment ..................... (468) (2,191) (2,329)
Capitalization of computer software
development costs ...................... (425) (682) (607)
-------- -------- --------
Cash used for investing activities .. (893) (2,873) (29,902)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease
obligations ............................... (64) (163) (136)
Borrowings (repayments) under notes and
loans payable .............................. 13,207 (19,475) (3,194)
Issuance of convertible notes payable to
related parties ............................ --- 3,869 ---
Contributed capital ........................ 1,568 1,236 ---
Issuance of common stock, net of issuance
costs ...................................... 12 26,596 57,328
Issuance of common stock through Employee
Stock Purchase Plan ........................ --- --- 135
Proceeds from exercise of common stock
options .................................... --- 100 477
-------- -------- --------
Cash provided by financing activities 14,723 12,163 54,610
-------- -------- --------
Net increase in cash and cash equivalents .. 9,849 9,072 22,885
CASH AND CASH EQUIVALENTS, beginning of period . 1,883 11,732 20,804
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ....... $11,732 $20,804 $43,689
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest ..................... $ --- $543 $110
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS:
Purchase of equipment subject to capital
lease ...................................... 17 128 ---
Repurchase of Series B preferred stock in
exchange for extinguishment of shareholder
receivable ............................. --- 53 ---
Conversion of notes payable to related
parties to convertible preferred stock ..... 5,007 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 Synergy acquisition ................ --- --- 2,000
Issuance of common stock in connection with
acquisition of Healthcare Revenue Management,
Inc ...................................... --- --- 2,300
Issuance of common stock warrants in
connection with acquisition of Medicus
Systems Corporation ...................... $ --- $ --- $ 7,200
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 55
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. THE COMPANY
QuadraMed Corporation (the Company) was incorporated in California in
September 1993. In August 1996, the Company reincorporated in Delaware. The
Company operates in a single industry segment and offers a suite of decision
support, financial management and electronic data interchange (EDI) software
products that are designed to enable health care providers to increase
operational efficiency and measure the cost of care and to facilitate the
negotiation of managed care contracts and capitation agreements. In addition to
its software products, the Company provides business office outsourcing and 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-Term Investments
The Company accounts for short term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Instruments." The Company considers its short
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 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. The amortized
cost, aggregate fair value and gross unrealized holding gains and losses by
major security type were as follows:
<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>
F-7
<PAGE> 56
Long-Term 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, is due on December 31, 1998.
There were no outstanding borrowings at December 31, 1997. VantageMed borrowed
$500,000 against the line of credit subsequent to December 31, 1997.
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. Maintenance and repairs are expensed as
incurred.
Software Development Costs
Under the provisions of Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," software development costs are capitalized upon the
establishment of technological feasibility, which the Company defines as
establishment of a working model which is typically the beta version of the
software. Capitalized software development costs require a 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 $497,000, including $72,000 which was acquired from
Healthcare Design Systems, $682,000 and $607,000 in 1995, 1996 and 1997,
respectively. Amortization of capitalized software development costs was
$47,000, $32,000 and $155,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Amortization is based upon the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated economic life of the
product, generally five years.
Revenue Recognition
The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue is composed of business office outsourcing and cash flow management
services. The product suite is comprised of three primary elements: financial
management, decision support and EDI software. Each of these elements includes a
variety of products which can be licensed individually or as a suite of
interrelated products. Products are 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
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 the financial management, decision support and EDI 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.
The Company provides business office outsourcing and cash flow
management services to certain hospitals under contract service arrangements.
Business office outsourcing revenues typically consist of fixed monthly fees
plus incentive-based payments that are based on a percentage of dollars
recovered for the provider for which the service is being performed. The monthly
fees are recognized as revenue on a monthly basis at the end of each month.
Incentive fees are recognized as the conditions upon which such fees are based
are realized based on
F-8
<PAGE> 57
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 by the customer as a result of
the services provided by the Company. The fixed fee portion is recognized as
revenue upon the completion of the project. Incentive amounts are recognized
upon cash collection from the customer.
Other services are also provided to certain of the Company's licensees
of software 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 had been recognized as revenue by acquired companies
but 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.
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 year ended December 31, 1995, one customer accounted for 11% of
total revenue. In the years ended December 31, 1996 and 1997, no customers
accounted for greater 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.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable and
accounts payable, approximate their fair values.
Intangibles
Intangibles include goodwill, which represents the amount of purchase
price in excess of the fair value of the tangible net assets, and 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
annually for impairment and written down to net realizable value if necessary.
No impairment has been recorded to date. 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.
F-9
<PAGE> 58
Intangible assets include the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Customers lists $2,606 $21,756
Goodwill -- 396
Work force and trade names -- 3,000
------ -------
2,606 25,152
Less: Accumulated amortization (568) (2,665)
------ -------
$2,038 $22,487
====== =======
</TABLE>
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which was adopted by the Company in the quarter ended December 31, 1997,
and in accordance with this standard all prior periods presented have been
restated to conform to its provisions. Under the new requirements for
calculating earnings per share, basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of stock options and warrants (using
the treasury stock 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,
1997, no common equivalent shares are included in diluted weighted average
common shares outstanding.
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. During the fourth quarter ended
December 31, 1997, the Company completed two acquisitions which were accounted
for as a pooling of interests. In connection with these acquisitions, the
Company incurred $3,111,000 in acquisition and related costs which have been
recorded as non-recurring charges. As a result of completed acquisitions during
1997, the Company recorded certain charges to write-off assets which were
determined to have no future realizable value.
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.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." This statement establishes standards for reporting and displaying
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements and is effective for fiscal
years beginning after December 15, 1997. The adoption of this statement will not
have a material impact on the Company's results of operations or financial
position.
F-10
<PAGE> 59
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." 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. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement will not have a material impact on the
Company's results of operations or financial position.
3. LINE OF CREDIT
In January 1996, the Company arranged a line of credit agreement with a
bank. Borrowings were limited to the lesser of 80% of eligible borrowing base
(accounts receivable) or $1,200,000. There were no outstanding borrowings under
the line of credit at December 31, 1996. In addition, warrants were issued to
the bank for the purchase of $50,000 worth of Common Stock at $5.25 per share.
The line of credit expired in January 1997.
In July 1997, the Company entered into an unsecured line of credit
arrangement with a bank to borrow up to $5,000,000 at the bank's prime rate. The
line of credit expires in July 1998 and contains certain financial and other
covenants, including, but not limited to, maintaining a minimum quick ratio,
tangible net worth and total liabilities to tangible net worth. The Company was
not in compliance with certain of these financial covenants at December 31,
1997; however, the Company received a waiver from the bank for noncompliance
with such covenants. There were no borrowings against the line of credit at
December 31, 1997.
In connection with the Medicus Systems Corporation ("Medicus")
acquisition in November 1997 (see Note 12), the Company assumed a line of credit
arrangement Medicus had entered into with a bank to borrow up to a maximum of
$2,500,000. The line of credit bears interest at the bank's prime rate and
provides the bank with a first security interest in all assets of Medicus.
There were no borrowings against the line of credit at December 31, 1997. In
January 1998, the Company terminated the line of credit arrangement with the
bank.
4. NOTES PAYABLE
The Company's notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
---- ----
<S> <C> <C>
Promissory note, bearing interest at 10.75
percent, due in 2004, converted to
contributed capital in 1997 .................. $5,000 $ --
Junior promissory note, bearing interest
at 11.75 percent, due in 2004, converted
to contributed capital in 1997 ............... 3,700 --
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 Queen City Microsystems,
Inc. and stockholders of that company,
unsecured, bearing interest at 8 percent,
due in quarterly installments plus
interest for a three year period. Repaid
in full February 1998 ........................ -- 255
Miscellaneous notes payable .................. -- 41
----- -----
8,700 1,916
----- -----
Less: Current portion ............... -- (1,753)
$8,700 $163
====== =====
</TABLE>
F-11
<PAGE> 60
During 1997, Rothenberg Health Systems, Inc. (see Note 12) converted
both the promissory and junior promissory notes aggregating $8,700,000, along
with accrued interest of $878,000 to contributed capital.
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, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- --------
<S> <C> <C>
1998........................................... $ 202 $ 2,537
1999........................................... 158 2,230
2000........................................... 137 1,812
2001........................................... 44 1,219
2002........................................... 3 820
Thereafter..................................... -- 2,273
------ -------
Total minimum payments................. 544 $10,891
=======
Interest on capital lease obligations at a
rate of 8.5 percent............................ (96)
------
Net minimum principal payments................. 448
Current maturities............................. (163)
------
$285
======
</TABLE>
Rental expense was approximately $807,000, $1,282,000 and $1,947,000 for
fiscal 1995, 1996 and 1997, 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 share. The
warrants were partially exercised through a cashless exercise into 343,379
shares of Common Stock during 1997. 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 1995, 76,805 shares of Series A Preferred Stock were issued at $4.79
for conversion of notes payable and accrued interest of $367,703 and 891,519
shares of Series B Preferred Stock were issued at $5.25 per share for cash of
$3,959,450, net of issuance costs and conversion of notes payable and accrued
interest of $680,475.
In June 1996, 6,400 shares of Series B Preferred Stock were returned to
the Company in exchange for the extinguishment of a shareholder receivable for
approximately $53,000.
F-12
<PAGE> 61
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 through a cashless exercise 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 the acquisition of Medicus in November 1997, the
Company assumed notes payable to a former officer and current director of
Medicus aggregating $2,000,000. The notes were repaid in full by the Company in
December 1997. In addition, at the effective date of the Medicus acquisition, a
warrant issued to this Medicus director will be cancelled in exchange for
securities of the Company with an aggregate value of $1,200,000. The value of
this warrant has been included in the purchase price for this transaction.
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
Medicus, the Company will assume and convert such warrant into a warrant based
on the conversion rate as set forth in the Merger Agreement with Medicus.
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 through a cashless exercise to purchase 25,554
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 through a cashless exercise into
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. 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 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
F-13
<PAGE> 62
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 June 1996, the Company effected a l-for-25 reverse stock split. In
October 1996, the Company effected a change in the authorized number of Common
and Preferred shares, respectively. The authorized number of Common shares
increased from 1,162,000 to 20,000,000. The authorized number of Preferred
shares increased from 2,795,467 to 5,000,000. The accompanying financial
statements have been restated to reflect this increase in authorized shares and
the reverse stock split.
In 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.
9. STOCK OPTION AND PURCHASE PLANS
Stock Option Plan
Under the Company's 1994 Stock Option Plan and its successor plan, the
1996 Stock Incentive Plan, which became effective in October 1996 (collectively,
the "Option Plan"), the Board of Directors may grant incentive and nonqualified
stock options to employees, directors and consultants. The exercise price per
share for an incentive stock option cannot be less than the fair market value on
the date of grant. The exercise price per share for a nonqualified stock option
cannot be less than 85% of the fair market value on the date of grant. Option
grants under the Option Plan generally expire ten years from the date of grant
and generally vest over a four-year period. Options granted under the Option
Plan are exercisable subject to the vesting schedule. As of December 31, 1997, a
total of 2,136,759 shares of Common Stock have been authorized by the Company's
stockholders for grant under the Option plan.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan. Accordingly, no compensation cost has been
recognized for its Option Plan. Had compensation cost for the Company's Option
Plan been determined based on the fair value at the grant dates for the awards
calculated in accordance with the method prescribed by Statement of Financial
Accounting Standards 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>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C> <C>
Net loss.................... As reported $ (18,831) $ (958) $ (42,529)
Pro forma $ (18,881) $ (1,438) $ (44,163)
Basic and diluted net loss
per share................. As reported $ (8.10) $ (0.26) $ (4.91)
Pro forma $ (8.12) $ (0.40) $ (5.09)
</TABLE>
F-14
<PAGE> 63
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, 1996 and 1997 were:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected dividend yield.......................... 0.00% 0.00%
Expected stock price volatility.................. 79.00% 73.00%
Risk-free interest rate.......................... 6.0%-6.8% 5.50%-5.54%
Expected life of options......................... 4.5 years 4.5 years
</TABLE>
The weighted average fair value of options granted during 1995, 1996,
and 1997 was $3.75, $7.49 and $13.14 per share, respectively. Option activity
under the option plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
--------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Balance, December 31, 1994.............. 34 178 $2.57
Authorized.......................... 328 -- --
Granted............................. (353) 353 3.75
Canceled ........................... 106 (106) 2.95
----- ----- ------
Balance, December 31, 1995.............. 115 425 3.45
Authorized.......................... 830 -- --
Granted............................. (247) 247 7.49
Exercised........................... -- (40) 2.54
Canceled............................ 39 ( 39) 3.48
----- -----
Balance, December 31, 1996.............. 737 593 5.18
Authorized.......................... 767 -- --
Granted............................. (1,523) 1,523 13.14
Exercised........................... -- (107) 3.87
Canceled............................ 251 (251) 11.31
----- ----- ------
Balance, December 31, 1997............. 232 1,758 $11.22
===== ===== ======
</TABLE>
F-15
<PAGE> 64
The following table summarizes information about stock options
outstanding at December 31, 1997:
<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 12/31/97 CONTRACTUAL LIFE PRICE 12/31/97 PRICE
- --------------- ---------- --------------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$1.36 - $ 2.50 18,163 3.59 $2.46 16,163 $2.46
$3.75 218,479 5.45 $3.75 102,218 $3.75
$5.61 - $ 7.75 86,866 4.16 $7.47 22,980 $7.07
$9.13 405,500 7.92 $9.13 - -
$9.63 183,225 7.16 $9.63 - -
$11.50 350,000 7.53 $11.50 - -
$12.00 - $16.48 183,953 8.19 $14.75 141,965 $14.95
$16.83 - $18.23 194,986 8.57 $17.88 180,014 $17.94
$18.60 - $26.26 107,928 7.56 $20.44 85,922 $20.51
$33.37 8,910 6.81 $33.37 8,910 $33.37
- --------------- -------- ------ ------- -------- -------
$1.36 - $33.37 1,758,010 7.30 $11.22 558,172 $14.33
</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 year ended December 31,
1997, 13,580 shares of common stock were issued under the plan for an aggregate
purchase price of $135,000.
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 $132,000, $879,000 and
$965,000 in 1995, 1996 and 1997, 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 1995 and 1996
and $72,000 was contributed by the Company in 1997.
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, 1995, 1996 and 1997, the Company made
contributions of $8,000, $36,000 and $72,000, respectively. Employees vest in
company
F-16
<PAGE> 65
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 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 $18,000, $75,000 and $126,000 for
the years ended December 31, 1995, 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 Medicus Systems Corporation in
November 1997, eligible employees of that Company may participate in Medicus's
401(k) Savings Plan (the "Medicus Plan"). The Medicus Plan has substantially the
same terms and conditions as the Company's Plan. The Company plans to transition
the Medicus Plan into the Company's Plan during 1998.
12. ACQUISITIONS
In December 1995, the Company acquired the net assets of Healthcare
Design Systems for a purchase price of approximately $8,750,000, which was
comprised of $3,750,000 in cash paid in February 1996 and a note payable of
$5,000,000. The note bore interest at a prime rate established by Bank of
America. The note and accrued interest were repaid in full in October 1996.
Costs and fees related to the acquisition totaled approximately $110,000.
In connection with the Healthcare Design Systems acquisition, which was
accounted for as a purchase, the Company allocated the purchase price based upon
the estimated fair value of the assets acquired and liabilities assumed.
Intangible assets acquired aggregated $10,200,000, of which $1,900,000,
$2,100,000 and $6,200,000 were assigned to acquired software, customer lists and
acquired in-process research and development, respectively. Because there was no
assurance that the Company would be able to successfully complete the
development and integration of the acquired in-process research and development
or that it had alternative future use at the acquisition date, the acquired
in-process research and development was written off as an expense by the Company
in its quarter ended December 31, 1995. Net tangible liabilities assumed in the
acquisition totaled approximately $1,300,000. No fair value adjustments to net
tangible and intangible assets and liabilities were recorded in the purchase
accounting outside of the appraised intangible assets listed above.
The components of the acquired in-process research and development and
acquired software capitalized by product group were as follows (expressed as a
percentage of the amounts recorded in the purchase accounting for such items):
<TABLE>
<CAPTION>
ACQUIRED
ACQUIRED IN-PROCESS RESEARCH
SOFTWARE AND
CAPITALIZED DEVELOPMENT
----------- --------------------
<S> <C> <C>
Financial Management Products..................... 45% 71%
Decision Support Products......................... 49% 23%
Service Products.................................. 6% 6%
--- ---
100% 100%
=== ===
</TABLE>
The unaudited pro forma results of operations for the year ended
December 1995 are as follows as adjusted for pooling transactions below (in
thousands, except per share amounts):
F-17
<PAGE> 66
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Revenues........................................... $ 16,418
Net loss........................................... $ (20,193)
Basic and diluted net loss per share............... $ (8.69)
</TABLE>
Prior to the acquisition, Healthcare Design Systems acted as a
distributor of certain of QuadraMed's products. Sales by Healthcare Design
Systems were approximately $60,000 in fiscal year 1995.
In December 1996, the Company acquired 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 ten year period.
In July 1997, the Company purchased certain assets, including the
customer list, of Queen City Microsystems, Inc. for an aggregate amount of
$500,000, consisting of $200,000 in cash and $300,000 in notes payable. The
notes were repaid in February 1998 (See Note 4).
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, 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
F-18
<PAGE> 67
Company in January 1998 (See Note 4), plus Warrants to purchase an aggregate of
972,220 shares of QuadraMed Common Stock at $24 per share.
In conjunction with Stock Purchase Agreements discussed above, the
Company entered into an Agreement and Plan of Reorganization in November 1997
(the "Merger Agreement"), by and among the Company and Medicus to purchase the
remaining 43.3 percent of outstanding Common Stock held by Medicus stockholders.
The consummation of the merger between both companies will result in the
extinguishment and conversion of all the outstanding shares of Common Stock of
Medicus into the right to receive any of (i) a cash payment of $7.50 per share
of Medicus Common Stock, (ii) .3125 shares of Common Stock of QuadraMed for each
share of Medicus Common Stock, subject to adjustment and certain limitations as
provided in the Merger Agreement, or (iii) a combination of cash and QuadraMed
Common Stock.
In connection with the agreements discussed above, the Company purchased
the net assets of Medicus for a purchase price of approximately $51,000,000,
which was comprised of a cash payment of $21,700,000, the issuance of a note
payable for approximately $1,600,000 to one selling stockholder and the value of
options and warrants issued of $7,200,000. The Company also assumed two-year
promissory notes aggregating $2,000,000 which were bearing interest at 8 percent
and were repaid by the Company in December 1997. The Company has recorded a
payable of $17,819,000 to stockholders of Medicus for the remaining 43.3 percent
of outstanding Common Stock. This amount represents the maximum that will be
paid in cash or converted to QuadraMed Common Stock upon the effective date of
the acquisition. Costs and fees related to the acquisition totaled $1,500,000.
In connection with the acquisition, which was accounted for as a purchase, the
Company allocated the purchase price based upon the estimated fair value of the
assets acquired and liabilities assumed. Intangible assets acquired aggregated
to $55,000,000, of which $3,000,000, $13,500,000 and $38,500,000 were assigned
to acquired software, acquired intangible assets and acquired in-process
research and development, respectively. Because there was no assurance that the
Company would be able to successfully complete the development and integration
of the acquired research and development in-process or that it had alternative
future use at the acquisition date, the acquired in-process product development
was charged to expense by the Company in the year ended December 31, 1997. Net
tangible liabilities assumed in the acquisition totaled approximately
$17,600,000. No fair value adjustments to net tangible and intangible assets and
liabilities were recorded in the purchase accounting outside of the acquired
intangible assets listed above.
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 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. 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 have been 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.
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.
F-19
<PAGE> 68
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>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
QuadraMed $ 5,639 $ 17,304 $ 32,443
Rothenberg and Softlink 2,432 10,043 12,483
InterMed 1,964 1,784 --
-------- -------- --------
Consolidated $ 10,035 $ 29,131 $ 44,926
======== ======== ========
Net income (loss):
QuadraMed $ (9,771) $ 268 $(38,092)
Rothenberg and Softlink (9,397) (1,111) (4,437)
InterMed 337 (115) --
-------- -------- --------
Consolidated $(18,831) $ (958) $(42,529)
======== ======== ========
</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>
QuadraMed Prior Pro Forma
Corporation Acquisitions(a) Combined
----------- --------------- ------------
<S> <C> <C> <C>
Revenues $ 44,926 $19,316 $ 64,242
Net loss $(42,529) $(9,155) $(51,684)
</TABLE>
(a) Includes results of operations of Synergy HMC for the three months ended
March 31, 1997, HRM for the eight months ended August 31, 1997 and Medicus
for the ten months ended October 31, 1997, respectively. Subsequent to
March 31, 1997, August 31, 1997, and October 31, 1997 the results of
operations of Synergy HMC, HRM and Medicus, respectively, are included in
QuadraMed Corporation.
13. CONTINGENCIES
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, 1997, 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.
14. 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, 1997.
F-20
<PAGE> 69
The components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995 1996 1997
------- ------ -------
(Restated)
(See Note 12)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 2,699 $ 2,840 $ 6,836
Accruals and reserves............................ 338 1,915 3,673
Writeoff of acquired research and development in
process........................................ 3,053 2,764 2,452
------- -------- --------
6,090 7,519 12,961
Deferred tax liabilities:
Cash to accrual adjustment....................... 1,170 --- ---
Depreciation..................................... 165 253 345
Intangible assets................................ 498 --- 582
------- -------- --------
1,833 253 927
Net deferred tax asset before allowance............ 4,257 7,266 12,034
Valuation allowance................................ (4,257) (7,266) (12,034)
------- -------- --------
Net deferred tax asset........................... $ -- $ -- $ --
======= ======== ========
</TABLE>
The significant components of the provision for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal $ -- $-- $622
State -- -- 166
---- --- ----
Total current -- -- 788
Deferred:
Federal -- -- (1,312)
State -- -- (249)
--------- ------- -------
Total deferred -- -- (1,561)
Change in valuation
allowance, net of
the effect of
Medicus -- -- 1,561
--------- ------- -------
$ -- $-- $ 788
========= ======= =======
</TABLE>
Reconciliation of the provision for income taxes computed at the
statutory rate to the effective tax rate are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Federal income tax rate (34)% (34)% (34)%
Change in valuation allowance 34 34 4
Write off of acquired research
and development in process -- -- 31
Alternative minimum tax -- -- 1
--------- -------- ------
--% --% 2%
========= ======== ======
</TABLE>
A valuation allowance has been recorded for the entire deferred tax
asset as a result of uncertainties regarding the realization of the asset
including the limited operating history of the Company.
As of December 31, 1997, the Company had net operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $19,000,000 and $10,000,000, respectively. These carryforwards
expire in various periods from 2009 to 2011. 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.
15. SUBSEQUENT EVENTS
In February 1998, the Company acquired Cabot Marsh Corporation for
approximately $2,800,000 in cash and 382,767 shares of QuadraMed Common Stock
with an aggregate fair market value of approximately $8,400,000. The acquisition
will be accounted for as a purchase.
F-21
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
2.11 Amendment No. 1 to Agreement and Plan of Reorganization, dated as of February 26, 1998.
2.12 Amendment No. 2 to Agreement and Plan of Reorganization, dated as of March 24, 1998.
10.45 Letter dated January 15, 1998 from the Company to Andrew J. Hurd, regarding terms of employment.
10.46 Employment Agreement dated September 29, 1997 by and between Steven D. McCoy and the Company.
10.47 Letter dated March 17, 1998 from the Company to Keith M. Roberts regarding terms of employment.
10.48 Employment Agreement dated February 4, 1998 by and between Ruthann Russo and the Company.
21 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
27.1 Financial Data Schedule for the Year Ended 12/31/97.
27.2 Financial Data Schedule for the Year Ended 12/31/96.
27.3 Financial Data Schedule for the Year Ended 12/31/95.
</TABLE>
<PAGE> 1
EXHIBIT 2.11
AMENDMENT NO. 1
TO AGREEMENT AND PLAN OF REORGANIZATION
AMENDMENT NO. 1, dated as of February 26, 1998 ("Amendment No. 1"), to
that certain Agreement and Plan of Reorganization, dated as of November 9, 1997
(the "Agreement"), by and between QuadraMed Corporation, a Delaware corporation
("QuadraMed") and Medicus Systems Corporation, a Delaware corporation
("Medicus").
RECITALS
WHEREAS, the parties to the Agreement, pursuant to Section 7.4 of the
Agreement, desire to amend the Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree to amend the Agreement pursuant to Section 7.4 of the Agreement as
follows:
SECTION 1. Amendments to the Agreement.
(a) Section 1.6(c) of the Agreement is amended by deleting "the Stock
Exchange and Subscription warrants dated March 19, 1997 issued by Medicus to
Richard C. Jelinek and a trust for his benefit (the "Jelinek Warrants")" and
"the Jelinek Warrants" from the first sentence of that section. A second
sentence is added as follows: "Those certain Stock Exchange and Subscription
warrants dated March 19, 1997 issued by Medicus to Richard C. Jelinek and a
trust for his benefit (the "Jelinek Warrants") shall be purchased by QuadraMed
and cancelled at the Effective Time pursuant to purchase agreements to be
negotiated between QuadraMed and Richard C. Jelinek and the trust,
respectively."
(b) Section 1.6(g) of the Agreement is amended by deleting the words
"and each" in the last line and adding at the end of the last sentence "and in
the case of clause (2), such holders shall receive the remaining Merger
Consideration to which they are entitled in cash."
(c) Section 1.7(e) of the Agreement is amended by replacing the word
"age" at the end of the first sentence with "agent of QuadraMed."
(d) Section 1.11 of the Agreement is amended by deleting the word
"QuadraMed" which immediately precedes the words "Common Stock" in the first
sentence.
(e) Section 2.11(c) of the Agreement is amended by adding after the
phrase "including any employee" the following: "or former employee of Medicus or
any of its subsidiaries. Neither Medicus nor any".
1
<PAGE> 2
(f) Section 2.12 of the Agreement is amended to change the second
subsection (a) to subsection (b) and in the last line of subsection (b), the
word "of" is changed to "on".
(g) Section 2.13 of the Agreement is amended to change the last word of
the first sentence from "returns" to "Returns" and to change the last word in
clause (ii) of the second sentence from "authority" to "Authority".
(h) Section 2.14(c) of the Agreement is amended to change the words
"Section 4062, 4063 or 4041 or ERISA" in clause (vi) to "Section 4062, 4063 or
4041 of ERISA".
(i) Section 2.14(e) of the Agreement is amended by adding after the
phrase "except as" the following: "expressly provided in this Agreement, or (ii)
accelerate the time of payment or".
(j) Section 2.30 of the Agreement is amended to insert the word "the"
between the words "including" and "Medicus Disclosure Schedule".
(k) Section 3.3 of the Agreement is amended to insert the words "(in the
case of QuadraMed)" after the word "Agreement" in each of the first two
sentences and is further amended to delete all references to "and Merger Sub" in
all but the first two sentences.
(l) Section 4.2 of the Agreement is amended to change the second
subsection (e) to subsection (f).
(m) Section 4.2(s) of the Agreement is amended to add the words "its
covenants hereunder." at the end of the subsection.
(n) Section 5.7 of the Agreement is amended to change the words
"Affiliates Agreements" in the last sentence to "Affiliate Agreement".
(o) Section 5.11(a) of the Agreement is amended by deleting "the Jelinek
Warrants" from the first sentence.
(p) Section 5.11(b) of the Agreement is amended by deleting "each of the
Jelinek Warrants and" from the first sentence and by deleting the word "each"
which immediately precedes "such warrant" in clause (i).
(q) Section 5.11 of the Agreement is amended to add subparagraph (e) as
follows: "(e) The Jelinek Warrants shall be purchased by QuadraMed and cancelled
at the Effective Time pursuant to purchase agreements to be negotiated between
QuadraMed and Richard C.
Jelinek and the trust, respectively."
(r) Section 5.12(b) of the Agreement is hereby deleted.
2
<PAGE> 3
(s) Section 5.13 of the Agreement is amended by placing a period after
"QuadraMed" in the first sentence and deleting "and the shares of QuadraMed
Common Stock issuable pursuant to the Jelinek Warrants" in the first sentence.
(t) Section 5.16 of the Agreement is amended to change the words "claim
or claim" in clause (iii) to "claim or claims" and is further amended to change
the word "tow" in the last sentence to "two".
(u) Section 6.1 of the Agreement is amended to change the second
subsection (c) to subsection (d) and to change the current subsection (d) to
subsection (e).
(v) Section 8.1 of the Agreement is amended to change the reference to
Section 5.19 to 5.17.
(w) Section 8.3 of the Agreement is amended to change "November ___,
1997" to "November 9, 1997" in the fourth sentence.
(x) Section 8.5 of the Agreement is amended by replacing the words "set
forth in Sections 1.6(a)-(c) and (f), 1.7-1.9, 5.11 and 5.14 in subsection (b)
with "otherwise set forth in this Agreement".
SECTION 2. Reference to and Effect on the Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof each reference in the Agreement to "this Agreement," "the Agreement,",
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Agreement as amended by Section 1 hereof.
(b) Except as specifically amended above, the Agreement shall remain in
full force and effect and is hereby ratified and confirmed.
SECTION 3. Execution and Counterparts. This Amendment No. 1 may be
executed in one or more counterparts, and by the different parties hereto in
separate counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the same
instrument.
3
<PAGE> 4
IN WITNESS WHEREOF, each party hereto has executed, or caused its duly
authorized officer to execute, this Amendment No. 1 as of the date first written
above.
MEDICUS SYSTEMS CORPORATION
By: /s/Bernie Murphy
-----------------------------------
Name: Bernie Murphy
Title: Chief Financial Officer
QUADRAMED CORPORATION
By: /s/John Cracchiolo
-----------------------------------
Name: John Cracchiolo
Title: Chief Financial Officer
SIGNATURE PAGE TO AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 1
EXHIBIT 2.12
AMENDMENT NO. 2
TO AGREEMENT AND PLAN OF REORGANIZATION
AMENDMENT NO. 2, dated as of March 24, 1998 ("Amendment No. 2"), to that
certain Agreement and Plan of Reorganization, dated as of November 9, 1997 and
amended as of February 26, 1998 (the "Agreement"), by and between QuadraMed
Corporation, a Delaware corporation ("QuadraMed") and Medicus Systems
Corporation, a Delaware corporation ("Medicus").
RECITALS
WHEREAS, the parties to the Agreement, pursuant to Section 7.4 of the
Agreement, desire to amend the Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree to amend the Agreement pursuant to Section 7.4 of the Agreement as
follows:
SECTION 1. Amendments to the Agreement.
Section 7.1(b) of the Agreement is amended by replacing the words "May
1, 1998 (or such later date as may be agreed upon in writing by the parties
hereto)" with "July 31, 1998 (or such later date as may be agreed upon in
writing by the parties hereto)".
SECTION 2. Reference to and Effect on the Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof each reference in the Agreement to "this Agreement," "the Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Agreement as amended by Section 1 hereof.
(b) Except as specifically amended above, the Agreement shall remain in
full force and effect and is hereby ratified and confirmed.
SECTION 3. Execution and Counterparts. This Amendment No. 1 may be
executed in one or more counterparts, and by the different parties hereto in
separate counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the same
instrument.
1
<PAGE> 2
IN WITNESS WHEREOF, each party hereto has executed, or caused its duly
authorized officer to execute, this Amendment No. 2 as of the date first written
above.
MEDICUS SYSTEMS CORPORATION
By: /s/Bernie Murphy
------------------------------------
Name: Bernie Murphy
Title: Chief Financial Officer
QUADRAMED CORPORATION
By: /s/John Cracchiolo
------------------------------------
Name: John Cracchiolo
Title: Chief Financial Officer
SIGNATURE PAGE TO AMENDMENT NO. 2 TO
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 1
EXHIBIT 10.45
January 15, 1998
Mr. Andy Hurd
4122 Tompkins Avenue
Oakland, CA 94619
Dear Andy,
We are pleased to offer you the position of Executive Vice President of
Business Development for QuadraMed Corporation at a starting base salary
of $150,000 per year. As Executive Vice President of Business
Development, your primary role will be the development and management of
a sales team to serve QuadraMed's existing customer base. You will be
eligible to participate in a number of benefit programs described in
QuadraMed's Employee Manual, which I have enclosed for your information.
You will be eligible to participate in a bonus program based upon
QuadraMed's performance as well as your individual performance and that
of your team. Upon the achievement of your established annual
performance objectives you will receive a bonus payment equal to
$150,000, payable when bonus payments in connection with 1998 are made
to QuadraMed's executives generally. After your start date, we will
formalize a more detailed bonus program for you and your team under
which you will be eligible for additional bonuses based on the
achievement of incremental revenue in excess of the revenue performance
objectives established for 1998. As I mentioned to you in our last
discussion, your potential bonus will not be subject to any sort of cap.
You will receive a $50,000 non-recoverable draw against your 1998 bonus.
This draw will be paid as a part of your bi-weekly paycheck over the
first 12 months of your employment.
Subject to the approval of QuadraMed's Board of Directors at its next
meeting, (i) you will be granted an option to purchase 50,000 shares of
QuadraMed's common stock in accordance with QuadraMed's 1996 Stock
Incentive Plan, which will vest over a period of four years from the
date of grant based on your continued employment, and (ii) you will be
granted a warrant to purchase 50,000 shares of QuadraMed Stock, which
will vest upon the achievement of certain performance goals.
Specifically, your warrant will vest 25% of the shares at the end of
your first year of service provided your performance objectives for 1998
are achieved. In subsequent years, your warrant will vest 25% of the
shares if the revenue target set forth in your annual performance
objectives is achieved in that year. All of your outstanding options
will vest immediately if your employment is terminated without cause in
connection with a change in control of QuadraMed. Any termination of
your employment within the 12-month period following a change in control
would be deemed to be effected by a change in control.
Should your employment be terminated without cause by QuadraMed, you would
be entitled to receive a severance benefit equal to three months of your
base salary. Should your
<PAGE> 2
Mr. Andy Hurd
January 7, 1998
Page 2
employment be terminated without cause in connection with a change in
control, your severance benefit would increase to six months salary.
As I'm sure you can appreciate Andy, I need to clarify a few more formal
legal points to make QuadraMed's lawyers happy.
Employment with QuadraMed is for no specific period of time. As a result,
either you or QuadraMed are free to terminate your employment
relationship at any time for any reason, with or without cause. This
letter sets forth the full and complete agreement between us on this
term. Although your job duties, title, and other terms of your
employment, as well as QuadraMed's personnel policies and procedures,
may change from time-to-time, the "at-will" nature of your employment
may only be changed in an express writing signed by you and the Chief
Executive Officer or President of QuadraMed.
Your employment pursuant to this offer is contingent upon you executing the
enclosed Proprietary Information Agreement and upon you providing
QuadraMed with the legally required proof of your identity and
authorization to work in the United States.
A duplicate original of this offer is enclosed for your records. To accept
this offer, please sign and return this letter and an executed
Proprietary Information Agreement to me. This offer, if not accepted,
will expire on January 19, 1998.
Andy, we are delighted to have you join our senior management team, and we
feel confident that you will find this a rewarding career opportunity.
Please feel free to contact me at your convenience if you have any
questions.
Very truly yours,
James D. Durham
/s/ James D. Durham
Chairman of the Board,
President and Chief Executive Officer
I have read and accept this employment offer.
/s/ Andy Hurd
Date:January 7, 1998
<PAGE> 1
Exhibit 10.46
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made this 29th day of
September, 1997 (the "Effective Date") by and between QuadraMed Corporation, a
Delaware corporation ("QuadraMed" or the "Employer"), and Steven D. McCoy, an
individual resident of California (the "Employee").
WHEREAS, concurrently with the execution and delivery of this
Agreement, the Employer is acquiring from the Employee and certain other
stockholders of Healthcare Revenue Management, Inc. (the "Company") in excess of
ninety percent (90%) of the issued shares of stock of the Company pursuant to
that certain Acquisition Agreement and Plan of Merger dated September 24, 1997
by and among QuadraMed, HRM Acquisition Corporation, the Company, the Employee
and certain other stockholders of the Company (the "Merger Agreement").
WHEREAS, the Employer desires the Employee's employment with the
Employer, and the Employee wishes to accept such employment, upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Definitions. For the purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1.
1.1. "Agreement" shall mean this Employment Agreement, including
Exhibit "A" attached hereto and incorporated herein by this reference, as
amended from time to time.
1.2. "Basic Compensation" shall mean Salary and Benefits.
1.3. "Benefits" shall be as defined in Section 3.1(b).
1.4. "Board of Directors" shall mean the board of directors of the
Employer.
1.5. "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Employer, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current and planned research and development, current and
planned manufacturing or distribution methods and processes, customer lists,
current and anticipated customer requirements, price lists, market studies,
business plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures and
architectures (and related formulae, compositions, processes, improvements,
devices, know-how, inventions, discoveries, concepts, ideas, designs, methods
and information, and any other information, however documented, that is a trade
secret within the meaning of applicable law;
<PAGE> 2
(b) information concerning the business and affairs of the
Employer (which includes historical financial statements, financial projections
and budgets, historical and projected sales, capital spending budgets and plans,
the names and backgrounds of key personnel and personnel training and techniques
and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries and
other material prepared by or for the Employer containing or based, in whole or
in part, on any information included in the foregoing.
1.6. "disability" shall be as defined in Section 6.2
1.7. "Effective Date" shall mean the date stated in the first
paragraph of the Agreement.
1.8. "Employee Invention" shall mean any idea, invention,
technique, modification, process or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Employer, that is based upon
or uses Confidential Information.
1.9. "Employment Period" shall mean the term of the Employee's
employment under this Agreement.
1.10. "Fiscal Year" shall mean the Employer's fiscal year, as it
exists on the Effective Date or as changed from time to time.
1.11. "for cause" shall be as defined in Section 6.3.
1.12. "person" shall mean any individual, corporation (including
any non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization or governmental
body.
1.13. "Post-Employment Period" shall be as defined in Section 8.2.
1.14. "Proprietary Items" shall be as defined in Section
7.2(a)(iv).
1.15. "Salary" shall be as defined in Section 3.1(a).
2. Employment Terms and Duties.
<PAGE> 3
2.1. Employment. The Employer hereby employs the Employee, and the
Employee hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2. Term. Subject to the provisions of Section 6, the term of the
Employee's employment under this Agreement will be two (2) years, beginning on
the Effective Date and ending on the second (2nd) anniversary of the Effective
Date.
2.3. Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors or the Chief Executive
Officer, President or Chief Operating Officer of the Employer, and will
initially serve as a Senior Vice President of the Employer. The Employee will
devote his or her entire business time, attention, skill and energy exclusively
to the business of the Employer, will use his or her best efforts to promote the
success of the Employer's business and will cooperate fully with the Board of
Directors and the Employer's executive officers in the advancement of the best
interests of the Employer. Nothing in this Section 2.3, however, will prevent
the Employee from engaging in additional activities in connection with personal
investments and community affairs that are not inconsistent with the Employee's
duties under this Agreement.
3. Compensation.
3.1. Basic Compensation.
(a) Salary. The Employee will be paid an annual salary of One
Hundred Seventy-Five Thousand Dollars ($175,000), subject to adjustment as
provided below (the "Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll practices, but no
less frequently than monthly. The Salary will not be adjusted for a period of
two (2) years from the Effective Date. If the Employee's employment with the
Employer is continued following the second (2nd) anniversary of the Effective
Date, the Salary will be reviewed by the Board of Directors or the Chief
Executive Officer, President or Chief Operating Officer of the Employer not less
frequently than annually, and may be adjusted upward or downward in the sole
discretion of the Board of Directors or the Chief Executive Officer, President
or Chief Operating Officer of the Employer.
(b) Bonus. Upon execution of this Agreement by both parties,
the Employee shall be entitled to receive from the Employer a one time, lump sum
bonus payment of Thirty Thousand Dollars ($30,000) in consideration of the
Employee's continued employment with the Employer.
(c) Withholdings. The Employer will deduct and withhold, from
the Salary and the Bonus payable to the Employee under Sections 3.1(a) and
3.1(b) above, any and all applicable federal, state and local income and
employment withholding taxes and any other amounts required to be deducted or
withheld by the Employer under applicable statute or regulation.
<PAGE> 4
(d) Benefits. The Employee will, during the Employment Period,
be permitted to participate in such pension, profit sharing, bonus, life
insurance, hospitalization, major medical and other employee benefit plans of
the Employer that may be in effect from time to time, to the extent the Employee
is eligible under the terms of those plans (collectively, the "Benefits").
4. Facilities and Expenses. The Employer will furnish the Employee
office space, equipment, supplies and such other facilities and personnel as the
Employer deems necessary or appropriate for the performance of the Employee's
duties under this Agreement. The Employer will pay the Employee's dues in such
professional societies and organizations as the Chairman of the Board, Chief
Executive Officer, President or Chief Operating Officer of the Employer deems
appropriate, and will pay on behalf of the Employee (or reimburse the Employee
for) reasonable expenses incurred by the Employee at the request of, or on
behalf of, the Employer in the performance of the Employee's duties pursuant to
this Agreement, and in accordance with the Employer's employment policies. The
Employee must file expense reports with respect to such expenses in accordance
with the Employer's policies.
5. Vacations and Holidays. The Employee will be entitled to four (4)
weeks paid vacation each Fiscal Year in accordance with the vacation policies of
the Employer in effect for its officers from time to time. Vacation must be
taken by the Employee at such time or times as approved by the Chairman of the
Board, Chief Executive Officer, President or Chief Operating Officer of the
Employer. The Employee will also be entitled to the paid holidays set forth in
the Employer's policies.
6. Termination.
6.1. Events of Termination. The Employment Period, the Employee's
Basic Compensation and any and all other rights of the Employee under this
Agreement or otherwise as an employee of the Employer will terminate (except as
otherwise provided in this Section 6):
(a) upon the death of the Employee;
(b) upon the disability of the Employee (as defined in Section
6.2) immediately upon notice from either party to the other;
(c) upon termination by the Employer, without cause or for
cause (as defined in Section 6.3), immediately upon notice from the Employer to
the Employee, or at such later time as such notice may specify.
6.2. Definition of Disability. For purposes of Section 6.1, the
Employee will be deemed to have a "disability" if, he or she is disabled as
defined in the Employer's disability insurance policy applicable to the
Employee.
<PAGE> 5
6.3. Definition of "for cause". For purposes of Section 6.1, the
phrase "for cause" means: (a) the Employee's breach of this Agreement; (b) the
Employee's negligence in attention to material affairs of the Employer or
failure to adhere to any written Employer policy if the Employee has been given
a reasonable opportunity to comply with such policy or cure his or her
negligence or failure to comply; (c) the appropriation (or attempted
appropriation) of a material business opportunity of the Employer, including
attempting to secure or securing any personal profit in connection with any
transaction entered into on behalf of the Employer; (d) the misappropriation (or
attempted misappropriation) of any of the Employer's funds or property; (e) the
Employee's commission of any crime or an act of dishonesty, fraud or moral
turpitude or knowingly making false or misleading statements in connection with
his or her employment; or (f) the conviction of, the indictment for (or its
procedural equivalent) or the entering of a guilty plea or plea of no contest
with respect to, a felony, the equivalent thereof, or any other crime with
respect to which imprisonment is a possible punishment.
6.4. Termination Pay. Effective upon the termination of this
Agreement, the Employer will be obligated to pay the Employee (or, in the event
of his or her death, his or her designated beneficiary as defined below) only
such compensation as is provided in this Section 6.4, and in lieu of all other
amounts and in settlement and complete release of all claims the Employee may
have against the Employer. For purposes of this Section 6.4, the Employee's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Employee may designate by notice to the Employer from time
to time or, if the Employee fails to give notice to the Employer of such a
beneficiary, the Employee's estate. Notwithstanding the preceding sentence, the
Employer will have no duty, in any circumstances, to attempt to open an estate
on behalf of the Employee, to determine whether any beneficiary designated by
the Employee is alive or to ascertain the address of any such beneficiary, to
determine the existence of any trust, to determine whether any person or entity
purporting to act as the Employee's personal representative (or the trustee of a
trust established by the Employee) is duly authorized to act in that capacity,
or to locate or attempt to locate any beneficiary, personal representative or
trustee.
(a) Termination by the Employer Without Cause. During the
first (1st) year of this Agreement, if the Employer terminates this Agreement
without cause, the Employer will pay the Employee the Employee's salary through
the first anniversary of the Effective Date and for four (4) consecutive
calendar months thereafter. During the second (2nd) year of this Agreement, if
the Employer terminates this Agreement without cause, the Employer will pay the
Employee the Employee's Salary for the remainder, if any, of the calendar month
in which such termination is effective and for four (4) consecutive calendar
months thereafter. Notwithstanding the preceding sentence, if the Employee
obtains other employment prior to the end of the period in which compensation is
being paid pursuant to this Section 6.4(a), he or she must promptly give notice
thereof to the Employer, and the Salary payments under this Agreement for any
period after the Employee obtains other employment will be reduced by the amount
of the cash compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period. All
payments pursuant to this Section 6.4(a) will be payable in equal periodic
installments
<PAGE> 6
according to Employer's customary payroll practices, but no less frequently than
monthly. For purposes of this Section 6.4(a), termination by the Employer
without cause shall include a termination of the Employee's employment at his
initiative following the occurrence, without the Employee's prior written
consent, of one or more of the following events: (i) a reduction in the
Employee's Salary; (ii) a material diminution in the Employee's duties or the
assignment to the Employee of duties which are materially inconsistent with the
Employee's duties or which materially impair the Employee's ability to function
in his or her then-current position; or (iii) a relocation of the Employee's
principal place of employment by more than forty-five (45) miles.
(b) Termination by the Employer for Cause. If the Employer
terminates this Agreement for cause, the Employee will be entitled to receive
his or her Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Employee's disability, as
determined under Section 6.2, the Employer will pay the Employee his or her
Salary for the lesser of (i) four (4) consecutive calendar months or (ii) the
period until disability insurance benefits commence under the disability
insurance coverage furnished by the Employer to the Employee.
(d) Termination upon Death. If this Agreement is terminated
because of the Employee's death, the Employee will be entitled to receive his or
her Salary through the end of the calendar month in which his or her death
occurs.
(e) Benefits. The Employee's accrual of, or participation in
plans providing for, the Benefits will cease at the effective date of the
termination of this Agreement, and the Employee will be entitled to accrued
Benefits pursuant to such plans only as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions.
7.1. Acknowledgments by the Employee. The Employee acknowledges
that (a) during the Employment Period and as a part of his or her employment,
the Employee will be afforded access to Confidential Information; (b) public
disclosure of such Confidential Information could have an adverse effect on the
Employer and its business; (c) because the Employee possesses substantial
technical expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee Invention, and
the Employer will be at a substantial competitive disadvantage if it fails to
acquire exclusive ownership of each Employee Invention; (d) the Employer has
required that the Employee make the covenants in this Section 7 as a condition
to its acquisition of the Employee's stock in the Company; and (e) the
provisions of this Section 7 are reasonable and necessary to prevent the
improper use or disclosure of Confidential Information and to provide the
Employer with exclusive ownership of all Employee Inventions.
7.2. Agreements of the Employee. In consideration of the
compensation and
<PAGE> 7
benefits to be paid or provided to the Employee by the Employer under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the
Employee will hold in confidence the Confidential Information and will not
disclose it to any person except with the specific prior written consent of the
Employer or except as otherwise expressly permitted by the terms of this
Agreement.
(ii) Any trade secrets of the Employer will be entitled
to all of the protections and benefits under any applicable law. If any
information that the Employer deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this Agreement,
such information will, nevertheless, be considered Confidential Information for
purposes of this Agreement. The Employee hereby waives any requirement that the
Employer submit proof of the economic value of any trade secret or post a bond
or other security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the Employee
demonstrates was or became generally available to the public other than as a
result of a disclosure by the Employee.
(iv) The Employee will not remove from the Employer's
premises (except to the extent such removal is for purposes of the performance
of the Employee's duties at home or while traveling, or except as otherwise
specifically authorized by the Employer) any document, record, notebook, plan,
model, component, device or computer software or code, whether embodied in a
disk or in any other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Employer and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the exclusive
property of the Employer. Upon termination of this Agreement by either party, or
upon the request of the Employer during the Employment Period, the Employee will
return to the Employer all of the Proprietary Items in the Employee's possession
or subject to the Employee's control, and the Employee shall not retain any
copies, abstracts, sketches or other physical embodiment of any of the
Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that all Employee
Inventions are works made for hire and the property of the Employer, including
any copyrights, patents or other intellectual property rights pertaining
thereto. If it is determined that any such works are not works made for hire,
the Employee hereby assigns to the Employer all of the Employee's right, title
and interest, including all rights of copyright, patent and other intellectual
property rights, to or in such Employee Inventions. The Employee covenants that
he or she will promptly:
(i) disclose to the Employer in writing any Employee
<PAGE> 8
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and without additional compensation, all
of the Employee's right to the Employee Invention for the United States and all
foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments and other documents as the Employer may request in
order to apply for and obtain patents or other registrations with respect to any
Employee Invention in the United States and any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance in
support of the Employer's rights to any Employee Invention.
No assignment of this Agreement shall extend to Employee Inventions, the
assignment of which is prohibited by California Labor Code Section 2870, a copy
of which is attached hereto as Exhibit "A" and incorporated herein by this
reference.
7.3. Disputes or Controversies. The Employee recognizes that should
a dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Employee and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference.
8.1. Acknowledgments by the Employee. The Employee acknowledges
that: (a) the services to be performed by him or her under this Agreement are of
a special, unique, unusual, extraordinary and intellectual character; (b) the
Employer's business is national in scope and its products are marketed
throughout the United States; (c) the Employer competes with other businesses
that are or could be located in any part of the United States; (d) the Employer
has required that the Employee make the covenants set forth in this Section 8 as
a condition to the its acquisition of the Employee's stock in the Company; and
(e) the provisions of this Section 8 are reasonable and necessary to protect the
Employer's business.
8.2. Covenants of the Employee. In consideration of the
acknowledgments by the Employee, and in consideration of the compensation and
benefits to be paid or provided to the Employee by the Employer, the Employee
covenants that he or she will not, directly or indirectly:
<PAGE> 9
(a) during the Employment Period, except in the course of his
or her employment hereunder, engage or invest in, own, manage, operate, finance,
control or participate in the ownership, management, operation, financing or
control of, be employed by, associated with or in any manner connected with,
lend the Employee's name or any similar name to or lend Employee's credit to or
render services or advice to, any business whose products or activities compete
in whole or in part with the products or activities of the Employer anywhere
within the United States; provided, however, that the Employee may purchase or
otherwise acquire up to (but not more than) one percent (1%) of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended;
(b) whether for the Employee's own account or for the account
of any other person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Employer, from any customer, client, vendor or other business
source of the Employer, whether or not the Employee had personal contact with
such person during and by reason of the Employee's employment with the Employer;
(c) whether for the Employee's own account or the account of
any other person (i) at any time during the Employment Period and the
Post-Employment Period, solicit, employ or otherwise engage as an employee,
independent contractor or otherwise, any person who is or was an employee of the
Employer at any time during the Employment Period or in any manner induce or
attempt to induce any employee of the Employer to terminate his or her
employment with the Employer or (ii) at any time during the Employment Period
and for two (2) years thereafter, interfere with the Employer's relationship
with any person, including any person who at any time during the Employment
Period was an employee, contractor, supplier or customer of the Employer; or
(d) at any time during or after the Employment Period,
disparage the Employer or any of its stockholders, directors, officers,
employees or agents. For purposes of this Section 8.2, the term "Post-Employment
Period" means the two (2) year period beginning on the date of termination of
the Employee's employment with the Employer. If any covenant in this Section 8.2
is held to be unreasonable, arbitrary or against public policy, such covenant
will be considered to be divisible with respect to scope, time and geographic
area, and such lesser scope, time or geographic area, or all of them, as a court
of competent jurisdiction may determine to be reasonable, not arbitrary, and not
against public policy, will be effective, binding, and enforceable against the
Employee. The period of time applicable to any covenant in this Section 8.2 will
be extended by the duration of any violation by the Employee of such covenant.
The Employee will, while the covenant under this Section 8.2 is in effect, give
notice to the Employer, within ten (10) days after accepting any other
employment, of the identity of the Employee's employer. The Employer may notify
such employer that the Employee is bound by this Agreement and, at the
Employer's election, furnish such employer with a copy of this Agreement or
relevant portions thereof.
<PAGE> 10
9. General Provisions.
9.1. Injunctive Relief and Additional Remedy. The Employee
acknowledges that the injury that would be suffered by the Employer as a result
of a breach of the provisions of this Agreement (including any provision of
Sections 7 and 8) would be irreparable and that an award of monetary damages to
the Employer for such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may have, to
obtain injunctive relief to restrain any breach or threatened breach or
otherwise to specifically enforce any provision of this Agreement, and the
Employer will not be obligated to post bond or other security in seeking such
relief. Without limiting the Employer's rights under this Section 9 or any other
remedies of the Employer, if the Employee breaches any of the provisions of
Section 7 or 8, the Employer will have the right to cease making any payments
otherwise due to the Employee under this Agreement.
9.2. Covenants of Sections 7 and 8 are Essential and Independent
Covenants. The covenants by the Employee in Sections 7 and 8 are essential
elements of this Agreement, and without the Employee's agreement to comply with
such covenants, the Employer would not have acquired the Employee's stock under
the Merger Agreement and the Employer would not have entered into this Agreement
or employed or continued the employment of the Employee. The Employer and the
Employee have independently consulted their respective counsel and have been
advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted by the
Employer. The Employee's covenants in Sections 7 and 8 are independent covenants
and the existence of any claim by the Employee against the Employer under this
Agreement or otherwise will not excuse the Employee's breach of any covenant in
Section 7 or 8. If the Employee's employment hereunder expires or is terminated,
this Agreement will continue in full force and effect as is necessary or
appropriate to enforce the covenants and agreements of the Employee in Sections
7 and 8.
9.3. Representations and Warranties by the Employee. The Employee
represents and warrants to the Employer that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction or
order of any court, arbitrator or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of or constitute a default under, any agreement to which the
Employee is a party or by which the Employee is or may be bound.
9.4. Obligations Contingent on Performance. The obligations of the
Employer hereunder, including its obligation to pay the compensation provided
for herein, are contingent upon the Employee's performance of the Employee's
obligations hereunder.
9.5. Waiver. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any delay
by either party in exercising any right, power or privilege under this Agreement
will operate as a waiver of such right,
<PAGE> 11
power or privilege, and no single or partial exercise of any such right, power
or privilege will preclude any other or further exercise of such right, power or
privilege or the exercise of any other right, power or privilege. To the maximum
extent permitted by applicable law, (a) no claim or right arising out of this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the claim or right unless in writing signed by the other party,
(b) no waiver that may be given by a party will be applicable except in the
specific instance for which it is given and (c) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or of the
right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
9.6. Binding Effect; Delegation of Duties Prohibited. This
Agreement shall inure to the benefit of, and shall be binding upon, the parties
hereto and their respective successors, assigns, heirs and legal
representatives, including any entity with which the Employer may merge or
consolidate or to which all or substantially all of its assets may be
transferred. The duties and covenants of the Employee under this Agreement,
being personal, may not be delegated.
9.7. Notices. All notices, consents, waivers and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt), provided
that a copy is mailed by registered mail, return receipt requested or (c) when
received by the addressee, if sent by a nationally recognized overnight delivery
service (receipt requested), in each case to the appropriate addresses and
facsimile numbers set forth below (or to such other addresses and facsimile
numbers as a party may designate by notice to the other parties):
If to Employer: QuadraMed Corporation
80 East Sir Francis Drake Boulevard, Suite 2A
Larkspur, California 94939
Attention: James D. Durham
Facsimile: (415) 461-3953
With a required copy to: Zevnik Horton Guibord & McGovern, L.L.P.
101 West Broadway, 17th Floor
San Diego, California 92101
Attention: Steven G. Rowles, Esq.
Facsimile: (619) 515-9629
If to the Employee: Healthcare Revenue Management, Inc.
301 Mission Street, 5th Floor
San Francisco, California 94105
Attention: Steven D. McCoy
Facsimile: (415) 227-4677
With a required copy to: Foley McIntosh & Foley
<PAGE> 12
3675 Mt. Diablo Boulevard, Suite 250
Lafayette, California 94549
Attention: Jay Richard Strauss
Facsimile: (510) 284-3029
9.8. Entire Agreement; Amendments. This Agreement, the Merger
Agreement and the documents executed in connection with the Merger Agreement
contain the entire agreement between the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, between the parties hereto with respect to the subject matter hereof.
This Agreement may not be amended orally, but only by an agreement in writing
signed by the parties hereto.
9.9. Governing Law. This Agreement will be governed by the laws of
the State of Delaware without regard to conflicts of laws principles.
9.10. Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of California,
County of Marin, or, if it has or can acquire jurisdiction, in the United States
District Court for the Northern District of California, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
9.11. Section Headings, Construction. The headings of sections in
this Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "Section" or "Sections" refer
to the corresponding section or sections of this Agreement unless otherwise
specified. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
9.12. Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.
9.13. Counterparts; Facsimile. This Agreement may be executed in
one or more counterparts, all of which when fully-executed and delivered by all
parties hereto and taken together shall constitute a single agreement, binding
against each of the parties. To the maximum extent permitted by law or by any
applicable governmental authority, any document may be signed and transmitted by
facsimile with the same validity as if it were an ink-signed document. Each
signatory below represents and warrants by his or her signature that he or she
is duly authorized (on behalf of the respective entity for which such signatory
has acted) to execute and deliver this instrument and any other document related
to this transaction, thereby
<PAGE> 13
fully binding each such respective entity.
9.14. Resolution of Disputes. Any controversy arising out of this
Agreement or breach thereof shall be settled by arbitration in San Francisco,
California, in accordance with the rules of the American Arbitration
Association, and judgment entered upon the award rendered by arbitrator may be
enforced by appropriate judicial action pursuant to the California Code of Civil
Procedure. The arbitration panel shall consist of one (1) member, which shall be
a person agreed to by each party to dispute within thirty (30) days following
notice by one party that desires the matter to be arbitrated. If the parties are
unable within such thirty (30) day period to agree upon an arbitrator, than the
panel shall be one (1) arbitrator selected by the San Francisco office of the
American Arbitration Association, which arbitrator shall be experienced in
commercial law and acquisition transactions and knowledgeable with respect to
the subject matter of the dispute. The losing party shall bear any fees and
expenses of the arbitrator, other tribunal fees and expense and reasonable
attorneys fees of both parties, and the cost of such witness and other
reasonable costs or expenses incurred by him or the prevailing party. The
arbitrator shall render a decision within thirty (30) days following the close
of presentation by the parties to their cases and any rebuttal. The parties
shall agree within thirty (30) days following the selection of the arbitrator to
any pre-hearing procedures or further procedures necessary for the arbitration
to proceed, including, interrogatories or other discovery, provided, in any
event, each party shall be entitled to discovery in accordance with California
Code of Civil Procedures Section 1283.05.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date above first written above.
QUADRAMED CORPORATION
By:/s/ James D. Durham
James D. Durham, Chief Executive Officer
/s/ Steven D. McCoy
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
<PAGE> 15
EXHIBIT "A"
CALIFORNIA LABOR CODE SECTION 2870
Section 2870. Application of provision providing that employee will
assign or offer to assign rights in invention to employer.
(a) Any provision in an employment agreement which provides that an
employee will assign, or offer to assign, any of his or her rights in an
invention to his or her employer will not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for his
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
EXHIBIT 10.47
March 17, 1997
Keith M. Roberts
Executive Vice President and General Counsel
QuadraMed Corporation
981 Dolores Street
San Francisco, CA 94110
Dear Mr. Roberts:
We are pleased to inform you that the Board of Directors (the "Board")
of QuadraMed Corporation (the "Company") has authorized an employment package
for you which will provide certain assurances concerning the terms and
conditions of your continued employment with the Company and will allow you to
participate in a program of severance benefit payments should your employment
terminate. The purpose of this letter agreement (the "Agreement") is to document
the terms of your employment package by providing you with a formal employment
contract.
The Company considers it essential to the continuing operation of the
Company and in the best interests of its stockholders to assure the continuous
dedication of key management personnel. It is recognized in the context of
public ownership that a termination of an employee's employment without cause
may be sought and that such circumstances could prove distracting to key
executives and detrimental to the ongoing management and administration of the
Company. Such distraction is not in the best interest of the stockholders of the
Company. Accordingly, the Board has determined to discourage the inevitable
distraction to you in the face of potentially disturbing circumstances inherent
in any uncertainty regarding your employment status. This Agreement is intended
to secure and encourage your ongoing retention by providing separation benefits
in the event that your employment is altered as hereinafter described. In order
to induce you to remain in the employ of the Company, and in consideration of
your agreement set forth in Sections 11, 12, 13 and 14 of Part Two hereof, the
Company agrees to pay the severance payments and benefits set forth in this
Agreement, under the circumstances described herein.
This Agreement supersedes any written or oral employment agreement
between you and the Company prior to the date hereof.
Part One of this Agreement sets forth certain definitional provisions to
be in effect for purposes of determining your benefit entitlements. Part Two
specifies the terms and conditions which will apply to your continued employment
with the Company, including the severance payments and benefits to which you
will become entitled in the event your employment should be terminated. Part Two
concludes this Agreement with a series of general terms and conditions
<PAGE> 2
applicable to your employment benefits.
PART ONE -- DEFINITIONS
DEFINITIONS. For purposes of this Agreement, including in particular the
severance payments and benefits to which you may become entitled under Part Two,
the following definitions will be in effect:
"CHANGE IN CONTROL" means:
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change the
State of the Company's incorporation;
(ii) the sale, transfer or other disposition of all or substantially all
of the assets of the Company in liquidation or dissolution of the Company;
(iii) a transfer of all or substantially all of the Company's assets
pursuant to a partnership or joint venture agreement or similar arrangement
where the Company's resulting interest is less than fifty percent (50%);
(iv) any reverse merger in which the Company is the surviving entity but
in which fifty percent (50%) or more of the Company's outstanding voting stock
is transferred to holders different from those who held the stock immediately
prior to such merger;
(v) on or after the date hereof, a change in ownership of the Company
through an action or series of transactions, such that any person is or becomes
the beneficial owner, directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the securities of the combined
voting power of the Company's outstanding securities;
(vi) a majority of the members of the Board are replaced during any
twelve-month period by directors whose appointment or election is not endorsed
by a majority of the members of the Board prior to the date of such appointment
of election; or
(vii) the occurrence of any other event constituting a "change in
control" under Code Section 280G or the Treasury regulations promulgated
thereunder.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"EMPLOYEE" means Keith M. Roberts
"EMPLOYEE BENEFIT PLAN" shall have the meaning given the term under
Section 3 of ERISA.
"EMPLOYMENT PERIOD" means the period of your employment with the Company
governed by the terms and provisions of this Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect from time to time.
<PAGE> 3
"INVOLUNTARY TERMINATION" means the termination of your employment with
the Company:
(i) involuntarily upon your discharge, dismissal or the Company's
failure to renew this Agreement pursuant to Section 3 of Part Two, whether or
not in connection with a Change in Control; or
(ii) voluntarily or involuntarily, provided such termination occurs in
connection with (a) a change in your position with the Company which materially
reduces your level of responsibility or changes your title from Executive Vice
President and General Counsel, (b) a reduction in your level of compensation
(including base salary, fringe benefits and any non-discretionary bonuses or
other incentive payments earned pursuant to objective standards or criteria) or
(c) a relocation of your principal place of employment by more than forty-five
(45) miles and such change, reduction or relocation is effected without your
written concurrence.
"OPTION" means any option granted to you under the Stock Option Plan
which is outstanding at the time of your Involuntary Termination.
"STOCK OPTION PLAN" means the Company's 1996 Stock Incentive Plan
(including the predecessor 1994 Stock Option Plan), as amended through the date
hereof.
"TERMINATION FOR CAUSE" will mean an Involuntary Termination of your
employment for (i) one or more alleged acts of fraud, embezzlement,
misappropriation of proprietary information, misappropriation of the Company's
trade secrets or other confidential information, a verifiable breach of your
fiduciary duties to the Company or any other verifiable misconduct adversely
affecting the business reputation of the Company in a material manner or (ii)
your failure to devote your full working time and effort to the performance of
your duties hereunder; provided, however, you will have the right to perform
incidental services as are necessary in connection with (a) your private passive
investments, (b) your charitable or community activities and (c) your
participation in trade or professional organizations, but only to the extent
such incidental services do not materially interfere with the performance of
your services hereunder.
<PAGE> 4
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT
The following terms and conditions will govern your employment with the
Company throughout the Employment Period and will also, to the extent indicated
below, remain in effect following your termination date.
1. EMPLOYMENT AND DUTIES. The Company will continue to employ you as an
executive officer in the position of Executive Vice President and General
Counsel. You agree to continue in such employment for the duration of the
Employment Period and to perform in good faith and to the best of your ability
all services which may be required of you in your executive position and to be
available to render such services at all reasonable times and places in
accordance with reasonable directives and assignments issued by the Board.
During your Employment Period, you will devote your full time and effort to the
business and affairs of the Company within the scope of your executive office.
Your principal place of operations will be at the Company's corporate offices in
Larkspur, California.
2. TERM OF AGREEMENT. The Employer hereby employs the Employee, and the
Employee hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement. Employee shall be an employee "at will",
terminable at any time by Employer for cause or without cause.
3. AUTOMATIC EXTENSION. The initial term of this Agreement shall be one
year from the effective date hereof. Commencing on the anniversary of the
effective date hereof, and on each succeeding anniversary of the date hereof,
the term of this Agreement shall automatically be extended for one (1)
additional year unless, not later than three (3) months preceding such
anniversary date, the Company shall have given written notice pursuant to
Section 7 of Part Three that it will not extend the term of this Agreement.
4. COMPENSATION.
A. For service in the 1997 calendar year, your base salary will be
paid at the annual rate of One Hundred Fifty Thousand Dollars ($150,000). Your
annual rate of base salary may be subject to adjustment each calendar year by
the Board.
B. Your base salary will be paid at periodic intervals in accordance
with the Company's payroll practices for salaried employees.
C. You will be entitled to such bonuses (if any) for service rendered
during the Employment Period as the Board may determine in its sole discretion
and based upon the recommendation of the Company's Compensation Committee and
such additional factors as the Board deems appropriate, including your
individual performance and the Company's financial results.
D. The Company will deduct and withhold, from the compensation
payable to you hereunder, any and all applicable federal, state and local income
and employment withholding taxes and any other amounts required to be deducted
or withheld by the Company under applicable statute or regulation.
5. EXPENSE REIMBURSEMENT. You will be entitled to reimbursement from the
<PAGE> 5
Company for all customary, ordinary and necessary business expenses incurred by
you in the performance of your duties hereunder, provided you furnish the
Company with vouchers, receipts and other substantiation of such expenses in
accordance with Company policies.
6. FRINGE BENEFITS. During the Employment Period, you will be eligible
to participate in any group life insurance plan, group medical and/or dental
insurance plan, accidental death and dismemberment plan, short-term disability
program and other employee benefit plans, including profit sharing plans,
cafeteria benefit programs and stock purchase and option plans, which are made
available to executives and for which you qualify.
7. VACATION. You will accrue four (4) weeks of paid vacation benefits
during each calendar year of the Employment Period in accordance with the
Company policy in effect for executive officers.
8. DEATH OR DISABILITY.
A. Upon your death or disability during the Employment Period, the
employment relationship created pursuant to this Agreement will immediately
terminate, and no further compensation will become payable to you pursuant to
Part Two, Section 4. In connection with such termination by reason of death, the
Company will only be required to pay you (or your estate) any unpaid
compensation earned under Part Two, Section 4 for services rendered through the
date of your death, together with a special termination payment equal to the
additional amount of base salary you would have earned hereunder had your
employment continued for an additional thirty (30) days. In connection with such
termination by reason of disability, the Company will be required to pay to you
any unpaid compensation earned under Part Two, Section 4 for services rendered
through the date of your disability, together with the severance benefits set
forth in Section 9 below.
B. You will be deemed disabled if you are so characterized pursuant
to the terms of the Company's disability insurance policies applicable to you
from time to time.
C. Upon death or disability the terms of the Stock Option Plan will
apply.
9. SEVERANCE BENEFITS. You will be entitled to receive the severance
benefits specified below in the event there should occur on the termination of
your employment by reason of disability or an Involuntary Termination of your
employment (other than a Termination for Cause).
A. SEVERANCE BENEFIT. The Company will make a severance payment to
you, in one lump sum within thirty (30) days of the date of your Involuntary
Termination, in an aggregate amount equal to the average annual rate of base
salary paid to you by the Company for service rendered in the two (2)
immediately preceding calendar years. In the event that you have been employed
by the Company for one year or less at the time of your Involuntary Termination,
then the Company will make a severance payment to you in an amount equal to your
then current annual base salary. You may elect, in your sole discretion, to have
the severance benefit payable pursuant to this Section 9.A in monthly
installments over a one year period following the date of your Involuntary
Termination.
B. WELFARE BENEFITS. For a period of twelve (12) months, Employee
(and his
<PAGE> 6
dependents, as applicable) shall be provided by the Company with the same life,
health and disability plan participation, benefits and other coverages to which
he was entitled as an employee immediately before the disability or the
Involuntary Termination. In the event that under applicable law or the terms of
the relevant Employee Benefit Plans such participation, benefits and/or coverage
cannot be provided to Employee following his Involuntary Termination, such
coverage and/or benefits shall be provided directly by the Company pursuant to
this Agreement on a comparable basis. In its sole discretion, the Company may
obtain such coverage and benefits for Employee through private insurance
acquired at the Company's expense. Amounts paid or payable to or on behalf of
Employee pursuant to any "employee welfare benefit plan," as defined in ERISA,
providing health and/or disability benefits, that is sponsored by the Company or
an affiliate of the Company, shall be credited against amounts due under this
Section 9.B. To the maximum extent permitted by applicable law, the benefits
provided under this Section 9.B shall be in discharge of any obligations of the
Company or any rights of Employee under the benefit continuation provisions
under Section 4980A of the Code and Part VI of Title I of ERISA ("COBRA") or any
other legislation of similar import.
C. OPTION ACCELERATION. In connection with the Involuntary
Termination of your employment (other than Termination for Cause), each of your
Options under the Stock Option Plan will (to the extent not then otherwise
exercisable) automatically accelerate so that each such Option will become
immediately exercisable for the total number of shares purchasable thereunder.
Each such accelerated Option, together with all of your other vested Options,
will remain exercisable for a period of three (3) years following your
Involuntary Termination and may be exercised for any or all of the accelerated
shares in accordance with the exercise provisions of the Option agreement
evidencing the grant.
10. OPTION ACCELERATION UPON A CHANGE IN CONTROL. Upon the occurrence of
a Change in Control, each of your Options under the Stock Option Plan will (to
the extent not then otherwise exercisable) automatically accelerate so that each
such Option will become immediately exercisable for the total number of shares
purchasable thereunder. Each such accelerated Option, together with all of your
other vested Options, will remain exercisable for a period of three (3) years
following a Change in Control and may be exercised for any or all of the
accelerated shares in accordance with the exercise provisions of the Option
agreement evidencing the grant.
11. RESTRICTIVE COVENANT. During the Employment Period, you will not
directly or indirectly, whether for your own account or as an employee,
consultant or advisor, provide services to any business enterprise other than
the Company, unless otherwise authorized by the Company in writing.
12. NON-SOLICITATION AND NON-DISPARAGEMENT. During any period for which
you are receiving compensation payments pursuant to Part Two, Section 4 and one
(1) year thereafter, you will not directly or indirectly (i) solicit any Company
employee, independent contractor or consultant to leave the Company's employ or
otherwise terminate such person's relationship with the company for any reason
or interfere in any other manner with the employment or other relationships at
the time existing between the Company and its current employees, independent
contractors or consultants, (ii) solicit any of the Company's customers for
products or services substantially similar to those offered by the Company, or
(iii) disparage the Company or any of its shareholders, directors, officers,
employees or agents.
<PAGE> 7
13. CONFIDENTIALITY.
A. You hereby acknowledge that the Company may, from time to time
during the Employment Period, disclose to you confidential information
pertaining to the Company's business and affairs and client base, including
(without limitation) customer lists and accounts, other similar items indicating
the source of the Company's income and information pertaining to the salaries,
duties and performance levels of the Company's employees. You will not, at any
time during or after such Employment Period, disclose to any third party or
directly or indirectly make use of any such confidential information, including
(without limitation) the names, addresses and telephone numbers of the Company's
customers, other than in connection with, and in furtherance of, the Company's
business and affairs. Nothing contained in this paragraph shall be construed to
prevent Employee from disclosing the amount of his salary.
B. All documents and data (whether written, printed or otherwise
reproduced or recorded) containing or relating to any such proprietary
information of the Company which come into your possession during the Employment
Period will be returned by you to the Company immediately upon the termination
of the Employment Period or upon any earlier request by the Company, and you
will not retain any copies, notes or excerpts thereof. Notwithstanding the
foregoing, Employee shall be entitled to retain his file or Rolodex containing
names, addresses and telephone numbers and personal diaries and calendars;
provided, however, that Employee shall continue to be bound by the terms of
Section 13.A. above to the extent such retained materials constitute
confidential information.
C. Your obligations under this Section 13 will continue in effect
after the termination of your employment with the Company, whatever the reason
or reasons for such termination, and the Company will have the right to
communicate with any of your future or prospective employers concerning your
continuing obligations under this Section 13.
14. OWNERSHIP RIGHTS.
A. All materials, ideas, discoveries and inventions pertaining to
the Company's business or clients, including (without limitation) all patents
and copyrights, patent applications, patent renewals and extensions and the
names, addresses and telephone numbers of customers, will belong solely to the
Company.
B. All materials, ideas, discoveries and inventions which you may
devise, conceive, develop or reduce to practice (whether individually or jointly
with others) during the Employment Period will be the sole property of the
Company and are hereby assigned by you to the Company, except for any idea,
discovery or invention (i) for which no Company equipment, supplies, facility or
trade secret information is used, (ii) which is developed entirely on your own
time and (iii) which neither (a) relates at the time of conception or reduction
to practice, to the Company's business or any actual or demonstrably-anticipated
research or development program of the Company nor (b) results from any work
performed by you for the Company. The foregoing exception corresponds to the
assignment of inventions precluded by California Labor Code Section 2870,
attached as Exhibit A.
<PAGE> 8
C. You will, at all times whether during or after the Employment
Period, assist the Company, at the Company's sole expense, in obtaining,
maintaining, defending and enforcing all legal rights and remedies of the
Company, including, without limitation, patents, copyrights and other
proprietary rights of the Company. Such assistance will include (without
limitation) the execution of documents and assistance and cooperation in legal
proceedings.
D. You will continue to be bound by all the terms and provisions
of your existing Proprietary Information Agreement with the Company, and nothing
in this document will be deemed to modify or affect your duties and obligations
under those other agreements.
15. TERMINATION OF EMPLOYMENT.
A. The Company (or any successor entity resulting from a Change
in Control) may terminate your employment under this Agreement at any time for
any reason, with or without cause, by providing you with at least seven (7) days
prior written notice. However, such notice requirement will not apply in the
event there is a Termination for Cause under subparagraph D below.
B. In the event there is a termination of your employment by
reason of disability or is an Involuntary Termination of your employment with
the Company (other than Termination for Cause) during the Employment Period, you
will become entitled to the benefits specified in Part Two, Section 9 in
addition to any unpaid compensation earned by you under Part Two, Section 4 for
services rendered prior to such termination.
C. Should your employment with the Company terminate by reason of
your death during the Employment Period, no severance benefits will be payable
to you under Part Two, Section 9, and only the limited death benefits provided
under Part Two, Section 8 will be payable.
D. The Company may at any time, upon written notice, terminate
your employment hereunder for any act qualifying as a Termination for Cause.
Such termination will be effective immediately upon such notice.
E. Upon such Termination for Cause, the Company will only be
required to pay you any unpaid compensation earned by you pursuant to Part Two,
Section 4 for services rendered through the date of such termination, and no
termination or severance benefits will be payable to you under Part Two, Section
9.
PART THREE -- MISCELLANEOUS PROVISIONS
1. MITIGATION. Employee shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise. The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any
<PAGE> 9
amounts otherwise payable, or in any way diminish Employee's existing rights
which would accrue solely as a result of the passage of time, under any Company
Employee Benefit Plan, "Payroll practice" (as defined in ERISA), compensation
arrangement, incentive plan, stock option or other stock-related plan.
2. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company, including, without
limitation, any corporation or corporations acquiring directly or indirectly all
or substantially all of the stock, business or assets of the Company whether by
merger, consolidation, division, sale or otherwise (and such successor shall
thereafter be deemed "the Company" for the purposes of this Agreement). The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance satisfactory to
Employee, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement entitling Employee to the benefits hereunder, as
though Employee was subject to Involuntary Termination. This Agreement shall be
binding upon and inure to the benefit of Employee, his successors, assigns,
executors, administrators or beneficiaries.
3. DEATH. Should you die before receipt of all the separation payments
to which you may become entitled under Part Two, Section 8, then such payment or
payments will be made, on the due date or dates hereunder had you survived, to
the executors or administrators of your estate. Should you die before you
exercise your outstanding vested options, then each such option may be
exercised, within twelve (12) months after your death, by the executors or
administrators of your estate or by person to whom the option is transferred
pursuant to your will or in accordance with the laws of inheritance. In no
event, however, may any such vested option be exercised after the specified
expiration date of the option term.
4. INDEMNIFICATION. The indemnification provisions for officers and
directors under the Company's Bylaws will (to the maximum extent permitted by
law) be extended to you, during the period following your Involuntary
Termination, with respect to any and all matters, events or transactions
occurring or effected during your Employment Period.
5. MISCELLANEOUS. The provisions of this Agreement will be construed and
interpreted under the laws of the State of California. This Agreement
incorporates the entire Agreement between you and the Company relating to the
terms of your employment and the subject of severance benefits and supersedes
all prior agreements and understandings with respect to such subject matter.
This Agreement may only be amended by written instrument signed by you and an
authorized officer of the Company.
6. ARBITRATION. Any controversy which may arise between you and the
Company with respect to the construction, interpretation or application of any
of the terms, provisions, covenants or conditions of this Agreement or any claim
arising from or relating to this Agreement will be submitted to final and
binding arbitration in San Francisco, California in accordance with the rules of
the American Arbitration Association then in effect.
7. NOTICES. Any notice required to be given under this Agreement shall
be deemed
<PAGE> 10
sufficient, if in writing, and sent by certified mail, return receipt requested,
via overnight courier, or hand delivered to the Company at 80 East Sir Francis
Drake Boulevard, Suite 2A, Larkspur, California 94939, and to Employee at his
most recent address reflected in the permanent Company records. Copies of each
such notice delivered by either the Company or Employee shall be provided to
each current member of the Board at each such director's current address as
listed in the Company's records.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 11
Please indicate your acceptance of the foregoing provisions of this
Agreement by signing the enclosed copy of this Agreement and returning it to the
Company.
Very truly yours,
QUADRAMED CORPORATION
By:/s/ James D. Durham
Title:Chairman of the Board, President
and Chief Executive Officer
ACCEPTED BY AND AGREED TO:
/s/ Keith M. Roberts
Dated:March 17,1998
<PAGE> 12
EXHIBIT A
Section 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE WILL
ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER.
(a) Any provision in an employment agreement which provides that an
employee will assign, or offer to assign, any of his or her rights in an
invention to his or her employer will not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for his employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
Exhibit 10.48
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made this 4th day of
February, 1998 (the "Effective Date") by and between QuadraMed Corporation, a
Delaware corporation ("QuadraMed" or the "Employer"), and Ruthann Russo, an
individual resident of Pennsylvania (the "Employee").
WHEREAS, concurrently with the execution and delivery of this Agreement,
the Employer is acquiring from the Employee and the other stockholders of Cabot
Marsh Corporation (the "Company") all of the issued shares of stock of the
Company pursuant to that certain Acquisition Agreement and Plan of Merger dated
February 2, 1998 by and among QuadraMed, CMC Acquisition Corporation, the
Company, the Employee and certain of the other stockholders of the Company (the
"Merger Agreement").
WHEREAS, the Employer desires the Employee's employment with the Employer,
and the Employee wishes to accept such employment, upon the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Definitions. For the purposes of this Agreement, the following terms
have the meanings specified or referred to in this Section 1.
1.1. "Agreement" shall mean this Employment Agreement, including
Exhibit "A" attached hereto and incorporated herein by this reference, as
amended from time to time.
1.2. "Basic Compensation" shall mean Salary and Benefits.
1.3. "Benefits" shall be as defined in Section 3.1(c).
1.4. "Board of Directors" shall mean the board of directors of the
Employer.
1.5. "Confidential Information" shall mean any and all trade secrets
concerning the business and affairs of the Employer, product specifications,
data, know-how, formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas, past, current and
planned research and development, current and planned manufacturing or
distribution methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, business plans, computer
software and programs (including object code and source code), computer software
and database technologies, systems, structures and architectures (and related
formulae, compositions, processes, improvements, devices, know-how, inventions,
discoveries, concepts, ideas, designs, methods and information, and any other
information, however documented, that is a trade secret within the meaning of
applicable law; information concerning the business and affairs of the Employer
(which includes historical financial statements, financial projections and
budgets, historical and projected sales, capital spending
<PAGE> 2
budgets and plans, the names and backgrounds of key personnel and personnel
training and techniques and materials), however documented; and notes, analysis,
compilations, studies, summaries and other material prepared by or for the
Employer containing or based, in whole or in part, on any information included
in the foregoing.
1.6. "disability" shall be as defined in Section 6.2.
1.7. "Effective Date" shall mean the date stated in the first
paragraph of the Agreement.
1.8. "Employee Invention" shall mean any idea, invention, technique,
modification, process or improvement (whether patentable or not), any industrial
design (whether registerable or not), any mask work, however fixed or encoded,
that is suitable to be fixed, embedded or programmed in a semiconductor product
(whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Employer, that is based upon
or uses Confidential Information.
1.9. "Employment Period" shall mean the term of the Employee's
employment under this Agreement.
1.10. "Fiscal Year" shall mean the Employer's fiscal year, as it
exists on the Effective Date or as changed from time to time.
1.11. "for cause" shall be as defined in Section 6.3.
1.12. "person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization or governmental
body.
1.13. "Proprietary Items" shall be as defined in Section 7.2(a)(iv).
1.14. "Salary" shall be as defined in Section 3.1(a).
2. Employment Terms and Duties.
2.1. Employment. The Employer hereby employs the Employee, and the
Employee hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2. Term. Subject to the provisions of Section 6, the term of the
Employee's employment under this Agreement will be two (2) years, beginning on
the
<PAGE> 3
Effective Date and ending on the second (2nd) anniversary of the Effective
Date.
2.3. Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors or the Chairman, Chief
Executive Officer, President or Chief Operating Officer of the Employer, and
will initially serve as the President of the newly-formed Compliance and
Education Division of the Employer. Subject to review and change by the Board of
Directors or the Chairman, Chief Executive Officer, President or Chief Operating
Officer of the Employer, the Employee shall initially have primary management
responsibility for such division, and the following employees of the Employer
shall report to the Employee: all existing employees of (i) the Company, (ii)
the business of QuadraMed formerly known as Healthcare Cash Management Seminars,
Inc., (iii) the existing QuanTIM FACTS operations of QuadraMed, (iv) the
business of QuadraMed formerly known as Healthcare Research Advisors, Inc. and
(v) the business known as Healthcare Management Advisors, Inc. (if and when such
acquisition is consummated by QuadraMed). The Employee will devote his or her
entire business time, attention, skill and energy exclusively to the business of
the Employer, will use his or her best efforts to promote the success of the
Employer's business and will cooperate fully with the Board of Directors and the
Employer's executive officers in the advancement of the best interests of the
Employer. Nothing in this Section 2.3, however, will prevent the Employee from
engaging in additional activities in connection with personal investments and
community affairs that are not inconsistent with the Employee's duties under
this Agreement.
3. Compensation.
3.1. Basic Compensation.
(a) Salary. The Employee will be paid an annual salary of One
Hundred Seventy-Five Thousand Dollars ($175,000), subject to adjustment as
provided below (the "Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll practices, but no
less frequently than monthly. The Salary will be reviewed by the Board of
Directors or the Chief Executive Officer, President or Chief Operating Officer
of the Employer not less frequently than annually, and may be adjusted upward in
the sole discretion of the Board of Directors or the Chief Executive Officer,
President or Chief Operating Officer of the Employer.
(b) Withholdings. The Employer will deduct and withhold, from
the Salary payable to the Employee under Section 3.1(a) above, any and all
applicable federal, state and local income and employment withholding taxes and
any other amounts required to be deducted or withheld by the Employer under
applicable statute or regulation.
(c) Benefits. The Employee will, during the Employment Period,
be permitted to participate in such pension, stock option, profit sharing,
bonus, life insurance, hospitalization, major medical and other employee benefit
plans of the Employer that may be in effect from time to time, to the extent the
Employee is eligible under the terms of those plans (collectively, the
"Benefits"). The Employee shall also be reimbursed in accordance
<PAGE> 4
with the Employer's policies for a maximum of $300 per month in cellular phone
charges attributable to the Employee's duties hereunder. The Employee shall
assume personal responsibility for payment of the existing automobile loan or
lease on the Employee's current automobile.
4. Facilities and Expenses. The Employer will furnish the Employee office
space, equipment, supplies and such other facilities and personnel as the
Employer deems necessary or appropriate for the performance of the Employee's
duties under this Agreement. The Employer will pay the Employee's dues in such
professional societies and organizations as the Chairman of the Board, Chief
Executive Officer, President or Chief Operating Officer of the Employer deems
appropriate, and will pay on behalf of the Employee (or reimburse the Employee
for) reasonable expenses incurred by the Employee at the request of, or on
behalf of, the Employer in the performance of the Employee's duties pursuant to
this Agreement, and in accordance with the Employer's employment policies. The
Employee must file expense reports with respect to such expenses in accordance
with the Employer's policies.
5. Vacations and Holidays. The Employee will be entitled to four (4) weeks
paid vacation each Fiscal Year in accordance with the vacation policies of the
Employer in effect for its officers from time to time. Vacation must be taken by
the Employee at such time or times as approved by the Chairman of the Board,
Chief Executive Officer, President or Chief Operating Officer of the Employer.
The Employee will also be entitled to the paid holidays set forth in the
Employer's policies.
6. Termination.
6.1. Events of Termination. The Employment Period, the Employee's
Basic Compensation and any and all other rights of the Employee under this
Agreement or otherwise as an employee of the Employer will terminate (except as
otherwise provided in this Section 6): (i) upon the death of the Employee; (ii)
upon the disability of the Employee (as defined in Section 6.2) immediately upon
notice from either party to the other; (iii) upon termination by the Employer or
the Employee, without cause or for cause (as defined in Section 6.3),
immediately upon notice from the Employer or the Employee, as the case may be,
or at such later time as such notice may specify.
6.2. Definition of Disability. For purposes of Section 6.1, the
Employee will be deemed to have a "disability" if, he is disabled as defined in
the Employer's disability insurance policy applicable to the Employee.
6.3. Definition of "for cause". For purposes of Section 6.1, the
phrase "for cause" means: (i) the Employee's material breach of Section 7 of
this Agreement; (ii) a material knowing breach of or knowing misrepresentation
with respect to any obligation, representation, warranty, covenant or agreement
by the Employee under the Merger Agreement; (iii) the Employee's negligence in
attention to material affairs of the Employer or failure to adhere to any
written Employer policy if the Employee has been given a reasonable opportunity
to comply with such policy or cure his or her negligence or failure to comply;
<PAGE> 5
(iv) the appropriation (or attempted appropriation) of a material business
opportunity of the Employer, including attempting to secure or securing any
personal profit in connection with any transaction entered into on behalf of the
Employer; (v) the misappropriation (or attempted misappropriation) of any of the
Employer's funds or property; (vi) the Employee's commission of any crime or an
act of dishonesty, fraud or moral turpitude or knowingly making false or
misleading statements in connection with his or her employment; or (vii) the
conviction of, the indictment for (or its procedural equivalent) or the entering
of a guilty plea or plea of no contest with respect to, a felony, the equivalent
thereof, or any other crime with respect to which imprisonment is a possible
punishment.
6.4. Termination Pay. Effective upon the termination of this
Agreement, the Employer will be obligated to pay the Employee (or, in the event
of his or her death, his or her designated beneficiary as defined below) only
such compensation as is provided in this Section 6.4, and in lieu of all other
amounts and in settlement and complete release of all claims the Employee may
have against the Employer. For purposes of this Section 6.4, the Employee's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Employee may designate by notice to the Employer from time
to time or, if the Employee fails to give notice to the Employer of such a
beneficiary, the Employee's estate. Notwithstanding the preceding sentence, the
Employer will have no duty, in any circumstances, to attempt to open an estate
on behalf of the Employee, to determine whether any beneficiary designated by
the Employee is alive or to ascertain the address of any such beneficiary, to
determine the existence of any trust, to determine whether any person or entity
purporting to act as the Employee's personal representative (or the trustee of a
trust established by the Employee) is duly authorized to act in that capacity,
or to locate or attempt to locate any beneficiary, personal representative or
trustee. All payments pursuant to this Section 6.4(a) will be payable in equal
periodic installments according to the Employer's customary payroll practices,
but no less frequently than monthly.
(a) Termination by the Employer Without Cause. If the Employer
terminates this Agreement without cause, the Employer will pay the Employee the
Employee's Salary for the remainder, if any, of the calendar month in which such
termination is effective and for twelve (12) consecutive calendar months
thereafter. Notwithstanding the preceding sentence, if the Employee obtains
other employment prior to the end of the twelve (12) months following the month
in which the termination is effective, he must promptly give notice thereof to
the Employer, and the Salary payments under this Agreement for any period after
the Employee obtains other employment will be reduced by the amount of the cash
compensation received and to be received by the Employee from the Employee's
other employment for services performed during such period. For purposes of this
Section 6.4(a), termination by the Employer without cause shall include a
termination of the Employee's employment at his or her initiative following the
occurrence, without the Employee's prior written consent, of one or more of the
following events: (i) a reduction in the Employee's Salary; (ii) a material
diminution in the Employee's duties such that the Employee is not a
management-level employee; or (iii) a relocation of the Employee's principal
place of employment by more than forty-five (45) miles.
<PAGE> 6
(b) Termination by the Employer for Cause. If the Employer
terminates this Agreement for cause, the Employee will be entitled to receive
his or her Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Employee's disability, as
determined under Section 6.2, the Employer will pay the Employee his or her
Salary for the lesser of (i) six (6) consecutive calendar months or (ii) the
period until disability insurance benefits commence under the disability
insurance coverage furnished by the Employer to the Employee.
(d) Termination upon Death. If this Agreement is terminated
because of the Employee's death, the Employee will be entitled to receive his or
her Salary through the end of the calendar month in which his or her death
occurs.
(e) Benefits. The Employee's accrual of, or participation in
plans providing for, the Benefits will cease at the effective date of the
termination of this Agreement, and the Employee will be entitled to accrued
Benefits pursuant to such plans only as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions.
7.1. Acknowledgments by the Employee. The Employee acknowledges
that: (i) during the Employment Period and as a part of his or her employment,
the Employee will be afforded access to Confidential Information; (ii) public
disclosure of such Confidential Information could have an adverse effect on the
Employer and its business; (iii) because the Employee possesses substantial
technical expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee Invention, and
the Employer will be at a substantial competitive disadvantage if it fails to
acquire exclusive ownership of each Employee Invention; (iv) the Employer has
required that the Employee make the covenants in this Section 7 as a condition
to its acquisition of the Employee's stock in the Company; and (v) the
provisions of this Section 7 are reasonable and necessary to prevent the
improper use or disclosure of Confidential Information and to provide the
Employer with exclusive ownership of all Employee Inventions.
7.2. Agreements of the Employee. In consideration of the
compensation and benefits to be paid or provided to the Employee by the Employer
under this Agreement, the Employee covenants as follows:
(a) Confidentiality. During and following the Employment
Period, the Employee will hold in confidence the Confidential Information and
will not disclose it to any person except with the specific prior written
consent of the Employer or except as otherwise expressly permitted by the terms
of this Agreement. Any trade secrets of the Employer will be entitled to all of
the protections and benefits under any applicable law. If any information that
the Employer deems to be a trade secret is found by a court of competent
jurisdiction not to be a trade secret for purposes of this Agreement, such
information will,
<PAGE> 7
nevertheless, be considered Confidential Information for purposes of this
Agreement. The Employee hereby waives any requirement that the Employer submit
proof of the economic value of any trade secret or post a bond or other
security. The term "Confidential Information" shall not include information
which is (i) generally or readily obtainable by the public or the trade, (ii)
publicly known or becomes known, through no fault or activity of Employee or
(iii) required to be disclosed by Employee or any relative of Employee pursuant
to deposition, interrogatory, request for documents, order, subpoena, civil
investigative demand or similar legal compulsion; provided, however, that prompt
written notice of such requirement shall be provided to Employer so that it may
seek a protective order or other appropriate remedy and/or may waive compliance
with this Section 7.2(a); and provided, further, that if such protective order
or other remedy is not obtained, and whether or not such waiver is given, only
such portion of the Confidential Information which Employee is advised in
writing by his or her counsel is legally required to be disclosed shall be
disclosed and reasonable effort shall be made to obtain assurances that
confidential treatment will be accorded such Confidential Information. The
Employee will not remove from the Employer's premises (except to the extent such
removal is for purposes of the performance of the Employee's duties at home or
while traveling, or except as otherwise specifically authorized by the Employer)
any document, record, notebook, plan, model, component, device or computer
software or code, whether embodied in a disk or in any other form (collectively,
the "Proprietary Items"). The Employee recognizes that, as between the Employer
and the Employee, all of the Proprietary Items, whether or not developed by the
Employee, are the exclusive property of the Employer. Upon termination of this
Agreement by either party, or upon the request of the Employer during the
Employment Period, the Employee will return to the Employer all of the
Proprietary Items in the Employee's possession or subject to the Employee's
control, and the Employee shall not retain any copies, abstracts, sketches or
other physical embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that all Employee
Inventions are works made for hire and the property of the Employer, including
any copyrights, patents or other intellectual property rights pertaining
thereto. If it is determined that any such works are not works made for hire,
the Employee hereby assigns to the Employer all of the Employee's
right, title and interest, including all rights of copyright, patent and other
intellectual property rights, to or in such Employee Inventions. The Employee
covenants that he will promptly: (i) disclose to the Employer in writing any
Employee Invention; (ii)assign to the Employer or to a party designated by the
Employer, at the Employer's request and without additional compensation, all of
the Employee's right to the Employee Invention for the United States and all
foreign jurisdictions; (iii) execute and deliver to the Employer such
applications, assignments and other documents as the Employer may request in
order to apply for and obtain patents or other registrations with respect to any
Employee Invention in the United States and any foreign jurisdictions; (iv) sign
all other papers necessary to carry out the above obligations; and (v) give
testimony and render any other assistance in support of the Employer's rights to
any Employee Invention. No assignment of this Agreement shall extend
<PAGE> 8
to Employee Inventions, the assignment of which is prohibited by California
Labor Code Section 2870, a copy of which is attached hereto as Exhibit "A" and
incorporated herein by this reference.
7.3. Disputes or Controversies. The Employee recognizes that should
a dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Employee and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. General Provisions.
8.1. Injunctive Relief and Additional Remedy. The Employee
acknowledges that the injury that would be suffered by the Employer as a result
of a breach of the provisions of this Agreement (including any provision of
Section 7) would be irreparable and that an award of monetary damages to the
Employer for such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may have, to
obtain injunctive relief to restrain any breach or threatened breach or
otherwise to specifically enforce any provision of this Agreement, and the
Employer will not be obligated to post bond or other security in seeking such
relief. Without limiting the Employer's rights under this Section 8 or any other
remedies of the Employer, if the Employee breaches any of the provisions of
Section 7, the Employer will have the right to cease making any payments
otherwise due to the Employee under this Agreement.
8.2. Covenants of Section 7 are Essential and Independent Covenants.
The covenants by the Employee in Section 7 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Employer would not have acquired the Employee's stock under the Merger
Agreement and the Employer would not have entered into this Agreement or
employed or continued the employment of the Employee. The Employer and the
Employee have independently consulted their respective counsel and have been
advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted by the
Employer. The Employee's covenants in Section 7 are independent covenants and
the existence of any claim by the Employee against the Employer under this
Agreement or otherwise will not excuse the Employee's breach of any covenant in
Section 7. If the Employee's employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of the Employee in Section 7.
8.3. Representations and Warranties by the Employee. The Employee
represents and warrants to the Employer that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both:
<PAGE> 9
(a) violate any judgment, writ, injunction or order of any court, arbitrator or
governmental agency applicable to the Employee; or (b) conflict with, result in
the breach of any provisions of or the termination of or constitute a default
under, any agreement to which the Employee is a party or by which the Employee
is or may be bound.
8.4. Waiver. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any delay
by either party in exercising any right, power or privilege under this Agreement
will operate as a waiver of such right, power or privilege, and no single or
partial exercise of any such right, power or privilege will preclude any other
or further exercise of such right, power or privilege or the exercise of any
other right, power or privilege. To the maximum extent permitted by applicable
law, (a) no claim or right arising out of this Agreement can be discharged by
one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party, (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement.
8.5. Binding Effect; Delegation of Duties Prohibited. This Agreement
shall inure to the benefit of, and shall be binding upon, the parties hereto and
their respective successors, assigns, heirs and legal representatives, including
any entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
8.6. Notices. All notices, consents, waivers and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt), provided
that a copy is mailed by registered mail, return receipt requested or (c) when
received by the addressee, if sent by a nationally recognized overnight
delivery service (receipt requested), in each case to the appropriate addresses
and facsimile numbers set forth in the Merger Agreement (or to such other
addresses and facsimile numbers as a party may designate by notice to the other
parties).
8.7. Entire Agreement; Amendments. This Agreement, the Merger
Agreement and the documents executed in connection with the Merger Agreement
contain the entire agreement between the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, between the parties hereto with respect to the subject matter hereof.
This Agreement may not be amended orally, but only by an agreement in writing
signed by the parties hereto.
8.8. Governing Law. This Agreement will be governed by the laws of
the State of Delaware without regard to conflicts of laws principles.
8.9. Jurisdiction. The parties hereby agree that jurisdiction and
venue for
<PAGE> 10
any controversy arising out of the terms of this Agreement or the breach thereof
shall be appropriate in federal or state court in the states of California,
Pennsylvania or Delaware.
8.10. Section Headings, Construction. The headings of sections in
this Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "Section" or "Sections" refer
to the corresponding section or sections of this Agreement unless otherwise
specified. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
8.11. Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.
8.12. Counterparts; Facsimile. This Agreement may be executed in one
or more counterparts, all of which when fully-executed and delivered by all
parties hereto and taken together shall constitute a single agreement, binding
against each of the parties. To the maximum extent permitted by law or by any
applicable governmental authority, any document may be signed and transmitted by
facsimile with the same validity as if it were an ink-signed document. Each
signatory below represents and warrants by his or her signature that he is duly
authorized (on behalf of the respective entity for which such signatory has
acted) to execute and deliver this instrument and any other document related to
this transaction, thereby fully binding each such respective entity.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
QUADRAMED CORPORATION
By:/s/James D. Durham
Name: James D. Durham
Title: Chairman of the Board, President and
Chief Executive Officer
/s/ Ruthann Russo
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
<PAGE> 12
EXHIBIT "A"
CALIFORNIA LABOR CODE SECTION 2870
Section 2870. Application of provision providing that employee will assign
or offer to assign rights in invention to employer.
(a) Any provision in an employment agreement which provides that an
employee will assign, or offer to assign, any of his or her rights in an
invention to his or her employer will not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for his or her
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
Exhibit 21
List of Subsidiaries of the Registrant
Corporation State of Incorporation
- ----------- ----------------------
QuadNet Corporation California
QuadraMed Acquisition Corporation Delaware
InterMed Acquisition Corporation Delaware
Healthcare Recovery Acquisition Delaware
Corporation
Queen City Acquisition Corporation Delaware
FRA Acquisition Inc. Delaware
SoftLink Acquisition Corporation Delaware
Resource Holdings Ltd. Pennsylvania
HRM Acquisition Corporation Delaware
Inter-Link Acquisition Corporation Delaware
CMC Acquisition Corporation Delaware
Velox Acquisition Corporation Pennsylvania
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements (File No. 333-16385 and File No. 333-35937) on Form S-8.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
March 31, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-16385 and 333-35937 of Quadramed Corporation on Forms S-8 of our report
dated April 25, 1997 (relating to the financial statements of FRA Acquisitions,
Inc. not presented separately herein) appearing in this Annual Report on Form
10-K of Quadramed Corporation for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997 AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,689
<SECURITIES> 1,032
<RECEIVABLES> 15,015
<ALLOWANCES> 3,376
<INVENTORY> 0
<CURRENT-ASSETS> 64,106
<PP&E> 8,990
<DEPRECIATION> 3,412
<TOTAL-ASSETS> 99,213
<CURRENT-LIABILITIES> 40,528
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 58,141
<TOTAL-LIABILITY-AND-EQUITY> 99,213
<SALES> 44,926
<TOTAL-REVENUES> 44,926
<CGS> 20,059
<TOTAL-COSTS> 67,912
<OTHER-EXPENSES> (1,304)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (41,741)
<INCOME-TAX> 788
<INCOME-CONTINUING> (41,741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,741)
<EPS-PRIMARY> (4.91)<F1>
<EPS-DILUTED> (4.91)
<FN>
<F1> For purposes of this Exhibit, Primary means Basic
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996
AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,804
<SECURITIES> 0
<RECEIVABLES> 5,353
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 29,548
<PP&E> 5,121
<DEPRECIATION> 2,055
<TOTAL-ASSETS> 38,284
<CURRENT-LIABILITIES> 8,103
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 21,275
<TOTAL-LIABILITY-AND-EQUITY> 38,284
<SALES> 29,131
<TOTAL-REVENUES> 29,131
<CGS> 14,254
<TOTAL-COSTS> 15,031
<OTHER-EXPENSES> (201)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,005
<INCOME-PRETAX> (958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (958)
<EPS-PRIMARY> (0.26)<F1>
<EPS-DILUTED> (0.26)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1995 AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,733
<SECURITIES> 0
<RECEIVABLES> 5,630
<ALLOWANCES> 379
<INVENTORY> 0
<CURRENT-ASSETS> 19,145
<PP&E> 2,930
<DEPRECIATION> 905
<TOTAL-ASSETS> 27,212
<CURRENT-LIABILITIES> 22,216
<BONDS> 28,175
0
18
<COMMON> 6
<OTHER-SE> 9,589
<TOTAL-LIABILITY-AND-EQUITY> 27,212
<SALES> 10,035
<TOTAL-REVENUES> 10,035
<CGS> 8,308
<TOTAL-COSTS> 20,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> (18,831)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,831)
<EPS-PRIMARY> (8.10)<F1>
<EPS-DILUTED> (8.10)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
